| ITT EDUCATIONAL SERVICES INC Item 1A RISK FACTORS In addition to the other information contained in this report, you should consider carefully the following risk factors in evaluating us and our business before making an investment decision with respect to any shares of our common stock |
| This report contains certain statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act (and Section 21E of the Exchange Act) |
| Those forward-looking statements are based on the beliefs of, as well as assumptions made by and information currently available to, our management |
| All statements which are not statements of historical fact are intended to be forward-looking statements |
| The forward-looking statements contained in this report reflect our or our management’s current views and are subject to certain risks, uncertainties and assumptions, including, but not limited to, those set forth in the following Risk Factors |
| Should one or more of those risks or uncertainties materialize or should underlying assumptions prove incorrect, our actual results, performance or achievements in 2006 and beyond could differ materially from those expressed in, or implied by, those forward-looking statements |
| Risks Related to Our Highly-Regulated Industry Failure of our institutes 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 institutes |
| In 2005, we indirectly derived approximately 63prca of our revenue determined on an accrual accounting basis (or approximately 61prca determined on a cash accounting basis - 18 - ______________________________________________________________________ [20]Table of Contents as defined by the ED regulations) from Title IV Programs |
| To participate in Title IV Programs, an institution must receive and maintain authorization by the appropriate SEAs, be accredited by an accrediting commission recognized by the ED and be certified as an eligible institution by the ED As a result, our institutes are subject to extensive regulation by the ED, the SEAs and the ACICS, which is an accrediting commission recognized by the ED These regulatory requirements cover the vast majority of our operations, including our education programs, facilities, instructional and administrative staff, financial operations and financial condition, student recruitment, opening of new institutes and learning sites, changes in corporate structure and ownership, and many administrative procedures |
| Most ED requirements are applied on an institutional basis, with an institution defined by the ED as a main campus and its additional locations, if any |
| Under the ED’s definition, we have 29 such institutions |
| We currently operate one or more institutes in 32 states and our institutes recruit students in the remaining 18 states and the District of Columbia |
| The ED, the SEAs and the ACICS 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 all of our institutes will be able to comply with all of the requirements in the future |
| If our institutes failed to comply with any of these regulatory requirements, these agencies could: • impose monetary fines or penalties on our institutes; • terminate or limit our institutes’ operations or ability to grant degrees and diplomas; • restrict or revoke our institutes’ accreditation; • limit, terminate or suspend our institutes’ eligibility to participate in Title IV Programs or state financial aid programs; • require our institutes to repay funds received under Title IV Programs or state financial aid programs; • require us to post a letter of credit with the ED; • subject our institutes to heightened cash monitoring by the ED; • transfer our institutes from the ED’s advance system of receiving Title IV Program funds to its reimbursement system, under which a school must disburse its own funds to students and document the students’ eligibility for Title IV Program funds before receiving such funds from the ED; and • subject us or our institutes to other civil or criminal penalties |
| Each of these sanctions could adversely affect our financial condition, results of operations and cash flows and impose significant operating restrictions on us |
| If any of our institutes lost its state authorization, the institute would be unable to offer postsecondary education and we would be forced to close the institute |
| If any of our institutes lost its accreditation, it would lose its eligibility to participate in Title IV Programs |
| If any of our institutes lost its eligibility to participate in Title IV Programs, and we could not arrange for alternative financing sources for the students attending that institute, we could be forced to close the institute |
| Closing any of our institutes could have a material adverse effect on our financial condition, results of operations and cash flows |
| ” The following are some of the specific risk factors related to our highly-regulated industry: Action by the US Congress to revise the laws governing the federal student financial aid programs or reduce funding for those programs could reduce our student population and increase our costs of operation |
| The US Congress must periodically reauthorize the HEA and annually determine the funding level for each Title IV Program |
| In 2005, the US Congress temporarily extended the provisions of the HEA, pending completion of the formal reauthorization process |
| In February 2006, the US Congress enacted the Deficit Reduction Act of 2005, which contained a number of provisions affecting Title IV Programs, including some provisions that had been in the HEA reauthorization bills |
| We believe that, in 2006, the US Congress will either complete its reauthorization of the HEA or further extend additional provisions of the HEA Numerous changes to the HEA are likely to result from any further reauthorization and, possibly, from any extension of the remaining provisions of the HEA, but at this time we cannot predict all of the changes that the US Congress will ultimately make |
| Any action by the US Congress that significantly reduces Title IV Program funding or the ability of our institutes or students to participate in Title IV Programs could have a material adverse effect on our financial condition, results of operations and cash flows |
| Congressional action may also require us to modify our practices in ways that could increase our administrative costs and reduce our profit margin, which could have a material adverse effect on our financial condition and results of operations |
| If one of our institutes lost its eligibility to participate in Title IV Programs, or if the US Congress significantly reduced the amount of available Title IV Program funding, we would try to arrange for alternative sources of financial aid for that institute’s students |
| We cannot assure you that one or more private organizations would be willing to - 19 - ______________________________________________________________________ [21]Table of Contents provide loans to students attending one of our institutes, or that the interest rate and other terms of such loans would be as favorable as for Title IV Program loans |
| In addition, the private organizations could require us to guarantee all or part of this assistance and we might incur other additional costs |
| If we provided more direct financial assistance to our students, we would incur additional costs and assume increased credit risks |
| ” One or more of our institutes may lose its eligibility to participate in Title IV Programs, if its student loan default rates are too high |
| An institution may lose its eligibility to participate in some or all Title IV Programs, if the rates at which its students default on their federal student loans exceed specified percentages |
| An institution whose FFEL/FDL cohort default rate is: (a) 25prca or greater for three consecutive federal fiscal years loses eligibility to participate in the FFEL, FDL and Pell 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; or (b) greater than 40prca for one federal fiscal year loses eligibility to participate in the FFEL and FDL 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 |
| If any of our campus groups lost its eligibility to participate in FFEL, FDL and Pell programs and we could not arrange for alternative financing sources for the students attending the institutes in that campus group, we would probably have to close those institutes, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| ” We may be required to post a letter of credit or accept other limitations in order to continue our institutes’ participation in Title IV Programs, if we or our institutes do not meet the ED’s financial responsibility standards |
| To participate in Title IV Programs, an institution must satisfy specific measures of financial responsibility prescribed by the ED The most significant measurement is the institution’s composite score that can range from a negative 1dtta0 reflecting financial weakness to a positive 3dtta0 reflecting financial strength |
| The composite score must be at least 1dtta5 for the institution to be deemed financially responsible by the ED without the need for further oversight |
| Historically, the ED has evaluated the financial condition of our institutions on a consolidated basis based on our financial statements at the parent company level |
| If the ED determines that an institution does not satisfy the ED’s financial responsibility standards, the institution may establish its financial responsibility on one of several alternative bases, including posting a letter of credit in an amount equal to a specified percentage of the total Title IV Program funds received by the institution during the institution’s most recently completed fiscal year and, in some cases, agreeing to receive Title IV Program funds under an arrangement other than the ED’s standard advance funding arrangement while being provisionally certified |
| ” One or more of our institutes may have to post a letter of credit or be subject to other sanctions, if it does not correctly calculate and timely return Title IV Program funds for students who withdraw before completing their program of study |
| A school participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that was disbursed to students who withdrew from their educational programs before completing them, and must return those unearned funds in a timely manner, generally within 30 days of the date the school determines that the student has withdrawn |
| Beginning in July 2006, that time period extends to 45 days |
| If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the ED or be otherwise sanctioned by the ED An institution is required to post a letter of credit with the ED in an amount equal to 25prca of the total dollar amount of unearned Title IV Program funds that the institution was required to return with respect to withdrawn students during its most recently completed fiscal year, if the institution was found in an audit or program review to have untimely returned unearned Title IV Program funds with respect to 5prca or more of the students in the audit or program review sample of withdrawn students, in either of its two most recently completed fiscal years |
| The requirement to post a letter of credit or other sanctions by the ED could increase our cost of regulatory compliance and adversely affect our results of operations |
| See “Business — Highly-Regulated Industry — Return of Funds for Withdrawn Students |
| ” One or more of our institutes may lose its eligibility to participate in Title IV Programs, if the percentage of its revenue derived from those programs is too high |
| A for-profit institution loses its eligibility to participate in Title IV Programs if, on a cash accounting basis, it derives more than 90prca of its applicable revenue for a fiscal year from Title IV Programs |
| If one of our campus groups exceeded this threshold but continued to disburse Title IV Program funds, the ED would require the institution to repay, with limited exceptions, all Title IV Program funds disbursed by the institution after the effective date of the loss of eligibility |
| If any of our campus groups lost its eligibility to participate in Title IV Programs and we could not arrange for alternative financing sources for the students attending the institutes in that campus group, we would probably have to close those institutes, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| ” - 20 - ______________________________________________________________________ [22]Table of Contents One or more of our institutes may lose its eligibility to participate in Title IV Programs, if it teaches too many of its courses through distance education or is not determined to be capable of effectively delivering distance education programs |
| An institution loses its eligibility to participate in Title IV Programs if more than 50prca of its courses are offered through correspondence, which is currently defined to include courses taught through telecommunications, such as distance education courses offered online over the Internet |
| Beginning in July 2006, courses taught through telecommunications will be excluded from the definition of correspondence, but an institution must be determined by its accrediting agency to be capable of effectively delivering distance education programs |
| If any of our campus groups lost its eligibility to participate in Title IV Programs and we could not arrange for alternative financing sources for the students attending the institutes in that campus group, we would probably have to close those institutes, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| See “Business — Highly-Regulated Industry — Restrictions on Distance Education Programs |
| ” Failure by one or more of our institutes to satisfy the ED’s administrative capability requirements could result in financial penalties, limitations on the institute’s participation in Title IV Programs, loss of Title IV Program funds for its students or the repayment of Title IV Program funds received by our students |
| To participate in Title IV Programs, an institution must satisfy criteria of administrative capability prescribed by the ED The most significant of these criteria require that the institution: • demonstrate a reasonable relationship between the length of its programs and the entry-level job requirements of the relevant fields of employment; • comply with all of the applicable Title IV Program regulations prescribed by the ED; • have capable and sufficient personnel to administer the institution’s participation in Title IV Programs; • define and measure the satisfactory academic progress of its students within parameters specified by the ED; • provide adequate financial aid counseling to its students who receive Title IV Program funds; and • timely submit all required reports and financial statements to the ED If the ED determines that an institution is not capable of adequately administering its participation in any of the Title IV Programs, the ED could: • impose monetary fines or penalties on the institution; • require the institution to repay funds received under Title IV Programs; • restrict the institution’s receipt of Title IV Program funds; and • limit or terminate the institution’s eligibility to participate in Title IV Programs |
| Each of these sanctions could adversely affect our financial condition, results of operations and cash flows and impose significant operating restrictions on us |
| ” We are subject to sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admission or financial aid activities |
| An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the awarding of Title IV Program funds |
| The law and regulations governing this requirement 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 or penalties or other sanctions |
| Any substantial fine or penalty or other sanction could have a material adverse effect on our financial condition, results of operations and cash flows |
| See “Business — Highly-Regulated Industry — Compensation of Recruitment, Admission and Financial Aid Employees |
| ” We cannot open new institutes or learning sites or offer new programs if they are not timely approved by our regulators, and we may have to repay Title IV Program funds disbursed to students enrolled at any of those locations or in any of those programs if we do not obtain prior approval |
| An institution must obtain approvals from the ED, the ACICS and the relevant SEAs to establish new institutes and, in some cases, to add new learning sites for existing institutes and to expand program offerings |
| The requirements of the ACICS and some SEAs limit our ability to establish new institutes, add learning sites and offer new programs |
| If we established a new institute, added a new learning site or expanded program offerings at any institute without obtaining the required approvals, we could be required to repay any Title IV Program funds received by students at that institute or site or in that program, and could be subject to other sanctions |
| Our expansion plans assume that we will be able to continue to obtain the necessary approvals in a timely manner |
| If we are unable to obtain the approvals from the ED, the ACICS or the relevant SEAs - 21 - ______________________________________________________________________ [23]Table of Contents for any new institutes, learning sites or program offerings where such approvals are required, or to obtain such approvals in a timely manner, our ability to open the new institutes, add the new learning sites or offer the new programs as planned would be impaired, which could have an adverse effect on our expansion plans |
| ” A high percentage of the Title IV Program loans that our students receive are made by two lenders and guaranteed by one guaranty agency |
| In our 2005 fiscal year, two lenders provided approximately 87prca of the FFEL program loans that our students received, with one lender providing approximately 72prca and the other lender providing approximately 15prca, and one student loan guaranty agency guaranteed almost 100prca of the FFEL program loans made to our students |
| If FFEL program loans by our primary lenders or guarantees of those loans by our primary guaranty agency were significantly reduced or no longer available and we were unable to timely identify other lenders and guaranty agencies to make and guarantee FFEL program loans for our students, that could delay our students’ receipt of their loans, increase our receivables, cause our student population to decrease and have a material adverse effect on our financial condition, results of operations and cash flows |
| ” The ability of the affected institutes to participate in Title IV Programs or operate may be impaired, if regulators do not timely approve a change in control of us or any of our institutes |
| The ED, the ACICS and most of the SEAs have requirements pertaining to the change in control of institutions, but those requirements do not uniformly define what constitutes a change in control and are subject to varying interpretations as to whether a particular transaction constitutes a change in control |
| If we or any of our institutes experience a change in control under the standards of the ED, the ACICS or any of the SEAs, we or the affected institutes must seek the approval of the relevant regulatory agencies |
| Transactions or events that constitute a change in control for one or more of our regulatory agencies include the acquisition of a school from another entity, significant acquisitions or dispositions of our common stock and significant changes to the composition of our Board of Directors |
| Some of these transactions or events may be beyond our control |
| Our failure to obtain, or a delay in obtaining, a required approval of any change in control from the ED, the ACICS or any of the SEAs in states in which our institutes are located could impair our ability or the ability of the affected institutes to participate in Title IV Programs |
| Our failure to obtain, or a delay in obtaining, a required approval of any change in control from the SEA in any state in which we do not have an institute but in which we recruit students could require us to suspend our recruitment of students in that state until we receive the required approval |
| If we had a change in control and a material number of our institutes failed to obtain the required approvals of the SEAs, the ACICS or the ED in a timely manner, that could have a material adverse effect on our financial condition, results of operations and cash flows |
| ” Government and regulatory agencies and third parties may bring claims or actions against us based on alleged violations of the extensive regulatory requirements, which could require us to pay monetary damages, receive other sanctions and expend significant resources to defend those claims or actions |
| Due to the highly-regulated nature of the postsecondary education industry, we are subject to audits, compliance reviews, inquiries, complaints, investigations, claims of non-compliance and lawsuits by federal and state governmental agencies, regulatory agencies, present and former students and employees, shareholders and other third parties, which may allege violations of any of the regulatory requirements applicable to us and our institutes |
| If the results of any such claims or actions are unfavorable to us, we may be required to pay money damages or be subject to fines, operational limitations, loss of federal or state funding, injunctions, additional oversight and reporting or other civil and criminal penalties |
| Those penalties could have a material adverse effect on our financial condition, results of operations and cash flows |
| Even if we satisfactorily resolve the issues raised by any such claims or actions, we may have to expend significant financial and management resources from our ongoing business operations to address and defend those claims or actions, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| Adverse publicity regarding such claims and actions could also negatively affect our business |
| ” Investigations, claims and actions against companies in our industry could adversely affect our business and stock price |
| Our operations and the operations of a number of other companies in the postsecondary education industry have been subject to intense regulatory scrutiny, especially over the last two years |
| In some cases, allegations of wrongdoing have resulted in reviews or investigations by the U S Department of Justice (“DOJ”), the SEC, the ED, the SEAs or other state agencies |
| These allegations, reviews and investigations of us and other companies and the accompanying adverse publicity could have a negative impact on our industry as a whole and on our stock price |
| - 22 - ______________________________________________________________________ [24]Table of Contents 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 reduce our student population |
| Some states may provide financial aid to our students, such as California, Florida, Ohio, Pennsylvania and New York |
| From time to time, states face budget constraints that may cause them to reduce state appropriations in a number of areas |
| Some of those states may decide to reduce the amount of state financial aid that they provide to students, but we cannot predict how significant any of those reductions may be or how long they could last |
| If the level of state funding for our students decreased and our students were not able to secure alternative sources of funding, our student population could decrease, which could have a material adverse effect on our results of operations |
| Risks Related to Our Business If we fail to effectively identify, establish and operate new institutes and learning sites, our growth may be slowed |
| As part of our business strategy, we anticipate opening and operating new institutes and new learning sites to existing institutes at locations throughout the United States |
| Establishing new institutes and learning sites poses challenges and requires us to make investments in management and capital expenditures, incur marketing and advertising expenses and devote other resources that are different, and in some cases greater, than those required with respect to the operation of existing institutes |
| To open a new institute or learning site, we would be required to obtain the appropriate approvals from the SEAs and ACICS, which may be conditioned or delayed in a manner that could significantly affect our growth plans |
| In addition, to be eligible to participate in Title IV Programs, a new institute or learning site may have to be certified by the ED We cannot be sure that we will be able to identify suitable expansion opportunities to help maintain or accelerate our current growth rate or that we will be able to successfully integrate or profitably operate any new institutes or learning sites |
| Any failure by us to effectively identify, establish and manage the operations of newly established institutes or learning sites could slow our growth and make any newly established institutes or learning sites more costly to operate than we had planned and have an adverse effect on our expansion plans and results of operations |
| See “Business — Business Strategy — Geographically Expand Our Institutes and Program Offerings |
| ” Our success depends, in part, on our ability to effectively identify, develop, obtain approval to offer and teach new and/or higher-level degree programs in a cost-effective and timely manner |
| Part of our business strategy also includes increasing the number and level of degree programs offered at our institutes |
| Developing and offering new degree programs pose challenges and require us to make investments in research and development, management and capital expenditures, to incur marketing and advertising expenses and to devote other resources that are in addition to, and in some cases greater than, those associated with our current program offerings |
| In order to offer new and higher-level degree programs at our institutes, we would be required to obtain the appropriate approvals from the ED, the SEAs, the ACICS and, in certain circumstances, specialized programmatic accrediting agencies, which may be conditioned or delayed in a manner that could significantly affect our growth plans |
| We cannot be sure that we will be able to identify new programs to help maintain or accelerate our current growth rate, that we will be able to obtain the requisite approvals to offer new and/or higher-level degree programs at our institutes or that students will enroll in any new and/or higher-level degree programs that we develop, obtain approval for and offer at our institutes |
| Any failure by us to effectively identify, develop, obtain approval to offer and teach new and/or higher-level degree programs at our institutes could have an adverse effect on our expansion plans and results of operations |
| See “Business — Business Strategy — Enhance Results at the Institute Level |
| ” Our success depends, in part, on our ability to keep pace with changing market needs and technology |
| Increasingly, prospective employers of our graduates demand that their entry-level employees possess appropriate technical 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 |
| Accordingly, it is important for our programs to evolve in response to those economic and technological changes |
| The expansion of our existing programs and the development of new programs may not be accepted by prospective students or the employers of our graduates |
| Even if we are able to develop acceptable new programs, we may not be able to begin offering those new programs as quickly as required by the employers we serve 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, technological changes or other factors, our ability to attract and retain students could be impaired and the rates at which our graduates obtain jobs involving their fields of study could suffer |
| Our financial performance depends, in part, on our ability to continue to develop awareness and acceptance of our programs among high school graduates and working adults |
| The awareness of our programs among high school graduates and working adults is important to the success of our institutes |
| If we were unable to successfully - 23 - ______________________________________________________________________ [25]Table of Contents market or advertise our programs, our ability to attract and enroll prospective students in our programs would be adversely affected and, consequently, our ability to increase revenue or maintain profitability would be impaired |
| The following are some of the factors that could prevent us from successfully marketing or advertising our programs: • student dissatisfaction with our programs and services; • employer dissatisfaction with our programs and services; • diminished access to high school students; and • our failure to maintain or expand our brand or other factors related to our marketing or advertising practices |
| The vast majority of private student loans received by our students are made by one lender and serviced by one loan servicer |
| In 2005, we indirectly derived approximately 30prca of our revenue from unaffiliated, private loan programs that were made available to eligible students at our institutes to help fund a portion of the students’ cost of education |
| The vast majority of these private loan programs are offered by one lender and serviced by one loan servicer |
| If that lender or loan servicer ended the programs or reduced the volume of loans made or serviced under the programs in the near future and we were unable to timely identify other lenders and loan servicers to make and service private loans for our students and their parents on similar terms, our students’ ability to finance their education could be adversely affected, our receivables could increase and our student population could decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| Our loss of 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 |
| Our success also depends in large part upon our ability to attract and retain highly qualified faculty, school administrators and corporate management |
| We face competition in the attraction and retention of personnel who possess the skill sets that we seek |
| In addition, key personnel may leave us and subsequently compete against us |
| Furthermore, we do not currently carry “key man” life insurance |
| 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 impair our ability to successfully manage our business |
| In order to support revenue growth, we need to hire, retain, develop and train our recruiting representatives, who are our employees dedicated to student recruitment |
| Our ability to develop a strong team of recruiting representatives may be affected by a number of factors, including: • our ability to timely and effectively train and motivate our recruiting representatives in order for them to become productive; • restrictions on the method of compensating recruiting representatives imposed by regulatory bodies; • the competition we face from other companies in hiring and retaining recruiting representatives; • our ability to attract enough prospective students to our program offerings; and • our ability to effectively manage a multi-location educational organization |
| If we are unable to hire, retain, develop and train our recruiting representatives, the effectiveness of our student recruiting efforts would be adversely affected |
| Competition could decrease our market share, cause us to reduce tuition or force us to increase spending |
| The postsecondary education market in the United States is highly fragmented and competitive, with no single private or public institution enjoying a significant market share |
| Our institutes compete for students with graduate, bachelor and associate degree-granting institutions, which include nonprofit public and private colleges and for-profit institutions, as well as with alternatives to higher education such as military service or immediate employment |
| We believe competition among educational institutions is based on: • the quality and reliability of the institution’s programs and student services; • the perceived reputation of the institution and its programs and student services; • the cost of the institution’s programs; • the employability of the institution’s graduates; • the ability to provide easy and convenient access to the institution’s programs and courses; • the quality and experience of the institution’s faculty; and • the time required to complete the institution’s programs |
| - 24 - ______________________________________________________________________ [26]Table of Contents Certain public and private colleges offer programs similar to those offered by our institutes at a lower tuition cost due in part to government subsidies, foundation grants, tax deductible contributions or other financial resources not available to for-profit institutions |
| Other for-profit institutions offer programs that compete with those of our institutes |
| Certain of our competitors in both the public and private sectors have greater financial and other resources than we do |
| All of these factors could affect the success of our marketing efforts and enable our competitors to recruit prospective students more effectively |
| We may be required to reduce tuition or increase spending in response to competition in order to retain or attract students or pursue new market opportunities |
| As a result, our financial condition, results of operations and cash flows may be negatively affected |
| We cannot be sure that we will be able to compete successfully against current or future competitors or that competitive pressures faced by us will not adversely affect our business, financial condition, results of operations or cash flows |
| High interest rates could adversely affect our ability to attract and retain students |
| Interest rates in recent years have been relatively low, creating a favorable borrowing environment for our students |
| Much of the financing our students receive is tied to floating interest rates |
| Therefore, any future increase in interest rates will result in a corresponding increase in the cost to our existing and prospective students of financing their education, which could result in a reduction in the number of students attending our institutes and in our revenue |
| Higher interest rates could also contribute to higher default rates with respect to our students’ repayment of Title IV Program and private loans |
| High 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 our students, which could result in a reduction in the number of students attending our institutes |
| Our quarterly results of operations are likely to fluctuate based on our seasonal student enrollment patterns |
| In reviewing our results of operations, you should not focus on quarter-to-quarter comparisons |
| Our results in any quarter may not indicate the results we may achieve in any subsequent quarter or for the full year |
| Our quarterly results of operations have tended to fluctuate as a result of seasonal variations in our business, principally due to changes in our total student population |
| Our student population varies as a result of new student enrollments, graduations and student attrition |
| Historically, our revenue in our third and fourth fiscal quarters has generally benefited from increased student matriculations |
| The number of new students entering our institutes tends to be substantially higher in June and September, because of the significant number of recent high school graduates entering our institutes for the academic quarters beginning in those two months |
| Our institutes’ academic schedule generally does not affect our incurrence of most of our costs, however, and our costs do not fluctuate significantly on a quarterly basis |
| We expect quarterly fluctuations in results of operations to continue as a result of seasonal enrollment patterns |
| These patterns may change, however, as a result of new institute openings, new program offerings and increased enrollment of adult students |
| ” Terrorist attacks and other acts of violence or war could have an adverse effect on our operations |
| Terrorist attacks and other acts of violence or war could disrupt our operations |
| Attacks or armed conflicts that directly impact our physical facilities or ability to recruit and retain students and employees could adversely affect our ability to deliver our programs of study to our students and, thereby, impair our ability to achieve our financial and operational goals |
| Furthermore, violent acts and threats of future attacks could adversely affect the US and world economies |
| Finally, future terrorist acts could cause the United States to enter into a wider armed conflict that could further impact our operations and result in prospective students, as well as our current students and employees, entering military service |
| These factors could cause significant declines in the number of students who attend our institutes and have a material adverse effect on our results of operations |
| Natural disasters and other acts of God could have an adverse effect on our operations |
| Hurricanes, earthquakes, floods, tornados and other natural disasters and acts of God could disrupt our operations |
| Natural disasters and other acts of God that directly impact our physical facilities or ability to recruit and retain students and employees could adversely affect our ability to deliver our programs of study to our students and, thereby, impair our ability to achieve our financial and operational goals |
| Furthermore, natural disasters could adversely affect the economy and demographics of the affected region, which could cause significant declines in the number of students who attend our institutes in that region and have a material adverse effect on our results of operations |
| In 2005, we were forced to temporarily close our institute that is located in St |
| Rose, Louisiana due to a Gulf Coast hurricane |
| While the institute’s facility did not incur extensive physical damage, the hurricane’s impact on the region adversely affected the institute’s total student enrollment, which had an adverse effect on our results of operations in 2005 |
| We believe that our results of operations will continue to be adversely affected in 2006 as a result of that institute’s lower total student enrollment |
| - 25 - ______________________________________________________________________ [27]Table of Contents Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us more difficult |
| Certain provisions of Delaware law, our Restated Certificate of Incorporation and our By-Laws could have the effect of making it more difficult for a third party to acquire, or discouraging a third party from attempting to acquire, control of us |
| These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock |
| These provisions of Delaware law, our Restated Certificate of Incorporation and our By-Laws may also have the effect of discouraging or preventing certain types of transactions involving an actual or threatened change in control of us (including unsolicited takeover attempts), even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price |
| Certain of these provisions authorize us to issue “blank check” preferred stock, divide our Board of Directors into three classes expiring in rotation, require advance notice for stockholder proposals and nominations, prohibit stockholders from calling a special meeting and prohibit stockholder action by written consent |
| These provisions may make it more difficult for stockholders to take certain corporate actions and could have the effect of delaying or preventing a change in control of us |
| If we are unable to conclude successfully the litigation pending against us, our business, financial condition and results of operations could continue to be adversely affected |
| We and some of our current and former officers and directors have been named as defendants in a number of shareholder derivative lawsuits alleging that we and some of our current and former officers and directors, among other things, made certain material misrepresentations, failed to disclose certain material facts about our condition and prospects, breached fiduciary duties, violated laws and falsified our records |
| We cannot predict what the outcome of these lawsuits will be |
| Although the derivative actions are brought nominally on behalf of us, we expect to incur defense costs and other expenses in connection with the derivative lawsuits, and we cannot assure you that the ultimate outcome of these or other actions will not have a material adverse effect on our financial condition or results of operations |
| The current and former executive officers named in one or more of the shareholder derivative lawsuits include: Gene A Baugh, Rene R Champagne, Clark D Elwood, Eugene W Feichtner, Martin A Grossman, Thomas W Lauer, Kevin M Modany and Omer E Waddles |
| Additionally, in the ordinary conduct of our business, we and our institutes are 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 |
| It is possible that we may be required to pay substantial damages or settlement costs in excess of our insurance coverage, which could have a material adverse effect on our financial condition or results of operation |
| In connection with the DOJ investigation of us, the inquiry initiated by the SEC into allegations investigated by the DOJ and the securities class action, shareholder derivative and books and records inspections lawsuits, we have incurred substantial legal costs, and management’s attention and resources have been diverted from our business |
| See “Legal Proceedings |