UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015
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)
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Delaware |
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36-3932190 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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231 N. Martingale Road
Schaumburg, Illinois |
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60173 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants telephone number, including area code: (847) 781-3600
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
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¨ |
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Accelerated filer |
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x |
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Non-accelerated filer |
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¨ |
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(Do not check if a smaller reporting company) |
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Smaller reporting company |
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¨ |
Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange
Act. Yes ¨ No x
Number of shares of registrants common stock, par value $0.01, outstanding as of April 30, 2015: 67,883,682
CAREER EDUCATION CORPORATION
FORM
10-Q
TABLE OF CONTENTS
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
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March 31, 2015 |
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December 31, 2014 |
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ASSETS |
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(unaudited) |
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CURRENT ASSETS: |
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Cash and cash equivalents, unrestricted |
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$ |
69,244 |
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$ |
93,832 |
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Restricted cash |
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13,938 |
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22,938 |
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Short-term investments |
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123,183 |
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122,858 |
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Total cash and cash equivalents, restricted cash and short-term investments |
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206,365 |
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239,628 |
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Student receivables, net of allowance for doubtful accounts of $12,198 and $12,398 as of March 31, 2015 and December 31, 2014,
respectively |
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26,382 |
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24,564 |
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Receivables, other, net |
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18,938 |
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18,925 |
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Prepaid expenses |
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14,310 |
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14,679 |
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Inventories |
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3,066 |
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3,305 |
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Other current assets |
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1,983 |
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2,384 |
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Assets held for sale |
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76,211 |
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76,846 |
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Assets of discontinued operations |
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255 |
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473 |
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Total current assets |
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347,510 |
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380,804 |
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NON-CURRENT ASSETS: |
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Property and equipment, net |
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65,076 |
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73,083 |
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Goodwill |
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87,356 |
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87,356 |
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Intangible assets, net |
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8,064 |
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9,819 |
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Student receivables, net of allowance for doubtful accounts of $1,845 and $2,119 as of March 31, 2015 and December 31, 2014,
respectively |
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3,011 |
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2,926 |
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Other assets |
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17,703 |
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18,571 |
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Assets of discontinued operations |
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914 |
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975 |
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TOTAL ASSETS |
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$ |
529,634 |
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$ |
573,534 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Short-term borrowings |
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$ |
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$ |
10,000 |
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Accounts payable |
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28,677 |
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21,968 |
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Accrued expenses: |
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Payroll and related benefits |
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23,877 |
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29,545 |
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Advertising and production costs |
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21,757 |
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13,162 |
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Income taxes |
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1,579 |
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1,633 |
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Other |
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19,359 |
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21,440 |
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Deferred tuition revenue |
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34,036 |
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37,572 |
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Liabilites held for sale |
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51,036 |
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50,357 |
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Liabilities of discontinued operations |
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13,073 |
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15,506 |
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Total current liabilities |
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193,394 |
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201,183 |
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NON-CURRENT LIABILITIES: |
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Deferred rent obligations |
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42,641 |
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48,381 |
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Other liabilities |
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16,662 |
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19,178 |
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Liabilities of discontinued operations |
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18,991 |
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22,859 |
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Total non-current liabilities |
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78,294 |
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90,418 |
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STOCKHOLDERS EQUITY: |
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Preferred stock, $0.01 par value; 1,000,000 shares authorized; none issued or outstanding |
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Common stock, $0.01 par value; 300,000,000 shares authorized; 82,550,398 and 82,336,689 shares issued, 67,658,760 and 67,521,038 shares
outstanding as of March 31, 2015 and December 31, 2014, respectively |
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826 |
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823 |
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Additional paid-in capital |
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607,643 |
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606,531 |
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Accumulated other comprehensive loss |
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(658 |
) |
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(853 |
) |
Retained deficit |
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(134,284 |
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(109,403 |
) |
Cost of 14,891,638 and 14,815,651 shares in treasury as of March 31, 2015 and December 31, 2014, respectively |
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(215,581 |
) |
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(215,165 |
) |
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Total stockholders equity |
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257,946 |
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281,933 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
529,634 |
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$ |
573,534 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
(In thousands, except per share amounts)
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For the Quarter Ended March 31, |
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2015 |
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2014 |
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REVENUE: |
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Tuition and registration fees |
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$ |
181,401 |
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$ |
196,909 |
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Other |
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901 |
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1,245 |
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Total revenue |
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182,302 |
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198,154 |
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OPERATING EXPENSES: |
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Educational services and facilities |
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54,951 |
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61,638 |
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General and administrative |
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139,148 |
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148,446 |
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Depreciation and amortization |
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6,785 |
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9,945 |
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Asset impairment |
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6,019 |
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74 |
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Total operating expenses |
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206,903 |
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220,103 |
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Operating loss |
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(24,601 |
) |
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(21,949 |
) |
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OTHER (EXPENSE) INCOME: |
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Interest income |
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160 |
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106 |
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Interest expense |
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(162 |
) |
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(81 |
) |
Miscellaneous (expense) income |
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(387 |
) |
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482 |
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Total other (expense) income |
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(389 |
) |
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507 |
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PRETAX LOSS |
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(24,990 |
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(21,442 |
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(Benefit from) provision for income taxes |
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(211 |
) |
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220 |
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LOSS FROM CONTINUING OPERATIONS |
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(24,779 |
) |
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(21,662 |
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LOSS FROM DISCONTINUED OPERATIONS, net of tax |
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(102 |
) |
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(36,481 |
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NET LOSS |
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(24,881 |
) |
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(58,143 |
) |
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OTHER COMPREHENSIVE LOSS, net of tax: |
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Unrealized gains (losses) on investments |
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195 |
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(28 |
) |
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COMPREHENSIVE LOSS |
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$ |
(24,686 |
) |
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$ |
(58,171 |
) |
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NET LOSS PER SHARE - BASIC and DILUTED: |
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Loss from continuing operations |
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$ |
(0.37 |
) |
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$ |
(0.32 |
) |
Loss from discontinued operations |
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(0.55 |
) |
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Net loss per share |
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$ |
(0.37 |
) |
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$ |
(0.87 |
) |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic and Diluted |
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67,534 |
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66,994 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the Quarter Ended March 31, |
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2015 |
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2014 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss |
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$ |
(24,881 |
) |
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$ |
(58,143 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Asset impairment |
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6,019 |
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67 |
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Depreciation and amortization expense |
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6,712 |
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15,431 |
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Bad debt expense |
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4,275 |
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5,852 |
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Compensation expense related to share-based awards |
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940 |
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1,341 |
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Loss on disposition of property and equipment |
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3 |
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26 |
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Changes in operating assets and liabilities |
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(13,244 |
) |
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6 |
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Net cash used in operating activities |
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(20,176 |
) |
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(35,420 |
) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of available-for-sale investments |
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(15,259 |
) |
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(29,810 |
) |
Sales of available-for-sale investments |
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14,754 |
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14,320 |
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Purchases of property and equipment |
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(3,369 |
) |
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(3,468 |
) |
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Net cash used in investing activities |
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(3,874 |
) |
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(18,958 |
) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Issuance of common stock |
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174 |
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196 |
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Payment on borrowings |
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(10,000 |
) |
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Change in restricted cash |
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9,000 |
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(384 |
) |
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Net cash used in financing activities |
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(826 |
) |
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(188 |
) |
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EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS: |
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288 |
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10 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(24,588 |
) |
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(54,556 |
) |
DISCONTINUED OPERATIONS CASH ACTIVITY INCLUDED ABOVE: |
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Add: Cash balance of discontinued operations, beginning of the period |
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475 |
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Less: Cash balance of discontinued operations, end of the period |
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847 |
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CASH AND CASH EQUIVALENTS, beginning of the period |
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93,832 |
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318,468 |
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CASH AND CASH EQUIVALENTS, end of the period |
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$ |
69,244 |
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$ |
263,540 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY
Career Educations academic institutions offer a high-quality education to a diverse student population in a variety of
disciplines through online, on-ground and hybrid learning programs. Our two universitiesAmerican InterContinental University (AIU) and Colorado Technical University (CTU) provide degree programs through the
masters or doctoral level as well as associate and bachelors levels. Both universities predominantly serve students online with career-focused degree programs that meet the educational demands of todays busy adults. AIU and CTU
continue to show innovation in higher education, advancing new personalized learning technologies like their intellipath adaptive learning platform that allow students to more efficiently
move toward earning a degree by receiving course credit for knowledge they can already demonstrate. Career Education is committed to providing high-quality education that closes the gap between learners who seek to advance their careers and
employers needing a qualified workforce.
A detailed listing of individual campus locations and web links to Career Educations
colleges, institutions and universities can be found at www.careered.com.
As used in this Quarterly Report on Form 10-Q, the terms
we, us, our, the Company and CEC refer to Career Education Corporation and our wholly-owned subsidiaries. The terms college, institution, and university
refer to an individual, branded, proprietary educational institution, owned by us and includes its campus locations. The term campus refers to an individual main or branch campus operated by one of our colleges, institutions or
universities.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information
and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the quarter
ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.
The unaudited condensed consolidated financial statements presented herein include the accounts of CEC and our wholly-owned subsidiaries
(collectively, CEC). All intercompany transactions and balances have been eliminated.
As of March 31, 2015, we organized our
business across four reporting segments: CTU, AIU (comprises University Group); Career Colleges and Transitional Group. Campuses included in our Transitional Group segment are currently being taught out and no longer enroll new students. These
campuses employ a gradual teach-out process, enabling them to continue to operate while current students complete their course of study. On March 31, 2015, the Company announced the teach-out of one additional Career College campus, Harrington
College of Design. This campus is reported within our Career Colleges segment as of March 31, 2015 in accordance with ASC Topic 280 Segment Reporting.
Effective January 1, 2015, ASC Topic 360 Property, Plant and Equipment, limits discontinued operations reporting and thus
as campuses cease teach-out operations going forward, the results of operations for these campuses will remain within the results of continuing operations. Historically, campuses met the criteria for discontinued operations upon completion of the
teach-out. During the first quarter of 2015, the Company
4
completed the teach-out of one Transitional Group campus, Sanford-Brown White Plains, which continues to be reported under the Transitional Group as of March 31, 2015. As a result of this
change, no prior period recast was made in our reporting and our results of operations for this campus are recorded within continuing operations for all periods presented.
During the first quarter of 2015, the Company made the decision to sell one of its campuses reported within the Career Colleges segment. As a
result of this decision, the assets and liabilities of this campus are classified as held for sale within continuing operations as of March 31, 2015.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In January 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update
(ASU) No. 2015-01, Income Statement Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. This ASU eliminates from GAAP the
concept of extraordinary items. Subtopic 225-20 previously required that an entity separately classify, present, and disclose extraordinary events and transactions from the results of ordinary operations and show the items separately. The amendments
in this ASU are effective for annual periods and interim periods within those annual periods, beginning after December 15, 2015; early adoption is permitted, for both public and all other entities. We are currently evaluating this guidance and
do not believe the adoption will significantly impact the presentation of our financial condition, results of operations and disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entitys Ability to Continue as a Going Concern. This ASU provides guidance to an organizations management, intended to define managements responsibility to evaluate whether there is a
substantial doubt about an organizations ability to continue as a going concern and to provide guidance regarding related footnote disclosure. In connection with preparing financial statements for each annual and interim reporting period, an
entitys management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entitys ability to continue as a going concern within one year after the date that the
financial statements are issued. Managements evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. For all entities, ASU 2014-15 is effective
for annual periods and interim periods within those annual periods beginning after December 15, 2016; early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2014-15 will have on our financial condition,
results of operations and disclosures.
In June 2014, the FASB issued ASU No. 2014-12, Compensation Stock Compensation
(Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU standardizes the reporting for these awards by requiring that entities
treat these performance targets as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes
probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. For all entities, ASU 2014-12 is effective for annual periods
and interim periods within those annual periods beginning after December 15, 2015; early adoption is permitted. We are currently evaluating the impact that the adoption of ASU 2014-11 will have on our financial condition, results of operations
and disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09
is principles based guidance that can be applied to all contracts with customers, enhancing comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The core principle of the guidance is that
entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. The guidance
details the steps entities should apply to achieve the core
5
principle. For public entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period; early
adoption is not permitted. In April 2015, the FASB proposed a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under US GAAP. Under the proposal, the standard would be effective for
public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. Nonpublic entities would be required to adopt the new standard for annual reporting periods beginning after December 15, 2018, and interim
periods within annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our financial condition, results of operations and disclosures.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts upon disposal that
have (or will have) a major effect on an entitys operations and financial results. In addition, the amendments in this ASU require expanded disclosures for discontinued operations as well as for disposals that do not qualify as discontinued
operations. This ASU is effective for us as of January 1, 2015. We have evaluated the impact that the adoption of ASU 2014-08 will have on our financial condition, results of operation and disclosures and believe the impact to be material.
Previously, campuses within our Transitional Group would be reclassified as discontinued operations upon the teach-out date. Under the new guidance, campuses that complete their teach-out will not meet the definition of discontinued operations, with
the exception of those that meet the definition of a strategic shift upon disposal. Therefore, revenues and any respective operating losses associated with these campuses that do not meet the definition of a strategic shift
upon disposal will remain within continuing operations for all periods presented. Additionally, we have provided increased disclosures surrounding discontinued operations as well as increased disclosures surrounding our campuses that will cease
operations but not meet the requirements to be classified as discontinued operations.
4. DISCONTINUED OPERATIONS
As of March 31, 2015, the results of operations for campuses that have ceased operations prior to 2015, our LCB
campuses that are held for sale and campuses that were sold and meet the criteria to be considered discontinued operations FASB ASC Topic 360, are presented within discontinued operations. Prior to January 1, 2015, our Transitional Group
campuses met the criteria for discontinued operations upon completion of their teach-out. Prospectively, in accordance with updated guidance under ASC Topic 360, only campuses that meet the criteria of a strategic shift upon disposal will be
classified within discontinued operations, among other criteria. During the first quarter of 2015, we did not have any campuses that met the criteria to be considered as a discontinued operation under the new guidance effective January 1, 2015.
Prior periods are not required to be recast for this change in guidance.
6
Results of Discontinued Operations
The summary of unaudited results of operations for our discontinued operations for the quarters ended March 31, 2015 and 2014 were as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, (1) |
|
|
|
2015 |
|
|
2014 |
|
Revenue |
|
$ |
44,744 |
|
|
$ |
45,225 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Educational services and facilities |
|
|
19,873 |
|
|
|
32,647 |
|
General and administrative |
|
|
25,060 |
|
|
|
43,901 |
|
Depreciation and amortization |
|
|
(73 |
) |
|
|
5,486 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
44,860 |
|
|
|
82,034 |
|
|
|
|
|
|
|
|
|
|
Loss before income tax |
|
$ |
(102 |
) |
|
$ |
(36,481 |
) |
Income tax expense (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax |
|
$ |
(102 |
) |
|
$ |
(36,481 |
) |
|
|
|
|
|
|
|
|
|
Net loss per diluted share |
|
$ |
(0.00 |
) |
|
$ |
(0.55 |
) |
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
$ |
239 |
|
|
$ |
185 |
|
|
|
|
|
|
|
|
|
|
(1) |
Includes the results of operations for our LCB campuses that are held for sale, which met the criteria to be considered discontinued operations under ASC Topic 360. |
(2) |
Due to the valuation allowance against our net deferred taxes, there is no income tax benefit reported for the quarters ended March 31, 2015 and 2014. |
Assets and Liabilities of Discontinued Operations
Assets and liabilities of discontinued operations on our condensed consolidated balance sheets for campuses that have ceased operations or were
sold as of March 31, 2015 and December 31, 2014 include the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
December 31, 2014 |
|
Assets: |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Receivables, net |
|
$ |
255 |
|
|
$ |
473 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
255 |
|
|
|
473 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
914 |
|
|
|
975 |
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
(1) |
|
$ |
1,169 |
|
|
$ |
1,448 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
295 |
|
|
$ |
579 |
|
Remaining lease obligations |
|
|
12,778 |
|
|
|
14,927 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
13,073 |
|
|
|
15,506 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Remaining lease obligations |
|
|
18,827 |
|
|
|
22,689 |
|
Other |
|
|
164 |
|
|
|
170 |
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
(1) |
|
$ |
32,064 |
|
|
$ |
38,365 |
|
|
|
|
|
|
|
|
|
|
7
(1) |
Excludes assets and liabilities for our LCB campuses which are presented within assets and liabilities held for sale on our condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014.
|
Remaining Lease Obligations
A number of the campuses that ceased operations prior to January 1, 2015 or vacated real estate properties for our LCB campuses held for
sale, have remaining lease obligations that expire over time with the latest expiration in 2020. A liability is recorded representing the fair value of the remaining lease obligation at the time the space is no longer being utilized. Changes in our
future remaining lease obligations, which are reflected within current and non-current liabilities of discontinued operations and within liabilities held for sale on our unaudited condensed consolidated balance sheets, for the quarters ended
March 31, 2015 and 2014 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Period |
|
|
Charges Incurred (1) |
|
|
Net Cash Payments |
|
|
Other (2) |
|
|
Balance, End of Period |
|
For the quarter ended March 31, 2015 |
|
$ |
39,869 |
|
|
$ |
(486 |
) |
|
$ |
(5,942 |
) |
|
$ |
|
|
|
$ |
33,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 31, 2014 |
|
$ |
46,755 |
|
|
$ |
7,319 |
|
|
$ |
(6,764 |
) |
|
$ |
3,435 |
|
|
$ |
50,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes charges for newly vacated spaces and subsequent adjustments for accretion, revised estimates and variances between estimated and actual charges, net of any reversals for terminated lease obligations.
|
(2) |
Includes existing prepaid rent and deferred rent liability balances for newly vacated spaces that are netted with the losses incurred in the period recorded. |
5. ASSETS HELD FOR SALE
During the first quarter of 2015, we made the decision to sell one of our Career Colleges. Accordingly the assets and
liabilities for this campus are included within assets and liabilities held for sale on our unaudited condensed consolidated balance sheet as of March 31, 2015. As this campus does not meet the criteria for discontinued operations under ASC
Topic 360, the results of operations for this campus are reported within continuing operations for all periods presented. Additionally, during the fourth quarter of 2014, we made the decision to sell our Le Cordon Bleu Culinary Arts institutions.
The assets and liabilities for the LCB institutions are included within assets and liabilities held for sale on our condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014. The sale of the LCB institutions met the
criteria to be treated as discontinued operations under ASC Topic 360. Accordingly, the results of operations are reported within discontinued operations in the unaudited condensed consolidated statements of loss and comprehensive loss. As we
anticipate the sale of these assets to be completed within one year of the decision to sell, we have recorded the assets and liabilities related to these institutions within current assets and liabilities held for sale as of March 31, 2015.
8
Results of Operations
The summary of unaudited results of operations for our assets held for sale for the quarters ended March 31, 2015 and 2014 were as follows
(dollars in thousands):
Reported within loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Revenue |
|
$ |
2,818 |
|
|
$ |
3,497 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Educational services and facilities |
|
|
1,703 |
|
|
|
1,896 |
|
General and administrative |
|
|
1,620 |
|
|
|
1,845 |
|
Depreciation and amortization |
|
|
2 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,325 |
|
|
|
3,983 |
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
$ |
(507 |
) |
|
$ |
(486 |
) |
|
|
|
|
|
|
|
|
|
Reported within loss from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Revenue |
|
$ |
44,712 |
|
|
$ |
42,247 |
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
Educational services and facilities |
|
|
19,943 |
|
|
|
19,340 |
|
General and administrative |
|
|
24,525 |
|
|
|
36,685 |
|
Depreciation and amortization |
|
|
1 |
|
|
|
4,268 |
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
44,469 |
|
|
|
60,293 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
243 |
|
|
$ |
(18,046 |
) |
|
|
|
|
|
|
|
|
|
Assets and Liabilities of Assets Held for Sale
Assets and liabilities of assets held for sale on our condensed consolidated balance sheets as of March 31, 2015 and December 31,
2014 include the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
December 31, 2014 (1) |
|
Assets: |
|
|
|
|
|
|
|
|
Receivables, net |
|
$ |
7,464 |
|
|
$ |
8,303 |
|
Property and equipment, net |
|
|
42,755 |
|
|
|
42,521 |
|
Other intangible assets |
|
|
18,400 |
|
|
|
18,400 |
|
Other assets |
|
|
7,592 |
|
|
|
7,622 |
|
|
|
|
|
|
|
|
|
|
Total assets held for sale |
|
$ |
76,211 |
|
|
$ |
76,846 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
11,933 |
|
|
$ |
12,410 |
|
Deferred revenue |
|
|
17,414 |
|
|
|
17,001 |
|
Remaining lease obligations |
|
|
1,836 |
|
|
|
2,253 |
|
Other liabilities |
|
|
19,853 |
|
|
|
18,693 |
|
|
|
|
|
|
|
|
|
|
Total liabilities held for sale |
|
$ |
51,036 |
|
|
$ |
50,357 |
|
|
|
|
|
|
|
|
|
|
(1) |
Only assets and liabilities related to our LCB institutions were reported as held for sale as of December 31, 2014. |
9
6. INVESTMENTS
Investments from our continuing operations consist of the following as of March 31, 2015 and December 31, 2014
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain |
|
|
(Loss) |
|
|
Fair Value |
|
Short-term investments (available for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
$ |
5,937 |
|
|
$ |
|
|
|
$ |
(40 |
) |
|
$ |
5,897 |
|
Non-governmental debt securities |
|
|
94,438 |
|
|
|
12 |
|
|
|
(131 |
) |
|
|
94,319 |
|
Treasury and federal agencies |
|
|
22,961 |
|
|
|
13 |
|
|
|
(7 |
) |
|
|
22,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
|
123,336 |
|
|
|
25 |
|
|
|
(178 |
) |
|
|
123,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments (available for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bond |
|
|
7,850 |
|
|
|
|
|
|
|
(476 |
) |
|
|
7,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (available for sale) |
|
$ |
131,186 |
|
|
$ |
25 |
|
|
$ |
(654 |
) |
|
$ |
130,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014 |
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
|
Cost |
|
|
Gain |
|
|
(Loss) |
|
|
Fair Value |
|
Short-term investments (available for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds |
|
$ |
6,880 |
|
|
$ |
1 |
|
|
$ |
(56 |
) |
|
$ |
6,825 |
|
Non-governmental debt securities |
|
|
98,400 |
|
|
|
1 |
|
|
|
(271 |
) |
|
|
98,130 |
|
Treasury and federal agencies |
|
|
17,928 |
|
|
|
6 |
|
|
|
(31 |
) |
|
|
17,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
|
123,208 |
|
|
|
8 |
|
|
|
(358 |
) |
|
|
122,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments (available for sale): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bond |
|
|
7,850 |
|
|
|
|
|
|
|
(476 |
) |
|
|
7,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments (available for sale) |
|
$ |
131,058 |
|
|
$ |
8 |
|
|
$ |
(834 |
) |
|
$ |
130,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our long-term investment in a municipal bond is comprised of debt obligations issued by states, cities,
counties, and other governmental entities, which earn federally tax-exempt interest. Our investment in ARS has a stated term to maturity of greater than one year, and as such, we classify our investment in ARS as non-current on our condensed
consolidated balance sheets within other assets. Auctions can fail when the number of sellers of the security exceeds the buyers for that particular auction period. In the event that an auction fails, the interest rate resets at a rate
based on a formula determined by the individual security. The ARS for which auctions have failed continues to accrue interest and is auctioned on a set interval until the auction succeeds, the issuer calls the security, or it matures. As of
March 31, 2015, we have determined this investment is at risk for impairment due to the nature of the liquidity of the market over the past several years. Cumulative unrealized losses as of March 31, 2015 amount to $0.5 million and are
reflected within accumulated other comprehensive loss as a component of stockholders equity. We believe this impairment is temporary, as we do not intend to sell the investment and it is unlikely we will be required to sell the investment
before recovery of its amortized cost basis.
Our non-governmental debt securities primarily consist of corporate bonds and commercial
paper. Our treasury and federal agencies primarily consist of U.S. Treasury bills and federal home loan debt securities. We do not intend to sell our investments in these securities and it is not likely that we will be required to sell these
investments before recovery of the amortized cost basis.
10
Fair Value Measurements
FASB ASC Topic 820 Fair Value Measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in
measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of March 31, 2015, we held investments that are required to be measured at fair value on a recurring basis. These investments
(available-for-sale) consist of non-governmental debt securities, treasury and federal agencies and municipal bonds that are publicly traded and for which market prices are readily available, and our investment in an ARS. Available for sale
securities included in Level 2 are estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our investment in an ARS is categorized as Level 3 and fair value is estimated utilizing a discounted cash flow
analysis as of March 31, 2015 which considers, among other items, the collateralization underlying the security investment, the credit worthiness of the counterparty, the time of expected future cash flows, and the expectation of the next time
the security is expected to have a successful auction. The auction event for our ARS investment has failed for multiple years. The security was also compared, when possible, to other observable market data with similar characteristics.
Investments measured at fair value on a recurring basis subject to the disclosure requirements of FASB ASC Topic 820 Fair Value
Measurements at March 31, 2015 and December 31, 2014 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2015 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Municipal bonds |
|
$ |
|
|
|
$ |
5,897 |
|
|
$ |
7,374 |
|
|
$ |
13,271 |
|
Non-governmental debt securities |
|
|
|
|
|
|
94,319 |
|
|
|
|
|
|
|
94,319 |
|
Treasury and federal agencies |
|
|
|
|
|
|
22,967 |
|
|
|
|
|
|
|
22,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
|
|
|
$ |
123,183 |
|
|
$ |
7,374 |
|
|
$ |
130,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Municipal bonds |
|
$ |
|
|
|
$ |
6,825 |
|
|
$ |
7,374 |
|
|
$ |
14,199 |
|
Non-governmental debt securities |
|
|
|
|
|
|
98,130 |
|
|
|
|
|
|
|
98,130 |
|
Treasury and federal agencies |
|
|
|
|
|
|
17,903 |
|
|
|
|
|
|
|
17,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
|
|
|
$ |
122,858 |
|
|
$ |
7,374 |
|
|
$ |
130,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents a rollforward of our assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) as defined in FASB ASC Topic 820 for the quarter ended March 31, 2015 (dollars in thousands):
|
|
|
|
|
Balance at December 31, 2014 |
|
$ |
7,374 |
|
Unrealized gain (loss) |
|
|
|
|
|
|
|
|
|
Balance at March 31, 2015 |
|
$ |
7,374 |
|
|
|
|
|
|
Equity Method Investment
Our investment in an equity affiliate, which is recorded within other noncurrent assets on our condensed consolidated balance sheet, represents
an international investment in a private company. As of March 31, 2015,
11
our investment in an equity affiliate equated to a 30.7%, or $4.2 million, non-controlling interest in CCKF, a Dublin-based educational technology company providing intelligent adaptive systems
to power the delivery of individualized and personalized learning. During the quarter ended March 31, 2015, we recorded less than $0.1 million of loss related to our proportionate investment in CCKF. In the prior year quarter, this investment
was recorded as a cost method investment.
Credit Agreement
During the fourth quarter of 2014, the Company; its wholly-owned subsidiary, CEC Educational Services, LLC (CEC-ES); and the
subsidiary guarantors thereunder entered into a First Amendment (the First Amendment) to its Amended and Restated Credit Agreement dated as of December 30, 2013 (as amended, the Credit Agreement) with BMO Harris Bank
N.A. (BMO Harris), in its capacities as the initial lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the Credit Agreement, to among other things,
increase the revolving credit facility to $120.0 million. The revolving credit facility under the Credit Agreement is scheduled to mature on June 30, 2016. The loans and letter of credit obligations under the Credit Agreement are required to be
secured by 100% cash collateral. As of March 31, 2015, there were no outstanding borrowings under the revolving credit facility.
7. STUDENT RECEIVABLES
Student receivables represent funds owed to us in exchange for the educational services provided to a student. Student
receivables are reflected net of an allowance for doubtful accounts and net of deferred tuition revenue. Student receivables, net are reflected on our condensed consolidated balance sheets as components of both current and non-current assets. We do
not accrue interest on past due student receivables; interest is recorded only upon collection.
Generally, a student receivable balance
is written off once it reaches greater than 90 days past due. Although we analyze past due receivables, it is not practical to provide an aging of our non-current student receivable balances as a result of the methodology utilized in determining our
earned student receivable balances. Student receivables are recognized on our condensed consolidated balance sheets as they are deemed earned over the course of a students program and/or term, and therefore cash collections are not applied
against specifically dated transactions.
Our standard student receivable allowance estimation methodology considers a number of factors
that, based on our collection experience, we believe have an impact on our repayment risk and ability to collect student receivables. Changes in the trends in any of these factors may impact our estimate of the allowance for doubtful
accounts. These factors include, but are not limited to: internal repayment history, repayment practices of previous extended payment programs and information provided by a third-party institution who previously offered similar extended payment
programs, changes in the current economic, legislative or regulatory environments and credit worthiness of our students. These factors are monitored and assessed on a regular basis. Overall, our allowance estimation process for student
receivables is validated by trending analysis and comparing estimated and actual performance.
Student Receivables Under Extended Payment Plans and
Recourse Loan Agreements
To assist students in completing their educational programs, we had previously provided extended payment
plans to certain students and also had loan agreements with Sallie Mae and Stillwater National Bank and Trust Company (Stillwater) which required us to repurchase loans originated by them to our students after a certain period of time.
We discontinued providing extended payment plans to students during the first quarter of 2011 and the recourse loan agreements with Sallie Mae and Stillwater ended in March 2008 and April 2007, respectively.
12
As of March 31, 2015 and December 31, 2014, the amount of non-current student
receivables under these programs, net of allowance for doubtful accounts and net of deferred tuition revenue, was $3.0 million and $2.9 million, respectively.
Student Receivables Valuation Allowance
Changes in our current and non-current receivables allowance for the quarters ended March 31, 2015 and 2014 were as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Period |
|
|
Charges to Expense (1) |
|
|
Amounts Written-off |
|
|
Balance, End of Period (2) |
|
For the quarter ended March 31, 2015 |
|
$ |
14,517 |
|
|
$ |
4,022 |
|
|
$ |
(4,399 |
) |
|
$ |
14,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 31, 2014 |
|
$ |
17,570 |
|
|
$ |
5,056 |
|
|
$ |
(5,639 |
) |
|
$ |
16,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Charges to expense include an offset for recoveries of amounts previously written off of $1.1 million and $1.6 million for the quarters ended March 31, 2015 and 2014, respectively. |
(2) |
Includes amounts for allowances related to receivables reported within our assets held for sale within continuing operations. |
Fair Value Measurements
The carrying
amount reported in our condensed consolidated balance sheets for the current portion of student receivables approximates fair value because of the nature of these financial instruments as they generally have short maturity periods. It is not
practicable to estimate the fair value of the non-current portion of student receivables, since observable market data is not readily available, and no reasonable estimation methodology exists.
8. RESTRUCTURING CHARGES
During the past several years, we have carried out reductions in force related to the continued reorganization of our
corporate and campus functions to better align with current total enrollments and made decisions to teach out a number of campuses, meaning gradually close the campuses through an orderly process. Most notably, we have recorded charges within our
Career Colleges and Transitional Group segments and our corporate functions as we continue to align our overall management structure.
The
following table details the changes in our accrual for severance and related costs associated with these restructuring events for our continuing operations during the quarters ended March 31, 2015 and 2014 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Period |
|
|
Severance & Related Charges (1) |
|
|
Payments |
|
|
Non-cash Adjustments (2) |
|
|
Balance, End of Period |
|
For the quarter ended March 31, 2015 |
|
$ |
2,701 |
|
|
$ |
744 |
|
|
$ |
(771 |
) |
|
$ |
(218 |
) |
|
$ |
2,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the quarter ended March 31, 2014 |
|
$ |
3,243 |
|
|
$ |
|
|
|
$ |
(386 |
) |
|
$ |
(200 |
) |
|
$ |
2,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes charges related to COBRA and outplacement services which are assumed to be completed by the third month following an employees departure. |
(2) |
Includes cancellations due to employee departures prior to agreed upon end dates, employee transfers to open positions within the organization and subsequent adjustments to severance and related costs.
|
The current portion of the accrual for severance and related charges was $1.5 million and $1.3 million as of March 31,
2015 and March 31, 2014, respectively, which is recorded within current accrued expenses payroll
13
and related benefits; the long-term portion of $1.0 million and $1.4 million, respectively, is recorded within other non-current liabilities. In addition, as of March 31, 2015, we have
accrued approximately $0.4 million related to retention bonuses that have been offered to certain employees. These amounts will be recorded ratably over the period the employees are retained; $0.2 million was recorded during the quarter ended
March 31, 2015.
In addition to the charges detailed above, a number of these campuses will have remaining lease obligations
following the eventual campus closure, with the longest lease term being through 2021. The total estimated charge related to the remaining lease obligation for these leases, once the campus completes the close process, and adjusted for possible
lease buyouts and sublease assumptions is approximately $9.0 million. The amount related to each campus will be recorded at each campus closure date based on current estimates and assumptions related to the amount and timing of sublease income.
9. ASSET IMPAIRMENTS
Intangible Assets
During the first quarter of 2015, in conjunction with the quarterly review process, we concluded that certain indicators were present which
suggested that the Sanford-Brown trade name was at risk of its carrying value exceeding its respective fair value as of March 31, 2015. These indicators included, but were not limited to, a decline in cash flows, a decline in actual revenue and
earnings as compared to prior projected results and a more-likely-than-not expectation of selling or disposing of the campuses utilizing the Sanford-Brown trade name. As a result of the more-likely-than-not expectation of selling or disposing of the
asset coupled with declining cash flows, management concluded that the full value of $1.7 million for this trade name was impaired as of March 31, 2015, primarily due to the decrease in royalty rate to 0%. The $1.7 million impairment was
recorded within loss from continuing operations within the Career Colleges segment.
Property and Equipment
During the first quarter of 2015, we identified indicators of impairment due to the undiscounted cash flows of certain schools not exceeding
the carrying value of the related asset group and a more-likely-than-not expectation of selling or disposing of the campuses. As a result, property and equipment was affected by asset impairment charges of approximately $4.3 million for the quarter
ended March 31, 2015. The fair value for these assets was determined based upon managements assumptions regarding an estimated percentage of replacement value for similar assets and estimated salvage values. Because the determination of
the estimated fair value of these assets requires significant estimation and assumptions, these fair value measurements are categorized as Level 3 per ASC Topic 820.
10. CONTINGENCIES
An accrual for estimated legal fees and settlements of $3.1 million and $2.3 million at March 31, 2015 and
December 31, 2014, respectively, is presented within other current liabilities on our condensed consolidated balance sheets.
We
record a liability when we believe that it is both probable that a loss will be incurred and the amount of loss can be reasonably estimated. We evaluate, at least quarterly, developments in our legal matters that could affect the amount of liability
that was previously accrued, and make adjustments as appropriate. Significant judgment is required to determine both probability and the estimated amount. We may be unable to estimate a possible loss or range of possible loss due to various reasons,
including, among others: (1) if the damages sought are indeterminate; (2) if the proceedings are in early stages; (3) if there is uncertainty as to the outcome of pending appeals, motions, or settlements; (4) if there are
significant factual issues to be determined or resolved; and (5) if there are novel or unsettled legal theories presented. In such instances, there is considerable uncertainty regarding the ultimate resolution of such matters, including a
possible eventual loss, if any.
14
Litigation
We are, or were, a party to the following legal proceedings that we consider to be outside the scope of ordinary routine litigation incidental
to our business. Due to the inherent uncertainties of litigation, we cannot predict the ultimate outcome of these matters. An unfavorable outcome of any one or more of these matters could have a material adverse impact on our business, results of
operations, cash flows and financial position.
Student Litigation
Enea, et al. v. Career Education Corporation, California Culinary Academy, Inc., SLM Corporation, and Sallie Mae, Inc. Plaintiffs filed
this putative class action in the Superior Court State of California, County of San Francisco, on or about June 27, 2013. Plaintiffs allege that CCA materially misrepresented the placement rates of its graduates, falsely stated that admission
to the culinary school was competitive and that the school had an excellent reputation among restaurants and other food service providers, represented that the culinary schools were well-regarded institutions producing skilled graduates who
employers eagerly hired, and lied by telling students that the school provided graduates with career placement services for life. The class purports to consist of persons who executed Parent Plus loans or co-signed loans for students who attended
CCA at any time between January 1, 2003 and December 31, 2008. Plaintiffs seek restitution, damages, civil penalties and attorneys fees.
Defendants filed a motion to dismiss and to strike class action allegations on October 31, 2013. A hearing on the motions was conducted
on March 14, 2014. Thereafter, the Court issued two separate orders granting the motion to strike the class allegations and the motion to dismiss without leave to amend. Plaintiffs filed a motion seeking leave to file a third amended complaint
and/or for reconsideration of the Courts orders. On May 9, 2014, the Court denied plaintiffs motion to reconsider its order striking the class allegations and granted plaintiffs leave to file a third amended complaint as to some,
but not all, of plaintiffs claims. On May 15, 2014, plaintiffs appealed the Courts ruling with respect to the motion to strike the class allegations. The Court has stayed the case pending a ruling on the appeal.
Because of the many questions of fact and law that may arise in the future, the outcome of this legal proceeding is uncertain at this point.
Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because, among other things, our potential liability depends on whether a class is certified and, if so, the
composition and size of any such class, as well as on an assessment of the appropriate measure of damages if we were to be found liable. Accordingly, we have not recognized any liability associated with this action.
Surrett, et al. v. Western Culinary Institute, Ltd. and Career Education Corporation. On March 5, 2008, a complaint was filed in
Portland, Oregon in the Circuit Court of the State of Oregon in and for Multnomah County naming Western Culinary Institute, Ltd. (WCI) and the Company as defendants. Plaintiffs filed the complaint individually and as a putative class
action and alleged two claims for equitable relief: violation of Oregons Unlawful Trade Practices Act (UTPA) and unjust enrichment. Plaintiffs filed an amended complaint on April 10, 2008, which added two claims for money
damages: fraud and breach of contract. Plaintiffs allege WCI made a variety of misrepresentations to them, relating generally to WCIs placement statistics, students employment prospects upon graduation from WCI, the value and quality of
an education at WCI, and the amount of tuition students could expect to pay as compared to salaries they could expect to earn after graduation. WCI subsequently moved to dismiss certain of plaintiffs claims under Oregons UTPA; that
motion was granted on September 12, 2008. On February 5, 2010, the Court entered a formal Order granting class certification on part of plaintiffs UTPA and fraud claims purportedly based on omissions, denying certification
of the rest of those claims and denying certification of the breach of contract and unjust enrichment claims. The class consists of students who enrolled at WCI between March 5, 2006 and March 1, 2010, excluding those who dropped out
or were dismissed from the school for academic reasons.
15
Plaintiffs filed a fifth amended complaint on December 7, 2010, which included
individual and class allegations by Nathan Surrett. Class notice was sent on April 22, 2011, and the opt-out period expired on June 20, 2011. The class consisted of approximately 2,600 members. They are seeking tuition refunds,
interest and certain fees paid in connection with their enrollment at WCI.
On May 23, 2012, WCI filed a motion to compel arbitration
of claims by 1,062 individual class members who signed enrollment agreements containing express class action waivers. The Court issued an Order denying the motion on July 27, 2012. On August 6, 2012, WCI filed an appeal from the
Courts Order and on August 30, 2012, the Court of Appeals issued an Order granting WCIs motion to compel the trial court to cease exercising jurisdiction in the case. The oral argument on the appeal was heard on May 9, 2014 and
we are awaiting the Courts decision. All proceedings with the trial court have been stayed pending the outcome of the appeal.
Because of the many questions of fact and law that have already arisen and that may arise in the future, the outcome of this legal proceeding
is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because of the inherent difficulty in assessing the appropriate measure of damages and the
number of class members who might be entitled to recover damages, if we were to be found liable. Accordingly, we have not recognized any liability associated with this action.
False Claims Act
United States
of America, ex rel. Melissa Simms Powell, et al. v. American InterContinental University, Inc., a Georgia Corporation, Career Education Corp., a Delaware Corporation and John Doe Nos. 1-100. On July 28, 2009, we were served with a complaint
filed in the U.S. District Court for the Northern District of Georgia, Atlanta Division. The complaint was originally filed under seal on July 14, 2008 by four former employees of the Dunwoody campus of our American InterContinental
University on behalf of themselves and the federal government. On July 27, 2009, the Court ordered the complaint unsealed and we were notified that the U.S. Department of Justice declined to intervene in the action. When the federal government
declines to intervene in a False Claims Act action, as it has done in this case, the private plaintiffs (or relators) may elect to pursue the litigation on behalf of the federal government and, if they are successful, receive a portion
of the federal governments recovery. The action alleges violations of the False Claims Act and promissory fraud, including allegedly providing false certifications to the federal government regarding compliance with certain
provisions of the Higher Education Act and accreditation standards. Relators claim that defendants conduct caused the government to pay federal funds to defendants and to make payments to third-party lenders, which the government would not
have made if not for defendants alleged violation of the law. Relators seek treble damages plus civil penalties and attorneys fees. On July 12, 2012, the Court granted our motion to dismiss for a lack of jurisdiction, the claims
related to incentive compensation and proof of graduation. Thus, the only claim that remained pending against defendants was based on relators contention that defendants misled the schools accreditor, Southern Association of Colleges and
Schools, during the accreditation process. On December 16, 2013, we filed a motion for summary judgment on a variety of substantive grounds. On September 29, 2014, the Court granted our motion for summary judgment and entered judgment in
our favor. On October 2, 2014, relators filed a notice of appeal. The appeal is currently stayed pending the United States Supreme Courts decision in Kellogg Brown & Root Servs., Inc. v. U.S. ex rel. Carter,
No. 12-1497, which may resolve some of the issues on appeal in this matter.
Because of the many questions of fact and law that may
arise on appeal, the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because the complaint does not seek a
specified amount of damages and it is unclear how damages would be calculated, if we were to be found liable. Moreover, the case presents novel legal issues. Accordingly, we have not recognized any liability associated with this action.
United States of America, ex rel. Brent M. Nelson v. Career Education Corporation, Sanford-Brown, Ltd., and Ultrasound Technical Services,
Inc. On April 18, 2013, defendants were served with an amended complaint
16
filed in the U.S. District Court for the Eastern District of Wisconsin. The original complaint was filed under seal on July 30, 2012 by a former employee of Sanford-Brown College
Milwaukee on behalf of himself and the federal government. On February 27, 2013, the Court ordered the complaint unsealed and we were notified that the U.S. Department of Justice declined to intervene in the action. After the federal government
declined to intervene in this case, the relator elected to pursue the litigation on behalf of the federal government. If he is successful he would receive a portion of the federal governments recovery. An amended complaint was filed by the
relator on April 12, 2013 and alleges violations of the False Claims Act, including allegedly providing false certifications to the federal government regarding compliance with certain provisions of the Higher Education Act and accreditation
standards. Relator claims that defendants conduct caused the government to pay federal funds to defendants, and to make payments to third-party lenders, which the government would not have made if not for defendants alleged violation of
the law. Relator seeks treble damages plus civil penalties and attorneys fees. On June 11, 2013, defendants filed a motion to dismiss the case on a variety of grounds. The Court ruled on that motion, dismissing CEC from the case and
dismissing several of the relators factual claims. On November 27, 2013, Sanford Brown, LTD., and Ultrasound Technical Services, Inc., the remaining Company defendants, filed a motion to dismiss the case for lack of subject matter
jurisdiction due to prior public disclosures of the relators alleged claims. On March 17, 2014, the Court granted this motion in part, limiting the timeframe and geographical scope of the relators claims. On June 13, 2014, the
Court granted the remaining Company defendants motion for summary judgment and entered judgment in their favor. On July 9, 2014, relator filed a notice of appeal. The oral argument on the appeal was heard on January 8, 2015, and we
are awaiting the Courts decision.
Because of the many questions of fact and law that may arise on appeal, the outcome of this legal
proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because the complaint does not seek a specified amount of damages and it is
unclear how damages would be calculated, if we were to be found liable. Accordingly, we have not recognized any liability associated with this action.
United States of America, ex rel. Ann Marie Rega v. Career Education Corporation, et al. On May 16, 2014, Relator Ann Marie Rega,
a former employee of Sanford-Brown Iselin, filed an action in the U.S. District Court for the District of New Jersey against the Company and almost all of the Companys individual schools on behalf of herself and the federal government. She
alleges claims under the False Claims Act, including allegedly providing false certifications to the federal government regarding compliance with certain provisions of the Higher Education Act and accreditation standards. Relator claims that
defendants conduct caused the government to pay federal funds to defendants, and to make payments to third-party lenders, which the government would not have made if not for defendants alleged violation of the law. Relator seeks treble
damages plus civil penalties and attorneys fees. Relator failed to comply with the statutory requirement that all False Claims Act cases be filed under seal. On June 16, 2014, defendants filed a motion to dismiss the complaint with
prejudice as to relator for failure to file her complaint under seal in accordance with the requirements of the False Claims Act. The motion is fully briefed and the parties are awaiting a ruling from the Court.
Because the matter is in its early stages and because of the many questions of fact and law that may arise, the outcome of this legal
proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action because the complaint does not seek a specified amount of damages and it is
unclear how damages would be calculated, if we were to be found liable. Moreover, the case presents novel legal issues. Accordingly, we have not recognized any liability associated with this action.
Employment Litigation
Wilson,
et al. v. Career Education Corporation. On August 11, 2011, Riley Wilson, a former admissions representative based in Minnesota, filed a complaint in the U.S. District Court for the Northern District of Illinois. The two-count complaint
asserts claims of breach of contract and unjust enrichment arising from our
17
decision to terminate our Admissions Representative Supplemental Compensation (ARSC) Plan. In addition to his individual claims, Wilson also seeks to represent a nationwide class of
similarly situated admissions representatives who also were affected by termination of the plan. On October 6, 2011, we filed a motion to dismiss the complaint. On April 13, 2012, the Court granted our motion to dismiss in its entirety and
dismissed plaintiffs complaint for failure to state a claim. The Court dismissed this action with prejudice on May 14, 2012. On June 11, 2012, plaintiff filed a notice of appeal with the U.S. Court of Appeals for the Seventh Circuit
appealing the final judgment of the trial court. Briefing was completed on October 30, 2012, and oral argument was held on December 3, 2012. On August 30, 2013, the Seventh Circuit affirmed the district courts ruling on
plaintiffs unjust enrichment claim but reversed and remanded for further proceedings on plaintiffs breach of contract claim. On September 13, 2013, we filed a petition for rehearing to seek review of the panels decision on the
breach of contract claim and for certification of question to the Illinois Supreme Court, but the petition was denied.
The case now is on
remand to the district court for further proceedings on the sole question of whether CECs termination of the ARSC Plan violated the implied covenant of good faith and fair dealing. The parties have completed fact discovery as to the issue of
liability. On March 24, 2015, we filed a motion for summary judgment.
Because of the many questions of fact and law that may arise,
the outcome of this legal proceeding is uncertain at this point. Based on information available to us at present, we cannot reasonably estimate a range of potential loss, if any, for this action. Accordingly, we have not recognized any liability
associated with this action.
Other Litigation
In addition to the legal proceedings and other matters described above, we are also subject to a variety of other claims, lawsuits and
investigations that arise from time to time out of the conduct of our business, including, but not limited to, claims involving prospective students, students or graduates and routine employment matters. While we currently believe that such claims,
individually or in aggregate, will not have a material adverse impact on our financial position, cash flows or results of operations, these other matters are subject to inherent uncertainties, and managements view of these matters may change
in the future. Were an unfavorable final outcome to occur in any one or more of these matters, there exists the possibility of a material adverse impact on our business, reputation, financial position, cash flows, and the results of operations for
the period in which the effect becomes probable and reasonably estimable.
State Investigations
The Attorney General of Connecticut is serving as the point of contact for inquiries received from the attorneys general of the following 17
states: Arkansas, Arizona, Connecticut, Idaho, Iowa, Kentucky, Missouri, Nebraska, North Carolina, Oregon, Pennsylvania, Washington (January 24, 2014); Illinois (December 9, 2011); Tennessee (February 7, 2014), Hawaii (May 28, 2014 ), New
Mexico (May 2014), and Maryland (March 16, 2015) (these 17 attorneys general are collectively referred to as the Multi-State AGs). In addition, the Company has received inquiries from the attorneys general of Florida (November 5, 2010),
Massachusetts (September 27, 2012), Colorado (August 27, 2013) and Minnesota (September 18, 2014). The inquiries are civil investigative demands or subpoenas which relate to the investigation by the attorneys general of whether the Company and its
schools have complied with certain state consumer protection laws, and generally focus on the Companys practices relating to the recruitment of students, graduate placement statistics, graduate certification and licensing results and student
lending activities, among other matters. Depending on the state, the documents and information sought by the attorneys general in connection with their investigations cover time periods as early as 2006 to the present. The Company intends to
cooperate with the states involved with a view towards resolving these inquiries as promptly as possible. In this regard, over the past several months the Company has participated in several meetings with representatives of the Multi-State AGs about
the Companys business and to engage in a dialogue towards a resolution of these inquiries.
18
We cannot predict the scope, duration or outcome of these attorney general
investigations. At the conclusion of any of these matters, the Company or certain of its schools may be subject to claims of failure to comply with state laws or regulations and may be required to pay significant financial penalties and/or
curtail or modify their operations. Other state attorneys general may also initiate inquiries into the Company or its schools. If any of the foregoing occurs, our business, reputation, financial position, cash flows and results of operations could
be materially adversely affected. Based on information available to us at present, we cannot reasonably estimate a range of potential monetary or non-monetary impact these investigations might have on the Company because it is uncertain what
remedies, if any, these regulators might ultimately seek in connection with these investigations.
In addition to the aforementioned
inquiries, from time to time, we receive informal requests from state Attorneys General and other government agencies relating to specific complaints they have received from students or former students which seek information about the student, our
programs, and other matters relating to our activities in the relevant state. These requests can be broad and time consuming to respond to, and there is a risk that they could expand and/or lead to a formal inquiry or investigation into our
practices in a particular state.
Regulatory Matters
ED Inquiry and HCM1 Status
In
December 2011, the U.S. Department of Education (ED) advised the Company that it is conducting an inquiry concerning possible violations of ED misrepresentation regulations related to placement rates reported by certain of the
Companys institutions to accrediting bodies, students and potential students. This inquiry stems from the Companys self-reporting to ED of its internal investigation into student placement determination practices at the Companys
previous Health Education segment campuses and review of placement determination practices at all of the Companys other domestic campuses in 2011. The Company has been cooperating with ED in connection with this inquiry. If ED determines that
the Company or any of its institutions violated ED misrepresentation regulations with regard to the publication or reporting of placement rates or other disclosures to students or prospective students or finds any other basis in the materials we are
providing, ED may revoke, limit, suspend, delay or deny the institutions or all of the Companys institutions Title IV eligibility, or impose fines. In addition, a majority of the Companys institutions are currently in the process
of seeking recertification from ED to participate in Title IV Programs. We cannot predict whether, or to what extent, EDs inquiry might impact this recertification process.
In December 2011, ED also moved all of the Companys institutions from the advance method of payment of Title IV Program
funds to cash monitoring status (referred to as Heightened Cash Monitoring 1, or HCM1, status). Although the Companys prior practices substantially conformed to the requirements of this more restrictive method of drawing down students
Title IV Program funds, if ED finds violations of the HEA or related regulations, ED may impose monetary or program level sanctions, impose some period of delay in the Companys receipt of Title IV funds or transfer the Companys schools
to the reimbursement or Heightened Cash Monitoring 2 (HCM2) methods of payment of Title IV Program funds. While on HCM2 status, an institution must disburse its own funds to students, document the students eligibility
for Title IV Program funds and comply with certain waiting period requirements before receiving such funds from ED, which results in a significant delay in receiving those funds. The process of re-establishing a regular schedule of cash receipts for
the Title IV Program funds if ED places our schools on reimbursement or HCM2 payment status could take several months, and would require us to fund ongoing operations substantially out of existing cash balances. If our existing cash
balances are insufficient to sustain us through this transition period, we would need to pursue other sources of liquidity, which may not be available or may be costly.
OIG Audit
Our schools and
universities are also subject to periodic audits by various regulatory bodies, including the U.S. Department of Educations Office of Inspector General (OIG). The OIG audit services division
19
commenced a compliance audit of CTU in June 2010, covering the period July 5, 2009 to May 16, 2010, to determine whether CTU had policies and procedures to ensure that CTU administered
Title IV Program and other federal program funds in accordance with applicable federal law and regulation. On January 13, 2012, the OIG issued a draft report identifying three findings, including one regarding the documentation of
attendance of students enrolled in online programs and one regarding the calculation of returns of Title IV Program funds arising from student withdrawals without official notice to the institution. CTU submitted a written response to the OIG,
contesting these findings, on March 2, 2012. CTU disagreed with the OIGs proposed determination of what constitutes appropriate documentation or verification of online academic activity during the time period covered by the audit.
CTUs response asserted that this finding was based on the retroactive application of standards adopted as part of the program integrity regulations that first went into effect on July 1, 2011. The OIG final report, along with CTUs
response to the draft report, was forwarded to EDs Office of Federal Student Aid on September 21, 2012. On October 24, 2012, CTU provided a further response challenging the findings of the report directly to EDs Office of
Federal Student Aid. As a result of EDs review of these materials, on January 31, 2013, CTU received a request from ED that it perform two file reviews to determine potential liability on two discrete issues associated with one of the
above findings. The first file review relates to any potential aid awarded to students who engaged in virtual classroom attendance activities prior to the official start date of a course and for which no further attendance was registered during the
official class term. The second file review relates to students that were awarded and paid Pell funds for enrollment in two concurrent courses, while only registering attendance in one of the two courses. The Company completed these file reviews and
provided supporting documentation to ED on April 10, 2013. As of March 31, 2015, the Company has a $0.8 million reserve recorded related to this matter.
11. INCOME TAXES
The determination of the annual effective tax is based upon a number of significant estimates and judgments, including the
estimated annual pretax income in each tax jurisdiction in which we operate and the ongoing development of tax planning strategies during the year. In addition, our provision for income taxes can be impacted by changes in tax rates or laws, the
finalization of tax audits and reviews, as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.
The following is a summary of our (benefit from) provision for income taxes and effective tax rate from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
Pretax loss |
|
$ |
(24,990 |
) |
|
$ |
(21,442 |
) |
(Benefit from) provision for income taxes |
|
$ |
(211 |
) |
|
$ |
220 |
|
Effective rate |
|
|
-0.8 |
% |
|
|
1.0 |
% |
As of December 31, 2014, we reported a total deferred tax valuation allowance of $150.4 million within
our consolidated balance sheet. After considering both positive and negative evidence related to the likelihood of realization of the deferred tax assets, we have determined that it is necessary to continue to record this valuation allowance against
our net deferred tax assets as of March 31, 2015. During the quarter, certain statute of limitations expired related to previously recorded reserves. As a result, the effective tax benefit for the quarter ended March 31, 2015 approximates
$0.2 million.
The cumulative effect of federal and state valuation losses reduced the effective tax rate benefit by 40.8%. The current
quarter tax rate was also impacted by nominal uncertain tax position activity, the net effect of which resulted in a -0.8% effective tax rate.
We estimate that it is reasonably possible that the gross liability for unrecognized tax benefits for a variety of uncertain tax positions
will decrease by up to $1.5 million in the next twelve months as a result of the
20
completion of various state tax audits currently in process and the expiration of the statute of limitations in several jurisdictions. The income tax rate for the quarter ended March 31,
2015 does not take into account the possible reduction of the liability for unrecognized tax benefits. The impact of a reduction to the liability will be treated as a discrete item in the period the reduction occurs. We recognize interest and
penalties related to unrecognized tax benefits in tax expense. As of March 31, 2015, we had accrued $2.5 million as an estimate for reasonably possible interest and accrued penalties.
Our tax returns are routinely examined by federal, state, local and foreign tax authorities and these audits are at various stages of
completion at any given time. The Internal Revenue Service completed its examination of our U.S. income tax returns through our tax year ended December 31, 2012.
12. SHARE-BASED COMPENSATION
Overview of Share-Based Compensation Plans
The Career Education Corporation 2008 Incentive Compensation Plan (the 2008 Plan) authorizes awards of stock options, stock
appreciation rights, restricted stock, restricted stock units, deferred stock, performance units, annual incentive awards, and substitute awards, which generally may be settled in cash or shares of our common stock. Any shares of our common stock
that are subject to awards of stock options or stock appreciation rights payable in shares will be counted as 1.0 share for each share issued for purposes of the aggregate share limit and any shares of our common stock that are subject to any other
form of award payable in shares will be counted as 1.67 shares for each share issued for purposes of the aggregate share limit. As of March 31, 2015, there were approximately 6.6 million shares of common stock available for future
share-based awards under the 2008 Plan, which is net of 3.0 million shares issuable upon exercise of outstanding options. This amount does not reflect 0.7 million and 0.1 million shares underlying restricted stock units and deferred
stock units, respectively, as of March 31, 2015, which will be settled in shares of our common stock if the vesting conditions are met and thus reduce the common stock available for future share-based awards under the 2008 Plan by the amount
vested, multiplied by the applicable factor under the plan. The vesting of all types of equity awards (stock options, stock appreciation rights, restricted stock awards and restricted stock units) is subject to possible acceleration in certain
circumstances. Generally, if a plan participant terminates employment for any reason other than by death or disability during the vesting period, the right to unvested equity awards is forfeited.
As of March 31, 2015, we estimate that compensation expense of approximately $6.0 million will be recognized over the next four years for
all unvested share-based awards that have been granted to participants, including stock options, shares of restricted stock and restricted stock units and deferred stock units to be settled in shares of stock but excluding restricted stock units to
be settled in cash.
Stock Options. The exercise price of stock options and stock appreciation rights granted under each of
the plans is equal to the fair market value of our common stock on the date of grant. Employee stock options generally become exercisable 25% per year over a four-year service period beginning on the date of grant and expire ten years from
the date of grant. Non-employee directors stock options expire ten years from the date of grant and generally become exercisable as follows: one-fourth on the grant date and one-fourth for each of the first through third anniversary of
the grant date. Grants of stock options are generally only subject to the service conditions discussed previously.
21
Stock option activity during the quarter ended March 31, 2015 under all of our plans was as
follows (options in thousands):
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Weighted Average Exercise Price |
|
Outstanding as of December 31, 2014 |
|
|
3,782 |
|
|
$ |
12.88 |
|
Granted |
|
|
355 |
|
|
|
5.90 |
|
Exercised |
|
|
(7 |
) |
|
|
2.72 |
|
Forfeited |
|
|
(966 |
) |
|
|
4.24 |
|
Cancelled |
|
|
(167 |
) |
|
|
3.28 |
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2015 |
|
|
2,997 |
|
|
$ |
15.40 |
|
|
|
|
|
|
|
|
|
|
Exercisable as of March 31, 2015 |
|
|
2,241 |
|
|
$ |
18.79 |
|
|
|
|
|
|
|
|
|
|
Restricted Stock and Restricted Stock Units to be Settled in Stock. Restricted stock and restricted
stock units to be settled in shares of stock generally become fully vested 25% per year over a four-year service period beginning on the date of grant. Certain awards to plan participants referred to as performance-based are subject
to performance conditions that, even if the requisite service period is met, may reduce the number of shares or units of restricted stock that vest at the end of the requisite service period or result in all shares or units being forfeited.
The following table summarizes information with respect to all outstanding restricted stock and restricted stock units to be settled in shares
of stock under our plans during the quarter ended March 31, 2015 (shares and units in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock to be Settled in Shares of Stock |
|
|
|
Shares |
|
|
Weighted Average Grant-Date Fair Value Per Share |
|
|
Units |
|
|
Weighted Average Grant-Date Fair Value Per Unit |
|
|
Total |
|
Outstanding as of December 31, 2014 |
|
|
43 |
|
|
$ |
21.63 |
|
|
|
556 |
|
|
$ |
7.35 |
|
|
|
599 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
538 |
|
|
|
5.90 |
|
|
|
538 |
|
Vested |
|
|
(39 |
) |
|
|
21.80 |
|
|
|
(178 |
) |
|
|
8.45 |
|
|
|
(217 |
) |
Forfeited |
|
|
(3 |
) |
|
|
21.80 |
|
|
|
(220 |
) |
|
|
6.19 |
|
|
|
(223 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2015 |
|
|
1 |
|
|
$ |
7.21 |
|
|
|
696 |
|
|
$ |
6.32 |
|
|
|
697 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Stock Units to be Settled in Stock. During 2014 and for the first time since inception of any
of our plans, we granted deferred stock units to our non-employee directors. The deferred stock units are to be settled in shares of stock and generally vest one- third per year over a three-year service period beginning on the date of grant.
Settlement of the deferred stock units and delivery of the underlying shares of stock to the plan participants does not occur until he or she ceases to provide services to the Company in the capacity of a director, employee or consultant.
The following table summarizes information with respect to all deferred stock units during the quarter ended March 31, 2015 (units in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Deferred Stock Units to be Settled in Shares |
|
|
Weighted Average Grant-Date Fair Value Per Unit |
|
Outstanding as of December 31, 2014 |
|
|
117 |
|
|
$ |
4.39 |
|
Granted |
|
|
3 |
|
|
|
5.73 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2015 |
|
|
120 |
|
|
$ |
4.42 |
|
|
|
|
|
|
|
|
|
|
22
Restricted Stock Units to be Settled in Cash. Restricted stock units to be settled in cash
generally become fully vested 25% per year over a four-year service period beginning on the date of grant. Cash-settled restricted stock units are recorded as liabilities as the expense is recognized and the fair value for these awards is
determined at each period end date with changes in fair value recorded in our statement of loss and comprehensive loss in the current period. Cash-settled restricted stock units are settled with a cash payment for each unit vested equal to the
closing price on the vesting date. Cash-settled restricted stock units are not included in common shares reserved for issuance or available for issuance under the 2008 Plan.
The following table summarizes information with respect to all cash-settled restricted stock units during the quarter ended March 31,
2015 (units in thousands):
|
|
|
|
|
|
|
Restricted Stock Units to be Settled in Cash |
|
Outstanding as of December 31, 2014 |
|
|
1,842 |
|
Granted |
|
|
276 |
|
Vested |
|
|
(429 |
) |
Forfeited |
|
|
(349 |
) |
|
|
|
|
|
Outstanding as of March 31, 2015 |
|
|
1,340 |
|
|
|
|
|
|
Upon vesting, based on the conditions set forth in the award agreements, these units will be settled in cash.
We valued these units in accordance with the guidance set forth by FASB ASC Topic 718 Compensation-Stock Compensation and recognized $0.3 million of expense for the first quarter of 2015 for all cash-settled restricted stock units.
Stock-Based Compensation Expense. Total stock-based compensation expense for the quarters ended March 31, 2015 and 2014, for
all types of awards was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
Award Type |
|
2015 (1) |
|
|
2014 |
|
Stock Options |
|
$ |
270 |
|
|
$ |
461 |
|
Restricted stock or units settled in stock |
|
|
1,288 |
|
|
|
870 |
|
Restricted stock units settled in cash |
|
|
288 |
|
|
|
2,124 |
|
Stock appreciation rights settled in cash |
|
|
|
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense |
|
$ |
1,846 |
|
|
$ |
3,587 |
|
|
|
|
|
|
|
|
|
|
(1) |
Stock-based compensation expense for the first quarter of 2015 does not reflect $1.5 million of forfeitures related to our former Chief Executive Officers departure which was applied against the separation
agreement payment of $2.5 million. |
Performance Unit Awards. Performance unit awards granted during 2013, 2014 and
2015 are long-term incentive, cash-based awards. Payment of these awards is based upon a calculation of Total Shareholder Return (TSR) of CEC as compared to TSR across a specified peer group of our competitors over a three-year
performance period ending primarily on December 31, 2015, 2016 and 2017, respectively. These awards are recorded as liabilities as the expense is recognized and fair value for these awards is revalued at each period end date with changes in
fair value recorded in our statement of loss and comprehensive loss in the current period. We recorded $0.4 million as a credit to expense related to these awards for the quarter ended March 31, 2015, primarily due to the decrease in stock
price relative to the specified peer group.
23
13. WEIGHTED AVERAGE COMMON SHARES
Basic net (loss) income per share is calculated by dividing net (loss) income by the weighted average number of common
shares outstanding for the period. Diluted earnings per share is computed by dividing net (loss) income by the weighted average number of shares assuming dilution. Dilutive common shares outstanding is computed using the Treasury Stock Method and
reflects the additional shares that would be outstanding if dilutive stock options were exercised and restricted stock and restricted stock units were settled for common shares during the period.
Due to the fact that we reported a loss from continuing operations for the quarters ended March 31, 2015 and 2014, potential common stock
equivalents are excluded from the diluted common shares outstanding calculation. Per FASB ASC Topic 260 Earnings Per Share, an entity that reports discontinued operations shall use income or loss from continuing operations as the
benchmark for calculating diluted common shares outstanding, and as such, we have zero common stock equivalents since these shares would have an anti-dilutive effect on our net loss per share for the quarters ended March 31, 2015 and 2014.
14. SEGMENT REPORTING
Our segments are determined in accordance with FASB ASC Topic 280Segment Reporting and are based upon how the
Company analyzes performance and makes decisions. Each segment represents a group of postsecondary education providers that offer a variety of degree and non-degree academic programs. These segments are organized by key market segments to enhance
brand focus and operational alignment within each segment to more effectively execute our strategic plan. As of March 31, 2015, our segments are:
University Group:
Colorado Technical
University (CTU) places a strong focus on providing industry-relevant degree programs to meet the needs of our students for employment and of employers for a well-educated workforce and collectively offers academic programs in the
career-oriented disciplines of business studies, information systems and technologies, criminal justice, computer science and engineering, and health sciences. Students pursue their degrees through fully-online programs through CTU Online, local
campuses and blended formats, which combine campus-based and online education. As of March 31, 2015, students enrolled at CTU represented approximately 47% of our total enrollments. Approximately 91% of CTUs enrollments are fully online.
American InterContinental University (AIU) focuses on helping busy professionals get the degree they need to move forward in their
career as efficiently as possible and collectively offers academic programs in the career-oriented disciplines of business studies, information technologies, criminal justice and design technologies. Students pursue their degrees through
fully-online programs through AIU Online, local campuses and blended formats, which combine campus-based and online education. As of March 31, 2015, students enrolled at AIU represented approximately 31% of our total enrollments. Approximately
90% of AIUs enrollments are fully online.
Career Colleges includes Briarcliffe College, Brooks Institute, Missouri College and our
Sanford-Brown institutions. The Career Colleges segment collectively offers academic programs primarily in the career-oriented discipline of health education complemented by certain programs in business studies and information technology, as well as
visual communications, fashion design, photography, interior design, graphic design and video production. Students pursue their degrees through local campuses, fully-online programs through SBC Online and blended formats, which combine campus-based
and online education. As of March 31, 2015, students enrolled within our Career Colleges represented approximately 20% of our total enrollments. Approximately 15% of Career Colleges enrollments are fully online.
Transitional Group includes our campuses which were announced for teach-out prior to March 31, 2015 and were operating as of that date. In addition, it
includes SBI White Plains which closed in the first quarter of 2015. These campuses employ a gradual teach-out process, enabling them to continue to operate while current students
24
complete their course of study; they no longer enroll new students. The 11 campuses within the Transitional Group that have not yet ceased operations as of March 31, 2015 will complete their
teach-outs on varying dates through 2017.
Summary financial information by reporting segment is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
Revenue |
|
|
Operating (Loss) Income |
|
|
|
2015 |
|
|
% of Total |
|
|
2014 |
|
|
% of Total |
|
|
2015 |
|
|
2014 |
|
CTU |
|
$ |
85,127 |
|
|
|
46.7 |
% |
|
$ |
86,920 |
|
|
|
43.9 |
% |
|
$ |
14,616 |
|
|
$ |
14,481 |
|
AIU |
|
|
53,066 |
|
|
|
29.1 |
% |
|
|
52,573 |
|
|
|
26.5 |
% |
|
|
(2,887 |
) |
|
|
(3,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
138,193 |
|
|
|
75.8 |
% |
|
|
139,493 |
|
|
|
70.4 |
% |
|
|
11,729 |
|
|
|
10,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
39,772 |
|
|
|
21.8 |
% |
|
|
47,832 |
|
|
|
24.1 |
% |
|
|
(22,110 |
) |
|
|
(13,922 |
) |
Corporate and Other |
|
|
39 |
|
|
|
0.0 |
% |
|
|
100 |
|
|
|
0.1 |
% |
|
|
(5,860 |
) |
|
|
(11,136 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
178,004 |
|
|
|
97.6 |
% |
|
|
187,425 |
|
|
|
94.6 |
% |
|
|
(16,241 |
) |
|
|
(14,160 |
) |
Transitional Group |
|
|
4,298 |
|
|
|
2.4 |
% |
|
|
10,729 |
|
|
|
5.4 |
% |
|
|
(8,360 |
) |
|
|
(7,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
182,302 |
|
|
|
|
|
|
$ |
198,154 |
|
|
|
|
|
|
$ |
(24,601 |
) |
|
$ |
(21,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets as of (1) |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015 |
|
|
|
|
|
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
73,466 |
|
|
|
|
|
|
$ |
73,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
AIU |
|
|
55,052 |
|
|
|
|
|
|
|
51,755 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
128,518 |
|
|
|
|
|
|
|
125,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
21,206 |
|
|
|
|
|
|
|
29,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Other |
|
|
296,820 |
|
|
|
|
|
|
|
332,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
446,544 |
|
|
|
|
|
|
|
487,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transitional Group |
|
|
5,710 |
|
|
|
|
|
|
|
7,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale |
|
|
76,211 |
|
|
|
|
|
|
|
76,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
1,169 |
|
|
|
|
|
|
|
1,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
529,634 |
|
|
|
|
|
|
$ |
573,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Total assets do not include intercompany receivable or payable activity between schools and corporate and investments in subsidiaries. |
15. SUBSEQUENT EVENT
The Company has made the strategic decision to focus its resources and attention on its universities Colorado
Technical University (CTU) and American InterContinental University (AIU) where the company sees significant opportunity to provide quality higher education to the adult student market. In connection with that decision, on May 1, 2015,
the Board of Directors approved the teach-out of the Companys remaining 15 Sanford-Brown campuses and the pursuit of divestiture options for the three additional Career College campuses: Briarcliffe College, Brooks Institute and Missouri
College. If a sale of the three additional Career College campuses is not successful, they will be taught out. As part of the process to wind down the Career Colleges segment, the Company also announced that it will align its corporate overhead to
support a more streamlined and focused operating entity. The Career College segment contributed $172.8 million of revenue and approximately $73.8 million of operating losses for the year ended December 31, 2014. The campuses will remain open to
offer current students the reasonable opportunity to complete their course of study. The majority of these campuses are
25
expected to cease operations by 2017 with the remainder expected to cease operations in 2018. The total estimated costs associated with these teach-out and divestiture restructuring activities
are expected to be approximately $40 million -$50 million. These costs primarily relate to severance charges (approximately $20 - $25 million) and costs associated with exiting lease obligations (approximately $20 - $25 million). These estimated
charges are based on several assumptions, including timing of campus teach-outs, sales of campuses and implementation of support services realignment, and are subject to change. These charges will result in future cash expenditures through 2018 for
the severance related charges and through 2023 for lease obligations as certain campuses have lease terms ranging beyond their anticipated teach-out completion date. The severance and related charges will primarily be recorded during the second
quarter of 2015 and the lease charges will be recorded at the time each facility is vacated.
26
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The discussion below contains forward-looking statements, as defined in Section 21E of the Securities Exchange Act of
1934, as amended, that reflect our current expectations regarding our future growth, results of operations, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to,
our management. We have tried to identify forward-looking statements by using words such as anticipate, believe, expect, intend, on track, will, continue to, 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 our Annual Report on Form 10-K for the year ended December 31, 2014 that could cause our actual growth, results of operations, cash flows,
performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. Except as expressly required by 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.
Overview
The colleges, institutions and
universities that are part of the Career Education Corporation (CEC) family offer high-quality education to a diverse student population in a variety of career-oriented disciplines through online, on-ground and hybrid learning program
offerings. In addition to its online offerings, Career Education serves students from campuses throughout the United States offering programs that lead to doctoral, masters, bachelors and associate degrees, as well as to diplomas and
certificates.
Our institutions include, among others, American InterContinental University (AIU); Colorado Technical
University (CTU); Le Cordon Bleu North America (LCB); and Sanford-Brown Institutes and Colleges (SBI and SBC, respectively). Through our institutions, we are committed to providing high-quality
education, enabling students to graduate and pursue rewarding career opportunities.
On March 31, 2015, the Company announced the
teach-out of one additional Career College campus, Harrington College of Design. This campus is reported within our Career Colleges segment as of March 31, 2015 in accordance with ASC Topic 280 Segment Reporting.
Effective January 1, 2015, ASC Topic 360 Property, Plant and Equipment, limits discontinued operations reporting and thus
as campuses cease teach-out operations going forward, the results of operations for these campuses will remain within the results of continuing operations. Historically, campuses met the criteria for discontinued operations upon completion of the
teach-out. During the first quarter of 2015, the Company completed the teach-out of one Transitional Group campus, Sanford-Brown White Plains, which continues to be reported under the Transitional Group as of March 31, 2015. As a result of this
change, no prior period recast was made in our reporting and our results of operations for this campus is recorded within continuing operations for all periods presented.
During the first quarter of 2015, the Company made the decision to sell one of its campuses reported within the Career Colleges segment. As a
result of this decision, the assets and liabilities of this campus are classified as held for sale within continuing operations as of March 31, 2015.
We operate in a highly regulated industry, which has significant impacts on our business and creates risk and uncertainties. We encourage you
to review Item 1, Business, and Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2014 to learn more.
The following Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read
in conjunction with the Companys condensed consolidated financial statements and
27
the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help investors understand the results of operations, financial condition and present
business environment. The MD&A is organized as follows:
|
|
|
2015 First Quarter Overview |
|
|
|
Consolidated Results of Operations |
|
|
|
Segment Results of Operations |
|
|
|
Summary of Critical Accounting Policies and Estimates |
|
|
|
Liquidity, Financial Position and Capital Resources |
Note Regarding Non-GAAP measures
The Company believes it is useful to present non-GAAP financial measures which exclude certain significant items as a means to understand the
performance of its core business. As a general matter, the Company uses non-GAAP financial measures in conjunction with results presented in accordance with GAAP to help analyze the performance of its core business, assist with preparing the annual
operating plan, and measure performance for some forms of compensation. In addition, the Company believes that non-GAAP financial information is used by analysts and others in the investment community to analyze the Companys historical results
and to provide estimates of future performance and that failure to report non-GAAP measures could result in a misplaced perception that the Companys results have underperformed or exceeded expectations.
We believe adjusted EBITDA allows us to compare our current operating results with corresponding historical periods and with the operational
performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance. We also present adjusted EBITDA because we believe it is
frequently used by securities analysts, investors and other interested parties as a measure of performance. In evaluating adjusted EBITDA, investors should be aware that in the future we may incur expenses similar to the adjustments presented below.
Our presentation of adjusted EBITDA should not be construed as an inference that our future results will be unaffected by expenses that are unusual, non-routine or non-recurring. Adjusted EBITDA has limitations as an analytical tool, and you should
not consider it in isolation, or as a substitute for net income (loss), operating income (loss), or any other performance measure derived in accordance and reported under GAAP or as an alternative to cash flow from operating activities or as a
measure of our liquidity.
Non-GAAP financial measures, when viewed in a reconciliation to corresponding GAAP financial measures, provide
an additional way of viewing the Companys results of operations and the factors and trends affecting the Companys business. Non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to,
the corresponding financial results presented in accordance with GAAP.
2015 FIRST QUARTER OVERVIEW
During the first quarter of 2015, we remained on track against our key objectives to generate modest total student enrollment within our
University Group, to strengthen academic outcomes, to enhance regulatory compliance and simplify our business model, to reduce the organizational cost structure and continue to successfully complete the teach-out of our Transitional campuses. Our
continued execution against our plan enables us to continue our mission of enabling students to obtain a quality education that allows them to achieve their goals.
Revenue from continuing operations declined $15.9 million or 8.0% due to an overall 7.7% decrease in total student enrollments. For the
current quarter, we reported an operating loss from continuing operations of $24.6 million as compared to an operating loss of $21.9 million for the prior year quarter. This increase in operating loss was primarily due to an increase of $5.9
million of asset impairment charges recorded within our Career Colleges segment as compared to the prior year quarter. Excluding asset impairment charges, operating loss improved by 15.1% as compared to the prior year quarter.
28
We continued to see improving business trends within our University Group. For our University
Group, revenue decreased slightly by 0.9% as a result of relatively flat total student enrollments as compared to the prior year. Total student enrollments were impacted by the teach-out of two campuses within the University Group. Excluding these
two campuses, total enrollments increased slightly as compared to the prior year quarter. New student enrollments for the University Group were 10,130 compared to 10,720 in the first quarter of 2014. This decrease was primarily attributable to a
change in the methodology used to calculate new student enrollments at AIU in 2014 related to cancelled student enrollments. Excluding the impact of this change, new student enrollments within the University Group were down only 1.2% during the
first quarter as compared to the prior year quarter. Total online student enrollments within the University Group increased 1.3% as compared to the prior year quarter. Operating income for the University Group improved by 7.6% to $11.7 million due
to continued cost containment execution.
Within our Career Colleges, revenue decreased $8.1 million or 16.9% for the current quarter as
compared to the prior year quarter and operating loss increased $8.2 million or 58.8%, primarily due to the decrease in revenue as well as increased asset impairment charges. Career Colleges experienced a decline in new student enrollments of
approximately 34.2% and an approximate 19.6% decline in total student enrollments as compared to the prior year quarter.
Restructuring Actions
During May 2015, we made strategic decisions to exit our Career College business, to right-size our corporate overhead and to
streamline our University operations, in order to focus our resources and attention on our University businesses CTU and AIU, where we have significant opportunities to continue to provide quality higher education to the adult student market.
As a result of several factors that have significantly impacted the Career Colleges, including negative publicity across the sector, a prolonged recession with depressed hiring, increasing costs of education and corresponding debt level of students,
and increased legal and regulatory requirements aimed at private sector higher education, our career-oriented schools have faced increased difficulty to operate profitably. Accordingly, we are teaching out the 15 Sanford-Brown campuses and are
seeking divestiture options for Briarcliffe College, Brooks Institute and Missouri College.
As part of these changes, Senior Vice
President and Chief Career Schools Officer Lysa Clemens took on the role of Senior Vice President, Transitional Operations and Chief Transformation Officer, overseeing the teaching-out of campuses and right-sizing of centralized support operations.
As Career Education has successfully accomplished in previous campus teach-outs, the company intends to serve students well, while managing costs through the gradual process of closing.
The gradual discontinuation of operations at these campuses provides each student the reasonable opportunity to complete their programs of
study before the campus ultimately closes. We expect the majority of these teach-outs to be complete by 2017 with any remaining teach-outs expected to be complete in 2018. While a campus is completing the teach-out process, we will focus on
providing our students with a quality education and career placement services so that they can complete their education and to help them secure employment.
While we are marketing Briarcliffe College, Brooks Institute and Missouri College and are optimistic that we will be able to find new
ownership for these institutions, those that are not sold will also be taught out. We are in current negotiations with potential buyers for all three institutions and have signed an asset purchase agreement with a buyer for Brooks Institute, which
is subject to accreditor and regulatory approval. We dont expect to receive any cash consideration for the sale of these assets. Additionally, we announced the teach-out of Harrington College of Design on March 31, 2015 and have entered
into an agreement with Columbia College Chicago to facilitate the teach-out for these students.
With the newly announced teach-outs and
potential divestitures, coupled with the future sale of our Le Cordon Bleu culinary arts campuses, we expect reductions in our centralized support staff to align our corporate
29
overhead with the changing organization and to sharpen our focus on costs within the University Group to be more in line with leading education peers.
We expect to record approximately $40 to $50 million of restructuring charges related to these teach-out and divestiture initiatives. These
costs primarily relate to severance charges (approximately $20 - $25 million) and costs associated with exiting lease obligations (approximately $20 - $25 million). These estimated charges are based on several assumptions,
including timing of campus teach-outs, sales of campuses and implementation of support services realignment, and are subject to change. These charges will result in future cash expenditures through 2018 for the severance related charges and through
2023 for lease obligations as certain campuses have lease terms ranging beyond their anticipated teach-out completion date. The severance and related charges will primarily be recorded during the second quarter of 2015 and the lease charges
will be recorded at the time each facility is vacated. The majority of the teach-outs are expected to be complete by 2017 and any remaining teach-outs are expected to be complete by 2018. Excluding restructuring charges, these initiatives are
expected to be accretive to 2015 earnings. Specific timing and impacts of these actions on our cash balance are currently being approximated, but we do not anticipate any impact on our ability to maintain compliance with our Credit Agreement.
The Path Forward
Our focus
and direction of the Company will be on the University Group and degree-oriented, higher education offered primarily online through regionally-accredited universities, where we maintain a competitive advantage in our online platform, brand awareness
and intellipath adaptive learning technology. We are focused on being more efficient and effective in our spending as we continue to streamline operations to reduce our costs and improve our
student outcomes. The University segments continue to invest in strengthening academic outcomes for students through our intellipath adaptive learning technology, which we believe is a key
differentiator for our business. Given the strategic transformation announced for the Company, we believe our strong balance sheet and future positive cash flows will enable us to invest more in the CTU and AIU brands. These restructuring actions
are expected to accelerate our path to profitability and right-size our corporate overhead.
30
We believe the use of an adjusted EBITDA measure allows us to compare our current operating
results for our operations with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of
underlying operating performance. Adjusted EBITDA for the current quarter as well as the previous four quarters is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
Q1 2015 |
|
|
Q4 2014 |
|
|
Q3 2014 |
|
|
Q2 2014 |
|
|
Q1 2014 |
|
($ in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
University Group and Corporate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from continuing operations |
|
$ |
(24,990 |
) |
|
$ |
(7,747 |
) |
|
$ |
(31,651 |
) |
|
$ |
(11,664 |
) |
|
$ |
(21,442 |
) |
Transitional Group operating loss |
|
|
8,360 |
|
|
|
10,138 |
|
|
|
10,856 |
|
|
|
9,091 |
|
|
|
7,789 |
|
Career Colleges operating loss |
|
|
22,110 |
|
|
|
13,650 |
|
|
|
29,908 |
|
|
|
16,273 |
|
|
|
13,922 |
|
Interest expense (income), net |
|
|
2 |
|
|
|
(38 |
) |
|
|
(120 |
) |
|
|
(177 |
) |
|
|
(25 |
) |
Depreciation and amortization (1) |
|
|
4,361 |
|
|
|
5,170 |
|
|
|
5,402 |
|
|
|
5,732 |
|
|
|
6,108 |
|
Stock-based compensation (1) |
|
|
940 |
|
|
|
966 |
|
|
|
950 |
|
|
|
1,020 |
|
|
|
1,341 |
|
Legal settlements (1) (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(400 |
) |
|
|
2,850 |
|
Asset impairments (1) |
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
77 |
|
Unused space charges (1) (3) |
|
|
556 |
|
|
|
(373 |
) |
|
|
(368 |
) |
|
|
(363 |
) |
|
|
(380 |
) |
Insurance recovery |
|
|
|
|
|
|
|
|
|
|
(8,588 |
) |
|
|
|
|
|
|
|
|
Cumulative adjustment related to revenue recognition (1) |
|
|
93 |
|
|
|
1,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDAUniversity Group and Corporate |
|
$ |
11,432 |
|
|
$ |
23,120 |
|
|
$ |
6,462 |
|
|
$ |
19,512 |
|
|
$ |
10,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Memo: Advertising Expenses |
|
$ |
50,587 |
|
|
$ |
36,731 |
|
|
$ |
50,410 |
|
|
$ |
37,407 |
|
|
$ |
46,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges, Transitional Group and Discontinued Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from discontinued operations |
|
$ |
(102 |
) |
|
$ |
(17,195 |
) |
|
$ |
(15,201 |
) |
|
$ |
(33,046 |
) |
|
$ |
(36,481 |
) |
Transitional Group operating loss |
|
|
(8,360 |
) |
|
|
(10,138 |
) |
|
|
(10,856 |
) |
|
|
(9,091 |
) |
|
|
(7,789 |
) |
Career Colleges operating loss |
|
|
(22,110 |
) |
|
|
(13,650 |
) |
|
|
(29,908 |
) |
|
|
(16,273 |
) |
|
|
(13,922 |
) |
Loss on sale of business (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311 |
|
|
|
|
|
Depreciation and amortization (4) |
|
|
2,351 |
|
|
|
7,319 |
|
|
|
7,739 |
|
|
|
8,662 |
|
|
|
9,323 |
|
Legal settlements (4) |
|
|
1,485 |
|
|
|
|
|
|
|
225 |
|
|
|
2,000 |
|
|
|
3,000 |
|
Asset impairments (4) |
|
|
6,019 |
|
|
|
14,203 |
|
|
|
14,412 |
|
|
|
7,454 |
|
|
|
(10 |
) |
Unused space charges (3) (4) |
|
|
(2,424 |
) |
|
|
(2,063 |
) |
|
|
(3,343 |
) |
|
|
920 |
|
|
|
2,873 |
|
Cumulative adjustment related to revenue recognition (4) |
|
|
(67 |
) |
|
|
1,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDACareer Colleges, Transitional and Discontinued Operations |
|
$ |
(23,208 |
) |
|
$ |
(20,495 |
) |
|
$ |
(36,932 |
) |
|
$ |
(39,063 |
) |
|
$ |
(43,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Adjusted EBITDA |
|
$ |
(11,776 |
) |
|
$ |
2,625 |
|
|
$ |
(30,470 |
) |
|
$ |
(19,551 |
) |
|
$ |
(32,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Quarterly amounts relate to the University Group and Corporate |
(2) |
Legal settlement amounts are net of insurance recoveries |
(3) |
Unused space charges include initial charge and subsequent accretion |
(4) |
Quarterly amounts relate to Career Colleges, Transitional Group and discontinued operations |
Adjusted EBITDA for the University Group and Corporate improved $1.2 million or 11.6% for the first quarter of 2015 as compared to the same
quarter last year as we continued to execute against our cost containment initiatives. Adjusted EBITDA was $11.4 million for the first quarter of 2015 as compared to $10.2 million for the first quarter of 2014. We experienced positive Adjusted
EBITDA for the current quarter despite increased advertising spending in our AIU segment within certain marketing channels. We continue to expect positive Adjusted EBITDA from our University Group and Corporate for the full year 2015 as improvement
in operating margins for our University Group continues throughout 2015, although quarterly margins will be impacted by seasonal marketing spend.
31
Adjusted EBITDA for Career Colleges, the Transitional Group and discontinued operations was -$23.2 million, an improvement of $19.8 million as compared to -$43.0 million for the first quarter of 2014. This favorability was a result of the completion of teach-out operations at campuses that have now
closed and continued focus on exiting and reducing real estate lease obligations once a teach-out is complete. Such lease obligations are a large component of our cost structure and cash usage. In addition to real estate leases associated with our
ongoing operations, campuses that have completed the teach-out process more often than not have ongoing lease obligations that continue for some time. While we have added our Career Colleges to our teach-out operations, we expect to see the negative
Adjusted EBITDA associated with these campuses continue to improve as we complete the teach-outs.
We remain on track with previous
guidance related to positive Adjusted EBITDA for the full year of 2015 related to ongoing operations as defined at the beginning of the year as well as our previous guidance associated with the Transitional Group and discontinued operations of
expected negative Adjusted EBITDA of $62.0 million for the full year 2015. As we work through the finalization of estimates and timing related to our restructuring actions, we will update the previous guidance issued but excluding the
restructuring charges, we expect these actions to be accretive to our 2015 earnings.
As an organization, our focus continues to be to
Enroll, Educate and Place our students into a better position to succeed professionally and to close the gap between students and employers. In doing so, we seek to create a winning formula for our students, for employers that
employ our graduates and for our shareholders. We expect that the restructuring actions announced will provide us with the necessary resources and a strong foundation to refocus our efforts on our University Group. We believe that this path will
ultimately position the Company for long-term success. We continue to focus on our key objectives and expect positive Adjusted EBITDA from our University Group and Corporate for the full year 2015, modest total student enrollment growth within our
University segments for the full year 2015, further reductions of real estate obligations within our teach-out and discontinued operations, reductions in our overall cost structure, and to maintain a year end cash, cash equivalents, restricted cash
and investment balance of more than $190 million.
Industry Update: Student Loan Forgiveness Initiatives
During the past several months, ED has received claims from current and former students of for profit education institutions seeking loan
forgiveness. These students claim that they are legally entitled to such relief based on, among other things, allegations that their school engaged in unlawful conduct with respect to its administration of the Title IV loan program. ED is evaluating
how to respond to these claims. We continue to monitor this issue to determine what, if any, potential impact such claims might have on our business.
32
CONSOLIDATED RESULTS OF OPERATIONS
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 quarters ended March 31, 2015 and 2014 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
% Change |
|
|
|
2015 |
|
|
% of Total Revenue |
|
|
2014 |
|
|
% of Total Revenue |
|
|
2015 vs. 2014 |
|
TOTAL REVENUE |
|
$ |
182,302 |
|
|
|
|
|
|
$ |
198,154 |
|
|
|
|
|
|
|
-8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities (1) |
|
|
54,951 |
|
|
|
30.1 |
% |
|
|
61,638 |
|
|
|
31.1 |
% |
|
|
-11 |
% |
General and administrative (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
|
60,630 |
|
|
|
33.3 |
% |
|
|
58,249 |
|
|
|
29.4 |
% |
|
|
4 |
% |
Admissions |
|
|
24,775 |
|
|
|
13.6 |
% |
|
|
28,346 |
|
|
|
14.3 |
% |
|
|
-13 |
% |
Administrative |
|
|
49,721 |
|
|
|
27.3 |
% |
|
|
56,795 |
|
|
|
28.7 |
% |
|
|
-12 |
% |
Bad debt |
|
|
4,022 |
|
|
|
2.2 |
% |
|
|
5,056 |
|
|
|
2.6 |
% |
|
|
-20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense |
|
|
139,148 |
|
|
|
76.3 |
% |
|
|
148,446 |
|
|
|
74.9 |
% |
|
|
-6 |
% |
Depreciation and amortization |
|
|
6,785 |
|
|
|
3.7 |
% |
|
|
9,945 |
|
|
|
5.0 |
% |
|
|
-32 |
% |
Asset impairment |
|
|
6,019 |
|
|
|
3.3 |
% |
|
|
74 |
|
|
|
0.0 |
% |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING LOSS |
|
|
(24,601 |
) |
|
|
-13.5 |
% |
|
|
(21,949 |
) |
|
|
-11.1 |
% |
|
|
-12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRETAX LOSS |
|
|
(24,990 |
) |
|
|
-13.7 |
% |
|
|
(21,442 |
) |
|
|
-10.8 |
% |
|
|
-17 |
% |
(BENEFIT FROM) PROVISION FOR INCOME TAXES |
|
|
(211 |
) |
|
|
-0.1 |
% |
|
|
220 |
|
|
|
0.1 |
% |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
-0.8 |
% |
|
|
|
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
LOSS FROM CONTINUING OPERATIONS |
|
|
(24,779 |
) |
|
|
-13.6 |
% |
|
|
(21,662 |
) |
|
|
-10.9 |
% |
|
|
-14 |
% |
LOSS FROM DISCONTINUED OPERATIONS, net of tax |
|
|
(102 |
) |
|
|
-0.1 |
% |
|
|
(36,481 |
) |
|
|
-18.4 |
% |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS |
|
$ |
(24,881 |
) |
|
|
-13.6 |
% |
|
$ |
(58,143 |
) |
|
|
-29.3 |
% |
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Educational services and facilities expense includes costs directly attributable to the educational activities of our schools, including: salaries and benefits of faculty, academic administrators, and student support
personnel, and 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. Also included in
educational services and facilities expense are costs of other goods and services provided by our schools, including costs of textbooks, laptop computers, restaurant services and contract training. |
(2) |
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. Other
expenses within this expense category include costs of advertising and production of marketing materials, occupancy of the corporate offices and bad debt expense. |
Revenue
Current quarter revenue
decreased 8.0% as compared to the prior year quarter driven by the overall decline in total student enrollment. Excluding our Transitional Group campuses, which no longer enroll new students as they teach out the campus, revenue declined
approximately 5.0% for the current quarter as compared to the prior year quarter. We experienced a slight increase in revenue within AIU which was offset with decreases within the
33
remaining segments. The slight increase in revenue for AIU was driven by increases in both revenue per student and total student enrollments. Lastly, application volume within our Career Colleges
segment continued to decrease as compared to the prior period, contributing to the decline in enrollments and therefore revenue as compared to the prior year quarter.
Educational Services and Facilities Expense (dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2015 |
|
|
% of Total Revenue |
|
|
2014 |
|
|
% of Total Revenue |
|
Educational services and facilities: |
|
|
|
|
|
|
|
|
|
Academics & student related |
|
$ |
37,776 |
|
|
|
20.7 |
% |
|
$ |
43,462 |
|
|
|
21.9 |
% |
Occupancy |
|
|
17,175 |
|
|
|
9.4 |
% |
|
|
18,176 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total educational services and facilities |
|
$ |
54,951 |
|
|
|
30.1 |
% |
|
$ |
61,638 |
|
|
|
31.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in educational services and facilities expense as compared to the prior year quarter is primarily
driven by lower academic costs, most notably faculty and bookstore costs. The decrease in faculty and bookstore costs is caused by a combination of factors, including lower total student enrollments across the majority of our institutions. We
continue to closely monitor the variable costs while maintaining optimal student-teacher ratios.
General and Administrative Expense (dollars in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2015 |
|
|
% of Total Revenue |
|
|
2014 |
|
|
% of Total Revenue |
|
General and administrative: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising |
|
$ |
60,630 |
|
|
|
33.3 |
% |
|
$ |
58,249 |
|
|
|
29.4 |
% |
Admissions |
|
|
24,775 |
|
|
|
13.6 |
% |
|
|
28,346 |
|
|
|
14.3 |
% |
Administrative |
|
|
49,721 |
|
|
|
27.3 |
% |
|
|
56,795 |
|
|
|
28.7 |
% |
Bad Debt |
|
|
4,022 |
|
|
|
2.2 |
% |
|
|
5,056 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total general and administrative expense |
|
$ |
139,148 |
|
|
|
76.3 |
% |
|
$ |
148,446 |
|
|
|
74.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses decreased as compared to the prior year quarter within
administrative, admissions and bad debt expenses, which were slightly offset with an increase in advertising expense. Administrative expenses decreased by $7.1 million primarily driven by higher legal settlements recorded in the prior year quarter.
Admissions costs have decreased primarily in salary and related expenses due to headcount reductions made in response to decreasing enrollments as well as the Transitional Group no longer enrolling new students. The increased advertising expense is
substantially related to AIU as a result of increased spending in certain marketing channels to generate additional new student lead volume. Bad debt expense decreased as a percentage of revenue primarily due to a change in how we recognized revenue
for students who have withdrawn prior to completing their course of study. Beginning in the fourth quarter of 2014, we recognize revenue on a cash-basis for these students upon withdrawal. In the prior year quarter, revenue was recognized
immediately upon the withdrawal of a student with a corresponding charge to bad debt expense for the portion deemed uncollectible.
34
Bad debt expense incurred by each of our segments during the quarters ended March 31, 2015
and 2014 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
2015 |
|
|
% of Segment Revenue |
|
|
2014 |
|
|
% of Segment Revenue |
|
Bad debt expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
2,264 |
|
|
|
2.7 |
% |
|
$ |
2,269 |
|
|
|
2.6 |
% |
AIU |
|
|
1,262 |
|
|
|
2.4 |
% |
|
|
2,339 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
3,526 |
|
|
|
2.6 |
% |
|
|
4,608 |
|
|
|
3.3 |
% |
Career Colleges |
|
|
302 |
|
|
|
0.8 |
% |
|
|
560 |
|
|
|
1.2 |
% |
Corporate and Other |
|
|
140 |
|
|
|
NM |
|
|
|
(181 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Total |
|
|
3,968 |
|
|
|
2.2 |
% |
|
|
4,987 |
|
|
|
2.7 |
% |
Transitional Group |
|
|
54 |
|
|
|
1.3 |
% |
|
|
69 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,022 |
|
|
|
2.2 |
% |
|
$ |
5,056 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Loss
The operating loss reported for the current quarter resulted from the decline in revenues across most of our segments which was only partially
offset with the decline in operating expenses. Initiatives to align expenses with the declining student enrollment, changes in marketing strategies and implementation of efficiencies in our support functions continue to partially offset the impact
of declining revenues and deleveraging of the business.
(Benefit from) Provision for Income Taxes
As of December 31, 2014, we reported a total deferred tax valuation allowance of $150.4 million within our consolidated balance sheet. We
have determined that it is necessary to continue to record this valuation allowance against our net deferred tax assets as of March 31, 2015. The effective tax benefit for the quarter ended March 31, 2015 approximated $0.2 million,
resulting primarily from adjustments for uncertain tax positions. We will continue to evaluate our valuation allowance in future periods for any change in circumstances that may cause a change in judgment about the realizability of the deferred tax
assets.
Loss from Discontinued Operations
The results of operations for campuses that have been taught out or sold prior to 2015, and are considered distinct operations as defined under
FASB ASC Topic 205 Presentation of Financial Statements, as well as our LCB campuses which are held for sale, are presented within discontinued operations. During the first quarter of 2015, the Company adopted the new accounting
guidance impacting the presentation of financial statements for discontinued operations, which limits the discontinued operations treatment if the group being sold or disposed of does not meet the definition of a strategic business shift. During the
first quarter of 2015, the Company completed the teach-out of the Sanford-Brown White Plains campus which continues to be reported under the Transitional Group within continuing operations as a result of this new guidance.
Asset Held For Sale Le Cordon Bleu
During the fourth quarter of 2014, our Board of Directors approved a plan to sell our 16 Culinary Arts campuses (LCB). Our decision
to pursue the divestiture of LCB was the result of an ongoing portfolio review undertaken to evaluate the strategic direction of the Company. As a result of the decision to sell LCB, the results of operations for the entities to be sold are
classified within loss from discontinued operations as of March 31, 2015.
35
Revenue, operating expenses, income (loss) from discontinued operations, new student enrollments
and total student enrollments for our LCB asset held for sale during the first quarter of 2015 and prior year quarter was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
|
|
|
2015 |
|
|
2014 |
|
|
2015 vs 2014 % Change |
|
Asset Held For Sale: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
44,712 |
|
|
$ |
42,247 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Educational services and facilities |
|
|
19,943 |
|
|
|
19,340 |
|
|
|
3.1 |
% |
General and administrative |
|
|
24,525 |
|
|
|
36,685 |
|
|
|
-33.1 |
% |
Depreciation and amortization |
|
|
1 |
|
|
|
4,268 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
44,469 |
|
|
$ |
60,293 |
|
|
|
-26.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
250 |
|
|
$ |
(18,021 |
) |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New student enrollments |
|
|
2,040 |
|
|
|
2,300 |
|
|
|
-11.3 |
% |
Total student enrollments |
|
|
8,800 |
|
|
|
8,400 |
|
|
|
4.8 |
% |
Current quarter revenue for LCB increased by $2.5 million or 5.8% as compared to the prior year quarter. This
increase in revenue was primarily a result of improved total enrollments and reintroduction of the Associates degree program, which began to positively impact the revenue comparison. Total student enrollments were positively impacted by the
reintroduction of this program beginning in late 2012 due to the demand from students and employers. This program has a greater lead time between a prospective applicant to a new student enrollment as compared to the Certificate program due to the
longer length of the program impacting a students likelihood to start.
Current quarter income from discontinued operations for LCB
was $0.3 million as compared to the prior year quarter loss of $18.0 million. The increase in operating income is primarily a result of decreases in administrative expenses. Administrative expenses decreased primarily due to increased legal
settlements in the prior year quarter and increased management fee allocations in the prior year quarter as compared to the current year quarter. In accordance with ASC Topic 205 Presentation of Financial Statements, general corporate
overhead cannot be allocated to discontinued operations.
36
SEGMENT RESULTS OF OPERATIONS
The following tables present unaudited segment results for the reported periods (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended March 31, |
|
|
|
REVENUE |
|
|
OPERATING (LOSS) INCOME |
|
|
OPERATING MARGIN (LOSS) |
|
|
|
2015 |
|
|
2014 |
|
|
% Change |
|
|
2015 |
|
|
2014 |
|
|
% Change |
|
|
2015 |
|
|
2014 |
|
REVENUE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
85,127 |
|
|
$ |
86,920 |
|
|
|
-2.1 |
% |
|
$ |
14,616 |
|
|
$ |
14,481 |
|
|
|
0.9 |
% |
|
|
17.2 |
% |
|
|
16.7 |
% |
AIU |
|
|
53,066 |
|
|
|
52,573 |
|
|
|
0.9 |
% |
|
|
(2,887 |
) |
|
|
(3,583 |
) |
|
|
19.4 |
% |
|
|
-5.4 |
% |
|
|
-6.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
138,193 |
|
|
|
139,493 |
|
|
|
-0.9 |
% |
|
|
11,729 |
|
|
|
10,898 |
|
|
|
7.6 |
% |
|
|
8.5 |
% |
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
39,772 |
|
|
|
47,832 |
|
|
|
-16.9 |
% |
|
|
(22,110 |
) |
|
|
(13,922 |
) |
|
|
-58.8 |
% |
|
|
-55.6 |
% |
|
|
-29.1 |
% |
Corporate and Other |
|
|
39 |
|
|
|
100 |
|
|
|
-61.0 |
% |
|
|
(5,860 |
) |
|
|
(11,136 |
) |
|
|
47.4 |
% |
|
|
NM |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
178,004 |
|
|
|
187,425 |
|
|
|
-5.0 |
% |
|
|
(16,241 |
) |
|
|
(14,160 |
) |
|
|
-14.7 |
% |
|
|
-9.1 |
% |
|
|
-7.6 |
% |
Transitional Group |
|
|
4,298 |
|
|
|
10,729 |
|
|
|
-59.9 |
% |
|
|
(8,360 |
) |
|
|
(7,789 |
) |
|
|
-7.3 |
% |
|
|
NM |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
182,302 |
|
|
$ |
198,154 |
|
|
|
-8.0 |
% |
|
$ |
(24,601 |
) |
|
$ |
(21,949 |
) |
|
|
-12.1 |
% |
|
|
-13.5 |
% |
|
|
-11.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NEW STUDENT ENROLLMENTS |
|
|
TOTAL STUDENT ENROLLMENTS |
|
|
|
For the Quarter Ended March 31, |
|
|
As of March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
% Change |
|
|
2015 |
|
|
2014 |
|
|
% Change |
|
CTU (1) |
|
|
5,040 |
|
|
|
4,820 |
|
|
|
4.6 |
% |
|
|
20,300 |
|
|
|
20,600 |
|
|
|
-1.5 |
% |
AIU (1) (2) |
|
|
5,090 |
|
|
|
5,900 |
|
|
|
-13.7 |
% |
|
|
13,500 |
|
|
|
13,300 |
|
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
10,130 |
|
|
|
10,720 |
|
|
|
-5.5 |
% |
|
|
33,800 |
|
|
|
33,900 |
|
|
|
-0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
1,830 |
|
|
|
2,780 |
|
|
|
-34.2 |
% |
|
|
8,600 |
|
|
|
10,700 |
|
|
|
-19.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
11,960 |
|
|
|
13,500 |
|
|
|
-11.4 |
% |
|
|
42,400 |
|
|
|
44,600 |
|
|
|
-4.9 |
% |
Transitional Group (3) |
|
|
|
|
|
|
220 |
|
|
|
NM |
|
|
|
900 |
|
|
|
2,300 |
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,960 |
|
|
|
13,720 |
|
|
|
-12.8 |
% |
|
|
43,300 |
|
|
|
46,900 |
|
|
|
-7.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
A portion of the total student enrollment decrease for the University Group resulted from campus location teach-outs which negatively impacted the comparison of the current quarter versus the prior year quarter as a
result of the wind down of operations at one location within each segment. |
(2) |
Beginning in the second quarter of 2014, AIU changed its methodology related to certain cancelled student enrollments. As a result, the decrease in the current quarter versus the prior year quarter was partially a
result of this change in methodology. |
(3) |
Campuses within the Transitional Group segment no longer enroll new students; students who re-enter after 365 days are reported as new student enrollments. |
University Group. Current quarter revenue decreased slightly by approximately 0.9% as a slight increase in revenue for AIU was
offset with a decline in revenue for CTU driven by an overall 0.3% decrease in total student enrollments as compared to the prior year quarter. Total student enrollments were impacted by the teach-out of two campuses within the University Group.
Excluding these two campuses, total student enrollments increased slightly
37
as compared to the prior year quarter. New student enrollments decreased approximately 5.5% in the current quarter for our University Group as compared to the prior year quarter. This decrease
was primarily attributable to a change in the methodology used to calculate new student enrollments at AIU in 2014 related to cancelled student enrollments. Excluding the impact of this change, new student enrollments within the University Group
were down only 1.2% during the first quarter as compared to the prior year quarter.
Current quarter operating income for the University
Group increased $0.8 million, or 7.6%, as compared to the prior year quarter driven by an overall decrease in operating expenses which was partially offset with a decline in revenue. Most expense categories were lower when compared to the prior year
quarter, with the exception of administrative expenses and advertising expense. The increase in administrative expense is primarily due to increased management fees as a result of general corporate overhead no longer being allocated to the LCB
campuses and therefore increasing the percent allocated to the University Group. Advertising expense increased due to increased spending within certain marketing channels for AIU to assist with increasing new student interest.
Career Colleges. Current quarter revenue decreased $8.1 million, or approximately 16.9%, as Career Colleges experienced declines
in total student enrollments as compared to the prior year quarter. Lower total student enrollments at the beginning of the year as well as new student enrollments being approximately 34.2% lower as compared to the prior year quarter contributed to
the decline.
The current quarter operating loss of $22.1 million for Career Colleges is driven by the decline in revenue. Most expense
categories decreased as compared to the prior year quarter, primarily due to our restructuring and re-engineering initiatives carried out to better align with current total student enrollments. Asset impairment expenses increased by $6.0 million in
the current quarter as compared to the prior year quarter primarily due to changes in managements expectations regarding future use of the assets.
Transitional Group. This segment includes our institutions that are currently being taught out as of March 31, 2015 as well
as one campus that ceased operation in the current year quarter. The current quarter decline in revenue as compared to the prior year quarter is primarily a result of the decrease in total student enrollments at the beginning of the year and
campuses no longer enrolling new students. We expect revenue to continue to decline as compared to prior periods as campuses continue to wind down their operations.
The operating loss within the Transitional Group increased by $0.6 million as compared to the prior year quarter as the decrease in revenue
more than offset the reductions in variable operating expenses.
Corporate and Other. This category includes unallocated
costs that are incurred on behalf of the entire company. Corporate and Other costs decreased $5.3 million as compared to the prior year quarter, primarily due to higher legal settlement expense in the prior year quarter.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
A detailed discussion of the accounting policies and estimates that we believe are most critical to our financial condition and results of
operations that require managements most subjective and complex judgments in estimating the effect of inherent uncertainties is included under the caption Summary of Critical Accounting Policies and Estimates included in
Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2014. Note 2 Summary of Significant Accounting Policies of the notes to our
consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2014 also includes a discussion of these and other significant accounting policies.
38
LIQUIDITY, FINANCIAL POSITION, AND CAPITAL RESOURCES
As of March 31, 2015, cash, cash equivalents, restricted cash and short-term investments totaled $206.4 million. Our cash flows from
operations have historically been adequate to fulfill our liquidity requirements. We historically have financed our operating activities, organic growth and acquisitions primarily through cash generated from operations, existing cash balances and
credit facility borrowings. The recent declines in operating performance have resulted in an increase in net cash used in operating activities and we expect continued net cash usage in operating activities. However, as we execute on our strategic
imperatives, we expect continued improving cash trends in the business driven by continued reductions in cash usage related to our Transitional Group and discontinued operations, improved financial performance for our University Group, reduced real
estate obligations and reduced legal costs. 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 and existing cash balances.
Restricted cash balances as of March 31, 2015
approximate $13.9 million and are comprised of restricted cash balances for certificates of deposit to provide securitization for letters of credit.
The discussion above reflects managements expectations regarding liquidity; however, we are not able to assess the effect of loss
contingencies on future cash requirements and liquidity. See Note 10 Contingencies to our unaudited condensed consolidated financial statements. Further, as a result of the significance of the Title IV Program funds received by our
students, we are highly dependent on these funds to operate our business. Any reduction in the level of Title IV funds that our students are eligible to receive or any impact on timing or our ability to receive Title IV Program funds may have a
significant impact on our operations and our financial condition. In addition, our financial performance is dependent on the level of student enrollment which could be impacted by external factors. See Item 1A, Risk Factors, in
our Annual Report on Form 10-K for the year ended December 31, 2014.
In particular, to participate in Title IV Programs, our
institutions must either satisfy standards of financial responsibility prescribed by ED, or be subjected to additional oversight, required to post a letter of credit in favor of ED or placed on provisional certification. These regulations require
each eligible higher education institution to, among other things, satisfy a quantitative standard of financial responsibility that is a weighted average composite score of three annual tests which assess the financial condition of the institution.
If the institution achieves a composite score of at least 1.5, it is considered financially responsible without conditions or additional oversight. See Item 1, Business Student Financial Aid and Related Federal Regulation
Compliance with Federal Regulatory Standards and Effect of Federal Regulatory Violations Financial Responsibility Standards, in our Annual Report for Form 10-K for the year ended December 31, 2014 for more information
regarding EDs standards of financial responsibility.
ED applies its quantitative financial responsibility tests annually based on
an institutions audited financial statements. Recent profitability declines and the write down of the carrying value of non-financial assets, such as deferred tax assets and goodwill, have negatively impacted our financial responsibility
composite score. Our composite score for the consolidated entity for the year ended December 31, 2013 was 1.5, and our preliminary calculation for the year ended December 31, 2014 is 1.5, which are considered financially responsible
without conditions or additional oversight. The Company continuously monitors compliance with EDs standards of financial responsibility. In order to remain financially responsible for 2015 and 2016, as defined by ED, the Company is exploring
additional steps which include further cost reductions, investing in new business technologies, long-term borrowing options, acquisitions or divestitures, modifying our capital structure and other organization changes. Additionally, our investment
decisions, such as the use of our cash, will be impacted by the course of action we choose.
There can be no assurance that the
Companys actions will result in the Company remaining financially responsible as defined by ED. For example, a failure to successfully implement our plan to sell our Culinary Arts
39
campuses may negatively impact our financial responsibility composite score. Additionally, our plans to reduce costs through closure of campuses may negatively impact our composite score in the
short term. We believe that recent developments in the proprietary postsecondary education industry have negatively impacted the availability and cost of capital for companies in the industry, which may impact the course of action we choose and our
future compliance with EDs financial responsibility standards. Further, there is some uncertainty regarding EDs treatment of certain components of the financial responsibility composite score.
ED has significant discretion in determining the monitoring and reporting procedures applicable to an institution with a composite score below
1.5, the amount of any required letter of credit and the terms of any provisional certification. If in the future we are required to satisfy EDs standards of financial responsibility on an alternative basis, including potentially by posting
irrevocable letters of credit, we may not have the capacity to post these letters of credit.
Sources and Uses of Cash
Operating Cash Flows
During the
quarters ended March 31, 2015 and 2014, net cash flows used in operating activities totaled $20.2 million and $35.4 million, respectively. The current quarter operating cash usage included cash payments of $13.5 million of real estate payments
for lease obligations of vacated facilities, of which $8.9 million was paid to exit facilities which reduced future lease obligations by $19.4 million, as well as $4.9 million of cash payments for legal settlements and separation payments for the
previous CEO.
Our primary source of cash flows from operating activities is tuition collected from our students. Our students derive the
ability to pay 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, institution payment plans, private and institutional scholarships
and cash payments. For the quarters ended March 31, 2015 and 2014, approximately 76% and 77%, respectively, of our institutions cash receipts from tuition payments came from Title IV Program funding.
For further discussion of Title IV Program funding and alternative private loan funding sources for our students, see Item 1,
BusinessStudent Financial Aid and Related Federal Regulation, in our Annual Report on Form 10-K for the year ended December 31, 2014.
Our primary uses of cash to support our operating activities include, among other things, cash paid and benefits provided to our 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 institution supplies, and to federal, state and local governments for income and other taxes.
Investing Cash Flows
During
the quarters ended March 31, 2015 and 2014, net cash used in investing activities totaled $3.9 million and $19.0 million, respectively.
Purchases and Sales of Available-for-Sale Investments. Purchases and sales of available-for-sale investments resulted in a $0.5 million
and $15.5 million net cash outflow during the quarters ended March 31, 2015 and 2014, respectively.
Capital
Expenditures. Capital expenditures remained relatively flat at $3.4 million for the quarter ended March 31, 2015 as compared to $3.5 million for the quarter ended March 31, 2014. Capital expenditures represented 1.5% and 1.4% of
total revenue of continuing and discontinued operations during the quarters ended March 31, 2015 and 2014, respectively.
40
Financing Cash Flows
During the quarters ended March 31, 2015 and 2014, net cash flows used in financing activities totaled $0.8 million and $0.2 million,
respectively.
Credit Agreement. On October 31, 2014, we entered into a $120.0 million Amended and Restated Credit Agreement
with BMO Harris Bank N.A., in its capacities as the initial lender and letter of credit issuer thereunder and the administrative agent for the lenders which from time to time may be parties to the Credit Agreement. The revolving credit facility
under the Credit Agreement is scheduled to mature on June 30, 2016 and replaced our previous credit agreement entered into on December 30, 2013. The Credit Agreement, which includes certain financial covenants, requires that fees and
interest are payable monthly and quarterly in arrears, respectively, and principal is payable at maturity. During the first quarter of 2015, we repaid the $10.0 million which was borrowed under the Credit Agreement during the fourth quarter of 2014.
As of March 31, 2015, we have no outstanding borrowing under the Credit Agreement.
Restricted Cash. As of March 31,
2015, we had approximately $13.9 million of restricted cash related to certificates of deposit to secure outstanding letters of credit. As of December 31, 2014, our restricted cash balances approximated $22.9 million related to
collateralization of borrowings under our Credit Agreement and certificates of deposit to secure outstanding letters of credit.
41
Contractual Obligations
As of March 31, 2015, future minimum cash payments under contractual obligations for our non-cancelable operating lease arrangements were
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 (4) |
|
|
2016 |
|
|
2017 |
|
|
2018 |
|
|
2019 |
|
|
2020 & Thereafter |
|
|
Total |
|
Gross operating lease obligations (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
1,717 |
|
|
$ |
1,538 |
|
|
$ |
1,578 |
|
|
$ |
1,627 |
|
|
$ |
1,678 |
|
|
$ |
2,417 |
|
|
$ |
10,555 |
|
AIU |
|
|
8,628 |
|
|
|
6,411 |
|
|
|
6,522 |
|
|
|
6,676 |
|
|
|
6,207 |
|
|
|
2,903 |
|
|
|
37,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
10,345 |
|
|
|
7,949 |
|
|
|
8,100 |
|
|
|
8,303 |
|
|
|
7,885 |
|
|
|
5,320 |
|
|
|
47,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
19,249 |
|
|
|
19,269 |
|
|
|
17,031 |
|
|
|
16,815 |
|
|
|
11,044 |
|
|
|
15,033 |
|
|
|
98,441 |
|
Corporate and Other |
|
|
5,303 |
|
|
|
4,799 |
|
|
|
4,485 |
|
|
|
4,575 |
|
|
|
4,666 |
|
|
|
13,741 |
|
|
|
37,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
34,897 |
|
|
|
32,017 |
|
|
|
29,616 |
|
|
|
29,693 |
|
|
|
23,595 |
|
|
|
34,094 |
|
|
|
183,912 |
|
Transitional Group |
|
|
12,289 |
|
|
|
7,477 |
|
|
|
5,624 |
|
|
|
4,573 |
|
|
|
3,878 |
|
|
|
1,822 |
|
|
|
35,663 |
|
Discontinued Operations (Excluding Culinary Arts) |
|
|
16,137 |
|
|
|
13,906 |
|
|
|
12,996 |
|
|
|
6,734 |
|
|
|
1,438 |
|
|
|
620 |
|
|
|
51,831 |
|
Discontinued Operations (Culinary Arts) |
|
|
22,549 |
|
|
|
22,775 |
|
|
|
16,986 |
|
|
|
15,647 |
|
|
|
11,678 |
|
|
|
10,390 |
|
|
|
100,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross operating lease obligations (2) |
|
$ |
85,872 |
|
|
$ |
76,175 |
|
|
$ |
65,222 |
|
|
$ |
56,647 |
|
|
$ |
40,589 |
|
|
$ |
46,926 |
|
|
$ |
371,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease income (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
12 |
|
|
$ |
5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17 |
|
AIU |
|
|
1,407 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
1,419 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
Corporate and Other |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
1,471 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,589 |
|
Transitional Group |
|
|
405 |
|
|
|
244 |
|
|
|
159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
808 |
|
Discontinued Operations (Excluding Culinary Arts) |
|
|
4,805 |
|
|
|
4,879 |
|
|
|
4,827 |
|
|
|
801 |
|
|
|
675 |
|
|
|
620 |
|
|
|
16,607 |
|
Discontinued Operations (Culinary Arts) |
|
|
2,273 |
|
|
|
2,635 |
|
|
|
2,696 |
|
|
|
2,490 |
|
|
|
1,147 |
|
|
|
377 |
|
|
|
11,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sublease income |
|
$ |
8,954 |
|
|
$ |
7,876 |
|
|
$ |
7,682 |
|
|
$ |
3,291 |
|
|
$ |
1,822 |
|
|
$ |
997 |
|
|
$ |
30,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CTU |
|
$ |
1,705 |
|
|
$ |
1,533 |
|
|
$ |
1,578 |
|
|
$ |
1,627 |
|
|
$ |
1,678 |
|
|
$ |
2,417 |
|
|
$ |
10,538 |
|
AIU |
|
|
7,221 |
|
|
|
6,298 |
|
|
|
6,522 |
|
|
|
6,676 |
|
|
|
6,207 |
|
|
|
2,903 |
|
|
|
35,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total University Group |
|
|
8,926 |
|
|
|
7,831 |
|
|
|
8,100 |
|
|
|
8,303 |
|
|
|
7,885 |
|
|
|
5,320 |
|
|
|
46,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Career Colleges |
|
|
19,232 |
|
|
|
19,269 |
|
|
|
17,031 |
|
|
|
16,815 |
|
|
|
11,044 |
|
|
|
15,033 |
|
|
|
98,424 |
|
Corporate and Other |
|
|
5,268 |
|
|
|
4,799 |
|
|
|
4,485 |
|
|
|
4,575 |
|
|
|
4,666 |
|
|
|
13,741 |
|
|
|
37,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
33,426 |
|
|
|
31,899 |
|
|
|
29,616 |
|
|
|
29,693 |
|
|
|
23,595 |
|
|
|
34,094 |
|
|
|
182,323 |
|
Transitional Group |
|
|
11,884 |
|
|
|
7,233 |
|
|
|
5,465 |
|
|
|
4,573 |
|
|
|
3,878 |
|
|
|
1,822 |
|
|
|
34,855 |
|
Discontinued Operations (Excluding Culinary Arts) |
|
|
11,332 |
|
|
|
9,027 |
|
|
|
8,169 |
|
|
|
5,933 |
|
|
|
763 |
|
|
|
|
|
|
|
35,224 |
|
Discontinued Operations (Culinary Arts) |
|
|
20,276 |
|
|
|
20,140 |
|
|
|
14,290 |
|
|
|
13,157 |
|
|
|
10,531 |
|
|
|
10,013 |
|
|
|
88,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net contractual lease obligations (2) |
|
$ |
76,918 |
|
|
$ |
68,299 |
|
|
$ |
57,540 |
|
|
$ |
53,356 |
|
|
$ |
38,767 |
|
|
$ |
45,929 |
|
|
$ |
340,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Amounts exclude certain costs associated with real estate leases, such as expense for common area maintenance (i.e. CAM) and taxes, as these amounts are undeterminable at this time and may vary based on
future circumstances. |
(2) |
Certain real estate properties are shared by campuses within multiple segments. The lease obligations for shared locations are reported under the segment which holds the legal title to the lease. |
(3) |
Amounts provided are for executed sublease arrangements. |
(4) |
Amounts provided are for the full year of 2015. |
42
ITEM 3. |
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 investment in auction rate securities (ARS)
has a stated term to maturity of greater than one year, and as such, we classify our investment in ARS as non-current on our condensed consolidated balance sheets within other assets. Auctions can fail when the number of sellers of the
security exceeds the buyers for that particular auction period. In the event that an auction fails, the interest rate resets at a rate based on a formula determined by the individual security. The ARS for which auctions have failed continues to
accrue interest and is auctioned on a set interval until the auction succeeds, the issuer calls the security, or it matures. As of March 31, 2015, we have determined this investment is at risk for impairment due to the nature of the liquidity
of the market over the past several years. Cumulative unrealized losses as of March 31, 2015 amount to $0.5 million and are reflected within accumulated other comprehensive loss as a component of stockholders equity. We believe this
impairment is temporary, as we do not intend to sell the investment and it is unlikely we will be required to sell the investment before recovery of its amortized cost basis.
Interest Rate Exposure
Any outstanding
borrowings under our revolving credit facility bear annual interest at fluctuating rates under either the Base Rate Loan or as determined by the London Interbank Offered Rate (LIBOR) for the relevant currency, plus the applicable rate based on the
type of loan. As of March 31, 2015, we had no outstanding borrowings under this facility.
Our financial instruments are recorded at
their fair values as of March 31, 2015 and December 31, 2014. 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.
ITEM 4. |
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We completed an evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q (Report) under the
supervision and with the participation of management, including our Interim Chief Executive Officer and Interim 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 Interim Chief Executive Officer and Interim Chief Financial Officer concluded that, as of March 31, 2015
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 March 31, 2015, that have
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
43
Inherent Limitations on the Effectiveness of Controls
Our management does not expect that our disclosure controls and procedures or our internal controls will prevent or detect all errors and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.
These
inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of
two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures.
44
PART II OTHER INFORMATION
Item 1. |
Legal Proceedings |
Note 10 Contingencies to our
unaudited condensed consolidated financial statements is incorporated herein by reference.
In addition to the other information set forth
in this Quarterly Report on Form 10-Q, the reader should carefully consider the factors discussed in Part I, Item 1A Risk Factors, in the Companys Annual Report on Form 10-K for the year ended December 31, 2014, which was
filed with the Securities and Exchange Commission on March 3, 2015.
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth information regarding purchases made by us of shares of our common stock on a monthly basis during the quarter
ended March 31, 2015:
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid per Share |
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) |
|
|
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
|
December 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
183,296,772 |
|
January 1, 2015January 31, 2015 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
183,296,772 |
|
February 1, 2015February 28, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
183,296,772 |
|
March 1, 2015March 31, 2015 |
|
|
75,987 |
|
|
|
5.48 |
|
|
|
|
|
|
|
183,296,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
75,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes 75,987 shares delivered back to the Company for payment of withholding taxes from employees for vesting restricted shares pursuant to the terms of the Career Education Corporation 2008 Incentive Compensation
Plan. |
(2) |
As of March 31, 2015, approximately $183.3 million was available under our previously authorized repurchase program. Stock repurchases under this program may be made on the open market or in privately negotiated
transactions from time to time, depending on various factors, including market conditions and corporate and regulatory requirements. The stock repurchase program does not have an expiration date and may be suspended or discontinued at any time.
|
The exhibits required to be filed by Item 601
of Regulation S-K are listed in the Exhibit Index, which is attached hereto and incorporated by reference herein.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
CAREER EDUCATION CORPORATION |
|
|
|
|
Date: May 6, 2015 |
|
|
|
By: |
|
/s/ Ronald D. McCray |
|
|
|
|
|
|
Ronald D. McCray
Interim President and Chief Executive Officer
(Principal Executive Officer) |
Date: May 6, 2015 |
|
|
|
By: |
|
/s/ David Rawden |
|
|
|
|
|
|
David Rawden
Interim Chief Financial Officer
(Principal Financial Officer) |
46
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit Number |
|
Exhibit |
|
Incorporated by Reference to: |
|
|
|
4.1 |
|
Second Amendment to Credit Agreement dated as of January 30, 2015 |
|
Exhibit 4.4 to our Form 10-K for the year ended December 31, 2014 |
|
|
|
+*10.1 |
|
2015 Annual Incentive Award Program for Key Executives pursuant to the Career Education Corporation 2008 Incentive Compensation Plan (the 2008 Plan) |
|
|
|
|
|
+*10.2 |
|
2015 Annual Incentive Award Program pursuant to the 2008 Plan |
|
|
|
|
|
*10.3 |
|
Form of 2015 Performance Unit Agreement under the 2008 Plan |
|
Exhibit 10.1 to our Form 8-K filed March 6, 2015 |
|
|
|
*10.4 |
|
Form of Restricted Stock Unit Agreement under the 2008 Plan dated March 6, 2015 between Career Education Corporation and Ronald McCray (Performance-Based) |
|
Exhibit 10.2 to our Form 8-K filed March 6, 2015 |
|
|
|
*10.5 |
|
Form of Cash-Settled Restricted Stock Unit Agreement dated March 6, 2015 between Career Education Corporation and Ronald McCray (non-plan) (Performance-Based) |
|
Exhibit 10.3 to our Form 8-K filed March 6, 2015 |
|
|
|
*10.6 |
|
Agreement, by and among Career Education Corporation, Tenzing Global Management LLC, Tenzing Global Investors LLC, Tenzing Global Investors Fund I LP and Richard Wang, dated March 10, 2015 |
|
Exhibit 10.1 to our Form 8-K filed March 11, 2015 |
|
|
|
+*10.7 |
|
Agreement between Career Education Corporation and AP Services LLC dated March 23, 2015 (interim CFO services) |
|
|
|
|
|
+*10.8 |
|
Retention Award Agreement between Career Education Corporation and Michele Peppers dated March 27, 2015 |
|
|
|
|
|
*10.9 |
|
Separation and Release Agreement between the Company and Scott Steffey dated February 12, 2015 |
|
Exhibit 10.1 to our Form 8-K filed on February 12, 2015 |
|
|
|
*10.10 |
|
Career Education Corporation Executive Severance Plan (Amended and Restated as of January 1, 2015) |
|
Exhibit 10.1 to our Form 8-K filed December 18, 2014 |
|
|
|
+31.1 |
|
Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
+31.2 |
|
Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
+32.1 |
|
Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|
|
|
|
|
+32.2 |
|
Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|
|
47
|
|
|
|
|
Exhibit Number |
|
Exhibit |
|
Incorporated by Reference to: |
|
|
|
+101 |
|
The following financial information from our Quarterly Report on Form 10-Q for the three months ended March 31, 2015, filed with the SEC on May 6, 2015, formatted in Extensible Business Reporting Language (XBRL): (i) the
Condensed Consolidated Balance Sheets as of March 31, 2015 and December 31, 2014, (ii) the Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss for the three months ended March 31, 2015 and March 31, 2014,
(iii) the Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and March 31, 2014, and (iv) Notes to Unaudited Condensed Consolidated Financial Statements |
|
|
* |
Management contract or compensatory plan or arrangement required to be filed as an Exhibit on this Form 10-Q. |
48
Exhibit 10.1
Career Education Corporation
2015 Annual Incentive Award Program
for Key Executives
pursuant to the
2008
Incentive Compensation Plan
ARTICLE 1
PURPOSE AND PERFORMANCE PERIOD
1.1
Purpose. This document is created to set forth the terms and conditions for certain Grantees who have been selected to participate in the Annual Incentive Award portion of the Plan for calendar year 2015. To the extent that there is
any conflict between the terms of this document and the terms of the Plan, the Plan shall control. It is the intent of the Company that amounts that become due pursuant to this program will qualify as performance-based compensation for
purposes of Section 162(m) of the Code.
1.2 Performance Period. This document is effective for certain eligible Annual Incentive
Awards calculated for Grantees under the Plan relating to calendar year 2015.
1.3 Continued Employment. Unless otherwise determined by the
Committee, and subject to Section 1.4 hereof, a Grantee must be employed by the Company or an Affiliate on the last day of the Performance Period in order to be eligible to receive an Annual Incentive Award payment hereunder.
1.4 No Misconduct. If at any time prior to the date the Annual Incentive Award is paid by the Company a Grantee is determined by the Committee
to have engaged in Misconduct, then no such Annual Incentive Award shall be paid to such Grantee.
ARTICLE 2
DEFINITIONS
Capitalized
terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Plan. The following words and phrases shall have the following meanings:
2.1 General Program means the Career Education Corporation 2015 Annual Incentive Award Program.
2.2 Misconduct means any one of the following in which a Grantee may engage during the Performance Period or any time thereafter,
but prior to the date the Annual Incentive Award is paid: (a) any act of intentional misconduct, dishonesty, gross negligence, conscious abandonment, or neglect of duty; (b) any violation of the Companys Code of Conduct, policies on
maintaining confidentiality of proprietary information, Code of Ethics or non-discrimination or anti-harassment policy; (c) any commission of a criminal activity, fraud, or embezzlement; (d) any failure to reasonably cooperate in any
investigation or proceeding concerning the Company or any of its Affiliates; (e) any unauthorized disclosure or use of confidential information or trade secrets; or (f) any violation of any enforceable restrictive covenant, such as a
non-compete, non-solicit, or non-disclosure agreement between the Grantee and the Company.
2.3 Performance Period means the
calendar year ending December 31, 2015.
2.4 Plan means the Career Education Corporation 2008 Incentive Compensation Plan.
2.5 Program means this 2015 Annual Incentive Award Program for Key Executives which is established under the Plan.
2.6 Revenue means the Companys revenue from continuing operations as reported on the Companys Form 10-K for the year
ending December 31, 2015 (which is prepared in accordance with the generally accepted accounting principles of the U.S).
|
|
|
Program Effective January 1, 2015 |
|
Page 2 of 3 |
ARTICLE 3
ELIGIBILITY
3.1
Eligibility. The Grantees for the Performance Period have been designated as eligible hereunder in accordance with the Plan. The Grantees participating hereunder for the Performance Period are: Jeffrey Ayers, Lysa Clemens, Jeffrey
Cooper, Jason Friesen, Diane Auer Jones, Reid Simpson and Scott Steffey.
ARTICLE 4
ANNUAL INCENTIVE AWARD AMOUNTS
4.1
Amount. So long as the Company achieves Revenue for the Performance Period of at least $600 million, each Grantee hereunder will be eligible to receive the Annual Incentive Award set forth next to such Grantees name in the table
below. Provided, however, that annual award payments will not exceed the maximum threshold provided in the Plan.
|
|
|
|
|
|
|
Name of Grantee |
|
Position of Grantee |
|
Annual Incentive Award Amount |
|
|
|
|
Ayers, Jeffrey |
|
Sr. Vice President, General Counsel & Corp Secretary |
|
$ |
570,000 |
|
|
|
|
Clemens, Lysa |
|
Sr. Vice President, & Chief Career Schools Officer |
|
$ |
585,750 |
|
|
|
|
Cooper, Jeffrey |
|
Sr. Vice President, & Chief Compliance Officer |
|
$ |
305,000 |
|
|
|
|
Friesen, Jason |
|
Sr. Vice President, & Chief University Officer |
|
$ |
600,000 |
|
|
|
|
Jones Auer, Diane |
|
Sr. Vice President, & Chief External Relations Officer |
|
$ |
343,125 |
|
|
|
|
Simpson, Reid |
|
Sr. Vice President & Chief Financial Officer |
|
$ |
743,750 |
|
|
|
|
Steffey, Scott |
|
President & Chief Executive Officer |
|
$ |
2,337,500 |
|
ARTICLE 5
COMMITTEE DISCRETION
5.1 Committee
Discretion. The Committee retains the discretion to reduce, but not increase, the Annual Incentive Award of any Grantee in its sole and absolute discretion. Any such reduction may be made for any reason, including satisfaction or
non-satisfaction of subjective factors, that the Committee may, in its sole and absolute discretion, consider.
|
|
|
Program Effective January 1, 2015 |
|
Page 3 of 3 |
Exhibit 10.2
Final
Approved by the Compensation Committee on March 2, 2015
Career Education Corporation
2015 Annual Incentive Award Program
pursuant to the
2008
Incentive Compensation Plan
ARTICLE 1
PURPOSE AND PERFORMANCE PERIOD
1.1
Purpose. This document is created to set forth the terms and conditions for certain Grantees who have been selected to participate in the Annual Incentive Award portion of the Plan for calendar year 2015. To the extent that there is
any conflict between the terms of this document and the terms of the Plan, the Plan shall control.
1.2 Performance Period. This document is
effective for certain Annual Incentive Awards calculated for Grantees under the Plan relating to calendar year 2015. The 2015 Annual Incentive Awards earned pursuant to this Program shall be paid no later than March 15, 2016.
1.3 No Misconduct. If at any time prior to the date the 2015 Annual Incentive Award is paid by the Company or an Affiliate, a Grantee is
determined by the Administrator to have engaged in Misconduct, then no such Annual Incentive Award shall be paid to such Grantee.
ARTICLE 2
DEFINITIONS
Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Plan. The following
words and phrases shall have the following meanings:
2.1 Administrator means a committee consisting of the Senior Vice
President and Chief Financial Officer, the Senior Vice President and General Counsel, and the Senior Vice President and Chief Human Resources Officer (or their respective designees), and/or any other executive officer as determined by the Committee.
2.2 Affiliate means any corporation, campus, or other entity that, directly or indirectly through one or more intermediaries,
is owned by the Company.
2.3 Corporate Employee means an employee of the Company or an Affiliate whose primary duties relate to
corporate-level activities (rather than Education Group-level activities). Status as a Corporate Employee will be determined by the Administrator.
2.4
Covered Management Position means a position within the Company which the Company has determined to be covered under 34 C.F.R. Section 668.14(b)(22)(iii)(C).
2.5 EBITDA means (a) at the Corporate organizational level, earnings from continuing operations of the Company (and its
Affiliates), minus earnings from the Transitional Group, plus earnings from Culinary Arts, or (b) at an Education Group organization level, earnings from the relevant Education Group; but in each case determined before interest, taxes,
depreciation and amortization, and before amounts paid under this Program, the Key Executive Program and any other annual cash bonus program of the Company or any Affiliate. EBITDA shall be calculated using the earnings and other amounts as reported
on the Companys Form 10-K for the year ending on December 31, 2015 (which is prepared in accordance with the generally accepted accounting principles in the U.S.). To the extent the information reported on the Form 10-K is not
sufficiently specific to provide data for a specific amount or Education Group, the data will be obtained from the Companys Finance Department and will be based on the data upon which the information in the Form 10-K is based.
2.6 EBITDA Performance Factor means, with respect to the Company (and its Affiliates) and each Education Group, a percentage
(expressed to the second decimal place) determined pursuant to the table set forth in the applicable memorandum from the Company setting forth the criteria for a Grantees Award. The EBITDA Performance Factor may not be less than 0% nor
more than 200%.
|
|
|
Program Effective January 1, 2015 |
|
Page 2 of 7 |
2.7 Education Group means
each of the following:
Career Colleges, which shall mean the Companys Career Colleges Group financial
reporting segment;
Career Colleges, excluding Regionally Accredited, which shall mean the Companys Career
Colleges Group financial reporting segment, excluding the Regionally Accredited reporting unit therein;
Regionally
Accredited, which shall mean the separate financial reporting unit referred to as such within the Companys Career Colleges financial reporting segment;
Culinary Arts, which shall mean the Companys Le Cordon Bleu culinary arts campuses;
Career Schools, which shall collectively refer to Career Colleges and Culinary Arts;
University Group, which shall collectively refer to AIU and CTU;
AIU, which shall mean American InterContinental University;
CTU, which shall mean Colorado Technical University; and
Transitional Group, which shall mean the Companys Transitional Group financial reporting segment which includes
those campuses that are designated by the Company as being in teach-out.
2.8 Eligible Earned Wages means
compensation for services performed in an incentive-eligible position that is eligible for inclusion when determining a Grantees Annual Incentive Award. Eligible Earned Wages are based on base earnings during the Performance Period only and
exclude any other payments made during the Performance Period (i.e., teach pay, allowances, reimbursements, equity grants, bonuses, incentive payments, short-term disability payments, long-term disability payments, etc.). Notwithstanding the
foregoing, (a) to the extent any individual becomes employed by the Company or any of its Affiliates on or after November 1, 2015, or first moves into an incentive-eligible position on or after November 1, 2015, such individual will
not have any Eligible Earned Wages for the Performance Period, and (b) except as set forth in Section 3.1 hereof, to the extent any individual does not remain employed by the Company or an Affiliate as of the last day of the Performance
Period, such individual will not have any Eligible Earned Wages for the Performance Period.
2.9 Key Executive Program means the
Career Education Corporation 2015 Annual Incentive Award Program for Key Executives.
2.10 Misconduct means any one of the
following in which a Grantee may engage prior to or during the Performance Period or any time thereafter, but prior to the date the 2015 Annual Incentive Award is paid: (a) any act of intentional misconduct, dishonesty, gross negligence,
conscious abandonment, or neglect of duty; (b) any violation of the Companys Code of Conduct, policies on maintaining confidentiality of proprietary information, Code of Ethics or non-discrimination or anti-harassment policy; (c) any
commission of a criminal activity, fraud, or embezzlement; (d) any failure to reasonably cooperate in any investigation or proceeding concerning the Company or any of its Affiliates; (e) any unauthorized disclosure or use of confidential
information or trade secrets; (f) any violation of any enforceable restrictive covenant, such as a non-compete, non-solicit, or non-disclosure agreement between the Grantee and the Company or an Affiliate; or (g) any conduct that causes
the Grantee to be ineligible for benefits pursuant the applicable Company severance plan.
2.11 Performance Period means the
calendar year ending December 31, 2015.
2.12 Plan means the Career Education Corporation 2008 Incentive Compensation Plan,
as amended.
|
|
|
Program Effective January 1, 2015 |
|
Page 3 of 7 |
2.13 Program means this
2015 Annual Incentive Award Program which is established under the Plan.
2.14 Revenue means the revenue that is received during
the normal course of business by the University Group as a whole, or by AIU or CTU, as applicable to a particular Grantee, based on the Revenue as reported on the Companys Form 10-K for the year ending December 31, 2015 (which is prepared
in accordance with the generally accepted accounting principles of the U.S.).
2.15 Revenue Multiplier means, with respect to
each of the University Group, AIU and CTU, a percentage determined pursuant to the table set forth in the applicable memorandum from the Company setting forth the criteria for a Grantees Award. The Revenue Multiplier may not be less than
60% nor more than 150%.
2.16 Target Incentive Percentage means a Grantees target Annual Incentive Award percentage of
Eligible Earned Wages as communicated to the Grantee.
2.17 Targeted EBITDA means, with respect to the Company (and its
Affiliates) and each Education Group, the targeted EBITDA of the applicable organizational level for the Performance Period as approved by the Committee, which shall be consistent with the Companys 2015 operating plan approved by the Board of
Directors of the Company.
2.18 Targeted Revenue means, with respect to each of the University Group, AIU and CTU, the targeted
amount of Revenue to be received by the applicable organizational level for the Performance Period as approved by the Committee, which shall be consistent with the Companys 2015 operating plan approved by the Board of Directors of the Company.
ARTICLE 3
ELIGIBILITY
3.1
Eligibility. The Grantees for the Performance Period are employees in incentive-eligible positions who are not in a Covered Management Position and are classified by the Company as Grade E61 or higher. Grantees are separately notified
of their eligibility to participate in the Program. Employees who participate in the Key Executive Program are not eligible Grantees for purposes of this Program. If an individual is in a Covered Management Position at any point during the
Performance Period, then such individual will not be eligible for an award or payment under this Program. In addition, (a) to the extent an individual is newly hired by the Company or any of its Affiliates or first moves into an
incentive-eligible position on or after November 1, 2015, such individual shall not be eligible to receive an Annual Incentive Award pursuant to this Program, and (b) subject to Section 1.3 hereof and unless otherwise determined by
the Committee, a Grantee must be employed by the Company or an Affiliate on the last day of the Performance Period in order to be eligible to receive an Annual Incentive Award payment hereunder. Notwithstanding the foregoing, and subject to
Section 1.3 hereof, if a Grantees employment with the Company is terminated by the Company without Cause as part of a reduction in force on or after October 1, 2015, then such Grantee shall remain eligible to receive an Annual
Incentive Award pursuant to this Program and such Grantees Eligible Earned Wages earned during the Performance Period prior to his or her termination shall continue to be Eligible Earned Wages for purposes of this Program; provided that,
unless otherwise determined by the Committee, such Grantee shall not be eligible for a payment hereunder to the extent such Grantee received a severance package in connection with such termination and such severance package contained a payment
related to or otherwise based on annual bonus. In all cases, to the extent a Grantee is no longer employed by the Company or an Affiliate on the date the Annual Incentive Award becomes payable pursuant to this Program (a Separated
Grantee), then the Annual Incentive Amount shall only be paid to such Separated Grantee to the extent the Separated Grantee has executed a release of claims against the Company and its Affiliates, which release must be in a form
satisfactory to the Administrator, prior to the payment date for such Annual Incentive Award. In addition, if applicable law requires that any such release be subject to a revocation period in order to become fully effective, payment of
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Program Effective January 1, 2015 |
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Page 4 of 7 |
the Annual Incentive Award to a Separated Grantee
shall only be required if, prior to the payment date for the Annual Incentive Award, the applicable revocation period for the release has lapsed without any such revocation occurring.
ARTICLE 4
AWARD AMOUNT
4.1 Annual Incentive Award Weightings. The following table identifies the Annual Incentive Award element weightings based on the
performance components and Grantee classification for Grantees who are Corporate Employees and for Grantees who are part of an Education Group. Grantee classification will be determined by the Administrator and communicated to the Grantee.
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EBITDA Performance Component |
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Grantee Classification |
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Corporate EBITDA |
|
Education Group EBITDA |
|
Individual Goals |
|
Total |
Corporate Employee |
|
80% |
|
|
|
20% |
|
100% |
Career Colleges |
|
40% |
|
40% |
|
20% |
|
100% |
Career Colleges (excluding Regionally Accredited) |
|
40% |
|
40% |
|
20% |
|
100% |
Regionally Accredited |
|
40% |
|
40% |
|
20% |
|
100% |
Culinary Arts |
|
40% |
|
40% |
|
20% |
|
100% |
Career Schools |
|
40% |
|
40% |
|
20% |
|
100% |
University Group* |
|
40% |
|
40% |
|
20% |
|
100% |
AIU* |
|
40% |
|
40% |
|
20% |
|
100% |
CTU* |
|
40% |
|
40% |
|
20% |
|
100% |
Transitional Group |
|
40% |
|
40% |
|
20% |
|
100% |
* |
Grantees with a University Group, AIU or CTU classification will have the portion of their Award that is based on the EBITDA Performance Component subject to the Revenue Multiplier described in Section 4.3.
|
For Grantees performing services during the Performance Period in multiple Grantee classifications, the percentages set forth in the tables
above may be subject to proration pursuant to Section 5.2 hereof.
4.2 EBITDA Performance Component. In respect of the EBITDA
performance component, each Grantee will be eligible to receive a payment equal to the result of applying the following formula to such Grantee (subject to adjustment for certain Grantees as provided in Section 4.3):
A x B x C x D:
Where:
|
A |
equals such Grantees Eligible Earned Wages; |
|
B |
equals such Grantees Target Incentive Percentage; |
|
C |
equals the percentage set forth in the applicable box set forth in the relevant EBITDA Performance Component column in the table in Section 4.1 hereof; and |
|
D |
equals the applicable EBITDA Performance Factor for the relevant organizational level. |
To the extent the
performance of more than one organizational level applies based on the chart set forth in Section 4.1, then in order to determine the relevant payout pursuant to this Section 4.2, the formula set forth above shall be performed at both
organizational levels, and the result shall be aggregated.
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Program Effective January 1, 2015 |
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4.3 Revenue Multiplier. For a Grantee
who is employed in the University Group, AIU or CTU, the aggregate amount determined pursuant to Section 4.2 above for such Grantee shall be multiplied by the applicable Revenue Multiplier, and such product shall be the amount payable to such
Grantee for the EBITDA performance component of his or her Annual Incentive Award.
4.4 Individual Goals Performance Component. For the
individual goals performance component, each Grantee will be eligible to receive a payment based on the percentage set forth in the applicable box in the Individual Goals column set forth in the table in Section 4.1 hereof,
calculated as set forth in this Section 4.9. For 2015, achievement of target performance with respect to individual performance goals will result in a 60% payout factor for all Grantees. The individual goals performance component of a
Grantees Annual Incentive Award shall be determined based upon a Grantees achievement of the individual performance goals, and weighting of such goals, established by the Grantees manager or department head, as applicable, and
recorded in the Companys performance management system as the Grantees AIP Goals for the Performance Period. Notwithstanding the foregoing, if the Company does not achieve EBITDA at the corporate organizational level for the
Performance Period equal to or greater than 85% of Targeted EBITDA, then Grantees shall not be eligible for any payment based on the individual goals performance component.
4.5 Adjustment. The individual goals performance component of each Grantees Annual Incentive Award (determined without application of this
Section 4.5) is subject to adjustment by managers. Such adjustment may be negative for those Grantees who do not achieve the applicable goals, and positive for those Grantees who demonstrate outstanding accomplishments. For purposes of applying
this Section 4.5, any positive adjustment made to the individual goals performance component of the Annual Incentive Award of one Grantee must result in a dollar-for-dollar negative adjustment to the individual goals performance component of
the Annual Incentive Award of one or more other Grantees so that, in the aggregate, the application of the adjustment described in this Section 4.5 to all the Grantees shall not result in any additional cost to the Company and its Affiliates
for the group of Grantees over which a particular manager retains authority.
ARTICLE 5
MISCELLANEOUS
5.1
Miscellaneous. The Committee may modify or terminate this Program at any time and for any reason, effective at such date as the Committee may determine, without the approval of the Grantees or stockholders of the Company. Without
limiting the foregoing, the Committee reserves the right to adjust EBITDA, the EBITDA Performance Factor, Revenue, the Revenue Multiplier, Targeted EBITDA, Targeted Revenue, the Target Incentive Percentage, the applicable individual goals, or any
other related classification or determination for any and all Grantees for any reason, including if, in the Committees sole discretion, any unforeseen or unplanned event results in a positive or negative impact on the performance of the
Company (or its Affiliates) during the Performance Period or its overall financial position. All such modifications or terminations to this Program shall be binding on all Grantees.
5.2 Proration. For a Grantee who moves between two or more incentive-eligible positions (whether at the corporate or Education Group
organizational level) during the Performance Period, a proration may be applied to determine the amount due to such Grantee pursuant to Article 4 hereof. To the extent it applies, such proration shall be determined in the discretion of the
Administrator, and shall be based on relevant factors, which may include, but shall not be limited to, (a) the relative time spent by such Grantee working at each level, and (b) the extent to which corporate or an Education Group was
charged for the services of such Grantee. Unless otherwise determined by the Administrator, such proration will be based on whole months (rather than a day-by-day basis), and for purposes of such proration, actions taken prior to the fifteenth day
of any month will be deemed to have happened on the first day of that month, while action taken on or after the fifteenth day of any month will be deemed to have happened on the first day of the following month.
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Program Effective January 1, 2015 |
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Page 6 of 7 |
5.3 Compliance With Laws. This Program
was created to comply with the incentive compensation provisions of the Higher Education Act, 20 U.S.C.§ 1094(a)(20), and with the implementing regulations of the U.S. Department of Education (ED),
located at 34 C.F.R.§ 668.14(b)(22). The Company is aware that the ED regulations changed, effective July 1, 2011, and this Program has been created to comply with changed regulations that took effect July 1, 2011. All provisions
of this Program will be interpreted and applied so as to be consistent with that statute and those regulations. If at any time the Committee determines that any potential compensation action would, or in the Committees sole discretion might,
violate that statute or those regulations, the Committee may in its sole discretion elect not to pay such compensation. If the statute or regulations change or if ED provides guidance that changes the Committees understanding of how the
statute and regulations will be applied, the Committee will make appropriate changes to this Program, or may terminate this Program, in its sole discretion, with or without advance notice to the Grantees. The Committee reserves the right to modify
any element of this Program, to decline to make any payments under this Program, or to terminate this Program in its entirety, at any time for any reason, in its sole discretion, with or without advance notice to the Grantees.
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Program Effective January 1, 2015 |
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Page 7 of 7 |
Exhibit 10.7
March 23, 2015
Mr. Ron McCray
President and Chief Executive Officer
Career Education
Corporation
231 N. Martingale Road
Schaumburg, IL 60173
Re: Agreement for the Provision of Interim Management Services
Dear Mr. McCray:
This letter, together with the attached
Schedule(s) and General Terms and Conditions, sets forth the agreement (Agreement) between AP Services, LLC, a Michigan limited liability company (APS), and Career Education Corporation (CEC or the
Company) for the engagement of APS to provide interim management services to the Company.
All defined terms shall have the meanings ascribed
to them in this letter and in the attached Schedule(s) and General Terms and Conditions.
The engagement of APS, including any APS employees who serve in
Executive Officer positions, shall be under the supervision of the Companys Chief Executive Officer
OBJECTIVE
AND TASKS
Subject to APS internal approval from its Risk Management Committee, confirmation that the Company has
a Directors and Officers Liability insurance policy in accordance with section 7 of the attached General Terms and Conditions regarding Directors and Officers Liability Insurance coverage, and a copy of the signed Board of Directors resolution
(or similar document) as official confirmation of the appointment, APS will provide David A. Rawden to serve as the Companys interim Chief Financial Officer (CFO), reporting to the Companys President and Chief Executive
Officer (CEO). While acting in such capacity, Mr. Rawden will comply with all of the Companys policies applicable to executive officers of the Company, including but not limited to its Code of Business Conduct and ethics, Code
of Conduct for Executive officers, Insider Trading Policy and Travel and Entertainment Policy. Working collaboratively with the senior management team, the Board of Directors and other Company professionals, in addition to the normal duties of a
CFO, Mr. Rawden will assist the Company to do the following:
2000 Town
Center | Suite 2400 | Southfield, MI | 48075 | 248.358.4420 | 248.358.1969 fax | www.alixpartners.com
Mr. Ron McCray
March 23,
2015
Page
2
of 9
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Assist the Company with management of its financial, treasury and tax functions. |
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Assist the Company in conjunction with its external auditors and with the development, implementation and documentation of operational and internal accounting controls. |
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Assist in communication and oversight of these controls across the Company. |
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Cooperate to the extent reasonably necessary to allow the Company to continue to fulfill its obligations as a publicly traded company |
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Assist the Company in the refinement/enhancement/creation of timely and accurate operational and financial reporting. |
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Assist in developing and implementing cash management strategies, tactics and processes. Work with the Companys Treasury Department and other professionals and coordinate the activities of the representatives of
other constituencies in the cash management process. |
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Work directly with Companys operations management to assess, recommend necessary modifications to, and support the implementation of current forecasting procedures, supplier relationships, systems, internal
operations processes, and inventory purchasing decisions. |
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|
Assist the Company and its management in completing timely and accurate financial statements. |
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|
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Assist management with the development of the Companys business plan and forecast, and such other forecasts as may be required |
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Assist with such other matters as may be requested that fall within APS expertise and that are mutually agreeable. |
STAFFING
Keith Gillespie
will be the managing director responsible for the overall engagement. He will be assisted by a staff of consultants at various levels, who have a wide range of skills and abilities related to this type of assignment. In addition, APS has
relationships with, and may periodically use, independent contractors with specialized skills and abilities to assist in this engagement.
APS anticipates
initially using only Mr. Rawden for this engagement. We will periodically review the staffing levels to determine if additional staffing is required for this assignment. We will only use the necessary staff required to complete the requested or
planned tasks and will not add staff to assist Mr. Rawden without first discussing it with the CEO and obtaining his consent.
Mr. Ron McCray
March 23,
2015
Page
3
of 9
TIMING, FEES AND RETAINER
APS will commence this engagement on or about March 23, 2015 after receipt of a copy of the Agreement executed by the Company accompanied by the
retainer, as set forth on Schedule 1 and confirmation of the Companys compliance with the requirements set forth in the first paragraph of the Objective and Tasks section above.
The Company shall compensate APS for its services, and reimburse APS for expenses, as set forth on Schedule 1.
* * *
If these terms meet
with your approval, please sign and return the enclosed copy of the Agreement and wire transfer the amount to establish the Retainer.
We look forward to
working with you.
Sincerely yours,
AP Services, LLC
/s/ Keith Gillespie
Keith Gillespie
Managing Director
Acknowledged and Agreed to:
CAREER EDUCATION CORPORATION
|
|
|
By: |
|
/s/ Ronald D. McCray |
|
|
Its: |
|
Interim President and CEO |
|
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Dated: |
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3/23/15 |
SCHEDULE 1
FEES AND EXPENSES
We will charge a flat monthly rate of $130,000 for the services of David Rawden.
If additional staffing is required we will charge fees based on the hours spent by APS personnel at APS hourly rates, which are:
|
|
|
|
|
Managing Director |
|
$ |
915 1,055 |
|
Director |
|
$ |
695 850 |
|
Vice President |
|
$ |
510 615 |
|
Associate |
|
$ |
350 455 |
|
Analyst |
|
$ |
305 335 |
|
Paraprofessional |
|
$ |
230 250 |
|
APS reviews and revises its billing rates on January 1 of each year.
APS does not seek a Success Fee in connection with this engagement.
3. |
Expenses: In addition to the fees set forth in this Schedule, the Company shall pay directly, or reimburse APS upon receipt of periodic billings, for all reasonable out-of-pocket expenses incurred in connection
with this assignment, such as travel, lodging and meals, and an administrative fee of 2% of the fees to cover all other indirect administrative costs. Any out of pocket expenses, including travel expenses will be in accordance with Career Education
Corporations Vendor Travel and Expense Policy attached hereto. A budget for such travel related expenses shall be provided by APS for approval by the Companys Chief Executive Officer. Expenses shall be reimbursed at APSs actual
out-of-pocket cost without mark-up. |
4. |
Break Fee: APS does not seek a Break Fee in connection with this engagement. However, notwithstanding the notice provision in Section 9 of the attached General Terms and Conditions, the Company agrees that
it will provide no less than 30 days written notice to APS of its intent to terminate the engagement. |
5. |
Retainer: The Company shall pay APS a retainer of $150,000 to be applied against Fees and Expenses as set forth in this Schedule and in accordance with Section 2 of the attached General Terms and Conditions.
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Page 4 of 9
6. |
Payment: APS will submit monthly invoices for services rendered and expenses incurred. All invoices shall be due and payable immediately upon receipt. No discount is provided for prompt payment, and none shall be
taken, but interest on any invoices paid late shall accrue in accordance with section 2 of the General Terms and Conditions. |
Page 5 of 9
AP SERVICES, LLC
GENERAL TERMS AND CONDITIONS
These General Terms and Conditions (Terms) are incorporated into the Agreement to which these Terms
are attached. In case of conflict between the wording in the letter and/or schedule(s) and these Terms, the wording of the letter and/or schedule(s) shall prevail.
Section 1. Company Responsibilities.
The Company
will undertake responsibilities as set forth below:
1. |
Provide reliable and accurate detailed information, materials, documentation and |
2. |
Make decisions and take future actions, as the Company determines in its sole discretion, on any recommendations made by APS in connection with this Agreement. |
APS delivery of the services and the fees charged are dependent on (i) the Companys timely and effective completion of its responsibilities;
and (ii) timely decisions and approvals made by the Companys management. The Company shall be responsible for any delays, additional costs or other deficiencies caused by not completing its responsibilities.
Section 2. Billing, Retainer and Payments.
Billing. APS will submit monthly invoices for services rendered and expenses incurred. Unless explicitly stated in the invoice, all amounts invoiced are
not contingent upon or in any way tied to the delivery of any reports or other work product in the future and are not contingent upon the outcome of any case or matter. APS fees are exclusive of taxes or similar charges, which shall be the
responsibility of the Company (other than taxes imposed on APS income generally).
Retainer. Upon execution of the Agreement, the Company
shall promptly pay APS the agreed-upon advance retainer (Retainer). Invoices shall be offset against the Retainer. Payments of invoices will be used to replenish the Retainer to the agreed-upon amount. Any unearned portion of the
Retainer will be applied against our final invoice or returned to the Company at the end of the engagement
Payments. All payments to be made to
APS shall be due and payable upon receipt of invoice via wire transfer to APS bank account, as follows:
|
|
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Receiving Bank: |
|
Deutsche Bank |
|
|
ABA #021-001-033 |
Receiving Account: |
|
AP Services, LLC |
|
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A/C #004-62643 |
Currency: |
|
USD |
Section 3. Relationship of the Parties.
The parties intend that an independent contractor relationship will be created by the Agreement. As an independent contractor, APS will have complete and
exclusive charge of the management and operation of its business, including hiring and paying the wages and other compensation of all its employees and agents, and paying all bills, expenses and other charges incurred or payable with respect to the
operation of its business.
Of course, employees or consultants of APS will not be entitled to receive from the Company any vacation pay, sick leave, retirement, severance, pension or social security benefits, workers
compensation, disability, unemployment insurance benefits or any other employee benefits. APS will be responsible for all employment, withholding, income and other taxes incurred in connection with the operation and conduct of its business. Nothing
in this Agreement is intended to create, nor shall be deemed or construed to create an employment, fiduciary or agency relationship between APS and the Company or its Board of Directors.
Section 4. Confidentiality.
APS shall use
reasonable efforts to keep confidential all non-public confidential or proprietary information obtained from the Company during the performance of its services hereunder (the Information), and neither APS nor its personnel will disclose
any Information to any other person or entity. Information includes non-public confidential and proprietary data, plans, reports, schedules, drawings, accounts, records, calculations, specifications, flow sheets, computer programs,
source or object codes, results, models or any work product relating to the business of the Company, its subsidiaries, distributors, affiliates, vendors, customers, employees, contractors and consultants.
The foregoing is not intended to prohibit, nor shall it be construed as prohibiting, APS from making such disclosures of Information that APS reasonably
believes is required by law or any regulatory requirement or authority, or to clear client conflicts. APS may make reasonable disclosures of Information to third parties in connection with the performance of APS obligations and assignments
hereunder. In addition, APS will have the right to disclose to any person that it provided services to the Company or its affiliates and a general description of such services, but shall not provide any other information about its involvement with
the Company. The obligations of APS under this Section 4 shall survive the end of any engagement between the parties for a period of two (2) years.
The Company acknowledges that all information (written or oral), including advice and Work Product (as defined in Section 5), and the terms of this
Agreement, generated by APS in connection with this engagement is intended solely for the benefit and use of the Company (limited to its management and its Board of Directors) in connection with the transactions to which it relates. The Company
agrees that no such information shall be used for any other purpose or reproduced, disseminated, quoted or referred to with or without attribution to APS at any time in any manner or for any purpose without APS prior approval, except as
required by law.
Section 5. Intellectual Property.
Upon the Companys payment of all fees and expenses owed under this Agreement, all analyses, final reports, presentation materials, and other work product
(other than
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APS |
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Page 6 of 9 |
|
Rev. 01Mar13 |
AP SERVICES, LLC
GENERAL TERMS AND CONDITIONS
any Engagement Tools, as defined below) that APS creates or develops specifically for the Company and delivers to the Company as part of this engagement (collectively known as Work
Product) shall be owned by the Company and shall constitute Information as defined above. APS may retain copies of the Work Product and any Information necessary to support the Work Product subject to its confidentiality obligations in this
Agreement.
All methodologies, processes, techniques, ideas, concepts, know-how, procedures, software, tools, utilities and other intellectual property
that APS has created, acquired or developed or will create, acquire or develop (collectively, Engagement Tools), are, and shall be, the sole and exclusive property of APS. The Company shall not acquire any interest in the Engagement
Tools other than a limited non-transferable license to use the Engagement Tools to the extent they are contained in the Work Product. The Company acknowledges and agrees that any Engagement Tools provided to the Company are provided as
is and without any warranty or condition of any kind, express, implied or otherwise, including, implied warranties of merchantability or fitness for a particular purpose.
Section 6. Framework of the Engagement.
The Company
acknowledges that it is retaining APS solely to assist and advise the Company as described in the Agreement. This engagement shall not constitute an audit, review or compilation, or any other type of financial statement reporting engagement.
Section 7. Indemnification and Other Matters.
The
Company shall indemnify, hold harmless and defend APS and its affiliates and its and their partners, directors, officers, employees and agents (collectively, the APS Parties) from and against all claims, liabilities, losses, expenses and
damages arising out of or in connection with the engagement of APS that is the subject of the Agreement. The Company shall pay damages and expenses, including reasonable legal fees and disbursements of counsel as incurred in advance. The APS Parties
may, but are not required to, engage a single firm of separate counsel of their choice in connection with any of the matters to which these indemnification and advancement obligations relate.
If an APS Party is required by applicable law, legal process or government action to produce information or testimony as a witness with respect to this
Agreement, the Company shall reimburse APS for any professional time and expenses (including reasonable external and internal legal costs) incurred to respond to the request, except in cases where an APS Party is a party to the proceeding or the
subject of the investigation.
In addition to the above indemnification and advancement, APS employees serving as directors or officers of the Company or
affiliates will receive the benefit of the most favorable indemnification and advancement provisions provided by the Company to its directors, officers and any equivalently placed employees, whether under the Companys charter or by-laws, by
contract or otherwise.
The Company shall specifically include and cover employees and agents serving as directors or officers of the
Company or affiliates from time to time with direct coverage under the Companys policy for liability insurance covering its directors, officers and any equivalently placed employees (D&O insurance). Prior to APS accepting any
officer position, the Company shall, at the request of APS, provide APS a copy of its current D&O policy, a certificate(s) of insurance evidencing the policy is in full force and effect, and a copy of the signed board resolutions and any other
documents as APS may reasonably request evidencing the appointment and coverage of the indemnitees. The Company will maintain such D&O insurance coverage for the period through which claims can be made against such persons. The Company disclaims
a right to distribution from the D&O insurance coverage with respect to such persons. In the event that the Company is unable to include APS employees and agents under the Companys policy or does not have first dollar coverage acceptable
to APS in effect for at least $10 million (e.g., there are outstanding or threatened claims against officers and directors alleging prior acts that may give rise to a claim), APS may, at its option, attempt to purchase a separate D&O insurance
policy that will cover APS employees and agents only. The cost of the policy shall be invoiced to the Company as an out-of-pocket expense. If APS is unable or unwilling to purchase such D&O insurance, then APS reserves the right to terminate the
Agreement.
Notwithstanding anything to the contrary, the Companys indemnification and advancement obligations in this Section 7 shall be
primary to (and without allocation against) any similar indemnification and advancement obligations of APS, its affiliates and insurers to the indemnitees (which shall be secondary), and the Companys D&O insurance coverage for the
indemnitees shall be specifically primary to (and without allocation against) any other valid and collectible insurance coverage that may apply to the indemnitees (whether provided by APS or otherwise).
APS is not responsible for any third-party products or services separately procured by the Company. The Companys sole and exclusive rights and remedies
with respect to any such third party products or services are against the third-party vendor and not against APS, whether or not APS is instrumental in procuring such third-party product or service.
Section 8. Governing Law and Arbitration.
The
Agreement is governed by and shall be construed in accordance with the laws of the State of New York with respect to contracts made and to be performed entirely therein and without regard to choice of law or principles thereof.
Any controversy or claim arising out of or relating to the Agreement, or the breach thereof, shall be settled by arbitration. Each party shall appoint one
non-neutral arbitrator. The two party arbitrators shall select a third arbitrator. If within 30 days after their appointment the two party arbitrators do not select a third arbitrator, the third arbitrator shall be selected by the American
Arbitration Association (AAA). The arbitration shall be conducted in
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APS |
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Page 7 of 9 |
|
Rev. 01Mar13 |
AP SERVICES, LLC
GENERAL TERMS AND CONDITIONS
Southfield, Michigan under the AAAs Commercial Arbitration Rules, and the arbitrators shall issue a reasoned award. The arbitrators may award costs and attorneys fees to the
prevailing party. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof.
Notwithstanding the
foregoing, APS may in its sole discretion proceed directly to a court of competent jurisdiction to enforce the terms of this Agreement for any claim (and any subsequent counter claim) against the Company relating to either (i) the non-payment
of fees or expenses due under this Agreement, or (ii) the non-performance of obligations under Section 7.
In any court proceeding arising out
of this Agreement, the parties hereby waive any right to trial by jury.
Section 9. Termination and Survival.
The Agreement may be terminated at any time by written notice by one party to the other; provided, however, that notwithstanding such termination APS will be
entitled to any fees and expenses due under the provisions of the Agreement (for fixed fee engagements, fees will be pro rata based on the amount of time completed), including Success Fee and Break Fee in accordance with Schedule 1. Such payment
obligation shall inure to the benefit of any successor or assignee of APS.
Additionally, unless the Agreement is terminated by the Company for Cause (as
defined below) or due to circumstances described in the Success Fee provision in the Agreement, APS shall remain entitled to the Success Fee(s) that otherwise would be payable for the greater of 12 months from the date of termination or the period
of time that has elapsed from the date of the Agreement to the date of termination. Cause shall mean:
(a) an APS employee acting on behalf of the Company
is convicted of a felony, or
(b) it is determined in good faith by the Board of Directors of the Company after 30 days notice and opportunity to
cure, that either (i) an APS employee is engaging in misconduct injurious to the Company, or (ii) an APS employee is breaching any of his or her material obligations under this Agreement, or (iii) an APS employee is willfully
disobeying a lawful direction of the Board of Directors or senior management of the Company.
Sections 2, 4, 5, 7, 8, 9, 10, 11 and 12 of these Terms, the
provisions of Schedule 1 and the obligation to pay accrued fees and expenses shall survive the expiration or termination of the Agreement.
Section 10. Non-Solicitation of Employees
The
Company and APS each acknowledge and agree that each party has made a significant monetary investment recruiting, hiring and training its personnel. During the term of this Agreement and for a period of two years after the final invoice is rendered
by APS with respect to this engagement (the Restrictive Period), (i) the Company and its affiliates agree
not to directly or indirectly hire, contract with, or solicit the employment of any of APS Managing Directors, Directors, or other employees/ contractors that worked on this engagement, and
(ii) APS and its affiliates agree not to directly or indirectly hire, contract with, or solicit the employment of any of the Company employees who they were introduced to in connection with this engagement. General solicitations, sourcing
events or recruitment through newspaper advertisements, job boards, web sites and other similar channels not targeted at a partys employees will not be deemed a solicitation in violation of this Section 10.
If during the Restrictive Period, the Company or its affiliates directly or indirectly hires or contracts with any of APS Managing Directors, Directors, or
other employees/contractors who worked on the engagement in violation of the preceding paragraph, the Company will pay as liquidated damages and not as a penalty the sum total of the total annual compensation (inclusive of salary, bonuses and other
cash compensation) paid to such person in the last calendar year. The Company acknowledges and agrees that liquidated damages in such amounts are (a) fair, reasonable and necessary under the circumstances to reimburse the other party for the
costs of recruiting, hiring and training its employees as well as the lost profits and opportunity costs related to such personnel, and to protect the significant investment that APS has made in its Managing Directors, Directors, and other
employees/ consultants; and (b) appropriate due to the difficulty of calculating the exact amount and value of that investment.
The Company and APS
also acknowledge and agree that money damages alone may not be an adequate remedy for a breach of this provision, and each party agrees that the non-breaching party shall have the right to seek a restraining order and/or an injunction for any breach
of this non-solicitation provision. If any provision of this section is found to be invalid or unenforceable, then it shall be deemed modified or restricted to the extent and in the manner necessary to render the same valid and enforceable.
Section 11. Limit of Liability.
The APS
Parties shall not be liable to the Company, or any party asserting claims on behalf of the Company, except for direct damages found in a final determination to be the direct result of the bad faith, self-dealing or intentional misconduct of APS. The
APS Parties shall not be liable for incidental or consequential damages under any circumstances, even if it has been advised of the possibility of such damages. The APS Parties aggregate liability, whether in tort, contract, or otherwise, is limited
to the amount of fees paid to APS for services on this engagement (the Liability Cap). The Liability Cap is the total limit of the APS Parties aggregate liability for any and all claims or demands by anyone pursuant to this
Agreement, including liability to the Company, to any other parties hereto, and to any others making claims relating to the work performed by APS pursuant to this Agreement. Any such claimants shall allocate any amounts payable by the APS Parties
among themselves as appropriate, but if they cannot agree on the allocation it will not affect the enforceability of the Liability Cap. Under no circumstances shall the aggregate of all such allocations or other claims against the APS Parties
pursuant to this Agreement exceed the Liability Cap.
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Page 8 of 9 |
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Rev. 01Mar13 |
AP SERVICES, LLC
GENERAL TERMS AND CONDITIONS
Section 12. General.
Severability. If any portion of the Agreement shall be determined to be invalid or unenforceable, the remainder shall be valid and enforceable to the
maximum extent possible.
Entire Agreement. This Agreement, including the letter, the Terms and the schedule(s), contains the entire understanding
of the parties relating to the services to be rendered by APS and supersedes any other communications, agreements, understandings, representations, or estimates among the parties (relating to the subject matter hereof) with respect to such services,
The Agreement, including the letter, the Terms and the schedule(s), may not be amended or modified in any respect except in a writing signed by the parties. APS is not responsible for performing any services not specifically described herein or in a
subsequent writing signed by the parties.
Joint and Several. If more than one party signs this Agreement, the liability of each party shall be
joint and several.
Third-Party Beneficiaries. The indemnitees shall be third-party beneficiaries with respect to Section 7 hereof.
Data Protection. APS acknowledges and the Company agrees that in performing the services APS may from time to time be required to process certain
personal data on behalf of the Company. In such cases APS may act as the Companys data processor and APS shall endeavor to (a) act only on reasonable instructions from the Company within the scope of the services of this Agreement;
(b) have in place appropriate technical and organizational security measures against unauthorized or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data; and (c) comply (to the
extent applicable to it and/or the process) with relevant laws or regulations.
Notices. All notices required or permitted to be delivered under
the Agreement shall be sent, if to APS, to:
AP Services, LLC
2000 Town Center, Suite 2400
Southfield, MI 48075
Attention: General Counsel
and if to the
Company, to the address set forth in the Agreement, to the attention of the Companys General Counsel, or to such other name or address as may be given in writing to the other party. All notices under the Agreement shall be sufficient only if
delivered by overnight mail. Any notice shall be deemed to be given only upon actual receipt.
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Page 9 of 9 |
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Rev. 01Mar13 |
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Exhibit 10.8 |
March 27, 2015
Michele
Peppers
Dear Michele:
You are among a select group of key
employees who are being included in a retention program. As we discussed, you play a critical role in the successful operation of the Financial Reporting function at Career Education Corporation (CEC).
Specifically, in consideration for your continued active employment in good standing with CEC, which shall include but not be limited to the successful
performance of your day-to-day responsibilities, as well as such additional duties as may be assigned to you through the date below, you will be eligible for Retention Bonus payments under the terms and conditions set forth below.
Retention Bonus Payments
If you are actively employed in
good standing by CEC as of the following dates, CEC will make the following Retention Bonus Payments to you:
Retention Bonus Payment: $37,000.00, less all applicable deductions
Retention Bonus Payment: $37,000.00, less all applicable deductions
These payments will be made to you within fifteen (15) business days after the applicable Retention Bonus Payment date listed above.
If you leave the Company (whether by voluntary resignation or involuntary termination for Cause) at any time prior to the time any of the above contingencies
have been met, you will not be entitled to any portion of the Retention Bonus Payments prior to your separation from the Company. A for Cause termination includes, but is not limited to, discharge for poor performance, non-performance, or
misconduct. In the event you are involuntarily terminated from the Company other than for Cause prior to any of the Retention Bonus Payment dates listed above, you will be entitled to any Retention Bonus Payment that has not yet become due prior to
your separation from the Company. The payment will be made to you within fifteen (15) business days after your separation from the Company.
You and
the Company may mutually agree that you will transfer to a different position within CEC prior to any of the Retention Bonus Payment dates and, in that case, you would forego your eligibility for any outstanding Retention Bonus payments.
1
Exhibit 10.8
In addition, notwithstanding anything contained herein, you will remain an employee-at-will. This means you are free to terminate your employment at any time,
for any reason, and the Company retains the same right.
By signing this letter below and returning a copy to me by April 8, 2015, you acknowledge
that you have read, understand and agree to the terms set forth herein. We appreciate your continued dedication to the Company.
Sincerely,
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/s/ Ronald D. McCray |
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Ronald D. McCray |
Interim President and CEO |
AGREED TO AND ACCEPTED BY:
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/s/ Michele A. Peppers |
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4/8/15 |
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Accepted |
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Date |
2
EXHIBIT 31.1
CERTIFICATION
I, Ronald D. McCray,
Interim President and Chief Executive Officer of Career Education Corporation, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Career Education Corporation; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and |
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(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the
registrants board of directors: |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 6, 2015
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/s/ Ronald D. McCray |
Ronald D. McCray |
Interim President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION
I, David Rawden, Interim
Chief Financial Officer of Career Education Corporation, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Career Education Corporation; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; |
|
(c) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter
in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the
registrants board of directors: |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record,
process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 6, 2015
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/s/ David Rawden |
David Rawden |
Interim Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Career Education Corporation (the Company) for the quarter ended
March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Ronald D. McCray, Interim President and Chief Executive Officer of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
|
(i) |
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
|
(ii) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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/s/ Ronald D. McCray |
Ronald D. McCray |
Interim President and Chief Executive Officer |
May 6, 2015
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Career Education Corporation (the Company) for the quarter ended
March 31, 2015, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David Rawden, Interim Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
|
(i) |
the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
|
(ii) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
|
/s/ David Rawden |
David Rawden |
Interim Chief Financial Officer |
May 6, 2015
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement
required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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