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| EDMC > SEC Filings for EDMC > Form 10-K on 12-Sep-2012 | All Recent SEC Filings |
12-Sep-2012
Annual Report
Business Overview
We are among the largest providers of post-secondary education in North America,
with over 151,200 enrolled students as of October 2011. We offer academic
programs to our students through campus-based and online instruction, or through
a combination of both. We are committed to offering quality academic programs
and strive to improve the learning experience for our students. We target a
large and diverse market, as our educational institutions offer students the
opportunity to earn undergraduate and graduate degrees, including doctoral
degrees, and certain specialized non-degree diplomas in a broad range of
disciplines. These disciplines include media arts, health sciences, design,
psychology and behavioral sciences, culinary, business, fashion, legal,
education and information technology. Each of our schools located in the United
States is licensed or permitted to offer post-secondary programs in the state in
which it is located, accredited by a national or regional accreditation agency
and certified by the U.S. Department of Education, enabling students to access
federal student loans, grants and other forms of public and private financial
aid. Our academic programs are designed with an emphasis on applied content and
are taught primarily by faculty members who, in addition to having appropriate
academic credentials, offer practical and relevant professional experience in
their respective fields. Our net revenues were $2.76 billion in fiscal 2012.
Our schools comprise a national education platform that is designed to address
the needs of a broad market, taking into consideration various factors that
influence demand, such as programmatic and degree interest, employment
opportunities, requirements for credentials in certain professions,
demographics, tuition pricing points and economic conditions. We believe that
our schools collectively enable us to provide access to a high quality education
for potential students, at a variety of degree levels and across a wide range of
disciplines.
During our more than 40-year operating history, we have expanded the reach of
our education systems and currently operate 109 primary locations across
32 U.S. states and in Canada. In addition, we have offered online programs since
2000, enabling our students to pursue degrees fully online or through a flexible
combination of both online and campus-based education.
A majority of our students rely on funds received under various
government-sponsored student financial aid programs, especially Title IV
programs, to pay a substantial portion of their tuition and other
education-related expenses. Because of the dependence on government-sponsored
programs, we participate in industry groups and monitor the impact of newly
proposed legislation on our business. Some of our students also rely upon funds
received from private lenders to pay a portion of their tuition and related
expenses. Net revenues derived indirectly from private loans to students at our
schools represented less than 5% of our net revenues in each of the last three
fiscal years.
Though we experienced significant growth over the ten years preceding fiscal
2012 (including compounded annual enrollment growth at a rate of 16.7% during
the period from October 2001 through October 2011), we and other proprietary
post-secondary education providers have experienced a number of recent
challenges that resulted in declines in enrollment at many of our schools, which
negatively impacted our financial results. The average enrollment at our schools
during fiscal 2012 decreased 5.7% as compared to fiscal 2011, from total average
enrollment of approximately 150,800 students in fiscal 2011 to approximately
142,100 students in fiscal 2012.
Industry Overview
The U.S. Department of Education estimates that the U.S. public and private
post-secondary education market for degree-granting institutions was a
$490 billion industry in 2010, representing approximately 21.0 million students
enrolled at over 4,600 institutions. According to the National Center of
Education Statistics, traditional students, who typically are recent high school
graduates under 25 years of age and are pursuing their first higher education
degree, represent approximately 61% of the national student population. The
remaining 39% of the student population is comprised of non-traditional
students, who are largely working adults pursuing further education in their
current field or are preparing for a new career.
Although recently the industry as a whole has been challenged by state and
federal regulatory pressures, negative media coverage, widespread enrollment
declines and the overall negative impact of the current political and economic
climate, there remain a number of factors that we believe should contribute to
long-term demand for post-secondary education. The shift toward a services-based
economy increases the demand for higher levels of education. Georgetown
University's Center on Education and the Workforce published a research study
titled "Help Wanted - Projections of Jobs and Education Requirements through
2018", based upon the U.S. Department of Labor - Bureau of Labor Statistics
occupational employment projections. According to the study, jobs requiring an
Associate's or higher level degree are expected to grow 28% to approximately 79
million jobs in 2018, while jobs requiring some or no college are expected to
decrease 3%. Of the jobs in 2018 requiring
higher education, approximately 45% are in occupation groups in which we provide education - business, healthcare, education, food preparation, legal, and arts, design and media. Additionally, economic incentives are favorable for post-secondary graduates. According to the U.S. Department of Labor - Bureau of Labor Statistics, in 2011 the median weekly earnings for individuals aged 25 years and older with a Bachelor's degree was approximately 65% higher than for high school graduates of the same age with no college experience, and the average unemployment rate in 2011 for persons aged 25 years and older with a Bachelor's degree was nearly half that of those without college experience. See
graduation. This additional extension of credit has resulted in increases in bad
debt expense during fiscal 2012 and may result in higher bad debt expense as a
percentage of our net revenues in future periods if students continue to utilize
this funding source. Average tuition rates increased by approximately 2% in
fiscal 2012 and 4% in fiscal 2011.
Educational services expense consists primarily of costs related to the
development, delivery and administration of our education programs. Major cost
components are faculty compensation, salaries of administrative and student
services staff, costs of educational materials, facility occupancy costs, bad
debt expense and information systems costs.
General and administrative expense consists of marketing and student admissions
expenses and certain central staff departmental costs such as executive
management, finance and accounting, legal, corporate development and other
departments that do not provide direct services to our students. We have
centralized many of these services to gain consistency in management reporting,
efficiency in administrative effort and cost control. With regard to the
marketing component of our expenses, we have seen a change in the way we market
to and attract inquiries from prospective students as the Internet continues to
be an increasingly important way of reaching students. However, Internet
inquiries, which generally cost less than leads from traditional media sources
such as television and print, convert to applications at a lower rate than
inquiries from traditional media sources.
Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and
risks to our business:
U.S. Department of Education Program Integrity Regulations have negatively
impacted financial results in fiscal 2012 and will likely impact future results.
In November 2009, the U.S. Department of Education convened two negotiated
rulemaking teams related to Title IV program integrity issues. The resulting
program integrity rules promulgated in October 2010 and June 2011 address
numerous topics. With the exception of the gainful employment metrics described
below, the new regulations became effective on July 1, 2011. These rules have
required us to change certain of our business practices, incur additional costs
of compliance and of developing and implementing changes in operations, and have
affected student recruitment and enrollment, resulted in changes in or
elimination of certain educational programs and have other significant or
material effects on our business. The final program integrity rules that we
believe have had or will have the most significant potential impact on our
business are the following:
• the quantitative gainful employment requirements;
• substantial revisions to the regulation governing the payment of incentive compensation to employees engaged in recruiting activities or the awarding of financial aid;
• determining when a program of study is required to measure student progress in clock hours;
• new requirements about what constitutes satisfactory state authorization for institutions to offer postsecondary education in a state; and
• the enhanced definition of "substantial misrepresentation" that could impose enhanced liability on institutions of higher education.
As more fully described in "Business - Student Financial Assistance - Program
Integrity Regulations", the gainful employment regulation established three
annual, program-level metrics: debt repayment rate; debt-to-discretionary-income
ratio; and debt-to-total-earnings ratio. If an academic program fails all three
metrics in a year, the institution must disclose the amount by which the program
missed the minimum acceptable performance and the institution's plan to improve
the program. If an academic program fails all three metrics in two out of three
years, the institution must inform students in the failing program that their
debts may be unaffordable and the program may lose eligibility, and must
describe for students their available transfer options. If an academic program
fails all three metrics in three out of four years, the academic program would
become ineligible to participate in federal student financial aid programs for
at least three years.
The gainful employment regulations were scheduled to go into effect July 1,
2012. However, on June 30, 2012 the U.S. District Court for the District of
Columbia issued a decision in the APSCU case that vacated the program level
metrics and remanded them to the U.S. Department of Education for further
action. On July 6, 2012, the U.S. Department of Education issued an announcement
acknowledging that the Court had vacated the repayment rate metric as well as
the debt-to-income metrics that would have gone into effect on July 1, 2012. The
announcement also noted that institutions are not required to comply with
related regulations relating to gainful employment reporting requirements and
adding new educational programs, but are required to comply with requirements to
disclose certain information about educational programs. The Court's decision is
subject to appeal by the U.S. Department of Education and could be modified or
reversed on appeal. Moreover, the U.S. Department of Education could take
further action to address the Court's concerns regarding the regulations and
obtain
approval to enforce the regulations, or the U.S. Department of Education could issue new regulations regarding gainful employment. We cannot predict what steps the U.S. Department of Education will take in response to the Court's decision, how long those steps will take, or whether those steps will result in the U.S. Department of Education being able to enforce the gainful employment regulations or issuing new regulations. We have implemented a number of initiatives to respond to the gainful employment rules, such as shorter programs and lowering the costs associated with a number of our programs and continue to do so despite the ruling in the APSCU case. However, certain of our programs will be unable to maintain eligibility to enroll students receiving Title IV funds or have restrictions placed upon program offerings as a result of not meeting prescribed metrics if the gainful employment regulations become effective in their current form. To the extent that our new programmatic offerings do not offset the loss of any of our current programs, the loss of students or restrictions on program eligibility could have a material adverse effect on our student population, business, financial condition, results of operations and cash flows.
Changes in the availability of PLUS program loans contributed to a reduction in
new student projections at The Art Institutes and are likely to adversely impact
both continuing and new students in fiscal 2013 and beyond.
Approximately 50% of the students attending schools included in The Art
Institutes education system are considered dependents for Title IV program
purposes. These traditional-age students often receive financial support from
their parents to help pay for their education. As part of this support, parents
often participate in the PLUS program, which allows parents of a dependent
student to borrow an amount not to exceed the difference between the total cost
of that student's education and other aid to which that student is entitled.
PLUS program loans represented 12.4% and 12.8% of our net revenues in fiscal
2012 and fiscal 2011, respectively. However, during fiscal 2012 we believe that
the U.S. Department of Education revised the underwriting criteria for PLUS
program eligibility such that new PLUS program loans are not available to
parents with respect to whom a creditor previously charged-off a loan because
the creditor deemed the debt to be uncollectable. Though the U.S. Department of
Education has not publicly announced this change, we first became aware of it in
the fourth quarter of fiscal 2012 after investigating the reasons underlying a
decrease in the number of students applying for school who subsequently enroll.
While PLUS program loans for most of fiscal 2012 remained fairly consistent with
fiscal 2011, students attending, or interested in attending, our schools
experienced a significant decrease in PLUS loan approvals for the fourth quarter
of fiscal 2012. For example, The Art Institutes experienced a 28% decrease in
the number of students using PLUS program loans to fund a portion of their
education expense in the fourth quarter of fiscal 2012 as compared to the prior
year period. Although each of our education systems was affected by this change,
it most significantly impacted The Art Institutes, which has a larger proportion
of traditional-age students, who are the most likely to be impacted by changes
to the PLUS program. This change in PLUS loan availability, along with
continued economic pressures and a reluctance by parents to incur additional
indebtedness, is expected to result in a significant decrease in the number of
students using PLUS program loans to finance their education at our Art
Institute schools, which will adversely impact the number of students attending
those schools in the future. Additionally, we expect to extend a greater amount
of credit for those Art Institute students who are denied PLUS program loans but
who still enroll in school, which will likely result in higher bad debt expense
as a percentage of revenues in future periods. Furthermore, we may experience
similar declines with respect to GRAD PLUS program loans and related increases
in bad debt expense in the future, which could impact each of our reportable
segments. As a result of the changes in projected future cash flows primarily
due to the changes in availability of PLUS program loans in the fourth quarter
of fiscal 2012, we impaired goodwill at The Art Institutes' reporting unit. See
"Use of Estimates and Critical Accounting Policies" below for further
discussion.
Investigations of proprietary education institutions, student concerns over
incurring debt and negative media have adversely impacted fiscal 2012 results at
all of our reporting units.
Although we believe that there are a number of factors that should contribute to
long-term demand for post-secondary education, recently the industry as a whole
has been challenged by a number of factors, including the overall negative
impact of the current political and economic climate. We and other proprietary
post-secondary education providers have been subject to increased regulatory
scrutiny and litigation in recent years. On July 30, 2012, Senator Tom Harkin,
Chairman of the HELP Committee, and the majority staff of the HELP Committee
released a report, "For Profit Higher Education: The Failure to Safeguard the
Federal Investment and Ensure Student Success" which was drawn from hearings on
the industry beginning in August 2010. While stating that proprietary colleges
and universities have an important role to play in higher education and should
be well-equipped to meet the needs of non-traditional students who now
constitute the majority of the postsecondary educational population, the report
was highly critical of these institutions. Additionally, a number of state
Attorneys General have launched investigations into proprietary post-secondary
institutions, including a number of our schools. We received subpoenas from the
Attorneys General of Florida, Kentucky and New York in October 2010, December
2010 and August 2011, respectively, and the San Francisco, CA City Attorney in
December 2011 in connection with investigations of our institutions and their
business practices. These investigations, together with the Washington qui tam
lawsuit in which the U.S. Department of Justice and Attorneys General from five
states have intervened, have led to a significant amount of negative publicity
for the proprietary education industry and our schools.
In addition to the investigations and political climate, due to the effects of
the current economic climate many prospective students are unable to make cash
payments towards their education. Recently, there has been a significant amount
of negative publicity surrounding the incurrence of excessive debt to pay for a
post-secondary education. On July 19, 2012, the CFPB and the U.S. Department of
Education issued a report describing what they characterized as risky practices
in the private student loan market over the past ten years, among other things.
According to the CFPB's estimates, outstanding student loan debt in the United
States exceeded $1 trillion in 2011, with $864 billion of federal student debt
and $150 billion of private student loan debt. A number of media outlets have
published stories linking student loan indebtedness to the recent mortgage loan
crisis. We believe that the negative publicity surrounding student indebtedness,
together with the inability of students to pay cash for their education and the
effect of the numerous investigations of the proprietary post-secondary
industry, has led to a reluctance in a number of prospective students to enroll
in our schools.
Declines in online enrollment have adversely impacted South University and
Argosy University's financial results in fiscal 2012, which may continue into
the future.
Students enrolled in fully online programs are often non-traditional aged
students who must balance work and family responsibilities while attending
school. We believe that, recently, these students have been impacted more
significantly by the prolonged nature of the current economic downturn.
Additionally, we believe that competition for fully online students has
increased over the last several years as more institutions, including public and
private institutions, offer fully online programs and that, in general, interest
in our programs has been adversely affected by the substantial negative media
coverage of our business and industry. These external factors, as well as
changes that we have made to our online academic programs, such as the shift to
a non-term academic structure for our fully online programs at Argosy University
and South University have led to reduced growth and profitability. During fiscal
2012, average student enrollment in our fully online programs represented
approximately 16%, 40% and 69% of total average student enrollment for The Art
Institutes, Argosy University and South University reportable segments,
respectively.
Potential Changes to 90/10 Rule could impact financial results in fiscal 2013
and beyond.
Various legislative proposals have been introduced in Congress that would
heighten the requirements of the 90/10 Rule. For example, in May 2012, attorneys
general from 21 states and a chief consumer-affairs official for another state
sent a letter to the leaders of the House and Senate education and
veterans-affairs committees requesting that they revise the 90/10 rule so that
GI Bill and other educational benefits for military veterans count toward the
90-percent cap on the amount of annual revenue a proprietary college may receive
from federal student-aid programs. The Protecting Our Students and Taxpayers Act
was introduced in the U.S. Senate and, if adopted, would reduce the 90% maximum
under the rule to the pre-1998 level of 85%, cause tuition derived from Title IV
programs for military personnel to be included in the 85% portion under the rule
instead of the 10% portion as is the case today, and impose Title IV
ineligibility after one year of noncompliance rather than two. If this or other
revisions are made to the 90/10 Rule, we would have to make material changes to
our business to remain eligible to participate in Title IV programs, which could
materially and adversely affect our business. In addition, reductions in
state-funded student financial aid programs also could adversely impact our
compliance with the 90/10 Rule, because tuition revenue derived from such
programs is included in the 10% portion of the rule calculation.
Due to the impact of the foregoing factors, our net revenues and average student
population declined in fiscal 2012, and we anticipate these factors will
continue to impact us in fiscal 2013. Additionally, the foregoing factors have
resulted in our business becoming less predictable.
Results of Operations
The following table sets forth for the periods indicated the percentage
relationship of certain statements of operations items to net revenues.
. . .
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