Filed by Career Education Corporation
Pursuant to Rule 425 under the Securities Act
of 1933 and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934.
Subject Company: Whitman Education Group, Inc.
COMMISSION FILE NO. 1-13722
Date: March 28, 2003
The following is the transcript of the conference call held by Career Education
Corporation and Whitman Education Group, Inc. on March 27, 2003 to discuss, and
answer questions related to, the planned merger between Whitman Education Group
and a wholly owned subsidiary of Career Education Corporation:
Except for the historical and present factual information contained herein, the
matters set forth in this release, including statements as to the expected date
of the closing of the merger, future financial and operating results, expected
benefits and synergies of the merger, tax treatment of the merger, future
opportunities and any other effect, result or aspect of the proposed transaction
and any other statements identified by words such as "anticipates," "expects,"
"projects," "plans," "will," and similar expressions are forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995. Such statements are based on
information currently available to us and involve risks and uncertainties that
could cause our actual growth, results, performance and business prospects and
opportunities to differ materially from those expressed in, or implied by these
statements. These risks and uncertainties include, but are not limited to, costs
and difficulties related to the integration of acquired businesses, costs,
delays, and any other difficulties related to the merger, failure of the parties
to satisfy closing conditions, risks and effects of legal and administrative
proceedings and governmental regulations, future financial and operational
results, competition, general economic conditions, ability to manage and
continue growth, and other risk factors relating to our industry and business as
detailed in CEC's Annual Report on Form 10-K for the year ended December 31,
2002 and from time to time in each of CEC's and Whitman's reports filed with the
SEC. CEC and Whitman disclaim any responsibility to update these forward-looking
statements.
CEC and Whitman will file a proxy statement/prospectus concerning the proposed
merger transaction with the SEC as soon as practicable. Whitman investors are
urged to read the proxy statement/prospectus when it becomes available and any
other relevant documents filed with the SEC because they will contain important
information. After they have been filed, you will be able to obtain the
documents free of charge at the website maintained by the SEC at www.sec.gov. In
addition, you may obtain documents filed with the SEC by CEC free of charge by
requesting them in writing from Career Education Corporation, 2895 Greenspoint
Parkway, Suite 600 Hoffman Estates, Illinois 60195 Attention: Investor Relations
Department, or by telephone at (847) 585-3899. You may obtain documents filed
with the SEC by Whitman free of charge by requesting them in writing from
Whitman Education Group, Inc., 4400 Biscayne Boulevard, Miami, Florida 33137, or
by telephone at (800) 445-6108.
Whitman, and its directors and executive officers may be deemed to be
participants in the solicitation of proxies from the shareholders of Whitman in
connection with the merger. Information about the directors and executive
officers of Whitman and their ownership of Whitman stock is set forth in the
proxy statement for Whitman's 2002 annual meeting of shareholders which was
filed on July 15, 2002. Investors may obtain additional information regarding
such participants' interests in the merger by reading the proxy
statement/prospectus when it becomes available.
Whitman investors should read the proxy statement/prospectus carefully when they
become available before making any voting or investment decisions.
[TRANSCRIPT OF INVESTOR CALL]
CAREER EDUCATION
CORPORATION
HOST: Jack Larson
DATE: March 27, 2003
TIME: 8:30 a.m. EST
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Operator: Good morning and welcome, ladies and gentlemen, to the Career
Education and Whitman Education conference call. At this time I'd like to inform
you that this conference is being recorded, and that all participants are in a
listen only mode. At the request of the company, we will open up the conference
for questions and answers after the presentation.
Statements made on this call that are not historical facts, including
without limitation, statements about the future benefits of the merger, are
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements are based
on information currently available to us, and involve risks and uncertainties
that could cause our actual growth, results, performance and business prospects
and opportunities to differ materially from those expressed in, or implied by
these statements. These risks and uncertainties include, but are not limited to,
costs, delays and other difficulties related to the integration of acquired
businesses, including Whitman. Costs, delays and any other difficulties related
to the consummation of the merger, failure of the parties to satisfy closing
conditions, risks and effects of legal and administrative proceedings, and
governmental regulations. Future financial and operational results, competition,
general economic conditions, ability to manage and continue growth, and other
risk factors relating to our industry and business, as detailed in CEC's annual
report on
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Form 10K for the year ended December 31, 2002, and in each of CEC's and
Whitman's reports filed with the SEC. CEC and Whitman disclaim any
responsibility to update these forward-looking statements.
I would now like to turn the call over to Mr. Jack Larson, Career
Education's Chairman, President and Chief Executive Officer. Please go ahead
sir.
Jack Larson: Good morning. I'm pleased to be able to present and discuss
with you the acquisition of Whitman Education Group. We're very excited about
this acquisition and I'll explain why here in just a few moments, why this
strategy makes sense to both CEC and Whitman. With me today are Pat Pesch,
Executive Vice President and CFO; Todd Steele, Executive Vice President of
Development and Strategic Planning; also Jake Gruver, President of our Colleges,
Schools and Universities Group; and with me also is Rick Pfenniger Jr.,
President, CEO and Chairman of Whitman Education Group. What we plan on doing is
making a brief presentation and then we'll take questions. There are also slides
that are being presented this morning, which you'll be able to access to be able
to follow later on.
Let me first start by explaining what is Whitman Education, and just before
I begin those remarks I'd like to remind everybody that we have a very
successful history of acquisitions. We'll get some very valuable assets with
this acquisition and
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also strategically this gives us a lot of different assets in which to help grow
our various platforms. Things that we considered as we looked at this
acquisition was of course, that Whitman's a great education system, they've got
a long operating history and they've got some great brand names. Whitman has all
of the key elements that have made our acquisitions very successful in the past,
the ability to generate large numbers of leads, the ability to add new and
different programs, exciting locations and also some recent benefits is that we
can do this onsite or online.
First of all, Whitman's a publicly traded company; it's on the American
Exchange, under the symbol WIX. It operates three school brands with 22 campuses
in 13 states. It has approximately 9,800 students. They primarily focus their
curricula on health education, business and information technology. They've got
some very attractive geographic locations, which we put a high premium on. Also
their projected revenue of $109 million for the year ended in 2003, March of
this year. The EBITDA is projected to be $16.8 million, also for the year ended
March 31 of '03.
Some very positive situations also, the revenue increase year-over-year 20%
in 2003, also shows that there's a lot of strength in the Whitman model. Whitman
has good size, they've got good operating systems, they've got a strong
management team at the school level, the divisional level and corporate level,
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and also being a public company this certainly has given them the discipline to
do the various things that are necessary in a very regulated industry. So we see
that as a very positive aspect.
Let me next talk to you about what does Whitman offer CEC? First of all
it's a great platform to grow now and in the future. One of the things that we
told the market about is that we had started this health education division.
This was started this past year with our acquisition of Missouri College, and it
is something that we're extremely interested in getting into. Also, with the
huge numbers of dollars that are spent in our economy, some $1.3 trillion, this
gives us a very excellent platform to start growing this right away, with some
14 different schools. So that's a very positive aspect. I'll also remind you
that we've indicated that we do have a team in place that has kicked off this
division, they're some of our very senior people and I think this will certainly
give us a running start on this thing.
The other thing, of course, is that we will gain an additional regionally
accredited school, Colorado Technical University. This is a very rare
accreditation in our industry; it's North Central Accreditation. We've got a
number of other accredited schools that are regionally accredited; we see this
as a very positive aspect of being able to build upon that. Certainly with their
strong recent financial operating performance, this can be used to build a great
future; this is not a turnaround situation. Also with the quality brand names
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that they have, this really will help us expand various areas in terms of adding
programs, longer degrees, being able to branch and also using our various
marketing initiatives. They've got some advanced degrees also in the bachelor
degree area, the master's degree area, this does give us a first, that we are
now in the doctorate degree area, and this should be very positive both for
onsite as well as online area.
Attractive geographical markets; we look at certainly markets like Atlanta,
Cleveland, Dallas, Denver, Ft. Lauderdale, Houston, Jacksonville, New York,
Tampa, and these are either markets that we understand because we have schools
in them now, different types of schools, or strategically we wanted to enter
many of these markets. Keep in mind, one of the things that we formulated a
number of years ago was also having mega schools in various cities, and that has
been very, very successful. We've done that certainly in Los Angeles, Chicago
and in the New York metro area, and various other markets, and there's a lot
there that can be shared among the schools and positive benefits for everybody.
Certainly there are 13 campuses that we'll acquire in the top 50 populated U.S.
markets, and we see that as a very positive situation. There's a high quality
school level of management and the recently accredited online platform through
Colorado Technical University, that we intend to develop this here over the next
number of months, and that should give us another platform in which to look at
offering the online programs that we might choose to offer.
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Next let me talk to you about what does CEC offer Whitman. Basically what
we're looking at there is the enhancement that will make Whitman grow. It's
simple and proven, we have a long history and we know what works, and we're
prepared to increase the market share. Some of those things that I want to share
with you are certainly the multi-dimensional marketing model. Probably the
number one thing that we're going to find that we're going to be able to really
help them on, both in the short-term and long term is the ability to generate a
lot more leads. What we're finding is in the past acquisitions we've been able
to go in, do our marketing studies, determine what is needed, and literally grow
thousands of more leads. A typical CEC school in these various markets would
have tens of thousands of more leads coming out of those markets.
Also, as you know, we do specialize how we handle those leads. We look at
having some of the same positive impacts here. Certainly there's a strong local
market presence. There's a high school marketing team that goes out. The out of
area market for some of these schools will be very positive, about 35% of all
CEC students come from out of the area, and we see that because the programs are
very attractive and they're great brand names. We've also set up a new Internet
program, of course that's been very successful, starting last year and going
into this year. We would see sharing that certainly with the schools, and also
where it made sense the international recruiting ability.
7
We've also got the ability of course, to attract a broader student market.
What we're looking at is through the high school, some 30% of CEC students come
directly out of high school, young adults about 45%, and of course older
students, and finding that balance of both men and women. We've got a strong
management experience and expertise, in such areas as IT, advertising,
admissions, education, student finance, strategic planning, the facilities
expansion, and of course the all-important placement. The other thing is we're
prepared to offer the new curricula offerings in visual communication, design
and education. We've got a successful track record also in transplanting
programs, and we see this as a very exciting opportunity. This year, system
wide, we'll transfer some 50 programs. We see almost immediately being able to
also have that impact on various Whitman campuses and schools. There's also our
start up expertise and adding satellite campuses. We have a lot of confidence
that our expertise and capabilities will produce significant growth at Whitman.
It's really a very simple formula; we're going to add more leads, very
significant numbers. We're going to be able to expand their facilities in a
number of different ways, and add the various new programs. So it really is a
very simple formula.
Let me next cover with you, how does Whitman compare to CEC? A quick review
on how the two systems look side by side, and the important comparison here is
that the systems really compliment
8
each other. We've got the onsite and the online strategies and capabilities,
we've got proven methods. Certainly as you look at it, in 2002 CEC had $751
million in revenue, Whitman $105 million. We've also shown the ability to be
able to go out and generate more student population, which results in more
revenue and to gain greater margin, and we see that same thing at Whitman.
There's certainly a number of campuses throughout the country, you look at the
51 platforms internationally that CEC has, along with the 22 campuses that
Whitman has, this will not only give us a lot more platforms to grow from, but
also it will help give us economies of scale in various areas.
The other thing is when we look at student populations, some 55,000
students in the CEC system, about 10,000 students in the Whitman system. The
other thing that's very exciting to us is of course the core curricula, as you
kind of compare that. In visual communications CEC has 41% of our students. This
is a new area for Whitman, they have nothing in this area, and we see this as a
really great area to grow, not only because students want this, but because
there's lots of jobs out there. The other area of course is business studies,
anywhere from secretarial science to MBA, currently 27% in the CEC system, 12%
in the Whitman system. Again, this is a tremendous area of growth. The
information technology area, 16% CEC, 19% of the Whitman area, and this has been
a very strong area to grow in for both groups. The other area of opportunity,
just in terms of putting schools perhaps in these cities, is in the culinary
arts area, that's 14%
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of the population of CEC, Whitman of course, this is not an area that they're
currently in, but we see this as perhaps being the opportunity for certain
cities and certain states. The health education area is the real exciting part
here. Currently that's 2% of what we do, 69% of the Whitman system. So it gives
us a very, very significant presence in that very exciting area.
I think all in all what this does, is it keeps the whole system very
diversified. We found that that has been a strength of ours, to be able to not
put all of our eggs in one basket, but to be able to certainly take advantage of
those areas that students find very attractive, and where there's lots of jobs.
The other area that I just want to spell out, that I think is going to give us
tremendous capabilities, is the fact that last year system wide in the CEC
system, we generated 1.7 million leads. Certainly we've got the capabilities and
the capacities to not only share some of these leads, but also to generate large
numbers of leads in the Whitman system at reasonable cost.
The other area that I want to share with you, of course, is the degrees
offered, and again, I think there's a tremendous opportunity here. In the
diploma and certificate area, CEC is 14%; Whitman is about 70%. Again this is a
tremendous opportunity to be able to put more students into associate degree
programs. Many other acquisitions that we've purchased in the past perhaps had
the same balance, where they were 70 or 80% diploma programs, and over time, in
the short run we were able to
10
have many more students take the associate type, or longer degree program. This
is certainly true when we bought Katharine Gibbs and various other institutions
that we purchased over the years. On the associate degree side, 54% for CEC, 12%
for Whitman; again this is something that we plan on putting more associate
degrees in, and then in the bachelors', masters, doctorate degree area, 32% for
the CEC system, 18% for Whitman. Just like in the CEC system we have seen this
is a tremendous way to grow our schools, this year we'll add many more bachelor
degrees. We see rolling out these same strategies in the Whitman system.
The last comment that I want to make is the fact that we have a number of
different divisions of course. We've got our Katharine Gibbs division, our
university, our academy, our culinary, our college division, our healthcare
division, international, and of course our online education group. Each one of
those, as we've strategically looked at this, has the capacity and the
opportunity to generate up to or exceeding $500 million in revenue, and the
strategic plans over the next five years look to doing that. What I'd like to do
at this time is turn it over to Todd Steele, our Executive Vice President of
Strategic Planning and Development. Todd.
Todd Steele: Thanks. I'd like to start by describing Whitman's operating
divisions, starting with the ultrasound diagnostic schools, which I'll refer to
as the UDS schools. The UDS schools were founded in 1977; there are 14
locations,
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primarily in the eastern half of the United States. As Jack referred to earlier,
in attractive geographic locations such as Cleveland, Dallas, Houston,
Westchester County New York, Jacksonville Florida. They also have locations in
cities where CEC's been successful in the past, such as New York City and
Atlanta, Ft. Lauderdale Florida. Approximately 5,300 students are currently
enrolled in UDS schools, and the UDS schools offer a broad platform of
accredited programs in health education, including medical assisting, surgical
technology, medical coding and billing, cardiovascular technology and diagnostic
medical ultrasound. Strategically UDS gives us a meaningful platform in
healthcare education, and also a number of new programs that can be transplanted
to CEC schools.
Whitman's second operating division is the Sanford-Brown Colleges.
Sanford-Brown was founded in 1866, so it's almost 140 years old. Sanford-Brown
has five locations, four in Missouri and one in Illinois, in southern Illinois,
and currently 1,700 students are enrolled in Sanford-Brown schools.
Sanford-Brown has a long standing, strong local market presence, and in recent
years Sanford-Brown has migrated, as Jack referred to earlier, from more of a
diploma focus to associate degree, and is in the process of continuing that
migration up to a bachelor degree level. The areas of education offered at
Sanford-Brown are health education, including nursing programs, information
technology and business programs. Here we have a good franchise, a long-standing
presence, and entree into two new markets,
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southern Illinois and Kansas City Missouri, and also again they're starting this
migration to the associate degree and bachelor degree programs.
Whitman's third operating division is Colorado Technical University,
founded in 1965, three locations in Denver, Colorado Springs and Sioux Falls
South Dakota. Approximately 2,800 students are enrolled at CTU; we'll refer to
it as CTU. CTU offers primarily bachelors', masters and doctoral degrees in
information technology, business, engineering, telecommunications, project
management and several other areas. They also have an online business, which
they have just begun to build, and we think we can accelerate the growth of that
business, given our success with AIU online. One of the most exciting things
about Colorado Tech is that it's regionally accredited by North Central. Both
the bricks and mortar and the online businesses are accredited by North Central,
and CTU provides us with a regionally accredited platform that's very
complimentary in terms of its accreditation and geography to our AUI system, and
again this alternate online education platform.
With respect to our integration strategy, my comments today will not focus
on the infrastructural aspects of the integration, but rather on some of the
fundamental growth initiatives that we will embark on upon closing. For starters
there will be dedicated management teams who will work with the Whitman
divisional teams to help them execute their business plans. We
13
plan on augmenting Whitman's growing business with investment in the following
areas; investment in marketing. We believe, as Jack referred to earlier, we
believe we can increase leads, not only by spending more through Whitman's
existing marketing channels, but also add, or place more emphasis on, areas such
as Internet marketing, high school programs, and in select cases, market to
students outside the local market of the given school. Additional investment and
growth will occur in the areas of facility expansion, and we will also
anticipate accelerating the investment in Colorado Tech's online business, not
only in terms of capital but also in terms of the know how that we've gained
from our AIU online experience. Finally through additional investment in student
services, we believe we can improve student outcomes such as retention and
placement. On the expense side there are some duplicitous costs associated with
Whitman being a public company, and certainly those costs would be eliminated.
Longer term, as Jack mentioned, there are many program transplant
opportunities between CEC and Whitman, as well as new start up and satellite
opportunities. We have a very strong track record of success in executing on all
these initiatives in the past, and are very confident that we will be very
successful in this situation, given the quality of the Whitman assets, and
again, our track record of growing acquired schools. With that, I'd like to turn
the presentation over to Pat Pesch.
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Pat Pesch: Good morning everyone. I'm going to review kind of the combined
demographics in a couple of areas for Career Education and Whitman. Checking the
curriculum offerings of the respective organizations earlier, on a combined
basis we'll see that our visual communications and designing curriculum will be
34%, culinary 12%, health education moves up to 12%, IT at 17% and business at
25%. What this really shows is that the combination of these two organizations
improves the diversification of our curriculum offerings. We have long held that
strategically we wanted to be offering career-oriented curriculum in areas that
we believe are going to be heightened, both in terms of student interest, as
well as demand for the graduates. We see all these areas as having excellent
long-term growth dynamics, and the addition of a significant health education
population just improves the diversification of our offerings.
In terms of degree offerings, Jack has reviewed those; the consolidated
numbers do change, but only modestly, due to the smaller size of the Whitman
population versus the existing CEC population. Certificate and diploma is 22%,
associate degree is at 48% and advanced degree at approximately 30%. I'd like to
summarize a few aspects of the transaction and some, which were discussed in the
press release. The purchase price is $14.25 per share for the Whitman shares.
$6.00 is in cash and $8.25 in CEC shares. I'll point out to you, as it was
indicated in the press release, all of the outstanding Whitman stock options
will be settled in cash. That would be important to you in terms of
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modeling the effects of this transaction on the consolidated entity. The
valuation of approximately $230 million of enterprise value. Let me suggest to
you the approximate valuation included in this $230 million of stock to be
offered in the transaction is $118 million, the remainder of the consideration
is basically cash.
The valuation represents just over two times multiple of trailing revenue
and approximately 13.7 times trailing EBITDA. I'd also note that revenue and
EBITDA has accelerated in the Whitman system in the last year. We certainly,
with the marketing initiatives that Jack intends, and Todd touched upon, we
believe that growth will continue and even accelerate. We believe the earnings
from the Whitman acquisition will be accretive to our '03 earnings and we expect
the deal to close by July of this year. We have not provided specific guidance
on [unintelligible] or capital spending. We will be providing that shortly after
the closing of the transaction. I would also point out to you that on file with
the SEC there is an 8K that exhibits the acquisition documents. Included in
those documents you'll find descriptions of things like break up fees and the
adjustment parameters for the stock portion of the consideration. I would
suggest that those of you interested in those provisions review the document. We
certainly would be available afterward for follow up calls to address those
specific provisions and how they work. With that I will turn the presentation
back to Jack.
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J. Larson: Let me now at this time ask Rick Pfenniger, President and CEO
of Whitman Education Group, to make a statement.
Rick Pfenniger: Thanks Jack. I'll be brief and really touch on just a
couple of points. First, as a point of note and information that's included in
the joint press release that was issued yesterday after the market closed, and
that is that in that release we provided updated financial guidance for Whitman
for our fiscal year that will end March 31 of '03, next week. That updated
guidance is that we believe revenues will be $108-109 million for the current
fiscal year. EBITDA will be between $16.1-16.3 million, and net income will be
between $7.1-7.3 million, which equates to, on an EPS basis, 46-47 cents per
share. A point of note with respect to that guidance is that that guidance
includes approximately $500,000 of estimated transactional related costs that we
will incur in the current period, that equates to about 2 cents per share on an
EPS basis. That guidance has increased from our earlier guidance, which was
43-45 cents on an EPS basis.
The second point, and really a few general comments, because I think that
Jack and Todd and Pat have gone through a lot of information in good detail, so
I'll just echo a little bit of what's already been said. That is first, to say
that we believe that this is a compelling business combination that is a true
win/win situation for all interested parties, whether they be shareholders,
employees or students, on both sides of the
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transaction. Career Education has done an outstanding job in building their own
business, I think everybody knows that. Yet we're proud that by this combination
we at Whitman can meaningfully add to what they've already done. The merger
will, in a very powerful manner, fulfill an important strategic objective for
Career Education by providing them with an immediate leadership position in
allied health education, which I think was already well noted. Our technology
and business programs will well enhance and compliment existing areas of
strength for Career Ed, and third, the combination will meaningfully expand
Career Ed's geographic scope and reach, the already large geographic scope and
reach that they have.
At the same time, Whitman, its shareholders, its employees and students
will also receive substantial benefits. First, and probably most obviously, our
shareholders will receive a very attractive increase in the value of their
investment, and second and also of significant importance to us, is that our
employees and students will also benefit. The greater financial and management
resources that Career Ed possesses will permit greater investment in the growth
and evolution in our schools, which should provide positive challenges and
professional opportunities for our employees, and similarly the investment in
all of those respects should enhance and enrich the learning experience for our
students and our future students. Another point that I'd like to make is I
believe that there will be a very good cultural fit for our two organizations.
That's kind of an abstract point,
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but I think it's something that's important in transactions of this type and
that's just to say that beyond just a mutual commitment to professional
management, that I think both of our organizations possess, that throughout the
period of discussion and negot8iation with Career Ed we were consistently
impressed with their commitment to quality, high quality career oriented higher
education, and equally importantly, their understanding of the importance of
serving students well and the need for talented, committed, passionate educators
and school managers to do that. Those are fundamental principals on which we've
sought to build our business and refine our business, and we're confident that
this common view and philosophy will permit rapid and effective assimilation of
our two organizations post closing.
With that in short I'll just close by going back to the point that I
started with, in simply restating that we believe that this is a genuinely
compelling business combination that will well serve and benefit all interested
parties.
J. Larson: Rick, thank you very much. Let me - before I take any questions,
let me assure you that we have the experience, the structure, the strategies,
the management, the systems to operate and grow this new opportunity. I also
want to remind everybody that we certainly have a great track record of being
able to do acquisitions and to greatly enhance and find significant value. So
we're very excited about this new opportunity, and I think as Rick has stated,
and as we have
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experienced with many of our other acquisitions, we're expecting to close this
on July 1. What this should do in the meantime is give us ample time to kind of
ramp up and do all those things that we do to really get a running head start.
We've been able to show on every deal that we've done that where we have been
able to do this; this has made a major impact in the short run. Let me at this
time open it up then to any questions that people might have.
Operator: Thank you sir. The question and answer session will begin at this
time. If you are using a speakerphone, please pick up the handset before
pressing any numbers. Should you have a question, please press star, one, on
your pushbutton telephone. If you wish to withdraw that question please press
star, two. Your questions will be taken in the order that they are received.
Please stand by for your first question. Our first question in queue comes from
Greg Cappelli of CSFB. Please state your question sir.
Greg Cappelli: Good morning everyone. Jack I just wanted to start out by
asking you if you could talk a little bit more about your ability to make this a
value accretive deal, just aside from earnings accretion, given the price paid
for the company. And on meaningful cost savings, on synergies, or is it more,
Jack, what you talked about, enhancing the top line even further?
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J. Larson: Let both Pat and I speak to that. First of all, I mean we've
always, in all of our deals, we've looked for both of these opportunities.
Because I think that's how you really find an excellent situation and make it
better. You don't want to have to rely on just one, but certainly the primary
factor is that we see that we can certainly enhance the revenue side of it by
bringing in some of the things that we have found successful in the past. But
there's ample opportunities also on some of the various other efficiencies. Let
me ask Pat to speak to that.
P. Pesch: Greg in terms of kind of operating efficiency, I think there's
some clear areas of opportunity initially, which is we're both public companies
and there's a certain level of infrastructure associated with that, and a
certain level of cost associated with things like accounting and legal fees,
audit fees, all just dealing with regulatory filings and things of that nature.
Clearly those are duplicative type costs, which we'll be able to eliminate.
We've also made, as you know we've talked about some of the significant
investments we've made in technology, new student management system that we put
into our schools over the last year, the incremental investment necessary to
bring these schools in will be very modest, and yet we think they'll bring
operational efficiencies to all of these additional campuses. Having said that,
the real profit improvement opportunity here isn't so much in cost cutting so
much as it is leveraging and growing the existing operations.
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G. Cappelli: OK so I'm just assuming that this met your IRR type of
criteria that you've stated in the past.
P. Pesch: It absolutely does. We think there's just significant growth
opportunity here.
G. Cappelli: OK, just one more quick one. Do you guys plan on adjusting
price at all for any of the Whitman schools, or is it where you want it to be
right now?
J. Larson: Over time that's something that we've looked at in any
situation, we think that there's some very attractive programs here. We think
with some enhancements and as you add programs that are longer, programs that
maybe have a uniqueness to them, that certainly you have the opportunity to
charge more dollars.
G. Cappelli: OK, thanks a lot. Congratulations to both companies.
Operator: Thank you. Our next question in queue comes from Jerry Herman of
Legg Mason; please state your question.
Jerry Herman: Thanks. Good morning everybody. This one's probably for
either Jack or Rick. Could you speak to the accreditation side of Whitman, i.e.,
perhaps when the most recent
22
either program review or reaccredidation visits and reports took place, or when
they might in the future?
J. Larson: Sure. Let me turn that over to Rick.
R. Pfenniger: Hi Jerry. The most recent, we've had a lot of recent
accreditation activity. About a year ago, or in the last year, Colorado Tech was
reaccredited institutionally by the NCA for an additional 10-year period.
Sanford-Brown I think also about a year ago was reaccredited by ACICS for I
believe a five year period, and within the UDS system we're going through the
recycle for institutional accreditations, two campuses in the fall, the first
two up in that cycle, were reaccredited for five year periods, and the balance
will be occurring during the next year to 18 months.
J. Herman: Great. Jack, with regard to the size of this acquisition,
obviously it's large. There's not much left in the public domain. Could you
speak to the overall acquisition strategy? In any way does your overall
corporate strategy shift from one that has included a significant component of
acquisitions to more of an internal focus?
J. Larson: Well of course that's always been one of our game plans here
over the last three years. We've done start ups, we've transplanted programs
going back a couple of years ago we did two start ups, we did two this past
year, we'll do as many as
23
four this year, and probably next year, on the drawing board we've got probably
as many as six or eight. So that's something that we've always found is
beneficial and has been part of our strategy. Acquisitions are something that we
always look at doing. We've done probably more acquisitions than anybody in our
industry; we've been extremely successful in doing that and kind of identifying
the right acquisitions and being able to really enhance the value of those
things. Along with adding longer programs and kind of transplanting these
programs, that has been a real winning combination.
J. Herman: And just one final question. When you look at your healthcare
division, is this the platform for that $500 million business, or is there other
large components that need to happen?
J. Larson: Well I believe it's certainly a strong beginning. There's a
number of things we would look at in the future, adding more programs, varying
the programs, bringing some of those into the existing CEC schools. But this
certainly gives us a running start on that, and makes it a very significant
opportunity. I'm just reminded as we've started any of our divisions, sometimes
they started off fairly modestly, but looking what they look like over the next
two, three, four, five years after they were started, they were enormous. So we
feel that we have that same combination here.
24
J. Herman: Great guys, I'll turn it over.
Operator: Thank you. Our next question in queue comes from Alex Paris of
Barrington Research. Please state your question.
Alex Paris: Good morning guys, congratulations.
J. Larson: Thank you.
A. Paris: It looks like a great acquisition. A couple of questions. You
referred to a headquarters consolidation. What does that mean for senior
management within Whitman Education, and are there any plans for consolidating
schools in any cities where there exists significant overlap?
J. Larson: Let me speak to some of that and then let me ask Todd and Rick
to also talk to it. In any acquisition we see that there's opportunities to kind
of consolidate things. But certainly the strength of the business is at the
school level. There's some strong corporate and divisional people with Whitman,
we feel coupled with the team that we have at CEC that are experienced managers,
that it will be kind of a winning combination to give the schools the needed
support that they need. We've got a number of things that we're considering here
to kind of enhance their capabilities to be able to utilize some of the things
that they do well, but certainly some of the things that has been a strong suit
of CEC that we can bring to bear to
25
help them. Todd, let me ask you to speak to that a little bit on some of your
comments, and also Rick, if you have any.
T. Steele: When we refer to the opportunities that I outlined in the
presentation it's primarily, I'll call it the executive office, and that refers
to some of the public company costs. With respect to the divisional management
teams we need to learn more about the relationship with the schools, but I think
our intention is to fundamentally support them. With respect to school
consolidations there currently would not be any in our plan, certainly we need
to learn more about the business.
A. Paris: OK and then to that point, Whitman had planned its first start up
in quite some time, a planned start up for a UDS school in an existing territory
in the first half of the new fiscal year. Are those plans going to continue?
J. Larson: Todd, let me ask you to speak to that.
T. Steele: Yes, they're continuing on their current business plan. I don't
know, Rick, if you'd like to comment on the current status?
R. Pfenniger: Yeah. We expect to make an announcement real soon on the
precise location of that, but it's something that, of course, Todd and his folks
in their evaluation looked at closely, all parts of our plan. We've talked about
that. Our plan is to
26
continue our plan, including especially that. So, it is going forward.
A. Paris: Great. And then, Pat, or Todd, I guess, this might be a question
for you. I realize you're going to give guidance in the future. But just sort of
on first blush, as I combine these two companies, based on what it looks like
Whitman can do in the year that's ending in about a week and what their growth
rates look like, I kind of come up with a result that this is accretive before
you do any restructuring, or take out some redundant costs. Am I on track?
Pat Pesch: Yeah. If you--Alex if you just kind of take the trailing numbers
and kind of pro forma in, I kind of gave you the information in terms of the
cash stock split, you know, with some basic assumptions in terms of interest
costs associated with the cash piece. And I guess I would suggest to people that
they probably need to look at probably a 4% to 5% interest cost over the next
several years. But, using that type of interest assumption, just kind of working
through the math, it is accretive based on the trailing performance.
Obviously, we expect--and that's one of the reasons we certainly made the
statement in the press release that we expect the deal to be accretive.
Obviously, you know, we've got to integrate our own plans. In terms of specific
guidance, we will be forthcoming with that as we get to the closing time frame.
27
You know, our historical approach has been to look at making some
investment in marketing up front. Generally, while those investments pay off
well, in the short-term, they [unintelligible] in the earnings because we
expense all of our marketing costs as incurred. And until those marketing costs
pay off in terms of additional students, you don't have the revenue or the
additional profitability flowing through.
So I would say what would be of interest when we come out with this
guidance is more the quarter-by-quarter guidance and how that's affected by our
investment plans. But again, we still feel comfortable saying that it will be
accretive [unintelligible] immediately. And obviously, we wouldn't be doing the
deal if we didn't expect it to accrete and opportunity to grow in the succeeding
years.
A. Paris: Very good. Well guys, congratulations again and it's s real good
combination. Great, thank you.
Operator: Thank you. Our next question in queue comes from Howard Block,
with Bank of America Securities. Please state your question sir.
Howard Block: Good morning everybody and congratulations. The question is
about the branding in Allied Health that Jack you had mentioned several
occasions in the past. Is the UDS brand
28
sort of the brand that you've been thinking of in terms of buying an existing
brand? Or is there still a possibility you may brand with some sort of a pharma
company or something like that?
J. Larson: No, the opportunity, I think, on this partnership, you know,
much like we had perhaps with the Cordon Bleu, would be to find somebody that is
a major player in the medical industry. Like you say, it could be in medical. It
could be in pharmacy or something like that, but we continue to look for that.
We're not rushing into anything if we don't need it.
We just feel that if we were to find that partner that perhaps that could
enhance some of the things we're doing through credibility and resources and
other types of know-how. So we continue to look for that.
You know, I think with this large of a platform now, I think this probably
becomes far more attractive, to be able to kind of attract that partner to be
able to step in and maybe give us some assistance in certain areas. So, we're
really excited about having this to be able to go out and do that. Certainly,
the UDS experience, reputation and name is tremendous and we look upon growing
off of that.
H. Block: OK, and then, looking at Sanford Brown, I see that they have a
nursing program. I was wondering if someone
29
might be able to elaborate with regards to the opportunity to scale that
program, or the constraints in terms of scaling it. Is it a Missouri-specific
licensing? Is it--what can we expect from that nursing program that Sanford
Brown has?
J. Larson: Nursing, of course, is one of those really exciting areas
already. You read about it every day. There's a huge shortage in that area. The
really good news here, and we've studied this for a long time; most states will
let private schools like ours come in and in fact put in nursing programs. There
are very few that will not allow it. We see that as a tremendous opportunity
here. Certainly taking this as kind of the flagship part of this, both to gain
credibility and show people that we know what we're doing, we have other
situations where we have nursing. But we see this rolling out in a number of
other schools too, over time.
H. Block: OK. And then the last question I guess might be more for Pat.
That is, I think that everyone recognizes the price does look a little bit
steep, but as we look at sort of the recent performance of Whitman's operating
margin, it has been improving somewhat dramatically over the last couple of
years. Was it easier for you to rationalize the price based on sort of the
trajectory of their margin recently?
J. Larson: Pat, let me ask you to comment to that. And then, I've got kind
of a wrap up on that
30
P. Pesch: Clearly, the improving trend in their operations absolutely was a
factor to us. You know, Jack alluded to the fact earlier in his opening remarks
that we weren't in a turnaround situation. Having said that, there clearly
continues to be opportunity to improve the margins. And, we think that margin
improvement would've occurred with Whitman at a certain level on the growth rate
that they were at. We think the ability to generate stronger revenue growth will
do nothing other than to accelerate that margin improvement.
J. Larson: One of the things that we also certainly look at, in any
acquisition, is our ability, over different periods of time, to be able to add
significant value to add revenue. And we really feel this is a system that will
do very well. It has the same ingredients that we found in the past has really
responded well to the capabilities of what CEC is able to bring to bear on this.
Certainly, in going into probably a lot of different acquisitions over time
people might point and say gee, that was kind of a high price. But I think that
we've also been able to show over time that, when you look back, it was very
reasonable. And we've got a lot of confidence in what this partnership means and
what our capabilities are.
H. Block: Right. Thank you and again, congratulations.
31
Operator: Thank you. Our next question in queue comes from Richard Close,
of Suntrust Robinson Humphrey.
Richard Close: Congratulations as well. Maybe hitting on that margin
question that Howard just threw up there, you know, if you look on a nine-month
basis it looks like Whitman has about a 10% operating margin, if I'm correct
and, in the last quarter, 15% or so. Pat, with the investment, I guess, in
marketing and maybe some of the facilities that you expect after closing, where
do you think things are going to shake out from that standpoint? Obviously,
you'll get some revenue growth, but do you expect margins to be, you know,
stagnant, in that, you know, maybe first 12-month period?
J. Larson: Pat, why don't you speak to that?
P. Pesch: Yeah. If you addressed it on kind of a 12-month period, you know,
I would expect margins to be kind of relatively flat to up a little bit, and not
getting the immediate improvement just because of that marketing investment.
That is a pattern that holds true to all of our past acquisitions. We get
immediate, I think we get almost immediate earnings growth, let's say after that
first quarter, due to increasing the volume. It really isn't until we're
generally into the second year where we start getting earnings growth associated
with margin improvement.
32
Now, there have been exceptions to that, but those have generally been in
cases where we've acquired something that was either losing money or was at
extremely low operating margins.
R. Close: OK, and maybe a follow up on that. Maybe you can refresh our
memories with respect to EduTrek. I think that was one that was losing money and
maybe the margin progression that you were able to achieve because you guys did
do a very good job there and out performed. Did the opportunities with Whitman
mirror that? Maybe, could you give us details or a little color?
J. Larson: Let me just comment on the first part of it and then Pat will
comment on kind of the margin part. Yeah, I mean we feel the same formula is
here. Certainly, when you go into these deals, you look at all aspects of what
the opportunities are and certainly any challenges. But it really is fairly
simple. We really feel that going in the same formula that we found so
successful in other places is to have this ability to come in and generate a lot
more leads that will help in the short and long-term. That's the ability to
expand facilities, which is an easy process to really do and then by adding new
programs.
I think we're going to see some of the same types of results that we did
see at AIU just in terms of things responding well to that. The nice thing about
Whitman is there is many more platforms to really grow upon that can add value
in other areas also. Pat, do you want to comment on the margins at AIU?
33
P. Pesch: Yes. If we kind of look back at the EduTrek or the AIU
situations, you almost have to split that operation into two pieces. They had a
significant level of corporate spending, which we were able to eliminate almost
immediately after acquisition. That left us with kind of the school level
operating margins, which were positive but were lower than the Whitman operating
margins. And also, we really had a system there that fundamentally needed, I
guess what I would call, some remediation.
So the pattern that we had really with AIU, that was dilutive to earnings
in our early quarters of ownership. We indicated when we acquired that that it
would be diluted in the first year. We gave numbers for guidance roughly to
about 10 cents a share. By the end of the first year of ownership, on a
quarterly basis, it was accretive to earnings.
The similarity with Whitman would be one of pattern, a similar pattern but
not at the same level. We expect it to be accretive right away and certainly,
the accretion level growing after we make the initial investments.
R. Close: OK, great. Thanks for that color.
Operator: Thank you. Our next question comes from Mark Marostica with Piper
Jaffrey. Please state your question.
34
Mark Marostica: Hey guys, congratulations on the deal. The first question
relates to a comment Todd had made regarding growth opportunities and strategies
around the placement and retention rates for Whitman. I wonder if you could
comment on where those rates have been lying as they compare to CEC's rates?
J. Larson: Todd, let me ask you to comment on that and then maybe Rick, if
there are other things to add to it, please feel free.
T. Steele: I do not have the data in front of me. The retention rates at
the UDS schools are a little lower than our average. As we looked at the model,
we think there may be some opportunities through some of the things we've
learned here, to invest in that and improve retention. Retention's not
fundamentally dissimilar from our retention at Sanford Brown or Colorado Tech.
J. Larson: You know, just a comment I'd like to make regarding placement,
we have found that this is an area of opportunity just with our kind of national
system, our ability to kind of do things, both in terms of the local basis as
well as kind of a virtual thing. We've got an online capability in that area
also. We've kind of shared that with the market. As you know our placement rate
system-wide is 94%. We would look at
35
providing some of those same enhancements and opportunities at the Whitman
schools as we kind of look at them one on one.
And, of course, on the retention thing, there are always things there that
you can do to make that better.
M. Marostica: OK, great. I have a question on the online capabilities. I'm
not sure if you said how many students are fully online at Colorado Tech.
J. Larson: Currently, it's a very small number. But then again, it was kind
of nonexistent when we first looked at AIU when you looked at the full degree
programs. That's why we see this as such an exciting opportunity, because they
do have some attractive programs. We've got some other programs that we have on
the drawing board. It's a matter certainly of going through the proper
approvals. But, the north-central accreditation is kind of a unique
accreditation. That's the same people that accredit the University of Phoenix
and DeVries [sp] and places like that.
So we look upon it as being a unique thing to build upon in the future.
M. Marostica: So going forward, Jack, do you envision one platform and
essentially rolling Colorado Tech into AIU for the online piece?
36
J. Larson: You know, we're open on that. I think that Colorado Tech is kind
of its own unique situation. It certainly has that unique brick and mortar long
operating history on the brick and mortar side. On the online side, we feel that
you could probably run a number of brands out there perhaps that would do well
with the right types of programs. But we've not kind of discounted anything.
M. Marostica: OK. More of a maintenance question for Pat, what are your
post-deal debt levels and new borrowing capacity?
P. Pesch: I'm sorry Mark. You're breaking up a little bit there. Could you
repeat that?
M. Marostica: Sorry about that. Yeah, concerning post-deal, what are your
debt levels now and current borrowing capacity, post-deal?
P. Pesch: OK. I mentioned earlier that the cash consideration in this would
be in about the $112 million range. We will, at this point, and coming through
the end of this quarter, our debt position will be modest. At year-end, we had a
net debt position. We have since been generating cash form our operations but
we've also had to fund our acquisition of INSEEC. That should leave us
towards, you know, as of the end of this year, in a modest net debt position
before this transaction.
37
So, if this were to close immediately, we would basically be adding about $112
million to a pretty low debt position today.
Our existing bank facilities are that we've got a $200 million domestic
facility and that's more than adequate to draw upon for these needs.
M. Marostica: OK, thank you.
Operator: Thank you. Our next question in queue comes from Matt Litfin,
with William Blair & Company. Please state your question sir.
Matt Litfin: Good morning and congratulations. You guys have recently made
two fairly sizable acquisitions. Should we assume you'll be going through a
digestion period now? Or, what is your appetite for additional acquisitions in
the near-term?
J. Larson: Keep in mind that we've got a really good capacity and we've
really got some really strong people. That's why we broke the company a number
of years ago into various divisions so we could really absorb something like
this, as we did with the international stuff.
With Insieg, we, of course, put that in a separate and distinct
international division. That business is kind of its own type of business, etc.
But, as we look at this, we've got a
38
number of different people that can help on this. This will go into a number of
our different divisions. So, we have a full capacity there to kind of digest it
if you will.
Health care, we've set up a separate and distinct area. With Colorado
Technical University, that will kind of fall into a separate area. Sanford
Brown, of course, will be in the medical area too.
So, we've always been a cautious company. I think we've tried to take
things kind of slow but sure. Acquisitions are kind of opportunistic. You have
to, you know, kind of do them when you have the chance and see the opportunity.
So, I guess I just would say that we see being cautious as we move forward.
M. Litfin: I see. One other question; could you talk at all about the work
you guys did in looking at the job market for the health care piece here, the
ultrasound technicians, medical assistants, etc.? Do you have any data you can
give us as far as shortages in those areas, or something like that? Maybe even
Rick could chime in?
J. Larson: Sure. Let me just say overall that $1.3 trillion is spent in the
medical area. I think kind of the nice thing that we see about medical is doing
anything from, certainly, your medical, dental, pharmacy tech, you know, various
39
other components, nursing. We've certainly not ruled out other aspects of the
medical field at some of the higher levels.
But there are tremendous job opportunities out there and we've seen this
over time. There's probably a greater need for people in the medical field than
in almost other area. Rick, if you have any comments on that, it would be fine
too.
R. Pfenniger: I don't have specific data that I can say. Just based on what
we see in our markets, with our graduates, we see good demand for graduates of
all of our allied health programs, whether UDS or Sanford Brown.
Where we see the best demand is in the higher end, more specialized
programs, registered nursing, radiography, respiratory therapy, ultrasound and
cardiovascular tech. Those are all extremely high demand areas, and it's
reflected both in the placement rates, which for those programs typically exceed
90 and approach 100% for certain of the programs, depending on the location, and
in the starting pay. We're seeing RN's and radiography techs and even ultrasound
techs, depending on the pay scale in local markets, graduating out of a
non-degree or associate degree programs with starting pay of $40,000 plus. So
they're real good areas.
M. Litfin: Thanks, and well done on the Whitman deal.
40
J. Larson: Thank you.
Operator: Thank you. Our next question comes from Gary Bisbee of Lehman
Brothers; please state your question sir.
Gary Bisbee: Hi guys, congratulations to both sides. It sounds like a
pretty good transaction. A couple of questions though. First of all, you said
you're not going to comment on cap ex, and to give more guidance later. But can
you talk to the cap ex you think you may need to grow this business, and in
addition, if there's going to be any working capital disruption? I know that AIU
is certainly a lot more troubled asset that Whitman, but you had a year in 2001
when you digested that in which working capital used a lot of cash and your cap
ex went up about 100-200 basis points as a percentage of revenue, and you
generated no free cash flow even before the acquisition costs. Is it reasonable
to assume that we're going to have a similar effect on your cash flow from this
transaction?
J. Larson: Pat, let me ask you to comment on that.
P. Pesch: Gary, the quick answer to the last question is no, you shouldn't
expect it to be similar. It's perhaps important to point out with the EduTrek
acquisition there were some $30-some million of costs which we looked at as part
of the purchase price. There was some assumed debt, some unusual liabilities
that we assumed in that, and what was reflected in
41
our cash flow following that acquisition was cash outflows associated with that
that were essentially purchase price. But from a GAAP standpoint flow through
the statement and cash flow. There are no similar dynamics, similar
circumstances in place with this acquisition. So the answer is absolutely a
different transaction and you will not see a similar result.
With respect to the cap ex, we do expect that with higher levels of growth
that there will be a need to expand facilities, and as part of that there will
be some capital spending. We would not expect that the level of investment
required would be dissimilar to what we experienced and what we have to spend in
our existing operations. So we also look at there as not being some
extraordinary level of capital spending here.
G. Bisbee: OK so in general you think that the Whitman facilities and
whatnot are in fairly good shape, but the idea going forward is to invest in
expanding those facilities and maybe not as much bringing them up to the
standard of the Career organization. Is that fair?
P. Pesch: The expansion is where the bulk of the dollars will be. We think
there's clearly some opportunity in terms of some equipment spending and
everything that would improve the operations. But again, we're not looking at
any extraordinary level of spending.
42
G. Bisbee: OK. Secondly, the IT enrollment at Whitman has been decreasing
at a mid teens rate over the last couple of quarters, suffering from I think the
macro economy and the IT industry's woes. Maybe a bit also to the company
investing more toward its growing healthcare businesses. But what's your thought
on that, specifically the CTU asset, and what a reasonable expectation in terms
of turning around that operation is?
J. Larson: Before I comment on that, let me ask Rick to kind of comment on
that also if he would please.
R. Pfenniger: Gary the point we've made in our conference call is, as a
program you look at our population, the IT population is down year-over-year for
us, and part of it is market circumstances, and a part of it is focus for us.
We've shifted our focus to other programs, both in terms of marketing program
expansions, new program development, program transplants, not making investment
currently in IT but rather maintaining what we have. That's been true at
Sanford-Brown where we have IT programs, and at Colorado Tech. Having said that,
at Sanford-Brown we're having a great year. The guidance reflects a fantastic
improvement year-over-year for Sanford-Brown, largely because of the shift in
the focus where we believe there's better opportunities.
43
At Colorado Tech the situation's a little different, but it's still greatly
improving. Colorado Tech for the year ended 3/31/02, had a very small profit,
pre-tax about $.5 million. Implicit in the guidance that we've offered today is
that Colorado Tech, for the current year, will do about $1.5 million, so it
would be three times better with population as of fiscal year end approximately
the same as it was one year ago, after having been, at the mid point in the
year, down 5 or 6%. So what we're seeing there at Colorado Tech, is some
restoration of the population, it's starting to grow back up, although we're not
over where we were a year ago, and we're seeing a lot of benefit from internal
efficiencies that we saw out of that organization with the new management team
that we put in place a little over a year ago, and otherwise by focusing a
little more aggressively on some of the non-IT things. Having said that, again
we think that we will begin to see IT growth at Colorado Tech with some new
initiatives with security related programs, particularly in the IT field.
J. Larson: Just a few other comments too, one of the reasons we're really
excited about being able to kind of merge the systems is the fact that there's a
lot that we can help with in that area. We found it's been certainly very
successful, the businesses that we've run and operated. I think if you look at
the demographics, the high school program alone I think is going to add
significantly to what they do throughout the Whitman system. That local market
presence, just in terms of television
44
and Internet, that's something that we have been very, very successful in
implementing. These are ample opportunities for us to go in and do this. It does
not exist right now in any great numbers. There's some advertising things that
we can bring, both in terms of efficiencies, but just know how. Things like our
automated enrollment sites, I think that's going to have a tremendous impact in
helping all of these areas grow, because it certainly has on the CEC site. So
medical, that's a high growth field, business has really come roaring back here
I think, with the economy, etc., we've done very well in that over the last year
and I expect that we'll find that same thing at Whitman, and certainly in the IT
area, I think there's an abundance of job opportunities out there and you've
just got to kind of gear your advertising to hit different markets out there
under the current circumstances.
G. Bisbee: OK, great. One last one if I could. Whitman has done a real
strong job over the last couple of years and we've seen student growth at the
company accelerate from what I think was somewhere around 6.5% in their fiscal
'02 to somewhere probably slightly above 10% in fiscal '03. Is it reasonable to
assume that over the next two years you feel like you can accelerate the growth
of this business toward the mid teens growth rate that you talked about at your
analyst day for your businesses on an internal basis?
45
J. Larson: Let me ask Todd Steele to comment on that for just one moment,
then I've got a comment on it also.
T. Steele: The quick answer is absolutely. That was one of the primary
reasons why we thought this was an attractive opportunity, in addition to the
some of the strategic aspects of the transaction. But you know in terms of some
of the initiatives that I talked about earlier, we think all of those combined
can dramatically increase the already really positive growth rate that Whitman
has.
J. Larson: The combination of being able to generate more leads and we have
a lot of confidence in that, as well as adding new programs, and doing very
similar things that we've done with other acquisitions I think is going to make
that a pretty easy target for us.
G. Bisbee: OK, great. Thanks a lot and congratulations again.
J. Larson: Thank you.
Operator: Thank you. Our next question comes from Jerry Herman of Legg
Mason; please state your question.
J. Herman: Yes a follow up question with regard to margin. Obviously Rick
and crew have done a good job of improving the
46
margins at Whitman. Your corporate operating margin is north of 15%. Is this
business the way it's configured, the way the tuition and student infrastructure
is, is it a similar type margin operation ultimately?
J. Larson: Let me ask Jake Gruver to comment on that. Jake's our President
of our Colleges, Schools, and Universities, and then Pat, if you want to add any
thoughts on that also.
J. Gruver: Hi everyone. Yes, they're very similar type of operations and
with the potential, with the accelerated into the population we will have some
economies of scale to improve those, as we grow and invest for our future at the
same time. So I feel very comfortable, very confident that you'll see
improvement over both of those over a period of time. But at a manageable rate
that is very good.
J. Herman: So Jake, it should be consistent with the corporate average, is
that fair?
J. Gruver: Yes.
J. Herman: Great, thank you. That's all I had.
J. Larson: Great, thank you.
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Operator: Thank you. Our next question comes from Liz Tozin of Tiedemann
and Company; please state your question.
Brett Kapelski: Actually it's Brett Kapelski [sp]. Just a quick question,
what approvals do you need to get the deal done, and how confident are you that
you'll be able to get like all the DOE and all the approvals, like Title 4,
etc.?
J. Larson: Todd, let me ask you to comment on that, then I just have a wrap
up statement on that.
T. Steele: There are some state approvals we need to obtain prior to
closing, and with respect to our due diligence process that's a very important
part of the process. You're referring to the regulatory approvals I'm assuming.
That's a very important part of our due diligence process and we're extremely
confident we can receive all the pre-closing approvals necessary, and obviously
the post closing approvals.
J. Larson: One of the things that we've done, of course over the last nine
years we've probably done more transactions than anybody else. So I guess I
would just say that we have a certain expertise in that area. We certainly study
this a lot before we go into any of these things. But as Todd said, there's a
high degree of confidence.
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B. Kapelski: Is there any reason, because I know like for instance in Title
4 that there's change of controls, is there any reason, fundamentally, why they
wouldn't just be able to stay the way they are? Any reason why they'd be
cancelled because of the merger?
J. Larson: No, I mean we certainly, as I say, have a lot of experience in
this area and there's kind of a prescribed process that you go through with the
regulatory bodies, the state, the federal government etc. The federal
government, the various state regulatory agencies, and it's kind of a process.
So we don't feel that there will be any issues.
B. Kapelski: OK, thank you.
Operator: Thank you. Our next question comes from Alan Mitrani with Copper
Beach Capital; please state your question.
Alan Mitrani: Hi, thank you. In hearing you describe the acquisition of
Whitman, I could almost put any other company in the description and you're
talking about diversifying your offerings and making acquisitions. Can you tell
us what's specific to Whitman versus any other acquisition you may make, or that
you've made, that makes this more attractive?
J. Larson: Well I think there's a number of platforms that Whitman allows
us to kind of get into maybe a little bit earlier
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than we thought, certainly on our medical side it gives us a pretty significant
number of locations as well as programs. That is something that we've stated for
some time now we've been interested in getting into, and got into it last year.
The uniqueness of the accreditation at Colorado Technical University is of great
interest and great value. The online onsite capability, and the domination that
Sanford-Brown has in some of the things that it does is very attractive. It's a
company that I think has been well run. I think that with some of the support
that we can give it I think it's greatly going to enhance what the value is.
A. Mitrani: Also for Whitman, was there an auction process that went on, or
was this an exclusive negotiation with CEC?
R. Pfenniger: I would say it was an exclusive negotiation.
A. Mitrani: Thank you.
Operator: Thank you. Our next question comes from Mark Farano of First
Analysis; please state your question.
Mark Farano: Good morning. When you think about the facilities base you're
acquiring here, especially the UDS schools, it looks like it's a reasonably
small school model, 400-450 students per school. Does that mean, could you just
talk about a little bit what that means in terms of the ability to
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transplant the CECO programs into those schools? I think as you mentioned
earlier in the call, and also could you just comment on, I know you had plans to
put the Missouri College Programs I think in the Gibbs schools and elsewhere in
your system. Are those plans still going forward?
J. Larson: Yes, if you look at, a lot of schools we purchased in the past
start out small and they get fairly large quickly. That's one of the kind of
positive aspects. That's something that we remain very flexible on. We've got
the ability to go in there and to increase the physical size. We don't get ahead
of ourselves in that area, we're not going in and putting in gobs of space. But
as you need it you kind of bring it on an online basis and you ramp the space
and so on. Some of the AIU situations were pretty small when we got those, and
I've got to tell you, today they're pretty enormous. Gibbs was, a lot of those
schools were very small, as we added products and programs, I mean I could go
back to some of our culinary and some of the international academy and that type
of thing. So this is something that we see as being a very positive situation
and the nice thing is you don't have to bring on the space until you need it.
M. Farano: Right, and then the other transplant issue? Will the medical
still be going elsewhere in the CEC system as well?
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J. Larson: Yes, we've got that geared to go right now in a number of our
Gibbs schools. We're just awaiting approvals in some various areas and we expect
that net will materialize here in the near future.
M. Farano: OK, and one last question. I know you indicated you thought it
would be accretive for '03. Given that you're bringing Whitman on in the
September quarter, which has been its lowest margin quarter historically, just
being the summer quarter, will it be accretive for the September quarter do you
think? Or will it be accretive for the second half in total?
J. Larson: Pat, let me ask you to comment on that.
P. Pesch: Yes, Mark I would expect for the second half in total, and this
is one of the reasons we're not providing specific guidance at this point. As we
get to the closing date and we do own the schools and we know the exact timing
of that, we're estimating the beginning of July depending on exactly when that
closing occurs is going to affect precisely what the guidance is. So that's one
of the reasons we're holding off right now, until we can really provide some
firm information based on an actual closing.
M. Farano: Thank you very much.
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Operator: Thank you. Our next question comes from Trace Urdan with Think
Equity Partners; please state your question.
Trace Urdan: Good morning. We've covered a lot of territory; I just have
some nuts and bolts stuff. Pat, you talked about an interest rate of 4-5%, do
you expect that you'd be swapping any of that out for fixed rate stuff at a
later point?
P. Pesch: Well basically implicit in that rate is an assumption that we
would probably look to take a portion of the borrowings and fix it for at least
some period of time. Our existing bank facility is a floating rate facility, the
facility has about, at the time of the close here we would have about four and a
half years remaining on that credit facility. So we would look to swap out rates
and effectively lock rates for some period of time on a portion of the debt.
Again we will wait until we actually are at the close to look at our cash
position at that time and what the prudent level of hedge to put in place then.
T. Urdan: OK and then what are you all estimating your share of the
transaction costs are likely to be, and how are you going to handle that from an
accounting standpoint? Are you going to depreciate those over the life of the
assets?
P. Pesch: Well in terms of our share of the costs, effectively all the
costs are our costs, whether they're coming
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out of our bank accounts directly or whether it comes out of the Whitman account
prior to close. Because it's a stock deal they all ultimately end up for our
account. So when you go through the initial purchase price allocation based on
the opening balance sheet, they will all effectively go into the aggregate
purchase price and therefore will be part of the allocation and balance sheet.
So any costs there are effectively going to add to the intangible assets.
T. Urdan: I'm sorry; I'm kind of confused, because Whitman's talking about
$500,000 worth of costs. Are you telling me that's the total?
P. Pesch: They indicated that they have $500,000 of costs which they will
be expensing leading up to their March 31 numbers. Absent a closed deal, that's
their accounting, as a separate company, that's their accounting requirements to
expense those costs.
But I'm saying, whatever dollars they spend, ultimately affect their cash
balance and their cash position, which affects the assets that we acquire.
T. Urdan: I understand that. I don't know why I'm having such trouble
asking this question. What I'm asking is, what are the aggregate transaction
costs for the deal?
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P. Pesch: OK. I mean, the aggregate transaction costs would be
somewhere--I'd say a conservative estimate would be somewhere in the range of $7
million, between both parties.
T. Urdan: OK, that's great. And then, do you have any sense of what you
expect the depreciable assets, that you're acquiring, to be? You know, in other
words, what D&A's likely to look like as a result?
P. Pesch: I mean we don't have an initial purchase price allocation. I
would say it would be fair to say that the depreciation levels will certainly
not be lower than what they are for Whitman today. Certainly, when we go through
the final purchase price allocation there will be some adjustment in the
carrying values, which could have some impact on that. I certainly wouldn't
expect it to be lower, although I wouldn't expect it to be appreciably higher.
There will, in all likelihood, be some definite live intangible assets,
which will have to be amortized. Those would essentially be new costs. You know,
I would say those would likely be in the range of a half a million dollars, to
maybe a little less than $1 million.
T. Urdan: OK, thanks very much.
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J. Larson: Very good. Maybe just one or two more questions, and then we're
kind of coming up on, you know, we've been at this now about an hour and a half.
So, let's take one or two more questions, if there are any.
Operator: Thank you sir. Our next question comes from John Paulson, of
Paulson & Company. Please state your question.
John Paulson: My question's been answered. Thank you.
Operator: Our next question comes from Kelly Flynn, of UBS Warburg.
Andrew Fones: Hi, this is Andrew Fones [sp], for Kelly Flynn. You mentioned
earlier your intent to move towards higher end programs at Whitman. I understand
kind of the current break out at Whitman is about 70%, 12% 19% diploma,
associate and bachelor's degrees. I was wondering if you could give us some
indication, regarding the timing of the roll out of the bachelor's courses at
Sanford Brown?
And then also, perhaps if you could give us some indication, if you have
one, for your target for their level of programs offered by Whitman in those
different categories?
J. Larson: I would see that over time they probably would be somewhat
similar to what the overall CEC system looks like,
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currently. Certainly, when we put in things like VisCom [sp] and some of the
business programs and some of the IT areas, there's a greater emphasis there on
maybe associate and bachelor degrees. We've experienced this at other places,
where you give people a choice they can kind of do a diploma. But also, when
there's an opportunity and you have the approvals for an associate degree, a lot
of people will choose that. It not only gives you greater market share, because
people see that you have a larger variety of programs that might satisfy what
their end goals are.
And I think it's kind of a gradual process, but we would see starting this
and really kind of looking at it and probably fairly soon, right after the
acquisition closes. Certainly, we've studied that now in the meantime. That's
why we have a lot of confidence that the system would benefit from different
programs and higher levels of various degrees.
A. Fones: And regarding kind of the timing of their roll out of the
bachelor's courses at Sanford Brown, do you have kind of any estimate for that?
J. Larson: Well, we'll start this, as I say, just fairly soon after the
acquisition. But I mean this could take anywhere from, you know, for some it
might be six months. For others, it could be a year.
A. Fones: Thanks a lot.
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Operator: Sir, would you like to take one last question?
J. Larson: Yeah, one last question, please.
Operator: Thank you. Our last question comes from Oscar Wu, of Numera
Securities. Please state your question.
Oscar Wu: Hi. You talked about the stock options being settled in cash. Did
you mention the amount?
J. Larson: Pat, let me ask for you to refer to that.
P. Pesch: We did not specifically mention an amount. That number will
probably be between $35 million and $40 million. And that number is taken into
account in the kind of cash/equity split that I gave earlier when we talked
about the $230 million Enterprise value.
O. Wu: Right, OK.
P. Pesch: So, that is part of those numbers.
O. Wu: So that's included in, what was it, the $118 [million] of cash?
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P. Pesch: That was $118--we talked about $118 of stock, approximately $112
million cash. It was contemplated in that $112 million of cash.
O. Wu: OK.
P. Pesch: Along with some other factors in terms of the cash that they have
on the balance sheet, things like that.
O. Wu: OK, so it's exactly 50-50 basically, in terms of cash and stock,
right?
P. Pesch: It's close.
O. Wu: OK. But I guess the question would be, this is a tax-free
transaction, is it not?
P. Pesch: Yeah.
O. Wu: Of the stock portion?
P. Pesch: On the stock portion.
O. Wu: OK. I guess, if, you know, if the stock price were to go down, so
that the stock price, so the stock value was less than 50-50, could you still
get that to be tax free?
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P. Pesch: As it's structured, yes it will be tax-free. You know, what I
might suggest? I'd made mention of this earlier. If you take a look at the
actual merger agreement, which is on file with the SEC now, look at those
provisions, I'd be happy to, you know, discuss this with you outside this call
to make sure you understand the mechanics and why that's the case.
O .Wu: OK. I guess, just to wrap up--.
J. Larson: Yeah, just a quick wrap up here.
O. Wu: Is there a stock price at which it becomes not tax-free?
P. Pesch: No.
O. Wu: OK, thank you.
J. Larson: Very good, thank you. I certainly appreciate everybody's time
today. Hopefully, you have a greater understanding of the transaction and why
we're so excited about it, and certainly the value added. The confidence that
you've all shown us in the past, as we've kind of made different decisions and
moved forward with the company.
So, thank you very much. We appreciate all the questions.
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Operator: Thank you sir. Ladies and gentlemen, if you wish to access the
replay for this call, you may do so by dialing 973 709 2089, with an ID number
of 288281. This concludes our conference call for today. Thank you all for
participating and have a great day. All participants may now disconnect.
(conference concluded)
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