Perdoceo Education Corp (PRDO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Career Education earnings conference call. I will be your coordinator for today's call. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to our host for today's call, Ms. Karen King, Vice President of Investor Relations. Please proceed.

Thank you. Good morning, everyone, and thank you for joining us on our fourth quarter 2007 earnings call today. I'm Karen King, Vice President, Investor Relations; and with me today are Gary McCullough, our President and Chief Executive Officer; and Mike Graham, our Chief Financial Officer. Following a brief presentation by management, the call will be open for analysts and investor questions. This conference call is being webcast live on the Investor Relations section of our website at careered.com. The replay will also be available on our site. If we are unable to answer your questions during the call please call our Investor Relations department at 847-585-3899.

Before I turn the call over to Gary, let me remind you that yesterday's press release and the presentations made by our executives may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on information currently available to us and involve risks and uncertainties that could cause our actual 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 those factors identified in our fourth quarter earnings release and in our annual report on Form 10-K for the year ended December 31, 2006, and from time to time in our other filings with the Securities and Exchange Commission. Except as expressly required by law we undertake no obligation to update such forward-looking statements or to publicly announce the results of any of these statements to reflect future events, developments, or changed circumstances or for any other reason. Now let me turn the call over to Gary McCullough.

Thank you, Karen. Good morning. And thank you for joining us as we review our 2007 fourth quarter and full year results. As Karen indicated, I am joined on this call by Mike Graham, our Executive Vice President and Chief Financial Officer. Together, we have a lot to cover this morning. I will begin by discussing several things. Our fourth quarter operating results and progress we paid in key areas during 2007, the disposition of the schools we have held for sale, our general thinking related to the status of the student lending environment in which we're operating, and our recently announced restructuring and cost reduction efforts. Mike will follow me with more specific financial results and ramifications. Following our comments, we will open the lines and respond to your questions.

First the fourth quarter results. We continue to show improvement in key metrics during the fourth quarter. Our student starts and our continuing operations were up 12% year-over-year. Like last quarter, we continue to see growth in new student starts in each segment except colleges. We were able to achieve that 12% start improvement while reducing our cost per start by nearly 17%. This decrease was driven by the elimination of non productive media, resizing of our admission staff with 27% pure admissions representatives than last year, and realigning our admissions process with two distinct steps. Better qualifying leads and more personalized admissions advising.

Population in continuing schools improved through the latter half of 2007, reaching mid single-digit growth. Our population as of January 31, 2008, was just under 90,000 students, up 6% from January 31, 2007. We remain quite dissatisfied with the 8.8% operating margin we posted in the fourth quarter. If you remove the impact of teach-outs in both years operating margin would be 11.2% in 2007 versus 11% the prior year fourth quarter.

2007 was a year of significant change for our Company. It marked a period during which we were forced to recognize significant deficiencies in our operations. In the nine months I was on board in 2007, I took steps to address issues on a number of fronts. First, we strengthened our leadership team with experienced professionals who are already making a positive mark on our business. Since our last call, we announced the addition of Jeffrey Ayers as our new Senior Vice President and General Counsel. Jeff is a seasoned Chief Legal Officer with significant transactional, SEC, and compliance experience. He has practiced law for more than 20 years in both law firms and in publicly traded companies. Prior to Jeff joining the Company I also strengthened our executive leadership team by adding Mike, our new CFO, new leadership in marketing and admissions, and a new leader for our administrative functions.

In 2007 we also made significant progress in addressing legal, regulatory, and accreditation issues. That progress has continued into early 2008. During the year, we were able to resolve certain securities and shareholder derivative litigation as well as class action litigation. Justice department inquiries were resolved with no action taken against the Company. Just recently we announced that we had been advised the SEC investigation that was open early 2004 has been completed again with no action taken against the Company. Perhaps most important, in mid-December we announced that the Commission on Colleges of SACS had removed American InterContinental University from probation. This was a significant milestone for the Company and we are proud of the staff and faculty of AIU that work so hard to implement and now sustain the SACS recommendations.

AIU team has begun the process of renewing the brand. The objectives of their relaunch are to improve AIUs reputation, to increase AIU's awareness and to increase population. In January, each of AIU's websites was redesigned and advertising was launched across a variety of media with consistent messaging aimed at helping prospective students better understand how AIU can support them in obtaining their desired degree.

Now let me turn my attention and my comments to discontinued operations. I would like to take some time to discuss our announcements from last Friday where we announced a decision to teach-out most of the schools held for sale since late 2006. The exceptions being two Gibbs campuses for which we are seeking regulatory approval to convert to Sanford Brown schools. When I spoke with you last quarter we had broken up negotiations to sell all of these schools to an interested buyer. We made the decision to look at each school individually to determine their future disposition.

In considering the alternatives to a sale, we met with the leadership of each school and reviewed a significant amount of data. We considered, among other things, each school's current financial performance and forecasts, real estate aspect, including capacity utilization and potential sublease alternatives within each school, their location and viability of the current school for conversion to another CEC school in that location. And the level of interest and value we had seen from potential buyers for individual schools. During that period, we were approached by another buyer with an interest in purchasing all of the schools. Despite extended negotiations, we still could not find a suitable arrangement that would also protect the long and short-term interest of our students, faculty, and other constituencies. Despite great effort on the part of the faculty and staff of these institutions it was clear the schools would not become financially viable within a reasonable period of time. Accordingly, we made the decision to move forward with teach-outs.

In the fourth quarter, we also announced a teach-out of IDT Toronto. That campus was only marginally profitable, largely as a result of a sub optimal lease arrangement. In addition we are unable to offer degree programs and on-line learning in Canada which is a critical element of the strategy for our academy schools. These factors made us receptive to an offer from a third party to relieve us of a lease obligation of nearly $30 million that ran through the year 2017 and allowed us to teach out the campus in a responsible manner. Finally, two days ago we announced a teach-out of the Los Angeles campus of AIU. The impact of the two-year SACS probation resulted in a significant population decline at that campus. This combined with the current student market for our programs in Los Angeles made the continued operation of that campus untenable. Mike will provide more detail on the financial implications of these decisions when he speaks.

While we saw steady progress through the end of the year, the development of our strategic plan and insights from our new leadership team brought progressive thinking about the future direction of our Company. The facts are clear. As the Company's revenues declined over the past several years, academic, marketing, and admissions, and other administrative costs continued to rise. In the fourth quarter, we started to address these costs. During our planning last fall, we acknowledged that we needed to make significant structural changes to our organization to ensure the best possible student outcomes to continue to grow and to generate acceptable returns. We determined that we needed to simplify our structure in order to reduce redundancies to better utilize our size and scale by using shared resource or service centers and to develop more consistent processes throughout the Company. We concluded that we would need to make hard and potentially unpopular decisions to help the long-term interests of our employees, students, and stakeholders. As a result, we have embarked on the following initiatives.

First, we eliminated the group president layer in order to simplify decision making. I didn't feel there was sufficient incremental value at that level to warrant keeping the positions. We formed strategic business units, or SBUs, which better align our key schools consistent with our educational focus areas. We have redefined and clarified the expectation of senior leaders. Our previous manager director roles were narrowly defined and were short term focus primarily on starts and on day to day campus management. There was insufficient focus on medium to long-term planning and the achievement of quality institutional and student outcomes like retention, graduation, and placement.

Going forward, our SBU heads and their functional direct reports will be expected to take a more balanced business approach. Obviously, we'll continue to drive for start and population growth. However, the SBU teams will also be expected to develop and own long-term action plans. They will also own, with the guidance and support from the corporate headquarters brand strategy, including, where appropriate, decisions to rebrand or even eliminate brands. I'll also check that the SBUs drive more consistency in certain aspects of the business including programmatic consistency within the SBU, the consistent use of corporate functions and campus staffing practices.

We've also committed to improvement in our shared services capabilities. We believe we can better align and leverage our efforts in a number of other areas including procurement, certain HR functions, lead generations, including media buy and mixed management, agency selection and management, and alumni relations in certain career services. These are only some of the areas that we've identified. We will soon complete the integration of student finance, and the centralization of all payroll functions. This Company-wide restructuring has already resulted in a reduction of our workforce primarily the corporate headquarters and group-level staffs. We have reduced our workforce by approximately 220 positions this year, which is anticipated to result in a net savings of approximately 18 million to $20 million after severance of approximately $2 million in 2008. We expect that the severance costs will be primarily recognized in the first quarter of 2008 and that the savings will begin to materialize beginning in the second quarter. As the schools align their resources around the new structure we expect that further reductions at the campus or SBU level could occur.

Now let me discuss another topic that I know is top of mind for all of us. That is the current situation in the lending markets and its impact on our Company. I won't sugar-coat it. The situation for us is challenging, and Sallie Mae's recent decisions will have an impact on our Company. But I believe when we make the necessary changes in our programs and operations we'll look back at this period as a catalyst in making our Company stronger. As part of our strategic business planning process and in part driven by the change in the lending environment we recognize a large opportunity to reposition our culinary business for better results. To date, the culinary business has experienced good levels of growth and profitability. But recently, the growth trend has been leveling off. As we examine the program during the fall, we focused on a number of areas. The accelerated nature of the curriculum, the utilization of private funding, our marketing approach, which should become more national in scope and execution than local, and a retention, graduation, and placement rates.

We're pleased with our retention, graduation, and placement rates in culinary. However, some students failed to graduate on time and the combination of tuition and related school costs, in school loan payments and housing creates the need for an increased level of private funding for some students. Additionally, a larger portion of our culinary students utilize recourse loans and our extended payment plan than in any other of our SBUs. As we increase our focus on students that have both the desire and the financial capability to attend our programs, and those who will be successful in their academic pursuits, we expect to significantly alter our approach in our culinary business including resizing the schools and staffing levels. We have decided to seek state and accreditor approval to lengthen certain of our programs. It we anticipate that approval -- that the approval process for this will take approximately six to nine months but we expect that the benefits from this action will be significant.

The Le Cordon Bleu associate program will be extended on average from 15 months to 18 to 21 months. This will allow a student to spend fewer hours in class each week with more opportunity to gain employment while they are in school, more flexibility to maintain the educational pace if a class absence should occur and more time to work with our instructors in a classroom setting over the course of the program. Our students will also be eligible for an additional year of Title IV loans. Over the years, we've increased the population of schools, and as we've done that many students relocated and incurred housing expenses. For students without strong financial resources or credit histories this results in relatively larger out of school payments. We are refocusing our recruiting efforts on local markets to gain more in market students and reduce some of the need for funding of our students. In addition, we'll strengthen our already robust high school program so students and their families can take advantage of federal plus loans.

Our new start-ups in culinary will be based on an operating footprint of approximately 15,000 to 35,000 square feet versus an average today of 85,000 square feet. We are sizing the real estate to specific market potential rather than to a corporate wide standard. Finally, we are examining our curriculum to add more certificate-based programs similar to our kitchen academy programs. We have already had five schools introduce a certificate LCB curriculum and we'll roll out this offering to the rest of the culinary LCB schools throughout the year. This has been a broad overview of our direction and our thinking. Now, let me turn it over to Mike Graham who will provide more details.

Thanks, Gary. Let me spend some additional time on our teach-out and student lending details before I end with the fourth quarter results. In the past 60 days we have announced the teach-out of 11 schools including nine of which were previously held for sale. The 11 schools are comprised of seven from the Gibbs division, two from the college division, one from the academy division, and one from the university division. We're seeking approval to convert the two remaining schools held for sale, Gibbs College in Vienna, Virginia, and Katharine Gibbs school in Melville, New York to Sanford Brown campuses focusing on Allied Health programs.

As part of our reorganization we have named an experienced leader who will run our transitional school segment. We believe this focus will allow us to wind down the operations of these campuses in the most cost-efficient manner while making sure every student is served until the end of the program. In 2008, our GAAP reporting structure will include a transitional school segment. Beginning in the first quarter 2008 the results for the nine schools originally held for sale that are now being taught out will be part of continuing operations within the segment. For the full year 2007 the revenue and net loss, net of tax, for the nine schools was approximately $103 million and $36 million respectively. Included in this net loss was a pretax charge for approximately $29 million to recognize the impairment and write-down of the schools to their fair value.

We estimate that these nine schools will incur a 2008 operating loss of approximately 25 million to $35 million. The existing teach-outs of the two Brooks college campuses and IADT Pittsburgh and the 11 teach-outs announced in the past 60 days are estimated to incur an annual operating loss of 50 million to $65 million for 2008. The losses in 2007 from operating the Brooks colleges, IADT Pittsburgh, and Toronto, as well as the IAU Los Angeles campus were reflected in the previous operating segments. The estimated 2008 loss for these schools is not materially different from the losses those schools experienced in 2007. This loss is comprised of the net operating loss of running the schools, one-time costs for severance, the cost of exiting real estate obligations when the teach out is complete. We do not anticipate exiting any of the real estate for the former schools held for sale during 2008.

Most real estate exit activities for these schools will occur in 2009 and we estimate a pretax charge in 2009 of between 55 million and $75 million upon exiting the nine schools. This estimate is the combination of the present value of the then remaining real estate obligation, less our estimate of sublet income. This estimate is subject to significant change due to the nature and timing of the teach-outs and also the condition of the local real estate markets.

Let me turn to lending. Kerr Education Corp. and Sallie Mae have enjoyed a very positive and productive relationship since 2002 with Sallie Mae providing important financial resources to our students allowing them to pursue their education. Approximately $2.7 million of the Company's 2007 domestic cash receipts, including those from the discontinued operations, was related to Sallie Mae recourse loan programs. This amount of which excludes the related title IV loan programs and program funding received for these students. Since March 2007 we have been in a risk sharing agreement with Sallie Mae to provide recourse loans to our students at a 25% discount fee to the Company. On January 18, 2008, we received notification from Sallie Mae that Sallie Mae was terminating the discount loan program effective February 18, 2008.

Subsequent discussions with Sallie Mae resulted in extension of that termination date of the agreement to March 31, 2008, with an increase in the discount rate for that interim period to 44%. This higher discount rate will result in an additional expense in the first quarter of approximately $1 million. The extension was granted by Sallie Mae to help facilitate our ability to help replace Sallie Mae as a lender to these students. As we disclosed in our Form 8-K filed with the SEC we were working with Sallie Mae to arrange continued funding for active students that currently utilize Sally Mae recourse loans. Although all conversations with senior level officials said Sallie Mae were positive and indicated they would continue to lend to these students when entering their second or subsequent academic years, known as serial volume, and this would be an increased discount fee to the Company, we were notified on February 14, 2008 that Sallie Mae would no longer continue to offer recourse loans to these students and removed certain FICO bands above the recourse level from their nonrecourse programs.

We do not view ourselves as a lender nor do we see this as a potential core competency. We have traditionally provided limited financial assistance to students through our extended payments program. This program identified students that have special needs who did not qualify for private lenders' programs, and to date we have only approximately $12 million of outstanding balances under payment plans to students. However, the current credit environment and the termination by Sallie Mae has created very difficult conditions for our students. And we believe it is in the long-term interest of the Company and the students to provide some transitional financial assistance to these students so they can continue their program to graduation and better enable them to repay their financial commitments.

We estimate that in 2008 we will need to provide approximately 15 million to $20 million of financing for this serial volume under programs beginning April 1, 2008. The new -- the amount of new financings in 2009 is also estimated to be an incremental 15 million to $20 million. For these financings, we will need to establish the appropriate bad debt allowance required for anticipated charge-offs. We do not have collections history with the students base, as they were funded by Sallie Mae, and we will initially assume a 44% allowance rate consistent with the rate offered to us in the recourse program by Sallie Mae. This rate will change over time and will be subject to a large degree of estimation. We are finalizing the details of this program over the next several weeks.

We will also need to replace the loan capacity no longer provided by Sallie Mae for new starts. We've taken the following steps that we expect to have in place by April 1. First, we've been in discussions with a number of lenders whom we expect will step in to fund a portion of potential students with better credit histories or students who have not yet established a credit history. Second, we will use our balance sheet to provide payment plans to the most credit worthy and the lowest potential default risk candidates to whom our private loan providers have denied credit. We believe this is a sound decision as these students deserve the opportunity to gain an education and we can help them without experiencing a material financial loss. We recognize that these students have higher default rates and expect to design our programs to provide the lowest possible out of school payments for the student. While we have provided these payment plans in the past, as I spoke of earlier, we will now require students to have higher FICO ratings in the subprime category than to those to whom we have historically provided our funding. Third, we are examining grant programs and scholarship opportunities to help students. We're in the early stages of this work which may be subject to institutional and regulatory guidelines. We are also requiring that our financial aid advisors more consistently work to help candidates identify co-borrowers that allow them to qualify for a traditional private loan.

We closely examine each of our SBUs to determine the extent of our reliance on these recourse loan programs. The culinary SBU has the highest traditional use of this product. Gary spoke earlier regarding the steps we have taken to ensure the long-term success of the programs. The remainder of the SBUs utilize a limited amount of the recourse loan products and of our extended payment plan. Our new payment plans are being finalized, we're designing the program to carry interest rates below the current recourse product offered by Sallie Mae. Which we expect will result in out of school payments -- total out of school payments including title IV of no more than $450 to $500 for an associate degree candidate for a graduate or $700 to $800 for bachelor degree graduates. The loans will generally be kept at a $9,000 level per academic year. We believe this plan will provide an estimated 10 million to $15 million of financing in 2008, and an additional 10 million to $15 million of financing in 2009 in addition to the serial volume I spoke of earlier.

We will suspend the use of our extended payment plan for new starts as we've done in the past at the lower FICO score level which is expected to reduce revenue by approximately 20 million to $25 million in 2008. We will continue discussions with our lending partners as the credit markets recover to develop product for students in the former recourse level. Additionally, we are continuing discussions with various third parties to enter into a purchase agreement with recourse to the Company. In summary, we estimate the loss of the Sallie Mae recourse program and the lengthening of the culinary program will reduce the Company's 2008 culinary arts segment revenue between 50 million and -- to $65 million. And will reduce all other segments in the aggregate by approximately 25 million to $35 million.

Our new payment plan will add back revenues of approximately 20 million to $25 million and new lenders are estimated to add back up to $10 million of revenues. So including discontinuing the extended payment plan as exists now and its related revenue we estimate the total net loss of revenue in 2008 to be between 75 million and $100 million, which we expect to result in a potential operating income reduction of 40 million to $60 million in 2008, subject to further cost reductions, additional marketing efficiencies, and alternative lender opportunities.

Now let me give you some financial details on the fourth quarter. As Gary indicated we were pleased with our fourth quarter results. The results reflect progress we have made in many of the near-term initiatives that we've put in place. The fourth quarter revenue for 2007 was $437.2 million up 0.6% from the fourth quarter 2006, which is the result of several quarters of improving starts and population. The increase was aided by an additional $8.7 million in international revenue from Estudo Marinoni which was purchased early in 2007.

For our university on-line schools, student revenue for the fourth quarter decreased 4% from the prior year, which is improving from a decline of 16.7% in the third quarter of 2007. While AIU on line and ground continued to have significant negative impacts on year-over-year comparisons, the relative overall decline is diminishing each quarter as a result of the significant growth at CTU. CTU on line currently accounts for close to 50% of the revenue and 60% of the operating profit of our on-line schools in the university segments. AIU online population decreased 4% this quarter while CTU online population increased nearly 30%. AIU online revenue was down 18% while CTU online revenue was up 17%. Consolidated operating income was $38.4 million during the fourth quarter 2007 down from $42.5 million during the fourth quarter 2006. Operating profit margin percentage for the fourth quarter was 8.8% versus 9.8% for fourth quarter 2006.

There were several unusual items included in the fourth quarter 2007 as well as the fourth quarter of 2006, which had a significant impact margins. In the fourth quarter 2007 the academy segment included $2.1 million for the rated cost of severance in teach-out of Toronto, the academy and colleges segment included a $5.8 million asset impairment charge related to the teach-outs of the schools, and our health education segment included a $6.5 million increase for anticipated legal settlements. In the fourth quarter of 2006 there was a $4.4 million impairment related to several schools in the colleges segments and a $4.1 million severance expense representing payments payable to the Company's former Chairman.

The decrease in operating profit margins of the factors I just discussed was offset in part by a reduction in the admission representative headcount and improved rep productivity. A decline in our administration expenses due to reduction in corporate spending and overall approved efficiencies in advertising. The university segment's fully online platforms, operating profit margin declined to 21.6% during the fourth quarter 2007, down from 22.1% in the fourth quarter of 2006. AIU operating profit margin was 14.9%, down from 25.6% in the fourth quarter of 2006. CTU online was 29% up from 16.5% in the fourth quarter of 2006. AIU has many initiatives underway to improve its profitability. AIU is preparing to launch new programs and concentrations throughout 2008, the majority of which are bachelors and master's level programs. In addition, programs that are no longer viable will be phased out over time. Both of these initiatives were prohibited over the past two years while AIU was on probation.

AIU has launched a $12 million new media campaign utilizing multiple outlets including Internet, print, and TV. The majority of this expense for this campaign will be incurred in the first quarter. However, we anticipate savings in the second half of 2008 versus the prior year and advertising costs that will offset about half of this investment. AIU is also teaching out the Los Angeles ground campus which accounts for approximately 50% of the loss of all AIU ground campuses in 2007. We've also determined our agreement with AU Dubai was no longer of strategic importance and we mutually agreed with the school to end our agreement effective January 1, 2008. The termination provided us with a payment in 2008 of the equivalent of two years annualized revenue. AIU is also initiating a series of changes that will better leverage the power of the entire university. AIU is realigning the central administration and staffing at each campus consistent with current population and promoting the use of on-line classes at all ground campuses to achieve scheduling efficiencies and better address students needs.

Last, AIU is aligned the ground and online educational calendars beginning January 1, 2008, to better enable ground students and online students to use each others programs. This will result in a shift of earnings days from Q1 to Q3 from AIU online, moving approximately $6 million of operating income from the first quarter to the third quarter of 2008.

Let me wrap one discussion of investments, repurchase program, highlights from our balance sheet, and some perspectives on 2008. As of December 31, 2007, we had approximately $154 million of municipal bond auction rate securities that are rated AAA, and as of February 20, we only held $46 million in such securities. We've carefully monitored the auction rate markets and have actively reduced our position over the last several months. All holdings have an underlying credit rating of A or better exclusive of the monoline credit enhancements, and we feel comfortable we can hold these securities through market disruptions without risk to principal.

Turning to our repurchase program, during the fourth quarter of 2007 we repurchased 2.5 million shares at approximately $75 million, or an average price of $29.47 per share. From the inception of the buyback program in July of 2006 through the end of 2007 the Company has repurchased 18.2 million shares for approximately $591 million and we have remaining authorization as of December 31, 2007, of approximately $210 million.

As of December 31, 2007, we had $382 million in cash and investments. Our first priority is to maintain adequate liquidity to meet financial responsibility requirements of the DOE and to finance the limited amount of student receivables I discussed earlier. Our second priority continues to be to reinvest into high-growth opportunities such as selective start-ups, technology, and new programs. From there, we look to return cash to shareholders. In 2007 we purchased an unusually high volume of shares at a total value of $224.3 million. As we enter 2008 we will continue to deploy our cash to the highest return.

Our annual DSOs, day sales outstanding, were 14 days, an increase 3 days from December 31, 2006. This increase is primarily due to increased centralization of processing of student loans and also the timing of the release of title IV money near the end of the year. For the year, capital expenditures decreased to $57.6 million or 3.2% of revenue, including discontinued operations revenue during 2007 down from $69.5 million in 2006. Needless to say we entered 2008 with many challenges and many opportunities. We've highlighted this morning the impact in 2008 of the changes we are making in the business. We will have a significant amount of change in our quarterly earnings pattern, especially in the first quarter with the investment in AIU marketing, the change in earnings days, and the severance costs. Additionally, in the first quarter 2008, our schools will be reported in the new SBU segment structure. Our start and population figures for the fourth quarter in our press release have been adjusted for certain non comparable items including the removal of AU Dubai, which was previously in the university segment, and the teach-out of Toronto, which was previously included in the academy segment. With that, let me turn it back to Gary.

Thank you, Mike. Now we'll open the lines for your questions.

(OPERATOR INSTRUCTIONS) And our first question will come from the line of Corey Greendale with First Analysis.

A couple questions. Mike, I know you took kind of a top-down approach saying what the impact will be but can you just talk a little bit about the FICO score narrowing that you discussed, how much narrower it is, what percent of your population would be in the band that is no longer going to be able to access those loans from Sallie Mae that would have otherwise?

Again, we typically don't discuss the population. You can see from the funding tables and the use of the recourse loans in our footnote how much of the population was under recourse loans, $2.7 million -- 2.7%, excuse me of, our revenues. Needless to say we are walking away from the FICO bands below the recourse level which are the lowest part of subprime FICO bands. We are having our lender step into the higher band of Sallie Mae FICO scores and then we will take the higher level of the recourse band left behind by Sallie Mae, but we're not going to discuss the individual FICO cut-offs at this time.

It's really the in between part. I think you mentioned that there was a portion of the nonrecourse program where they're raising the level. Can you just give any sense of the magnitude of what portion of the population that part of it impacts?

It's -- I can't give specifics on that number. Let me think about a disclosure for that. If we're willing to disclose that. At the current time we don't have that number and I'm not sure we're ready to disclose that.

On the culinary segment, can you just give a sense as to, is the change in the square footage a reasonable sense of what will happen to the population there as well?

I don't think so. I think what we're saying is that we've built -- our facilities have been built to large size. It accomodates both the local market and the national market. As we have now looked at the efficiency of those spaces, the current space of 80,000-plus square feet is not the most efficient use of space. As we have designed new boxes we have taken down that square footage in our most recent designs. We are also saying now that we'll continue that and we'll probably also limit that as we get more local in the nature of the programs than we would in the national program.

Additionally as we look at culinary we expect that over time as we get more local and the initiatives improve, our population will rise again. We'll have a dip in our population from Sallie Mae and will extend out the program but as we get to a more normalized state in 2009 we will keep the real estate we have and we'll go back into some of the real estate as the population comes back.

I think it's important to note that we're not saying that 80,000 or 85,000 square feet, by going to 15 to 35, that the population is going to be reduced in accordance with that. That's not what we're saying at all. We're just saying as we go forward and we plan to go forward and continue to invest in our culinary business we expect we will be more efficient by redesigning the new boxes that we build out.

Okay. Maybe a better way to ask it it, do you know what the percent capacity utilization is in the culinary program right now?

Again, we don't use percent capacity utilization. We understand our square foot per student. It's in excess. There's also, as we design the schools, in terms of excess space and in terms of the flow of the school and the teacher ratios in the size of the classrooms we have got a much better model that we've done over time between learning from kitchen academy and learning from the LCB the new start-ups including the one we built in Dallas this year, and the next start-up that we plan for '09.

I'll turn it over and follow-up.

Thank you.

and our next question will come from the line of Jeff Silber with BMO Capital Markets.

Thanks so much. I'm a little bit confused on the numbers. If you could just help me walk through it I'd appreciate it. You keep on referring to this 2.7% of, I believe, cash receipts for Sallie Mae recourse. Yet in looking at the impact on revenues in 2008 we're talking about 75 million to $100 million which is larger than that, so do I assume that that 2.7% impact as well as a certain component of the nonrecourse loans? If you can walk me through it, I'd appreciate it.

There's a couple pieces of it, first, remember, the 2.7 is the portion of the Sallie Mae cash receipts. So for. So the loss of the revenue from Sallie Mae is not only the 2.7 that Sallie Mae is no longer funding but also the revenue that comes with the title IV money which is shown above. So the loss of the revenue from Sallie Mae is not only the 2.7 that Sallie Mae is no longer funding, but also the revenue that comes with the title IV funding. Additionally, we have walked away from some of our extended payment programs below those FICO scores, which are not in the private loan category, and additionally, we will lose some revenues in the above FICO bands where Sally Mae is not going to finance those, so that the combination of those, plus the addition, in addition to tuition revenue and cash receipts, there's other revenue such as housing revenue, books revenue, supplies revenue, things like that that get us to our estimate of 75 million to $100 million based on the details of the programs we've worked through.

Just going back to the culinary program, you said that these students tend to take up -- a larger percentage of these students relative to your other SBUs that take out these recourse loans. Can you give us some sort of quantification how that compares to the rest of the business?

I would say that the two highest users of the recourse loan programs have historically been the culinary group and the Gibbs group. The lowest users of our recourse programs have been our online groups. If you look at the use of culinary and Gibbs, on average it's probably 50% higher than some of the other SBUs in terms of their use of the program. That said, our cohort default rates, our culinary division has the best cohort default rate of any of our businesses at just around 7%. So's a mix that we have, our population we have higher repayments from our students with a recourse element in there so our default rates are better on a cohort default rate than the remainder of our program.

Then shifting gathers over to the transitional segment, going forward, just so I understand this transitional school segment, it only includes the nine schools that you're now bringing back into continued operations, but in terms of the other teach-out, Brooks, IADT, AIU, those are not going to be in there? Thery're going to be in their respected SBUs?

No, that's not correct, Jeff. What we're saying is that all the schools that we've chosen to teach-out, including Brooks and the AIU schools will go into that transition group so we can account for them and teach them out, both effectively and expeditiously.

I think it's meaningful -- we've put a leader in place on the teach-outs to make sure that the students are served well and also that we minimize the cost disruption and we do it in the most efficient way possible. For accounting reasons as we have a senior leader reporting to Gary doing that this will provide you going forward transparency on all the teach-outs on a comparable basis so all of the teach-outs in the past and going forward will be in this transitional segment, and separate from the ordinary SBUs and the SBU leaders no longer are focusing on the teach-outs, they're focusing on start-ups in the regular business.

Jeff what we have found is that the skillsets and the requirements for doing one or the other are different and so we want the folks who are running our continuing operations to focus on those things that are necessary to continue to grow the population and serve the students well. The folks who are dealing with the teach-outs, again, it's a different task at hand, and we want them to be able to to focus on that one and do that well am so as we separate them out, to ensure that there be appropriate focus on the task at hand.

That makes a lot of sense. In terms of getting onto the historical transitional school data, is that something you're going to be disclosing separately? Like 2007 in terms of on a quarterly basis, how that specific SBU did?

I think first in the first quarter we'll have the restatements and they will be restated back appropriately. Second is, we have given some guidance in the script of the number that the scores have done in the past and are doing in '08. So we gave a number of 50 million to $65 million for this unit next year, which we said is not materially different than what they experienced in '07. So that will give you a basis of the carve-outs.

But we won't get the quarterly data until the first quarter?

Correct.

Thanks. I'll let somebody else jump on.

And our next question will come from the line of Bob Craig with Stifel Nicolaus.

Good morning, everybody. Mike, you threw out a lots of numbers. I just wanted to make sure I have the net effect on operating profit in 2008 excluding the teach-outs from lending issues, other moves and the cost costing initiatives.

I think -- let me just go back to my notes--.

Basically 40 million to $50 million less 18 to 20.

We had spoke to the lending impact would be 40 million to $60 million. And then we believe that the savings net of severance on the restructuring be 18 million to $20 million. if you look at the teach-outs from what we experienced in '07 and we'll experience in '08 they won't be materially different. You have the discontinued versus continuing operations that we would move around. We also booked an incremental investment $12 million in AIU offset by $6 million of savings later in the year. We spoke to potentially the $1 million of recourse increase in the first quarter on Sallie Mae from the 25% to the 44; does that help?

That does help, thank you. Could you also describe overall efforts to increase your percentage of title IV? I think you alluded to additional co-signers and so on, but others talk about opportunities in the plus loan area. Maybe the direct program et cetera.

I spoke -- this is Gary. I spoke about the efforts we're making in the culinary program to extend the program because what we have found as we looked at our programs and we look competitively our programs tend to be shorter. Our programs, because they are -- they are so concentrated we end up having people who might be ill and miss a class or two and meant to extend, and they find themselves in a situation where the program costs, while competitive they are concentrated. So by extending the programs up 18 to 21 months, it enables them to access an additional year of title IV funding and we think that will be helpful to those students overall. That's probably the biggest significant shift that we're making programmatically in our business.

I think the other thing to think about are co-borrowers are very important and we are educating our admissions staff better on use of co-borrowers and working closer with the students o co-borrowers versus the recourse program other programs. We believe that will help the credit worthiness, it will help everybody. We've looked at the directs program and we've looked at some of the opportunities to date, our lending partners are there as the conduit versus going directly for the felt volume and things like that. So we've explored the steps necessary. We haven't necessarily taken all the steps to register and to get that moving forward. I think a lot of it is education, to the admissions team, its use of the co-borrowers, maximize the federal funds that are available, and also the mix of business will change a little bit here as we continue to grow the online business and the culinary business ramps down a bit. Does that help?

That does it help. Couple operational questions. The current admission rep headcount and staffing plans, they're going forward I think the last number you threw out was around 2400.

That's correct. We are looking at our current admissions processes and organization and we think there are other opportunities to reduce headcount going forward. That's not until we finalize the plan on at this point in time and as we continue to make these changes I expect that the population will decline there as well. That again, coupled with us making process changes that make the job more robust and make the outcomes and how they deal with students more effective and more efficient. So we've made those reductions but we don't believe operationally we're giving up the outcomes at the other end in terms of our ability to increase population starts over time.

We've got about 2300 reps at the end of the fourth quarter, down about 27% from last year.

If you gave AIU versus CTU starts, I missed that number. Did you throw it out?

In the fourth quarter total AIU starts were flat. Total CTU starts were up 17%.

I'll turn it over. Thanks.

Total ground and on-line.

And our next question will come from the line of [Gordon Lasik] with Robert W. Baird.

Thanks for taking my question. I just had another follow-up on the title IV situation. Have you seen any indication that title IV loans are at risk or that some of your students are having trouble -- having access to that funding?

We have not.

Okay. And just to clarify, you previously talked about, just a follow-up, 2.7% of cash receipts wasn't adding up to the 75 million to $100 million. The difference for that was, can you just--?

Again, the comment we gave to Jeff, 2.7 was just the recourse portion of the students loans. In addition to that title IV loans, they would have additional revenues related to books, related to housing, other elements there, and also we have lost some of the nonrecourse loan activity. We've dropped some of our extended payment term activity, and we've supplemented back with the steps we laid out. So that's how you reconcile back to the 2.7 to our numbers.

Thank you very much.

You're welcome.

And our next question will come from the line of Brandon Dobell with William Blair.

Wonder if I could shift gears a little bit over to AIU and CTU? You talked about extending the program lengths in culinary given the market dynamics. Any thoughts to the branding and/or kind of program strategy within those three different opportunities? You think you have the right programs in place, the right program links for what the funding environment looks like what your students are telling you?

Brandon, one of the things -- this is Gary -- one of the things that Mike covered I think in the script is that at AIU we were prohibited for the period of the probation from changing programs. And so we had quite a number of programs, particularly bachelors and master's degrees programs that we have applied for, new programmatic status on those with SACS and those are in process. We expect those to come on-line soon. The inability to change programs during that period of time certainly hindered AIU. We also have programs under development and underway at CTU as a normal portion or a normal part of making sure that the programs are robust. I've been asked a lot of questions with regard to do we want to keep both the brands. The answer is yes, we think they both have a place in our portfolio. I think we do have to look at Stonecliff and understand its long-term viability as a separate freestanding brand. Does that help?

Yes, that does. Finally, want to make sure that I understand the -- if we look at the relative exposure of what you guys are talking about with the recourse loans and the payment term change and all that kind of stuff, it sounds like the huge majority of that's going to be in culinary, any sense that you've really got your arms around the potential issues in different parts of the business besides culinary? I guess I'm trying to make sure that when we re down in Atlanta in a month or so, or back in the next call, that we don't get a little more information about now we found a different pocket of students, a different program that we think has the same kind of issues that culinary students might.

This is Gary again. We've spent obviously a great deal of time at each of our programs looking at where the issues are, and as Mike indicated, the significant issues that we face are in our culinary programs and we're making both the programmatic adjustments and as necessary the financial adjustments we'll have to make to do what's right by those students. We do have exposure in each of the other businesses to a far less extent and we believe we'll be able to manage those with the programs that we're talking about. So we don't believe you'll be seeing incremental surprises. The significant issues we face are in the culinary business.

We spend a lot of time on the issues. We've done a lot of analysis of data that we have from our own payment plans of the different loan sources from our students. We did a business by business SBU-driven analysis of what additional costs to take out of the business, variable costs versus fixed costs, grant programs, funding gaps, everything else to come down to these numbers, and the businesses have been working hard and we feel good given the sea change that's happened that we've responded well. Obviously signing up from Sallie Mae a different change on the 14th of February with our call today we've done a lot of work in the last week. We're just still a work in progress in a week to replace the serial volume. We're reluctant to share a lot of the details behind our models for competitive reasons and other reasons but rest assured we've done this at a very detailed level.

Final question for you Gary. Early on the call you talked about realigning the business units and trying to drive different focus from your senior leaders. Have you changed the compensation schemes in accordance with that to try and drive different behavior or do you think your compensation schemes are pretty much where they should be?

We have, in fact, changed our compensation programs, and it's something we've talked with the Board at this point in time. We're rolling out. We actually after senior leader meeting where we're bringing people in, including campus presidents, next week, but as we looked at our bonus programs in particular, we had in excess of 10 different programs in the Company. We're working to streamline that and to make sure that we're all in this together and that we place the appropriate focus both at the corporate level, at the SBU level, and reward campus presidents for the right behaviors and the right outcomes as well. So we will be going through that one in great detail next week with the leaders that we're bringing in. It's something that Tom Bud Long who joined us in late August, early September that he has spearheaded along with our HR organization, our compensation committee and the senior leaders in the organization, so we're aligned on how we want to go forward.

Thanks a lot.

And our next question will come from the line of Mark Marostica with Piper Jaffray. Please proceed.

Thank you and good morning. I wanted to follow-up on a couple questions on AIU. You mentioned your new media campaign. I'm not sure if it's in progress yet. That's my first question. Has it begun? And if so, any early returns or comments on the impact of it?

Mark this is Gary. We don't have early returns, as it's still relatively young at this point, but we -- as Mike mentioned, we're spending an incremental $12 million, actually, $6 million incrementally for the year on the programs. We have addressed the consistency and the look and feel of each of the websites. If you looked back, they were significantly different in some cases and so we've aligned them. We've aligned the messaging around again, AIU's ability to support students in their quest for the degree that they're seeking. But we also have done significant radio, outdoor and places where we have ground campuses. And so ultimately it's a pretty comprehensive program. We have benchmarked where we stood prior to the program launching but we don't have post-date at this point in time as it's relatively new.

Regarding the new programs that you're seeking approval for at AIU can you give us a sense for the number of new programs that you're (inaudible) for and when do you expect to get that approval and ultimately when do you expect to start to see the rollout of those new programs?

We have seven new programs that have gone in for approval. The approval process is hard to predict but we think it will be several months, and ideally we begin to teach those programs at the beginning of the next academic year.

I don't know if you disclosed this earlier but in January could you give us a sense what your start growth looked like for the month of January?

Actually, I made the decision not to talk about January for a variety of reasons. First of all, Mike talked about the significant number of calendar shifts that we have, the significant changes we've had in start-ups and teach-outs. We've got changes that are going on in the culinary programs and we have got AIU calendar shifts as we start to align the on-line programs with the on-ground programs. And based upon that I didn't believe that a one-month start number was as meaningful as it could be with all the noise that was in there. I will tell you this, that our starts were in-line with our expectations going forward.

Okay. Then last question, I'll turn it over, just taking a big step back here on the tuition pricing theme, as you look across the business, how should we think about tuition pricing in '08 relative to '07?

We've assumed that tuition price would remain as it is, as we've looked across each of our programs and their relevant competitors, we believe we are in line. I think the issue we had, and I will go back to what we talked about in culinary, our overall program costs is in line from a tuition point of view, the short duration of our programs make it more challenging to pay, and some of the national marking that we've done to bring people in have made the program costs above and beyond tuition pricing less competitive. That's what we're seeking to address but we he think across our business our tuition is consistent with the competitors that we're operating against.

And just to be clear, we do not give out and we don't take across the board tuition increases across the entire CEC portfolio. What we do is any tuition increases that are put in are school by school and paced based on historical trend. So we can't give you a total price/mix analysis yet, because we do all the decisions on pricing and annual increases on a campus by campus basis at different times during the year.

Thank you.

You're welcome.

Your next question comes from the line of Sarah Gubins with Merrill Lynch.

I'm sorry to go back to this but I just want to make sure that I understand the 75 million in lost revenue related to lending and the 40 million to $60 million in operating income. The 75 million to $100 million, does that include both the loss of the recourse program and effectively the loss of some students because of higher underwriting criteria?

Yes.

Okay. And then the 40 million to $60 million, that includes both the fewer students that you will have plus the incremental bad debt associated with you doing some of this funding on your own?

Yes, but also at the 44% rate of bad debt that we talked about also, still subject to additional cost cuts that we may do with marketing efficiencies or additional sizing that may be appropriate campus by campus as we go forward based on the impacts of this.

Okay. In terms of the restructuring, can you talk about where the headcount reductions were?

Yes. We, in this initial round, we took about 100 positions more or less out of our corporate headquarters. Again, some of those were positions that we had chosen not to fill towards the end of the year. I think about 60 of those were actually individuals who were enrolled. We also had, as a result of the changes we're making at AIU, some down sizing that we did at AIU that we were not able to do during the course of the probation that was going on there, and, of course, the down size, associated with teaching out AIU Los Angeles.

Just to be clear, in terms of the headcount number we gave, the 220 positions that were eliminated that does not include positions related to any of the teach-outs, because obviously our headcount, as the teach-outs progress, will change, but these are structural savings from the continuing operations that we're gaining going forward.

Okay. And in terms of the review of the business, I know it's still ongoing, do you feel like the campuses that you currently have are the right set of campuses, or do you expect more significant changes?

Sara, would you say that again please?

I'm wondering, you've gone through a round of decisions to make -- to do teach-outs. I'm just wondering if you now feel like you've gone through the campuses that you have and kind of the decisions that have been made are the ones that you will execute but that you're in good shape with the rest of them?

The answer is yes, we think this is the right thing to do at this point in time. As we've discussed previously, we did a strategic planning process, and as we came through that process we did identify there were a number of schools that were not operating as well and as efficiently as we would like them to operate. We'll continue to monitor those. We're redoubling our effort to make sure that those schools improve their performance over time. One of the things that we still need to do as we continue our structuring is look at each of the campuses. There are significant variation in campuses in terms of the number of staff and faculty, in some cases for operations that are of similar size in terms of serving students. So we think we can be more efficient on the campuses but at this point, our focus is on driving the effectiveness of the campuses that we have. We think we've dealt with the most significant issues at this point in time.

Particularly in the near term as we get the new alignment of SBUs, the new leaders in place and let their activities take hold, it will give us a chance here to see the results of the campuses under the leadership.

Last unrelated question, can you talk about whether or not you're looking at international expansion at this point, and if you are, if it's something that you view as imminent?

The answer is that we have some people in our organization, in our mergers and acquisition group who are appropriately, I think, understanding the market places outside the United States. But I will say once again that our focus at the moment is on fixing our current and continuing business here domestically. We have an international operations that's performing quite nicely in Europe, but at the moment, our focus is on driving better performance at our schools here domestically.

Good. Thank you very much.

You're welcome.

And our next question will come from the line of Edward Yruma with JPMorgan.

How much of the charge is actually cash?

How much of which charge?

The one-time charges that you've announced.

Well, you've got the $2 million of severance to look at that we disclosed, which is all cash. As you look at the teach-outs, we haven't given details but the majority of the teach-out costs will be cash. You will have a combination of the severance that will be cash. You do accelerate the recognition of the leasehold over a shorter period of time. That is noncash. You saw the $5.8 million impairment that we took there in that teach-out. At the end of the 2009 charge, which was a real-estate charge that is theoretically a noncash charge because you're bringing on the balance sheet a future obligation but that is cash over the period that you pay out those leases.

Got you. But you said you've accelerated that, correct?

No, we accelerate that when these facilities go dark and most of that charge on that real estate, the closure charge, the asset retirement obligation would be in '09. The acceleration over the teach-out period is for those lease-hold improvements related to a lease that get accelerated from the lease term now over the shorter period of the remaining teach-out.

One follow-up, if I may. Is there a specific minimum cash balance you must maintain for the FFR ratio?

There's a DOE requirement in terms of the financial responsibility that doesn't necessarily have specific cash ratio. There's three different ratios with different weightings that you have to comply with. We last year in 2006 we disclosed we were at a 3.0. We are not finished with our calculation right now for 2007 but we are well north of 2.5, and as we've looked forward on our DOE ratio under this financing and the changes we're making, we do not feel that we'll have any risk of being at a 1.5 or anything else that would cause a problem with the DOE ratio.

Thank you very much.

You're welcome.

And our next question will come from the line of Gary Bisbee with Lehman Brothers. Please proceed.

Good morning. This is Brian McGuire on for Gary. Just a question back on the AIU program changes. You talked a little bit about the tightening credit markets and the impact they're having on culinary and the accelerated programs there. If I remember right, AIU used part of the value proposition there is that it's an accelerated format which results in a little bit of a higher tuition revenue per year. Is there any thought as part of those programmatic changes into lengthening the program there and maybe spreading it out over more academic years to get more title IV financing?

At this point it's not something that we turn our attention to. As Mike said we've been working hard to react to some of the news that we've gotten lately. It will be something that we'll be asking each of our SBU heads to address as they look at their programs and the effectiveness of the programs and whether we're taking maximum advantage of the various funding sources that are available but it's nothing that we've contemplated at this point in time.

Okay. And then maybe you could help us understand some of the things that the lenders are talking to you are thinking about. As you've talked to a couple of them about replacing the Sallie Mae course arrangement, have they given -- where are they giving you the push-back? Is it more on what the actual discount rate should be, or is it just that they're not in this environment willing to make loans at any discount rate?

I don't think we're going to give a lot of clarity on negotiations which are still going forward. Needless to say the lenders are all being cautious in the environment. They are looking at their balance sheet and their capacity. We're talking about a variety of different programs where people can come in and help with us no credit score students who have a good default profile. They just haven't established credit yet. Different lenders are looking at different parts of Sallie Mae that have left behind, and trying to find where they can benefit as a partner to be into the program.

Okay. Just my last question, wondering if you could provide some insight into how you're thinking about the trade-off between tightening your own credit standards on who you're admitting versus potentially using more of your balance sheet to admit students and capture some of the title IV revenue from them and potentially offsetting the negative operating leverage that seems like will likely result from lower enrollment growth and how you think about the trade-off there and the decisions you're making.

Sure. The way we thought about it was we put ourselves in the shoes of the student. So our goal is to get the best graduation rate, the best placement rate and get the people through the program and make sure when they leave the program they can have the best ability to meet the financial responsibilities that they signed up for coming into their program. That said, we looked at our programs and our loan programs to make sure that we're serving the students that have the best chance to not only graduate but meet the financial responsibility. Obviously the lower the FICO score that you bring into school, then when you do have a payment plan in place the harder it is versus a high credit score student that you're going to make. We made various decisions between the variable costs, the outcomes, the placement rates, and we skewed our decision making on both placement and graduation retention, student success, versus we did about, we have cash on the balance sheet or we want to get more starts.

Okay. Could you -- do you guys have a metric for graduation rate that you track, or is that something that you would be willing to disclose?

We track it. We typically do not disclose it.

Thanks for taking my question.

You're welcome.

And our next question will come from Andrew Rittenberry with Jennison.

Thanks for taking the question. You mentioned the operating income hit as you teach out these schools, and you talked about the accelerated depreciation impact of that operating income number. Could you help us think about how big that is as a percent of the total operating income loss for that piece of the business in 2008?

I don't have those details available. Again, remember, these schools are leased, so they're not owned. So the component of depreciation you have is on equipment, which is short-lived anyway. You'll have some residual. The remaining depreciation is on the leasehold improvements which are not as big as you would if you owned the building so the relative magnitude versus some of the owned schools is a lot less.

Then could you also help us think about the -- if we're just thinking about the business on an EBITDA basis, if we're looking at 2007, what do we need to add back in terms of charges, severance, write-downs, et cetera, to get to a core number so we can think about what 2008 looks like?

I think if you look at 2007 you can get to an EBITDA number obviously from the press release with depreciation being laid out. We did during the course of the year in each of the earnings calls describe certain things that we had happen, i.e. we had a $13.5 million charge back in the middle of the year for different legal expenses. We have on the income statement itself the impairment line which you can add back on the teach-outs and things like that. It's up to you in terms of how you normalize things like the legal costs we talked about today or other one-time items. We'd be happy after the call to spend some time with you to you go through the past scripts and give you a list of things we've outlined for people and then let you make your decision on normalization.

Could you also talk about CapEx for 2008, and are there any cash tax refunds, et cetera, after all of these expenses and charges flowing through? Thanks.

To the first part of your question, we've built a CapEx plan, it's consistent with the normal plan that we've had, somewhere around the 3% revenue level. Our CapEx is driven by certain start-ups that we have. We are opening up our LCB Boston schools in the first quarter, we have two kitchen academies that open next year so we're still spending on our start-ups. We have our normal technology spend. So I don't think it will be materially different than our normal percentage of revenue on a capital basis.

Got it. Any thoughts on the taxes?

In terms of the tax rate?

Well, are there any -- I mean, given all the charges, et cetera, are there any cash tax refunds that you will get, or will your cash tax rate -- obviously it will be lower in 2008 than any wrinkles there that we should think about on a cash basis?

From a -- it will take a lot of work to do a cash tax basis, because all these charges typically are deductible as paid on a lot of these different things. So from a tax rate standpoint as you look at next year, we'll still have -- we'll have to model out our blend of foreign earnings, which benefits us, and our model of tax-exempt interest on a number, but a cash tax basis a lot harder to calculate out right now.

Thanks.

You're welcome.

And our next question will come from the line of Kevin Doherty with Banc of America Securities. Please proceed.

Thanks. Just had a question about bad debt expense. Wanted to see if you could maybe just isolate the impact that the teach-outs are going to have next year, and I guess bad debt expense have been trending down. Was that partially because schools were in discontinued operations last year?

To the latter question, no, because the bad debt expenses on continuing operations, the discontinued operations have their own bad debt expense within their business. Within a teach-out, you may have some higher bad debt expense as students decide necessarily not to complete their programs or leave behind some of their financial responsibilities within the number we gave you we have modeled the bad debt expense number out. But we're not going to disclose that in a specific school basis or a discontinued ops basis.

Is it fair to assume that the students in those underperforming schools had a higher bad debt expense versus the Company average?

I don't know that it's fair to say. That we did say that the Gibbs schools add higher use of the recourse program. We talked about culinary and Gibbs were two of the higher uses of the resource program. There's nothing in our models to indicate that bad debt expense experience with discontinued schools was materially different than what the traditional continuing schools were.

Just a question for Gary. Given all the changes you've discussed today, how do you think about the longer term margin potential of this business and maybe particularly how you thought about the business when you took over last year?

I will start by saying that I am probably more optimistic today about what we can do than I ever have been. I think what we're doing right now, what we're attempting to do, is lay things out as openly as we can given the situation we are in, deal head-on with the issues that we're faced with, so we can move through this and be a stronger Company at the other side. We recognize in the near term it's going to be challenging.

I think when you come into a new role, as I did, there's always something you don't expect, both on the positive side and negative side. I've seen plenty of both on that front but we've got a great team and I'm looking forward to moving forward from here.

That said, as I think about the margin potential of the business I really am not changing where I've been. I think we've got to make some near-term changes in our business, particularly in culinary, but when you look at what's happening in our business we're going to move through and begin to build AIU back. You've seen a good movement at CTU in terms of the margin profile. We've indicated long-term we believe in the online business we can get somewhere between 25 and 30%. Our healthcare business, which a couple years ago was losing money, is now making money and improving on a daily, weekly, and monthly basis. And so what I've said is I believe that we're going to get into the mid teens the 20% margins overall. I still stand by that but we've got work to do to get there. So we're making the hard organizational choices we have to make, and we are going to do the things that are right and necessary to deliver great student outcomes, and I think that quality over time will benefit us, so that's what we're about doing. I hope that answers your question.

Right. Thank you, it does. Just in terms of pricing, I mean, how important it is for you guys to eventually come back to getting some sort of price increases over time to start achieving some of those longer term operating metrics that you talked about?

When we've worked through our plan, we did not assume that we were going to take significant pricing to get there. As we've begun to work in the Company, and as we've looked at that time way we've operated, we believe that we are not operating as effectively and as efficiently as we can to go forward. We're working at taking some of that inefficiency and some of those unnecessary costs out of our system. I don't believe that we can cut our way to glory because ultimately you have to grow the business, but the changes that we're making are challenging, but we -- I think as we demonstrated last quarter we've made changes, we've reduced headcount and admissions in some other places and yet we're still able to drive population and start growth. And so we're looking at finding the balance that we need to find in our business to go forward. But we have not assumed in the numbers that I've talked to you about taking pricing. I think to take pricing you've got to make sure that you're hitting on a number of cylinders and people see the value that you deliver to them. We've got work to do on that front. I think in all of our businesses. So at that point in time that we believe we're either not priced competitive, or -- said it another way, priced at a disadvantage versus our competition we will make adjustments in pricing, but at the moment we're looking at driving both our revenue and operating margin increases in different way.

That said, back to your earlier comment, we look at the pricing on a market by market basis, and our long-term plans assume pricing in line with market increases as we go forward.

As they present themselves.

Thanks for the color, guys.

And our next question is a question from the line of Jennifer Childe with Credit Suisse.

Thanks. A couple questions. Was there anything unusual about the CTU online margins this quarter, and is 29% sustainable?

Was there anything unusual? Not necessarily unusual. It was a bit higher than we had anticipated. The CTU business did a fantastic job in the fourth quarter. They were able to get a great deal of operating leverage versus where they were last year from the additional population, the additional starts. They did reduce some headcount in admissions, and they did pull back a bit on advertising towards the end of the year. That may have given them a little bit of an upside in the fourth quarter in terms of the business. We've said all along that we think the sustainable margins for the on-line businesses are someplace to the 25 to 30% range over time, and to have a 29% in the fourth quarter, it was -- we were delighted to have that result.

So probably that ticked down a little bit?

Like I said, there was some short-term savings and advertising admissions are up that the business benefited from that we don't intend to sustain that over time. We want to make sure we spend everything we can behind the growing brand and to make sure we have a full staff level.

Then could we go back to the 40 million to $60 million? Do I understand correctly that that is the Company-wide impact including the teach-out schools, so if we're trying to calculate the impact on a continuing operations basis, not necessarily from a GAAP accounting standpoint, but, you know what I'm saying, continuing operations excluding the teach-out what would it be? Or what should the offset be?

So if one was to build a model, one would take the discontinued operations, move it up into continuing operations, move the segments around as we gave some color on to move that around, and then after that, model the base business growth that you think is appropriate and then off of that take the total impact from the lending which does include in the 40 million to $60 million it does include the teach-outs. Recognizing the teach-outs that you only have serial volume, because on the teach-out you have no new starts. And so in that revenue loss of $75 million, disproportionate less is for teach-outs because you only have to cover serial volume and not new starts.

Can you throw some numbers in?

Not at this time.

Okay. Thank you.

And that concludes our question-and-answer session for today. I would now like to turn the presentation back over to Gary McCullough for closing remarks.

Thank you all for participating on our call this morning. We recognize there's a lot to digest in the information that we shared with you. We've worked as hard as we can and as quickly as we can to be able to provide you color for where we stand at this point in time. As I said, our Company has faced significant challenges over the last several years, and in 2007, with the addition of some new key leadership and with the -- them working with the leaders who already here, we really took the time to identify the challenges we thought we'd face and defined our goals, our strategic choices and make sure that our organization begins to ready itself to deliver long-term change and strong operating results as we go forward. We're beginning 2008 by making the necessary changes that we have to make in our organization, and what we're working to do is set the baseline for a bright future to go forward. I recognize that there's a lot of work we have to do to drive cultural change to drive better operating results, and we're up to the challenge of making that happen. We appreciate your time and your attention and your interest in our company, and we'll look forward to talking with you at our next opportunity. Thanks.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.