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CAREER EDUCATION CORPORATION.
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BOSTIC R STEVEN
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The following is a letter that Steve Bostic issued to stockholders of Career
Education Corporation on May 2, 2006:
STEVE BOSTIC
Wachovia Plaza
P.O. Box 31046
Sea Island, Georgia 31561
May 2, 2006
Dear Fellow Stockholder,
Your vote at this year's annual meeting of stockholders is critical to the
future of CEC. I am seeking your support for not only my slate of nominees, but
for a mandate for necessary change in the management, policies and direction of
the Company. Your vote can decide whether the failed leadership of John Larson
and his management team is to continue, or whether CEC can be set on the path to
real growth and the sustainable profitability it is capable of.
Consider the Company's record under Larson's management:
o Probationary status imposed on American InterContinental University
(AIU) by the Southern Association of Colleges and Schools (SACS);
o Four ongoing inquiries or investigations by: the U.S. Department of
Education; the U.S. Department of Justice; the Bureau of Consumer
Protection of the Office of the Attorney General in PA; the Texas
Higher Education Coordinating Board, and the New Jersey Department
of Labor and Workforce Development;
o Litigation against the Company's California regulatory body;
o Ongoing lawsuits by stockholders, employees and former students; and
o What we believe is the result of Larson's mismanagement - the loss
of $3.4 billion in shareholder value.
Consider the above and decide how much more of this record of failure you
can afford. I own over a million shares of CEC, and I have had enough. I am
asking for your vote to elect myself and my two nominees to the CEC Board. I
believe that with sufficient support from the stockholders we will have a
mandate for change that the other independent directors on the Board will not be
able to ignore. As the former Chairman and CEO of AIU, the Company's flagship
school, I believe that I have the experience and know-how to fix what is wrong
with CEC. I have a plan and the will to execute it, but I need your vote. No
matter how many shares you own, your vote is important. Your clear support for
our slate will be the base upon which a new, revitalized CEC can grow.
--------------------------------------------
PLEASE SHOW YOUR SUPPORT. SIGN, DATE AND RETURN THE ENCLOSED
BLUE PROXY CARD TODAY.
LARSON, OGATA AND DOWDELL - HISTORY REPEATS ITSELF
The failure of management and oversight that threatens the future of CEC is only
the culmination of a pattern of failed education companies that Jack Larson,
Keith Ogata and Robert Dowdell have left in their wake.
Prior to forming CEC in 1994, Larson, from 1980 to 1993, served in senior
executive positions with two large, but now defunct, national school companies -
National Education Centers (Education Centers), a subsidiary of National
Education Corporation (NEC) and Phillips Colleges, Inc. (Phillips). Ogata and
Dowdell were fellow executives with Larson at Education Centers - Dowdell
serving as President of Education Centers from 1984 to 1988 and Ogata serving as
Chief Financial Officer, Treasurer and Vice President of NEC from 1987 to 1998
and as President of Education Centers from 1996 to 1998. During the tenure of
Larson and Dowdell, in the late 1980s, Education Centers' schools began to
develop excessive federal student loan default rates, which by the early 1990s
impaired the access of many of the schools to federal student aid programs.
During Ogata's tenure at NEC in the 1990s, NEC shut down its Education Centers
business, closing 25 schools and selling off the rest by 1996. The closure and
sale of schools resulted in a $70 million loss at NEC.
At Phillips, Larson held the position of Senior Vice President of College
Operations from 1989 to 1993, which included oversight of all of Phillips'
admissions and sales activities. By the late 1980s, Phillips had become the
largest national operator of postsecondary institutions, owning close to 100
schools at its zenith. Phillips developed extensive regulatory and operational
problems in the early 1990s and faced multi-million dollar liability assessments
by the U.S. Department of Education (DOE) for improper administration of federal
student aid programs, including unpaid refunds, lack of proper documentation,
excessive cash drawdowns, high loan default rates and use of commissioned sales
representatives in a "Onestop Shopping" sales program from 1987 to 1990 to
improperly promote federal student loans. The Onestop Shopping sales program,
which Phillips used in 1989 and 1990 after Larson took over admissions and sales
at Phillips, eventually led to a DOE audit determination in early 1993 that the
program violated federal regulations and required repayment of $155 million to
federal lenders. This $155 million liability was later upheld in 1994 and 1995
by an administrative law judge, the Secretary of Education and the courts. Also
during Larson's watch, in 1992 the DOE determined that Phillips was in such poor
financial condition that it could not continue to participate in the federal
student aid programs unless it posted a $5 million letter of credit. Larson left
Phillips in 1993, but the regulatory problems which began under Larson's tenure
ultimately led Phillips to close 43 schools and to sell off the rest.
It is not too late to prevent CEC from joining NEC and Phillips on the
scrap-heap of failed education companies on Jack Larson's resume.
I have attached to this letter two charts chronicling in detail the time periods
in which Larson, Ogata and Dowdell served with NEC and Larson served with
Phillips, as well as school closings and other adverse developments during those
time periods, together with sources for each item listed in the charts.
2
WHO IS RESPONSIBLE FOR AIU'S PROBATIONARY STATUS?
CEC's management has made much of the fact that the SACS placed AIU "on
sanction", in their words, for six months in 1997, while it was being operated
by EduTrek, the company of which I was CEO. This is yet another attempt to
distract you from the gravity of the problems that are facing CEC today. The
fact is that of all of the measures that can be taken by SACS against an
educational institution, there are five "negative actions" that are the most
serious, and these include the extremely serious public sanction of Probation.
SACS has confirmed to us in writing that during the time period that EduTrek
operated SACS, there were no such negative actions taken by SACS against AIU.
This is in stark contrast to what has occurred on Jack Larson's watch. SACS
initially imposed the public sanction of Warning status on CEC. AIU is now on
Probation and its accreditation is at risk. This is unprecedented in AIU's
history and threatens its very existence, and it is Jack Larson's fault, not
mine.
THE REAL "HEAVY LOSSES"
---
Jack Larson has also said that EduTrek suffered "heavy losses" during my time as
its CEO and that in 1996, it reported a $5.5 million loss for nine months.
Again, this is an attempt to distract your focus from the real "heavy losses",
namely the loss of $3.4 BILLION in shareholder value under Jack Larson's
management of CEC. In 1996, as CEC management acknowledges in its investor
presentation, EduTrek was a start-up company. As a result, it had significant
start-up expenses, in this case related to opening four new AIU campuses and
establishing the AIU Online university - in other words, building what is now
CEC's principal asset, accounting for more than 75% of its market value. Without
AIU, CEC would resemble what Larson, Ogata and Dowdell built in the 1980s and
1990s - career colleges with a fraction of CEC's current market value. And now,
under the leadership of Larson, Ogata and Dowdell, this valuable asset is in
grave jeopardy.
RHETORIC VS. REALITY
The title of management's recent investor presentations has been "The Year of
the Graduate". These materials state that "CEC prepares more than 100,000
students annually for career success in their chosen field". Elsewhere, they
talk about CEC's "strong student outcomes" and strong graduation rate. But what
is behind all of this rhetoric? In support of CEC's supposedly high graduation
rate, management cites a Banc of America research report from October 2004 that
shows graduation rates for 2001 through 2003. Why does management need to rely
on a three-year old, secondhand estimate of graduation rates? We have repeatedly
asked management to disclose both current graduation and drop-out rates. They
have not done so. What are they trying to hide? Had management disclosed the
conclusions in the most recent Banc of America research report on CEC, from
February 21, 2006, they would have revealed "the company's first ever year/year
decline in new student growth." The February 2006 report adds that the
new-student decline "bodes poorly for the future". There is an endemic lack of
transparency at CEC. Management is playing a game of smoke and mirrors - trying
to conceal the ugly truth behind upbeat rhetoric.
In CEC's 2005 annual report, Jack Larson makes the following statements in his
letter to stockholders: "CEC provides students with the skills they need to
pursue rewarding careers in the fields that they love. Graduates enter their
professions prepared not only for today but for a lifetime of success." Contrast
Larson's words with the stark conclusions presented in The
3
Chronicle of Higher Education's January 13, 2006 article on CEC, entitled
"Promises and Profits". The Chronicle undertook a three-month investigation into
the recruiting practices at the Los Angeles branch of AIU. Here is what it
found: "The sources painted a picture of a college devoted to enrolling students
by any means necessary, but that did little for them once they were enrolled and
their financial aid was collected. As a result, the sources said, hundreds of
dissatisfied students dropped out each year, heavily in debt with student loans,
but without the skills they needed to pursue careers in the fields in which they
sought training. Even many of those who have graduated are unhappy. Despite the
promises made in its advertisements, Career Education Corporation offered them
little help in finding jobs.... The problems identified by The Chronicle do not
appear to be isolated to the one campus." In fact, SACS has cited AIU for lack
of "integrity of student academic records and accuracy in recruiting and
admissions practices", among the 15 violations of SACS' Principles of
Accreditation for which SACS has placed AIU on Probation.
I and my nominees share a commitment to the ethical renewal of CEC and the
restoration of its reputation and standing in the educational community. We have
a clear and practical plan we believe will get us to that goal. We believe that
with a mandate from CEC stockholders, we will be able to work with the
independent directors on the CEC Board to effectuate it. It is only your vote
that will give us that mandate. We therefore urge you to SIGN, DATE and RETURN
YOUR BLUE PROXY CARD TODAY.
Thank you for your support,
/s/ Steve Bostic
--------------------
Steve Bostic
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IMPORTANT
If your shares are held in your own name, please sign, date and return the
enclosed BLUE proxy card today. If your shares are held in "Street-Name,"
only your broker or bank can vote your shares and only upon your specific
instructions. Please return the enclosed BLUE proxy card to your broker or
bank and contact the person responsible for your account to ensure that
a BLUE proxy is voted on your behalf.
Do not sign any White proxy card you may receive from CEC.
If you have any questions, or need assistance in voting your shares, please
contact the firm assisting us in the
solicitation of proxies:
INNISFREE M&A INCORPORATED
TOLL-FREE: (877) 750-9499
Banks and Brokers call collect: (212) 750-5833
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4
EXPERIENCE AT NEC AND EDUCATION CENTERS
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------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
Yrs at NEC Larson Ogata Dowdell Adverse Developments Source
& Education
Centers
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1980-83 VP Mktg, Forbes.com, MtkGuideIdPerson
Admissions Tearsheet
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1984-86 Same President Forbes.com
Education
Centers
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1987 Same Fin. Officer & Treasurer Same Forbes.com
of NEC NEC 10K FYE 12/31/04, p.13
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
1988 Same Same Same Same
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
1989 Same (left VP, Treas. of NEC High student loan default USDOE default records
in March, rates; 2 schools closed USDOE closed schools website
1989)
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
1990 Same High default rates USDOE default records
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
1991 VP, Treasurer and CFO of Same; 1 school closed USDOE closed schools website
NEC
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1992 Same Same; 2 schools closed Same
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1993 Same $23.6 Million Est. Charge for NEC 10K FYE 12/31/94, p.3
closing 13 schools
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1994 Same Plan adopted to dispose of NEC 10K FYE 12/31/94, pp 11-12
Education Centers; $40 Million & 22
Charge; 10 schools closed USDOE closed schools webpage
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
1995 Same 10 schools closed USDOE closed schools webpage
28 schools sold NEC FYE 12/31/95, p.12
Newsroom, Educational marketer,
7/17/95
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
1996 Same; President 3 former NEC campus officials OIG Semiannual Rpt to Congress
Education Centers plead guilty to Title IV fraud for period 4/1/96 to 9/30/96
------------ -------------- -------------------------- ----------- -------------------------------- -------------------------------
EXPERIENCE AT PHILLIPS
----------------------
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
Year Larson Adverse Developments at Phillips Source Information
Position
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1989 Senior VP Forbes.com
College
Operations
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1990 Same *4 schools closed USDOE closed schools website
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1991 Same *12 schools closed USDOE closed schools website
*DOE program review at Phillips headquarters finds high occurrence of Phillips Colleges, Inc. v
late refunds of Title IV aid for dropped students Riley, 844 F. Supp. 808, 809
(D.D.C. 1994), aff'd, 50F.3d
1096 (D.C.Cir. 1995)
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1992 Same *6 schools closed USDOE closed schools website
*4/29/92 DOE finding that Phillips failed to meet financial Phillips Colleges, No. 94-27-ST
responsibility requirements for Title IV aid programs
*7/24/92 - Phillips avoids termination by DOE from Title IV programs
by agreement to post $5 Million letter of credit
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1993 Same (left *7 schools closed Forbes.com
in Jan, 1993) *2/11/93 final audit determination that Phillips "OneStop Shopping" Phillips Colleges, 93-48-SP
sales policy used from 1987-1990 violated DOE regulations " and Phillips Colleges, No.
imposition of $155 Million liability to repay GSL Lenders 94-27-ST; Phillips Colleges,
*8/26/93 DOE draw of $2.19 Million on Phillips letter of credit to pay 844 F. Supp. at 811.
delinquent Title IV refunds
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1994 *2/28/94 ALJ ruling for repayment of $2.8 Million to GSL lenders Phillips Colleges, 91-96-SA
*4/24/94 Secretary DOE ruling ordering Phillips to make $3.19 Million Phillips Colleges, 92-64-SA
payment to replenish DOE letter of credit, in order to maintain Title Phillips Colleges, 93-39-SP
IV eligibility for 40 campuses and 16,000 students, Phillips Colleges, 93-48-SP
*5/15/94 ALJ ruling to repay $110,356 of campus based Title IVaid due Phillips Colleges, 93-58-SP
to lack of documentation Phillips Colleges, 94-4-SP
*8/23/04 ALJ ruling upholding $155 Million audit finding Phillips Colleges, 94-33-SP
*8/24/94 AJ ruling for Phillips to pay $586,700 as interest for
excessive drawdowns of Title IV aid
*11/2/94 ALJ ruling for Phillips to repay $242,962 of fair share of
campus based Title IV aid due to lack of documentation
*11/14/94 ALJ ruling for Phillips to repay $692,632 to GSL lenders and
$256,799 to DOE due to improper sales practices
*11/16/94 ALJ ruling to repay $102,952 of Title IV aid due to student
ineligibility
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1995 *9 schools closed USDOE closed schools webpage
---- ------------------- ------------------------------------------------------------------------- ---------------------------------
1996 *5 schools closed; sale of 18 schools USDOE closed schools webpage
Chronicle of Higher Education ,
11/15/96
---- ------------------- ------------------------------------------------------------------------- ---------------------------------