<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________.
Commission File Number: 0-23245
Career Education Corporation
(Exact name of registrant as specified in its charter)
Delaware 39-3932190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 West Higgins Road, Suite 790, Hoffman Estates, IL 60195
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 781-3600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of May 13, 1998, 7,134,838 shares of the registrant's Common Stock, par
value $.01, were outstanding.
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CAREER EDUCATION CORPORATION
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited)
and December 31, 1997................................................. 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1998 (unaudited) and 1997 (unaudited)................. 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 (unaudited) and 1997 (unaudited)................. 5
Notes to Condensed Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................... 15
Item 4. Submission of Matters to a Vote of Security Holders..................... 16
Item 6. Exhibits and Reports on Form 8-K........................................ 16
SIGNATURES.......................................................................... 17
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................. $ 15,174 $ 18,906
Receivables, net...................................................... 10,786 12,158
Inventories........................................................... 620 634
Prepaid expenses and other current assets............................. 2,255 4,498
Deferred income tax assets............................................ 766 406
-------- --------
Total current assets................................................ 29,601 36,602
-------- --------
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization...................................................... 45,011 45,555
INTANGIBLE ASSETS, net................................................. 34,720 33,579
OTHER ASSETS........................................................... 897 1,881
-------- --------
TOTAL ASSETS........................................................... $110,229 $117,617
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt.................................. $ 890 $ 3,888
Accounts payable...................................................... 2,654 3,580
Accrued expenses and other current liabilities........................ 6,733 7,852
Deferred tuition revenue.............................................. 6,509 7,476
-------- --------
Total current liabilities........................................... 16,786 22,796
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt, net of current maturities shown above................. 12,129 60,147
Other long-term liabilities........................................... 1,065 703
Deferred income tax liabilities....................................... 614 1,215
-------- --------
Total non-current liabilities....................................... 13,808 62,065
-------- --------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND WARRANTS................................ 527 40,160
-------- --------
STOCKHOLDERS' INVESTMENT:
Preferred stock, $0.01 par value; 1,000,000 shares authorized and..... - -
unissued.............................................................
Common stock, $0.01 par value; 50,000,000 shares authorized;..........
7,099,858 shares issued and outstanding at March 31, 1998............
Class A, B, C, D and E Common stock, $0.01 par value; no 71 -
shares outstanding at March 31 1998; total of
768,804 issued and outstanding at December 31, 1997.................. - 9
Warrants.............................................................. - 4,777
Additional paid-in capital............................................ 94,378 71
Accumulated other comprehensive income................................ (235) (297)
Accumulated deficit................................................... (15,106) (11,964)
-------- --------
Total stockholders' investment....................................... 79,108 (7,404)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT......................... $110,229 $117,617
======== ========
</TABLE>
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<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
Three Months
Three Months Ended Ended
March 31, March 31,
-------------------- ------------
1998 1997 1997
--------- --------- ------------
REVENUE:
<S> <C> <C> <C>
Tuition and registration fees, net............................ $ 30,188 $ 10,552 $ 23,815
Other, net.................................................... 2,409 1,231 2,008
--------- --------- ------------
Total net revenue........................................... 32,597 11,783 25,823
--------- --------- ------------
OPERATING EXPENSES:
Educational services and facilities........................... 13,174 4,688 10,054
General and administrative.................................... 15,098 4,695 12,031
Depreciation and amortization................................. 3,052 702 2,857
Compensation expense related to the offering.................. 1,961 -- --
--------- --------- ------------
Total operating expenses.................................... 33,285 10,085 24,942
--------- --------- ------------
Income (loss) from operations................................. (688) 1,698 881
INTEREST EXPENSE, net........................................... (544) (321) (1,331)
--------- --------- ------------
Income (loss) before provision (benefit) for income taxes...... (1,232) 1,377 (450)
PROVISION (BENEFIT) FOR INCOME TAXES............................ (517) 578 (189)
--------- --------- ------------
NET INCOME (LOSS)............................................... $ (715) $ 799 $ (261)
========= ========= ============
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:..................................................
Net income (loss) as reported.................................. $ (715) $ 799 $ (261)
Dividends on preferred stock................................... (274) (300) --
Accretion to redemption value of preferred stock and warrants.. (2,153) (81) --
--------- --------- ------------
Net income (loss) attributable to common stockholders.......... $ (3,142) $ 418 $ (261)
========= ========= ============
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Basic.......................................................... $ (0.68) $ 0.54 $ (0.34)
Diluted........................................................ $ (0.68) $ 0.39 $ (0.34)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares used in basic........................................... 4,638 768 768
Effect of dilutive employee stock options...................... -- 313 --
--------- --------- ------------
Shares used in diluted......................................... 4,638 1,081 768
========= ========= ============
PRO FORMA DATA:
Net income (loss) attributable to common stockholders.......... $ (813) $ 799 $ (261)
========= ========= ============
Diluted net income (loss) per share attributable to
common stockholders.......................................... $ (0.14) $ 0.40 $ (0.13)
========= ========= ============
Weighted average shares outstanding............................ 5,820 2,021 1,952
========= ========= ============
</TABLE>
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss)....................................................... $ (715) $ 799
Adjustments to reconcile net income (loss) to net cash provided by
operating activities--
Depreciation, amortization and debt discount.......................... 3,016 732
Compensation expense related to the offering.......................... 1,961 --
Deferred income taxes................................................. (961) 1,382
Changes in operating assets and liabilities, net of acquisition....... 641 (2,011)
------------- ------------
Net cash provided by operating activities........................... 3,942 902
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of cash....................................... (850) (4,933)
Acquisition and organizational costs.................................... (55) (353)
Purchase of property and equipment, net................................. (921) (210)
Other assets............................................................ 3 (12)
------------- ------------
Net cash used in investing activities............................... (1,823) (5,508)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering................................... 52,440 --
Issuance of common stock................................................ -- 30
Issuance of warrants.................................................... -- 268
Issuance of redeemable preferred stock.................................. -- 1,802
Dividends paid on preferred stock....................................... (47) (124)
Equity issuance costs................................................... (6,821) --
Book overdraft.......................................................... -- (683)
Payments of amounts due and notes payable to former owners of acquired (7,450) --
businesses............................................................
Payments of long-term debt.............................................. (137) (6)
Net payments on revolving credit facility............................... -- (3,403)
Proceeds from term loan facility........................................ -- 3,400
Net payments on revolving loans under Credit Agreement.................. (30,235) --
Payments on term loans under Credit Agreement........................... (13,500) --
------------- ------------
Net cash provided by (used in) financing activities................. (5,750) 1,284
------------- ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................................... (101) --
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS................................. (3,732) (3,322)
CASH AND CASH EQUIVALENTS, beginning of period............................ 18,906 7,798
------------- ------------
CASH AND CASH EQUIVALENTS, end of period.................................. $ 15,174 $ 4,476
============= ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and warrants........... $ (2,153) $ (81)
Dividends on preferred stock added to liquidation value................. (227) (176)
============= ============
</TABLE>
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<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 1998. The condensed consolidated balance sheet
at December 31, 1997 has been derived from the audited consolidated financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For additional information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
Note 2 - Initial Public Offering
On February 4, 1998, the Company sold 3,277,500 shares of its common stock
at $16.00 per share pursuant to an initial public offering ("IPO"). The net
proceeds from the offering of $45.6 million were used to repay $41.5 million of
borrowings under the Company's credit agreement and amounts owed to former
owners of acquired businesses of $4.1 million which were outstanding at that
time. Prior to the consummation of the IPO, all outstanding shares of all series
of preferred stock and accumulated dividends were converted into 2,423,485
shares of common stock and warrants (except for redeemable warrants exercisable
into 32,946 shares of Class E common stock) to purchase 624,320 shares of common
stock were exercised. Subsequent to December 31, 1997 and prior to the
consummation of the IPO, the Company also formed one class of common stock,
increased the number of authorized shares of common stock to 50,000,000,
completed a 9.376-for-1 stock split and all outstanding shares of common stock
were converted into the new class of common stock at a rate of 1:1. The effect
of the split has been retroactively reflected for all periods in the
accompanying condensed consolidated financial statements.
Pursuant to certain amended stock option agreements with two stockholders
giving them the right to purchase 122,615 shares of common stock at $0.01 per
share, the Company recorded compensation expense totalling approximately
$2.0 million in connection with the IPO.
Note 3 - Pro Forma Data
The pro forma data gives effect to the conversion of the preferred stock
into common stock which occurred in connection with the IPO. Net income (loss)
attributable to common stockholders eliminates the effect of dividends on
preferred stock and the accretion to redemption value of preferred stock and
warrants converted prior to the IPO. Historical weighted average shares
outstanding (which includes the dilutive effect of common stock equivalents for
periods with net income) has been adjusted for the assumed conversion of
preferred stock (at its liquidating value) into common stock when computing the
pro forma weighted average shares outstanding. The pro forma income statement
for the three months ended March 31, 1997 reflects the acquisitions of SCT,
Gibbs, IAMD-US and IAMD-Canada as if they had occurred on January 1, 1997.
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<PAGE>
Note 4 - New Accounting Pronouncement
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs (which include organization costs). It requires that all nongovernmental
entities expense the costs of start-up activities as those costs are incurred.
Nongovernmental entities are required to adopt this SOP by no later than January
1, 1999. Earlier adoption is permitted. The Company expenses all non-
organizational start-up costs as incurred. At December 31, 1997, the Company had
unamortized organizational costs of approximately $354,000. The Company is
currently evaluating the timing of adopting the SOP.
Note 5 - Business Acquisition
On March 13, 1998, the Company purchased 100% of the outstanding shares of
capital stock of Southern California School of Culinary Arts for approximately
$1.1 million. The acquisition is accounted for as a purchase and based upon
preliminary estimates, the purchase price (subject to adjustment) in excess of
the fair value of assets acquired and liabilities assumed is approximately $1.3
million.
Note 6 - Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The disclosure of
comprehensive income and accumulated other comprehensive income, which
encompasses net income and foreign currency translation adjustments, is as
follows:
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income -
Foreign Currency
Comprehensive Loss Translation Adjustment
-------------------- ----------------------
<S> <C> <C>
Balance December 31, 1997 $ (297)
Net loss for the three months ended $ (715) --
March 31, 1998
Other Comprehensive Income-
Foreign currency translation adjustment 62 62
--------------------
Comprehensive loss for the three months $ (653)
ended March 31, 1998
==================== ----------------------
Balance, March 31, 1998 $ (235)
======================
</TABLE>
The accumulated other comprehensive income balance as of January 1, 1998 has
been restated to conform to the SFAS No. 130 requirements.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of the management of Career Education Corporation and its
subsidiaries (collectively, the "Company" or "CEC"), as well as assumptions made
by, and information currently available to, the Company's management. The
Company's actual growth, results, performance and business prospects and
opportunities in 1998 and beyond could differ materially from those expressed
in, or implied by, any such forward-looking statements. See "Special Note
Regarding Forward-Looking Statements" on page 13 for a discussion of risks and
uncertainties that could cause or contribute to such material differences.
The following discussion and analysis should be read in conjunction with
the Company's Condensed Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.
Background and Overview
CEC is one of the largest providers of private, for-profit postsecondary
education in North America, with approximately 12,000 students enrolled as of
March 31, 1998. CEC operates 10 schools, with 19 campuses located in 13 states
and two Canadian provinces. These schools enjoy long operating histories and
offer a variety of bachelor's degree, associate degree and non-degree programs
in career-oriented disciplines within the Company's core curricula of (i)
computer technologies, (ii) visual communication and design technologies, (iii)
business studies and (iv) culinary arts.
Net revenue, EBITDA and net income have increased in each of the years the
Company has operated. Net revenue increased to $82.6 million in 1997, from $7.5
million in 1994; EBITDA increased to $10.4 million in 1997, from a loss of $0.5
million in 1994; and the net loss decreased to $0.9 million in 1997, from a loss
of $1.6 million in 1994. Student population at the Company's schools increased
248%, from 3,300 students at December 31, 1995 to 11,500 students at December
31, 1997. The Company has invested significant amounts of capital in the hiring
of additional personnel and increased marketing and capital improvements at each
of the acquired schools. The increased costs of personnel and marketing are
expensed as incurred and are reflected in general and administrative expenses.
Additional depreciation and amortization is reflected as a result of the capital
improvements.
The Company believes that EBITDA, while not a substitute for GAAP measures
of operating results, is an important measure of the financial performance of
the Company and its campuses. Management believes that EBITDA is particularly
meaningful due principally to the role acquisitions have played in the Company's
development. CEC's rapid growth through acquisitions has resulted in significant
non-cash amortization expense, because a significant portion of the purchase
price of a school acquired by CEC is generally allocated to goodwill and other
intangible assets. In a number of the Company's recent acquisitions, a large
portion of the purchase price has been allocated to non-competition agreements.
As a result of its ongoing acquisition strategy, non-cash amortization expense
may continue to be substantial.
The Company's principal source of revenue is tuition collected from its
students. The academic year is at least 30 weeks in length, but varies both by
individual school and program of study. The academic year is divided by term,
which is determined by start dates which vary by school and program. Payment of
each term's tuition may be made by full cash payment, financial aid and/or an
installment payment plan. If a student withdraws from school prior to the
completion of the term, the Company refunds a portion of the tuition already
paid which is attributable to the period of the term that is not completed.
Revenue is recognized ratably over the period of the student's program.
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The Company's campuses charge tuition at varying amounts, depending not
only on the particular school, but also upon the type of program (i.e., diploma,
associate or bachelor's) and the specific curriculum. Each of the Company's
campuses typically implements one or more tuition increases annually.
Other revenue consists of bookstore sales, placement fees, dormitory and
cafeteria fees, and restaurant revenue. Other revenue is recognized during the
period services are rendered.
The Company categorizes its expenses as educational services and
facilities, general and administrative and depreciation and amortization.
Educational services and facilities expense generally consists of expense
directly attributable to the educational activity of the schools, including
salaries and benefits of faculty, academic administrators and student support
personnel. Educational services and facilities expense also includes costs of
educational supplies and facilities (including rents on school leases), certain
costs of establishing and maintaining computer laboratories, costs of student
housing and all other physical plant and occupancy costs, with the exception of
costs attributable to the Company's corporate offices.
General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance, and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
Depreciation and amortization includes costs associated with the
depreciation of purchased computer laboratories, equipment, furniture and
fixtures, courseware, owned facilities, capitalized equipment leases and
amortization of intangible assets, primarily goodwill and non-competition
agreements with previous owners of the schools.
Acquisitions
On February 28, 1997, the Company acquired all of the outstanding capital
stock of SCT for a purchase price of approximately $4.9 million. In addition,
the Company paid approximately $1.8 million to the former owners of SCT pursuant
to non-competition agreements.
Effective May 31, 1997, the Company acquired all of the outstanding capital
stock of Gibbs for a purchase price of approximately $19.0 million. In addition,
the Company paid $7.0 million to the former owner of Gibbs pursuant to a non-
competition agreement.
On June 30, 1997, the Company acquired all of the outstanding capital stock
of IAMD-U.S. for a purchase price of $3.0 million, which amount may be increased
by up to $5.0 million based on future revenues of IAMD-U.S. operations and which
amount is otherwise subject to adjustment. In addition, the Company paid $2.0
million to the former owners of IAMD-U.S. pursuant to non-competition
agreements.
Also on June 30, 1997, the Company acquired all of the capital stock of
IAMD-Canada for a purchase price of $6.5 million, subject to adjustment. In
addition, the Company paid $2.0 million to the former owners of IAMD-Canada
pursuant to non-competition agreements.
On March 13, 1998, the Company acquired all of the outstanding capital
stock of Southern California School of Culinary Arts ("SCSCA"). The acquisition
of SCSCA was accounted for as a purchase. The purchase price was approximately
$1.1 million, subject to adjustment.
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Compensation Expense Related to the Offering
As of October 20, 1997, certain option agreements between the Company and
two of its executive officers and directors were amended to fix, upon the
consummation of the Offering, the number of shares of common stock issuable upon
exercise of the stock options provided under these agreements. Under the amended
options, which fully vested upon the consummation of the Offering, the holders
are entitled to purchase an aggregate of 122,615 shares of common stock at an
exercise price of $0.01 per share. As a result, the Company recorded a related
one-time, non-cash compensation expense of approximately $2.0 million in the
first quarter of 1998, substantially reducing operating and net income in such
period. See Note 2 to the Notes to the Company's Condensed Consolidated
Financial Statements.
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Tuition and registration, net.............................. 92.6 % 89.6 %
Other, net................................................. 7.4 10.4
------------ ------------
Net revenue............................................... 100.0 100.0
------------ ------------
Operating expenses:
Educational services and facilities........................ 40.4 39.8
General and administrative................................. 46.3 39.8
Depreciation and amortization.............................. 9.4 6.0
Compensation expense related to the offering............... 6.0 -
------------ ------------
Total operating expenses.................................. 102.1 85.6
------------ ------------
Income (loss) from operations............................. (2.1) 14.4
Interest expense, net....................................... (1.7) (2.7)
------------ ------------
Income (loss) before provision (benefit) for income taxes.. (3.8) 11.7
Provision (benefit) for income taxes........................ (1.6) 4.9
------------ ------------
Net income (loss)........................................... (2.2) 6.8
============ ============
Net income (loss) attributable to common stockholders....... (9.6)% 3.5 %
============ ============
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Revenue. Net tuition revenue increased 186% from $10.6 million in the first
three months of 1997 to $30.2 million in the first three months of 1998, due to
an approximately 11.3% increase in the average number of students attending the
schools which were owned by the Company during the 1997 period and tuition
increases effective in 1998 for these schools, as well as added net tuition
revenue of $15.8 million for schools acquired after the 1997 period. Other net
revenue increased 96%, from $1.2 million in the first three months of 1997 to
$2.4 million in the first three months of 1998, due to an increase in student
population for schools owned during the 1997 period and the addition of $0.9
million from schools acquired after the 1997 period.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 181%, from $4.7 million in the first three months
of 1997 to $13.2 million in the first three months of 1998. Of this increase,
$1.9 million was attributable to the increase in student population for schools
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<PAGE>
owned during the 1997 period and $6.6 million was attributable to the addition
of educational services and facilities for schools acquired after the 1997
period.
General and Administrative. General and administrative expense increased
221%, from $4.7 million in the first three months of 1997 to $15.1 million in
the first three months of 1998. The increase was primarily attributable to $8.0
million of expenses for schools acquired after the 1997 period, costs totalling
$1.1 million related to increased personnel at the corporate level to enhance
the Company's infrastructure and increased advertising and marketing (including
admissions) of $1.1 million for schools owned during the 1997 period. The
increase in advertising and marketing expenses reflected, in part, the fact that
the former owners of the acquired schools had reduced their expenditures in
these areas prior to their acquisition by the Company.
Depreciation and Amortization. Depreciation and amortization expense
increased 335%, from $0.7 million in the first three months of 1997 to $3.1
million in the first three months of 1998. The increase was due to increased
capital expenditures for schools owned during the 1997 period and related
increased depreciation expense of $0.3 million in the first three months of
1998. Additionally, depreciation expense increased $1.0 million due to the
depreciation expense for schools acquired after the 1997 period. Amortization
expense increased from $0.2 million in the first three months of 1997 to $1.2
million in the first three months of 1998, primarily due to additional
amortization of non-competition agreements and goodwill for the acquisition of
schools after the 1997 period.
Compensation Expense Related to the Offering. Pursuant to certain amended
stock option agreements with two stockholders, compensation expense totalling
approximately $2.0 million was recognized upon consummation of the initial
public offering in 1998.
Interest Expense. Interest expense increased 69% from $0.3 million in the
first three months of 1997 to $.5 million in the first three months of 1998. The
increase was primarily due to interest expense on borrowings used to finance the
acquisition of schools after the 1997 period.
Provision (Benefit) for Income Taxes. The benefit for income taxes
increased from a $0.6 million provision in the first three months of 1997 to a
$0.5 million benefit in the first three months of 1998 as a result of changes in
pretax income (loss).
Net Income (Loss). Net income (loss) decreased to a net loss of $0.7
million in the first three months of 1998 from a net income of $0.8 million in
the first three months of 1997.
Net Income (Loss) Attributable to Common Stockholders. Net loss
attributable to common stockholders decreased from a net income of $0.4 million
in the first three months of 1997 to a net loss of $3.1 million in the first
three months of 1998. The primary reason for this decrease was the increased
accretion in the redemption value of preferred stock and warrants as a result of
the Company's growth.
Liquidity and Capital Resources
On February 4, 1998, the Company sold 3,277,500 of its shares of common
stock at $16.00 per share pursuant to an initial public offering. The net
proceeds from the offering totalling $45.6 million were used to repay borrowings
of $41.5 million under the Credit Agreement and amounts owed to former owners of
acquired businesses of $4.1 million which were outstanding at that time. Prior
to the initial public offering, the Company financed its operating activities
through cash generated from operations. Acquisitions were financed through a
combination of additional equity investments and credit facilities. Net cash
provided by operating activities increased to $3.9 million in
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<PAGE>
the first three months of 1998 from $0.9 million in the first three months of
1997, due primarily to increases in depreciation and amortization.
Capital expenditures increased to $0.9 million in the first three months of
1998 from $0.2 million in the first three months of 1997. These increases were
primarily due to investments in capital equipment as a result of increasing
student population. Capital expenditures are expected to continue to increase as
new schools are acquired, student population increases, and the Company
continues to upgrade and expand current facilities and equipment. The Company
does not have any material commitments for capital expenditures for the
remainder of 1998.
The Company's net receivables as a percentage of net revenue increased to
33% in 1998 from 30% in 1997. These changes were primarily due to student
receivables at acquired schools. Based upon past experience and judgment, the
Company establishes an allowance for doubtful accounts with respect to tuition
receivables. When a student withdraws, the receivable balance attributable to
such student is charged to this allowance for doubtful accounts. The Company's
historical bad debt expense as a percentage of revenue for the years ended
December 31, 1996 and 1997 was 2%.
On May 30, 1997, the Company entered into the Credit Agreement with LaSalle
National Bank and prepaid approximately $21.2 million of revolving credit notes
and term loans that were outstanding under its previous credit agreement. The
Credit Agreement was amended and syndicated on September 25, 1997. Pursuant to
the Credit Agreement, the Company can borrow $65 million under a revolving
credit facility and $15 million under a term loan, and obtain up to $30 million
in letters of credit. Outstanding letters of credit reduce the revolving credit
facility availability under the Credit Agreement. The Credit Agreement matures
on May 30, 2002; however, availability under the revolving credit facility is
reduced by $10 million on May 30, 2001. The term loan is payable in equal
quarterly installments of $0.75 million, commencing September 30, 1997. The
Company's borrowings under the Credit Agreement bear interest, payable
quarterly, at either (i) a base rate equal to the greater of the (a) bank's
prime rate plus .75% or (b) the federal funds rate plus .50%, or (ii) LIBOR plus
2.00%, at the election of the Company. Under the Credit Agreement, the Company
is required, among other things, to maintain certain financial ratios with
respect to debt to EBITDA, interest coverage and fixed coverage and to maintain
a specified level of net worth. The Company is also subject to restrictions on,
among other things, payment of dividends, disposition of assets and incurrence
of certain additional indebtedness. The Company has pledged the stock of its
subsidiaries as collateral for the repayment of obligations under the Credit
Facility. At May 8, 1998, the Company did not have any outstanding borrowings
under its Credit Facility. Additionally, the Company had approximately $22.7
million of outstanding letters of credit as of such date.
After giving effect to the IPO and the repayment of the outstanding bank
debt through March 31, 1998, the interest rates applicable to the Credit
Agreement have been revised. Effective April 1, 1998, borrowings under the
Credit Agreement will bear interest, payable quarterly, at either (i) a base
rate equal to the greater of the (a) bank's prime rate or (b) the federal funds
rate plus .50%, or (ii) LIBOR plus 1.25%, at the election of the Company.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in separate cash or cash equivalent accounts until
the students are billed for the portion of their program related to these Title
IV Program funds. In addition, all funds transferred to the Company through
electronic funds transfer programs are held in a separate cash account until
certain conditions are satisfied. As of March 31, 1998, the Company holds
nominal amounts of such funds in separate accounts. The restrictions on any cash
held in these accounts have not significantly affected the Company's ability to
fund daily operations.
-12-
<PAGE>
The HEA and its implementing regulations require each higher education
institution to meet an acid test ratio (defined as the ratio of cash, cash
equivalents, restricted cash and current accounts receivable to total current
liabilities) of at least 1:1, calculated at the end of the institution's fiscal
year.
As of May 8, 1998, the Company's remaining credit availability under the
Credit Agreement was approximately $55 million. In discussions with the Company,
the DOE has agreed to consider financial information reflecting the results of
the Offering, as well as the 1997 audited financial statements in the DOE's next
review of the financial responsibility of the Company and its U.S. institutions.
The Company believes, based upon their 1997 audited financial statements and the
Company's post-Offering financial information, the Company and each of its U.S.
institutes continue to satisfy each of the DOE's standards of financial
responsibility. The Company is seeking the DOE's review of the Company's and its
U.S. institutions' audited 1997 financial statements and the Company's post-
Offering financial information on an expedited basis. To the extent the letters
of credit are reduced or eliminated, the Company will have additional
availability under the Credit Agreement. The Company believes that it will have
sufficient liquidity to increase the letters of credit should the DOE so
require. However, there can be no assurance that, if required, the Company will
be able to maintain or increase its letters of credit in the future. The Company
believes, based on its audited 1997 financial statements, that each of its U.S.
institutions satisfies each of the DOE's applicable standards of financial
responsibility and that the Company satisfies each of the DOE's standards of
financial responsibility, except for the tangible net worth ratio. However, the
Company believes that based upon the DOE's review of its audited 1997 financial
statements and the Company's audited post-Offering balance sheet, the Company
will also satisfy the tangible net worth ratio.
New Accounting Standards
Recently, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 131. SFAS No. 131
requires that a public business enterprise report financial and descriptive
information about its reporting segments on the same basis that it uses
internally for evaluating segment performance and deciding how to allocate
resources to segments. The adoption of this Statement is not expected to have a
material effect on the Company's consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs (which include organization costs). It requires that all nongovernmental
entities expense the costs of start-up activities as those costs are incurred.
Nongovernmental entities are required to adopt this SOP by no later than January
1, 1999. Earlier adoption is permitted. The Company expenses all non-
organizational start-up costs as incurred. At December 31, 1997, the Company had
unamortized organizational costs of approximately $354,000. The Company is
currently evaluating the timing of adopting the SOP.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains certain statements which reflect the Company's
expectations regarding its future growth, results of operation, performance and
business prospects and opportunities. Wherever possible, words such as
"anticipate," "believe," "plan," "expect" and similar expressions have been used
to identify these "forward-looking" statements. These statements reflect the
Company's current beliefs and are based on information currently available to
the Company. Accordingly, these statements are subject to risks and
uncertainties which could cause the Company's actual growth, results,
performance and business prospects and opportunities to differ from those
expressed in, or implied by, these statements. These risks and uncertainties
include implementation of the Company's operating and growth strategy, risks
inherent in operating private for-profit postsecondary education institutions,
risks associated with general economic and business conditions, charges and
costs related to acquisitions, and the Company's ability to: successfully
integrate its acquired institutions and continue its acquisition strategy,
attract and retain students at its institutions, meet regulatory and accrediting
agency requirements,
-13-
<PAGE>
compete with enhanced competition and new competition in the education industry,
and attract and retain key employees and faculty. The Company is not obligated
to update or revise these forward-looking statements to reflect new events or
circumstances.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On February 3, 1998, the Company completed an initial public offering
of its Common Stock, $.01 par value (the "Offering"). The managing
underwriters in the Offering were Credit Suisse First Boston
Corporation and Smith Barney, Inc. (the "Underwriters"). The shares of
Common Stock sold in the Offering were registered under the Securities
Act of 1933, as amended, on Registration Statements on Form S-1
(registration nos. 333-37601 and 333-45123) (together, the
"Registration Statement"). The Registration Statement was declared
effective by the Securities and Exchange Commission on January 28,
1998.
On January 28, 1998, the Company commenced the Offering. The Offering
terminated on February 3, 1998 after the Company had sold all
3,277,500 shares of Common Stock registered under the Registration
Statement. The offering price was $16.00 per share for an aggregate
offering price of $52,440,000.
From the effective date of the Registration Statement to February 3,
1998, the Company paid an aggregate of $3,670,800 in underwriting
discounts and commissions. In addition, the following table sets forth
an estimate of all expenses incurred in connection with the Offering,
other than underwriting discounts and commissions. All of the amounts
shown are estimated except for the registration fees of the Securities
and Exchange Commission, the National Association of Securities
Dealers, Inc. and the Nasdaq National Market. None of the amounts
shown were paid directly or indirectly to any director, officer
general partner of the Company or their associates, persons owing ten
percent or more of any class of equity securities of the Company, or
an affiliate of the Company.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................ $ 15,886
NASD filing fee................................. 5,675
Nasdaq National Market listing fee.............. 36,122
Blue sky qualification fees and expenses........ 5,000
Printing and engraving expenses................. 650,000
Legal fees and expenses......................... 1,000,000
Accounting fees and expenses.................... 1,300,000
Transfer agent and registrar fees and expenses.. 15,000
Miscellaneous................................... 122,317
----------
Total.......................................... $3,150,000
==========
</TABLE>
After deducting underwriting discounts and commissions and the
Offering expenses described above, net proceeds to the Company from
the Offering were approximately $45.6 million. Of this amount, the
Company used approximately $41.5 million to repay outstanding
revolving credit borrowings under its credit agreement and
approximately $4.1 million to repay the outstanding indebtedness on
notes payable to the former shareholders of two of the Company's
schools, IAMD-U.S. and IAMD-Canada. None of the net proceeds of the
Offering were paid directly or indirectly to any director, officer,
general partner of the Company or their associates, persons owning ten
percent or more of any class of equity securities of the Company, or
an affiliate of the Company.
-15-
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
On January 12, 1998, prior to the IPO, all of the Company's
stockholders signed a Unanimous Written Consent of Stockholders
approving the following: (i) the issuance of up to $69 million of
common stock pursuant to the Company's IPO; (ii) the Company's Amended
and Restated Certificate of Incorporation; (iii) the Company's Amended
and Restated Bylaws; (iv) the Company's 1998 Employee Incentive
Compensation Plan; (v) the Company's 1998 Non-Employee Directors'
Stock Option Plan; (vi) the Company's 1998 Employee Stock Purchase
Plan; (vii) indemnification agreements to be entered into between the
Company and its directors and executive officers; and (viii) the
election of directors of the Company. Robert E. Dowdell and Patrick K.
Pesch were elected as Class 1 directors, Wallace O. Laub, Keith K.
Ogata and Todd H. Steele were elected as Class 2 directors, and Thomas
B. Lally and John M. Larson were elected as Class 3 directors. The
terms of the Class 1, Class 2 and Class 3 directors end at the
Company's 1999, 2000 and 2001 annual meetings of stockholders,
respectively.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 11 - Statement Regarding Computation of Net Income (Loss)
Per Share.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the first
quarter of 1998.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Career Education Corporation
Date: May 13, 1998 By: /s/ JOHN M. LARSON
-------------------------------------
John M. Larson
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1998 By: /s/ WILLIAM A. KLETTKE
-------------------------------------
William A. Klettke
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
-17-
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
EXHIBIT 11
Statement Regarding Computation of Earnings Per Share
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
PRO FORMA
Three Months
Three Months Ended Ended
March 31, March 31,
------------------------- -----------
1998 1997 1997
------- ------- -----------
<S> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS, as reported $(3,142) $ 418 $ (261)
Dividends on preferred stock 274 300 -
Accretion to redemption value of preferred stocks and
warrants 2,055 81 -
------- ------- ------
Pro forma income (loss) attributable to common stockholders $ (813) $ 799 $ (261)
======= ======= ======
Pro forma Basic Earnings Per Share:
Common stock outstanding 4,638 768 768
Preferred stock conversion 940 925 925
Warrant conversion 242 259 259
------- ------- ------
Total weighted average shares outstanding 5,820 1,952 1,952
======= ======= ======
Pro forma income (loss) per share attributable to common
stockholders $ (0.14) $ 0.41 $(0.13)
======= ======= ======
Pro forma Diluted Earnings Per Share:
Common stock outstanding 4,638 768 768
Preferred stock conversion 940 925 925
Warrant conversion 242 259 259
Common stock equivalents - 69 -
------- ------- ------
Total weighted average shares outstanding 5,820 2,021 1,952
======= ======= ======
Pro forma income (loss) per share attributable to common
stockholders $ (0.14) $ 0.40 $(0.13)
======= ======= ======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 15,174 4,476
<SECURITIES> 0 0
<RECEIVABLES> 13,223 4,070
<ALLOWANCES> 2,437 579
<INVENTORY> 620 276
<CURRENT-ASSETS> 29,601 9,302
<PP&E> 54,068 27,078
<DEPRECIATION> 9,057 3,493
<TOTAL-ASSETS> 110,229 42,238
<CURRENT-LIABILITIES> 16,786 7,850
<BONDS> 0 0
0 15,629
0 0
<COMMON> 71 1
<OTHER-SE> 79,037 (1,808)
<TOTAL-LIABILITY-AND-EQUITY> 110,229 42,238
<SALES> 0 0
<TOTAL-REVENUES> 32,597 11,783
<CGS> 0 0
<TOTAL-COSTS> 33,285 10,085
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,355 256
<INTEREST-EXPENSE> 544 321
<INCOME-PRETAX> (1,232) 1,377
<INCOME-TAX> (517) 578
<INCOME-CONTINUING> (715) 799
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (715) 799
<EPS-PRIMARY> (0.68) 0.54
<EPS-DILUTED> (0.68) 0.39
</TABLE>
