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: June 30, 1999
[ ] 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 36-3932190
(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 August 5, 1999, 7,823,049 shares of the registrant's
Common Stock, par value $.01, were outstanding.
<PAGE>
CAREER EDUCATION CORPORATION
QUARTER ENDED JUNE 30, 1999
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 (unaudited) and
1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 (unaudited) and 1998
(unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
<CAPTION>
June 30, 1999 December 31, 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 34,114 $ 23,548
Receivables, net 10,727 12,407
Inventories, prepaid expenses and other current assets 8,706 4,973
Total current assets 53,547 40,928
PROPERTY AND EQUIPMENT, net 63,384 46,403
INTANGIBLE ASSETS, net 67,725 42,645
DEFERRED INCOME TAX ASSETS - 865
OTHER ASSETS 3,305 2,046
TOTAL ASSETS $ 187,961 $ 132,887
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 322 $ 317
Accounts payable 6,827 2,425
Accrued expenses and other current liabilities 8,938 12,033
Deferred tuition revenue 10,441 10,159
Total current liabilities 26,528 24,934
NON-CURRENT LIABILITIES:
Long-term debt, net of current maturities 51,748 22,300
Other long-term liabilities 6,185 1,017
Total non-current liabilities 57,933 23,317
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Common stock, $.01 par value; 50,000,000 shares authorized;
7,817,042 and 7,152,896 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively; 78 72
Additional paid-in capital 111,767 95,481
Accumulated other comprehensive income (533) (822)
Accumulated deficit (7,812) (10,095)
Total stockholders' investment 103,500 84,636
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 187,961 $ 132,887
</TABLE>
<PAGE>
<TABLE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net $ 44,842 $ 29,756 $ 86,963 $ 59,944
Other, net 3,938 2,569 7,252 4,978
Total net revenue 48,780 32,325 94,215 64,922
OPERATING EXPENSES:
Educational services and facilities 20,341 13,661 38,862 26,835
General and administrative 23,240 15,035 44,168 30,133
Depreciation and amortization 3,561 3,041 6,635 6,061
Compensation expense related to the initial
public offering - - - 1,961
Total operating expenses 47,142 31,737 89,665 64,990
Income (loss) from operations 1,638 588 4,550 (68)
INTEREST EXPENSE, net (333) (196) (545) (740)
Income (loss) before provision (benefit) for income
taxes and cumulative effect of change in accounting
principle 1,305 392 4,005 (808)
PROVISION (BENEFIT) FOR INCOME TAXES 561 165 1,722 (339)
Income (loss) before cumulative effect of change in
accounting principle 744 227 2,283 (469)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of taxes of $149 - - - (205)
NET INCOME (LOSS) $ 744 $ 227 $ 2,283 $ (674)
</TABLE>
<PAGE>
<TABLE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Continued
(Dollars in thousands, except per share amounts)
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net income (loss) as reported $ 744 $ 227 $ 2,283 $ (674)
Dividends on preferred stock - - - (274)
Accretion to redemption value of preferred
stock and warrants - - - (2,153)
Net income (loss) attributable to common
stockholders $ 744 $ 227 $ 2,283 $(3,101)
NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic $ 0.10 $ 0.03 $ 0.30 $ (0.51)
Diluted $ 0.09 $ 0.03 $ 0.29 $ (0.51)
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Shares used in basic 7,815 7,120 7,526 6,072
Dilutive effect of employee stock options 285 216 227 -
Dilutive effect of future issuable shares - - 67 -
Shares used in diluted 8,100 7,336 7,820 6,072
PRO FORMA DATA:
Net income (loss) attributable to common
stockholders $ 227 $ (772)
Diluted net income (loss) per share
attributable to common stockholders $ 0.03 $ (0.12)
Weighted average shares outstanding
used in diluted 7,336 6,660
</TABLE>
<PAGE>
<TABLE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<CAPTION>
Six Months Ended
June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period $ 2,283 $ (674)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 6,635 6,061
Compensation expense related to the initial public offering - 1,961
Deferred income taxes (2,721) (752)
Cumulative effect of change in accounting principle - 205
Changes in operating assets and liabilities, net of acquisitions 1,294 (937)
Net cash provided by operating activities 7,491 5,864
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash (24,751) (1,360)
Acquisition costs (1,195) (186)
Purchase of property and equipment, net (6,947) (1,890)
Other assets 375 (59)
Net cash used in investing activities (32,518) (3,495)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 15,723 52,492
Dividends paid on preferred stock - (47)
Equity issuance costs (1,945) (6,821)
Payments of amounts due and notes payable to former owners of acquired
businesses, capital lease obligations and other long-term debt (14) (7,883)
Net borrowings (payments) on revolving loans under Credit Agreement 21,751 (27,485)
Payments on term loans under Credit Agreement - (13,500)
Net cash provided by (used in) financing activities 35,515 (3,244)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 78 (257)
NET INCREASE (DECREASE) IN CASH 10,566 (1,132)
CASH, beginning of period 23,548 18,906
CASH, end of period $ 34,114 $ 17,774
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and warrants $ - $ (2,153)
Dividends on preferred stock added to liquidation value - (227)
Issued 50,601 shares of common stock under the
Le Cordon Bleu trademark agreement $ 2,000 -
</TABLE>
<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 six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1999. The condensed
consolidated balance sheet at December 31, 1998 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 for the year
ended December 31, 1998 that are included in our annual report on
Form 10-K.
Note 2 - Public Offering of Common Stock
On March 17, 1999, we sold 530,000 shares of common stock at
$29.00 per share pursuant to a public offering. The net proceeds
to us from the sale of the shares of common stock, after
deducting the discounts, commissions and estimated offering
expenses payable by us, were approximately $13.8 million. The net
proceeds from the offering were used for general corporate
purposes.
Note 3 - Business Acquisitions
Harrington Institute of Interior Design, Inc.
On January 4, 1999, we acquired all of the outstanding
shares of capital stock of Harringtion Institute of Interior
Design, Inc. for approximately $3.5 million. The acquisition was
accounted for as a purchase and the purchase price exceeded the
fair value of assets acquired and liabilities assumed, resulting
in goodwill of approximately $2.8 million.
McIntosh College, Inc.
On March 9, 1999, we acquired certain assets and assumed
certain liabilities of McIntosh College, Inc. for approximately
$5.0 million. The acquisition was accounted for as a purchase and
the purchase price exceeded the fair value of assets acquired and
liabilities assumed, resulting in goodwill of approximately $4.6
million.
Briarcliffe College, Inc.
On April 1, 1999, we acquired all of the outstanding shares
of capital stock of Briarcliffe College, Inc. for approximately
$20.6 million. The acquisition was accounted for as a purchase
and the purchase price exceeded the fair value of assets acquired
and liabilities assumed, resulting in goodwill of approximately
$17.5 million.
<PAGE>
Brooks Institute of Photography, Inc.
Effective June 1, 1999, we acquired all of the outstanding
shares of capital stock of Brooks Institute of Photography, Inc.
for approximately $6.5 million. The acquisition was accounted for
as a purchase and the purchase price exceeded the fair value of
assets acquired and liabilities assumed, resulting in goodwill of
approximately $2.2 million.
Note 4 - Comprehensive Income
<TABLE>
The disclosure of comprehensive income and accumulated other
comprehensive income, which encompasses net income and foreign
currency translation adjustments, is as follows:
<CAPTION>
Accumulated Other
Comprehensive Loss -
Foreign Currency
Comprehensive Income Translation Adjustment
<S> <C> <C>
Balance December 31, 1998 $ (822)
Net income for the six months ended
June 30, 1999 $ 2,283
Other Comprehensive Income -
Foreign currency translation adjustment 289 289
Comprehensive income for the six months
ended June 30, 1999 2,572
Balance, June 30, 1999 $ (533)
</TABLE>
Note 5 - Start-Up Costs
Effective January 1, 1998 we adopted the American Institute
of Certified Public Accountants Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities," which requires
all non-governmental entities to expense the costs of start-up
activities as those costs are incurred. We have restated our
financial statements for the three and six months ended June 30,
1998 to reflect this change.
Note 6 - Debt
On March 31, 1999, we increased our line of credit from
$60.0 million to $90.0 million. As of June 30, 1999, we had
approximately $33.0 million of borrowings outstanding under our
Credit Facility. Additionally, we had approximately $7.7 million
of outstanding letters of credit as of such date.
<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
our management, as well as assumptions made by, and information
currently available to, our management. Our actual growth,
results, performance and business prospects and opportunities in
1999 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 16 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 Condensed Consolidated Financial Statements
and attached Notes appearing elsewhere in this document.
Background and Overview
We are a provider of private, for-profit postsecondary
education in North America, with approximately 16,250 students
enrolled as of July 31, 1999 compared to approximately 11,500
students as of July 31, 1998. We have 25 campuses located in 14
states and two Canadian provinces. Our schools enjoy long
operating histories and offer a variety of bachelor's degree,
associate degree and non-degree programs in career-oriented
disciplines within our core curricula of:
- information technology
- visual communication and design technologies
- business studies
- culinary arts
We have experienced significant growth both internally and
through acquisitions. We have invested significant amounts of
capital in the hiring of additional personnel and increased
marketing and capital improvements at each of the schools we have
acquired. 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 capital improvements, as
well as added goodwill and covenants-not-to-compete from our new
acquisitions.
We believe that earnings before interest, taxes,
depreciation and amortization (EBITDA), while not a substitute
for GAAP measures of operating results, is an important measure
of our financial performance and that of our schools. For second
quarter 1999, EBITDA was $5.2 million, up 43.3% from $3.6 million
for second quarter 1998. For the six months ended June 30, 1999,
EBITDA was $11.2 million, up 86.6% from $6.0 million for the same
period in 1998. Excluding the before-tax non-cash compensation
charge of $1.9 million, EBITDA for the six months ended June 30,
1998 would have been $7.9 million. We believe that EBITDA is
particularly meaningful due principally to the role acquisitions
have played in our development. Our rapid growth through
acquisitions has resulted in significant non-cash depreciation
and amortization expense, because a significant portion of the
purchase price of a school acquired by us is generally allocated
to fixed assets, goodwill and other intangible assets. As a
result of our ongoing acquisition strategy, non-cash amortization
expense may continue to be substantial.
Our principal source of revenue is tuition collected from
our 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. If a student withdraws
from school prior to the completion of the term, we refund a
portion of the paid tuition that relates to the portion of the
term that is not completed. Revenue is recognized ratably over
the period of the student's program.
<PAGE>
Our campuses charge tuition at varying amounts, depending
not only on the particular school, but also upon the type of
program and the specific curriculum. On average, our campuses
increase tuition one or more times annually.
Other revenue consists of bookstore sales, placement fees,
dormitory and cafeteria fees, contract training revenue,
restaurant revenue and rental income. Other revenue is
recognized during the period services are rendered.
Educational services and facilities expense includes costs
directly attributable to the educational activity of our 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 owned facility costs.
General and administrative expense includes salaries and
benefits of personnel in recruitment, admissions, accounting,
personnel, compliance, 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
our schools.
Acquisitions
On January 4, 1999, we acquired all of the outstanding
capital stock of Harringtion Institute of Interior Design, Inc.
for a purchase price of approximately $3.5 million.
On March 9, 1999, we acquired certain assets and assumed
certain liabilities of McIntosh College, Inc. for a purchase
price of approximately $5.0 million.
On April 1, 1999, we acquired all of the outstanding capital
stock of Briarcliffe College, Inc. for a purchase price of
approximately $20.6 million.
Effective June 1, 1999 we acquired all of the outstanding
capital stock of Brooks Institute of Photography for a purchase
price of approximately $6.5 million.
<PAGE>
Results of Operations
<TABLE>
The following table summarizes our operating results as a
percentage of net revenue:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net 91.9 % 92.1 % 92.3 % 92.3 %
Other, net 8.1 7.9 7.7 7.7
Total net revenue 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Educational services and facilities 41.7 42.3 41.2 41.3
General and administrative 47.6 46.5 46.9 46.4
Depreciation and amortization 7.3 9.4 7.1 9.3
Compensation expense related to the initial public
offering - - - 3.0
Total operating expenses 96.6 98.2 95.2 100.0
Income (loss) from operations 3.4 1.8 4.8 0.0
INTEREST EXPENSE, net (0.7) (0.6) (0.6) (1.1)
Income (loss) before provision (benefit) for income
taxes and cumulative effect of change in accounting
principle 2.7 1.2 4.2 (1.1)
PROVISION (BENEFIT) FOR INCOME TAXES 1.2 0.5 1.8 (0.5)
Income (loss) before cumulative effect of change in
accounting principle 1.5 0.7 2.4 (0.6)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net - - - (0.3)
NET INCOME (LOSS) 1.5 0.7 2.4 (0.9)
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS: 1.5 % 0.7 % 2.4 % (4.8) %
</TABLE>
Revenue. Net tuition and registration fee revenue for second
quarter 1999 was $44.8 million, up $15.1 million or 50.7%
compared to second quarter 1998. On a same school basis, the
increase was 27.2% and was primarily due to an increase in
average student population of 20.4% and tuition increases
effective after June 1998. For the six months ended June 30,
1998, net tuition and registration fee revenue was $87.0 million,
up $27.0 or 45.1% compared to the same period last year.
Other net revenue for second quarter 1999 was $3.9 million, up
$1.4 million or 53.3% compared to second quarter 1998. The
increase was due to an increase in average student population.
For the six months ended June 30, 1998, other net revenue was
$7.3 million, up $2.3 million or 45.7% compared to the same
period last year.
Educational Services and Facilities. Educational services
and facilities expense for second quarter 1999 was $20.3 million,
up $6.7 million or 48.9% compared to second quarter 1998. On a
same school basis, this increase was 19.5% and was mainly
attributable to the increase in average student population
mentioned above. For the six months ended June 30, 1999 this
expense was $38.9 million, up $12.0 million or 44.8% compared to
the same period last year.
<PAGE>
General and Administrative. General and administrative
expense for second quarter 1999 was $23.2 million, up $8.2
million or 54.6% compared to second quarter 1998. On a same
school basis, this increase was 31.3% and was mainly due to
increased advertising and marketing (including admissions) of
$2.6 million and corporate and regional infrastructure
enhancements of $1.4 million. This planned increase in
infrastructure was primarily in regulatory compliance, financial
aid and curriculum development. For the six months ended June 30,
1999 the expenses were $44.2 million, up $14.0 million or 46.6%
compared to the same period last year.
Depreciation and Amortization. Depreciation and amortization
expense for second quarter 1999 was $3.6 million, up $0.5 million
or 17.1% compared to second quarter 1998. On a same school
basis, it decreased by 5.3% due to decreased amortization related
to non-compete agreements. For the six months ended June 30,
1999 depreciation and amortization was $6.6 million, up $0.6
million or 9.5% compared to the same period last year.
Compensation Expense Related to the Initial Public Offering.
A before-tax, non-cash compensation charge of approximately $2.0
million was recorded pursuant to amended stock option agreements
with two stockholders upon consummation of our initial public
offering in February 1998.
Net Interest Expense. Net interest expense for second
quarter 1999 was $0.3 million compared to $0.2 million in the
same period last year. For the six months ended June 30, 1999 net
interest expense was $0.5 million compared to $0.7 million the
same period last year.
Provision(Benefit) for Income Taxes. The provision for
income taxes for second quarter 1999 was $0.6 million, up $0.4
million from the same period last year. The increase was due to
higher pretax income coupled with a 1.0 percentage point higher
effective tax rate. For the six months ended June 30, 1999 the
provision for income taxes was $1.7 million compared to a benefit
of $0.3 million for the same period last year.
Cumulative Effect of Change in Accounting Principle. In
January 1998, we adopted Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities," which resulted in a net of
tax charge of $0.2 million.
Net Income (Loss). Net income for second quarter 1999 was
$0.7 million compared to $0.2 million in the same period last
year due to the reasons discussed above. For the six months
ended June 30, 1999 net income was $2.3 million compared to a net
loss of $0.7 million in the same period last year.
Net Income (Loss) Attributable to Common Stockholders. Net
income attributable to common stockholders increased to $0.7
million in the second quarter of 1999 from $0.2 million in the
second quarter of 1998. For the six months ended June 30, 1999
net income attributable to common stockholders was $2.3 million
compared to a net loss of $3.1 million. The increase was due to
decreases in dividends on preferred stock and accretion to
redemption value of preferred stock and warrants in connection
with our initial public offering, conversion of preferred stock
into common stock and exercise of warrants.
<PAGE>
Liquidity and Capital Resources
On March 17, 1999, we sold 530,000 shares of common stock at
$29.00 per share pursuant to a public offering. The net proceeds
to us from the sale of the shares of common stock, after
deducting the discounts, commissions and estimated offering
expenses payable by us, were approximately $13.8 million. The net
proceeds from the offering were used for general corporate
purposes. Net cash provided by operating activities also
increased to $7.5 million in the first six months of 1999 from
$5.9 million in the first six months of 1998, due primarily to
increases in net income and operating assets and liabilities.
Capital expenditures increased to $6.9 million in the first
six months of 1999 from $1.9 million in the first six months of
1998. These increases were primarily due to investments in
leasehold improvements on new and expanded facilities and 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 current
facilities and equipment are upgraded and expanded.
Our net receivables as a percentage of net revenue decreased
to 11.4% in 1999 from 17.8% in 1998, primarily due to increased
revenue at our schools acquired prior to June 1998 coupled with
better asset management. Based upon historical experience and
judgment, we establish an allowance for doubtful accounts with
respect to tuition receivables. When a student withdraws from
school, the receivable balance attributable to such student is
charged to this allowance for doubtful accounts.
On March 31, 1999, we amended our credit agreement dated
October 26, 1998 to increase our line of credit from $60.0
million to $90.0 million. We may now obtain letters of credit up
to $50.0 million. Outstanding letters of credit reduce the
revolving credit facility availability under our credit
agreement. Our credit agreement matures on October 26, 2003.
Under the credit agreement our borrowings bear interest, payable
quarterly, of either
(1) the bank's base or prime rate depending on whether the
particular loan is denominated in U.S. or Canadian dollars, plus
a specified number of basis points, ranging from 0 to 75, based
upon our leverage ratio or
(2) LIBOR, plus a specified number of basis points, ranging from
75 to 200 based upon our leverage ratio.
Under the credit agreement, we are required, among other things,
to maintain (1) financial ratios with respect to debt to EBITDA
and interest coverage and (2) a specified level of net worth. We
are also subject to limitations on, among other things, payment
of dividends, disposition of assets and incurrence of additional
indebtedness. We are required to pledge the stock of our
subsidiaries as collateral for the repayment of our obligations
under the credit agreement. At August 5, 1999, we had $16.0
million outstanding borrowings under our credit facility.
Additionally, we had approximately $7.7 million of outstanding
letters of credit as of such date.
The DOE requires that we keep unbilled Title IV Program
funds that are collected in separate cash or cash equivalent
accounts until the students are billed for the program portion
related to those Title IV Program funds. In addition, all funds
transferred to our schools through electronic funds transfer
programs are held in a separate cash account until certain
conditions are satisfied. As of June 30, 1999, we held nominal
amounts of such funds in separate accounts. The restrictions on
any cash held in these accounts have not significantly affected
our ability to fund daily operations.
<PAGE>
Year 2000 Compliance
The Year 2000 Problem. Many Information Technology
("IT") hardware and software systems and non-IT systems
containing embedded technology, such as microcontrollers and
microchip processors, can only process dates with six digits, for
example, 03/17/98, instead of eight digits, for example,
03/17/1998. This limitation may cause IT systems and non-IT
systems to experience problems processing information with dates
after December 31, 1999. For example, 01/01/00 could be
processed as 01/01/2000 or 01/01/1900. There could also be
problems with other dates, such as September 9, 1999, which was a
date traditionally used as a default date by computer
programmers. These problems may cause IT systems and non-IT
systems to suffer miscalculations, malfunctions or disruptions.
These problems are commonly referred to as ''Year 2000''
problems. In late 1997, we began our audit, testing and
remediation project to assess our exposure to Year 2000 problems
both because of our own IT systems and non-IT systems and because
of the systems of our significant vendors, including those who
process and disburse student financial aid for us. The discussion
below details our efforts to ensure Year 2000 compliance.
Our State of Readiness. Through our audit, testing and
remediation project, we have identified and evaluated the
readiness of our IT systems and non-IT systems, which, if not
Year 2000 compliant, could have a material adverse effect on us.
We held planning strategy sessions in the first quarter of 1998
and conducted our Year 2000 audits, upgrade assessments and
budget alignments during the remainder of 1998 and continued
through 1999. Our evaluation indicated that our administrative IT
systems are Year 2000 compliant, but identified the following
areas of concern:
- our accounting and financial reporting system
- our student database system
- the systems of third party vendors which process student
financial aid applications and loans for us
- the Department of Education's systems for processing and
disbursing student financial aid
- financial institutions which provide loans to our students
Based on our assessment and vendors' representations, we
believe that the financial and accounting systems, including
those systems necessary for financial aid, of our significant
third party vendors are compliant at this time. Our Management
Information Services department will continue to monitor and spot
test our vendors' financial and accounting systems throughout the
remainder of the year.
We believe that the material non-IT systems that we control
are Year 2000 compliant and have begun the process of surveying
our landlords, utility providers and other providers of non-IT
systems to confirm that such systems are compliant. We have
collected documentation from all of our key utility providers,
including landlords, and will be testing at our campuses through
the end of the third quarter.
At this time, all of our campus administration systems Year
2000 evaluations have been completed. Non-compliant computer
systems have been replaced at all campuses as of July 31, 1999.
<PAGE>
The Risks Associated with Our Year 2000 Issues. Although we
are unable at this time to quantify with certainty our internal
costs resulting from our Year 2000 problems, we do not believe
that the cost of remediating our internal Year 2000 problems or
the lost opportunity costs arising from any necessary diversion
of our personnel to Year 2000 problems will have a material
adverse effect on our business, results of operations or
financial condition. We estimate that we have spent approximately
$300,000 to either upgrade or replace non-compliant computer
systems.
We believe the greatest Year 2000 compliance risk, in terms
of magnitude, is that the Department of Education may fail to
complete its remediation efforts in a timely manner and federal
student financial aid funding for our students could be
interrupted for a period of time. During any such time, students
may not be able to pay for their tuition in a timely manner.
Because we derive approximately 70% of our revenue from U.S.
federal student financial aid programs, such delay would likely
have a material adverse effect on our business, results of
operations and financial condition. Other than public comments
provided by the Department of Education's May 14, 1999 status
report that states that one hundred percent of the Department's
175 systems are either retired (28) or are Year 2000 compliant
and fully implemented (147), we are unable to predict the
likelihood of this risk occurring.
Contingency Plans. At this time, we expect to be Year 2000
compliant and are satisfied that our significant vendors are
compliant. However, to avoid interruptions of our operations, we
have begun developing contingency plans in the event that we
experience any Year 2000 problems. With respect to IT-systems, we
have distributed guidelines to each of our campuses regarding
data backup practices to store the information for our critical
business processes in case any of them experience Year 2000
problems. Our contingency plan with respect to the material non-
IT systems that we control includes, among other things,
investigating the availability and replacement cost of such non-
IT systems that have Year 2000 problems, isolating such systems
that are not Year 2000 compliant so that they do not affect other
systems and adjusting the clocks on such non-IT systems that are
not date sensitive. We do not believe that the total costs of
such Year 2000 compliance activities will be material.
<PAGE>
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains certain statements, which reflect
our expectations regarding our future growth, results of
operations, 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 our
current beliefs and are based on information currently available
to us. Accordingly, these statements are subject to risks and
uncertainties, which could cause our 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, but are not limited to:
- implementation of our operating and growth strategy;
- risks inherent in operating private for-profit postsecondary
educational institutions;
- risks associated with general economic and business
conditions;
- charges and costs related to acquisitions;
- our ability to successfully integrate our acquired
institutions;
- our ability to continue our acquisition strategy;
- our ability to attract and retain students at our
institutions;
- our ability to compete with new and enhanced competition in
the education industry;
- our ability to meet regulatory and accrediting agency
requirements; and
- our ability to attract and retain key employees and faculty.
We are not obligated to update or revise these forward-looking
statements to reflect new events or circumstances.
Item 3. Quantitative and Qualitative Disclosure About Market
Risk.
We are exposed to the impact of interest rate changes,
foreign currency fluctuations and changes in the market value of
our investments. We have not entered into interest rate caps or
collars or other hedging instruments.
Our exposure to changes in interest rates is limited to
borrowings under revolving credit agreements, which have variable
interest rates tied to the prime and LIBOR rates. In addition, we
had debt with fixed annual rates of interest at June 30, 1999 of
7.0% totaling $10.0 million, 8.0% totaling $6.6 million and 8.25%
totaling $0.2 million. We estimate that the fair value of each of
our debt instruments approximated its market value at June 30,
1999.
We are subject to fluctuations in the value of the Canadian
dollar vis-a-vis the U.S. dollar. Our investment in our Canadian
operations is not significant and the fair value of the assets
and liabilities of these operations at June 30, 1999 approximated
their fair value.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We and our campuses are subject to occasional lawsuits,
investigations and claims arising out of the ordinary conduct of
our business, including the following:
On February 24, 1997, 30 former and current students in
Brown's PC/LAN program brought a suit entitled Peter Alsides, et
al. v. Brown Institute, Ltd. in the Fourth Judicial District in
Hennepin County, Minnesota alleging breach of contract, fraud,
negligent misrepresentation, violation of the Minnesota Consumer
Fraud Act and violation of the Minnesota Deceptive Trade Practices
Act. Plaintiffs allege that Brown failed to provide them with the
education for which they contracted and which had been represented
to them. There are currently 35 plaintiffs, who are seeking to
recover their tuition, interest and costs. Brown's motion for
summary judgment dismissing the case was granted in May 1998.
Plaintiffs appealed and on April 13, 1999, the Minnesota
Court of Appeals affirmed in part and reversed in part and
remanded the case to the trial court. The appellate court affirmed
the dismissal of claims constituting educational malpractice but
held that the claims which allege specific promises or representations
not performed by Brown could be actionable on theories of breach of
contract, misrepresentation or consumer fraud. The appellate
court also held that the Deceptive Trade Practices Act applies to
schools but provides only injunctive relief. The trial court
then dismissed that claim. The trial court refused Brown's
second request for summary judgment and has scheduled the trial
for September 27, 1999. A pretrial and settlement conference is
set for August 18, 1999. We believe that all of these claims are
frivolous and without merit and we are vigorously contesting the
allegations.
Although outcomes cannot be predicted with certainty, we do not
believe that the above described matter or any other legal proceedings
to which we are a party will have a material adverse effect on our
business, results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) Our annual meeting of stockholders was held on May 20, 1999.
<TABLE>
(b) Our stockholders voted as follows to elect two Class I
directors to our board of directors:
<CAPTION>
Directors: For: Authority Withheld: Broker Non-Votes:
<S> <C> <C> <C>
Robert E. Dowdell 6,765,796 12,650 __
Patrick K. Pesch 6,765,796 12,650 __
</TABLE>
In addition to Mr. Dowdell and Mr. Pesch, the following
directors terms of office as directors continued after the
meeting: Thomas B. Lally, John M. Larson, Wallace O. Laub and
Keith K. Ogata.
<PAGE>
<TABLE>
(c) 1. Our stockholders voted as follows to approve an
amendment to the Career Education Corporation 1998 Employee
Incentive Compensation Plan which authorizes the addition of
750,000 shares of common stock authorized for issuance under such
plan and the increase in the maximum number of shares of common
stock any employee may be granted an option to purchase in any
year under such plan from 100,000 to 250,000:
<CAPTION>
For: Against: Abstentions: Broker Non-Votes:
<S> <C> <C> <C>
5,207,398 981,431 959 588,658
</TABLE>
<TABLE>
2. Our stockholders voted as follows to approve an amendment to
the Career Education Corporation 1998 Employee Stock Purchase
Plan which expands the eligibility requirements of such plan:
<CAPTION>
For: Against: Abstentions: Broker Non-Votes:
<S> <C> <C> <C>
6,724,454 47,692 6,300 __
</TABLE>
<TABLE>
3. Our stockholders voted as follows to ratify the appointment
of Arthur Andersen LLP as independent auditors of our financial
statements for the year ended December 31, 1999:
<CAPTION>
For: Against: Abstentions: Broker Non-Votes:
<S> <C> <C> <C>
6,777,365 300 781 __
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
We did not file any reports on Form 8-K during the second
quarter of 1999.
<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: August 6, 1999 By: /s/ JOHN M. LARSON
John M. Larson
President and Chief Executive Office
(Principal Executive Officer)
Date: August 6, 1999 By: /s/ WILLIAM A. KLETTKE
William A. Klettke
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 34,114
<SECURITIES> 0
<RECEIVABLES> 13,474
<ALLOWANCES> (2,747)
<INVENTORY> 1,161
<CURRENT-ASSETS> 53,547
<PP&E> 81,996
<DEPRECIATION> (18,612)
<TOTAL-ASSETS> 187,961
<CURRENT-LIABILITIES> 26,528
<BONDS> 51,748
0
0
<COMMON> 78
<OTHER-SE> 103,422
<TOTAL-LIABILITY-AND-EQUITY> 187,961
<SALES> 0
<TOTAL-REVENUES> 94,215
<CGS> 0
<TOTAL-COSTS> 89,665
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,014
<INTEREST-EXPENSE> 545
<INCOME-PRETAX> 4,005
<INCOME-TAX> 1,722
<INCOME-CONTINUING> 2,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,283
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.29
</TABLE>
