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: September 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 October 28, 1999, 7,837,775 shares of the
registrant's Common Stock, par value $.01, were outstanding.
<PAGE>
CAREER EDUCATION CORPORATION
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1999 (unaudited) and December 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 (unaudited)
and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 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 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
<CAPTION>
September 30, 1999 December 31, 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 39,664 $ 23,548
Receivables, net 15,654 12,407
Inventories, prepaid expenses and other current assets 9,092 4,973
Total current assets 64,410 40,928
PROPERTY AND EQUIPMENT, net 63,589 46,403
INTANGIBLE ASSETS, net 66,739 42,645
DEFERRED INCOME TAX ASSETS - 865
OTHER ASSETS 3,257 2,046
TOTAL ASSETS $ 197,995 $ 132,887
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 264 $ 317
Accounts payable 8,239 2,425
Accrued expenses and other current liabilities 12,766 12,033
Deferred tuition revenue 15,550 10,159
Total current liabilities 36,819 24,934
NON-CURRENT LIABILITIES:
Long-term debt, net of current maturities 49,513 22,300
Other long-term liabilities 1,224 1,017
Deferred income tax liability 4,927 -
Total non-current liabilities 55,664 23,317
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Common stock, $.01 par value; 50,000,000 shares
authorized; 7,829,146 and 7,152,896 shares issued
and outstanding at September 30, 1999 and December
31, 1998, respectively; 78 72
Additional paid-in capital 112,092 95,481
Accumulated other comprehensive income (507) (822)
Accumulated deficit (6,151) (10,095)
Total stockholders' investment 105,512 84,636
TOTAL LIABILITIES AND STOCKHOLDERS'INVESTMENT $ 197,995 $ 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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net $ 50,094 $ 31,715 $ 137,057 $ 91,659
Other, net 5,511 3,279 12,763 8,257
Total net revenue 55,605 34,994 149,820 99,916
OPERATING EXPENSES:
Educational services and facilities 23,172 14,584 62,034 41,419
General and administrative 25,423 16,028 69,591 46,161
Depreciation and amortization 3,731 3,172 10,366 9,233
Compensation expense related to the initial
public offering - - - 1,961
Total operating expenses 52,326 33,784 141,991 98,774
Income from operations 3,279 1,210 7,829 1,142
INTEREST EXPENSE, net (366) (247) (911) (987)
Income before provision for income taxes and
cumulative effect of change in accounting principle 2,913 963 6,918 155
PROVISION FOR INCOME TAXES 1,252 404 2,974 65
Income before cumulative effect of change in
accounting principle 1,661 559 3,944 90
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of taxes of $149 - - - (205)
NET INCOME (LOSS) $ 1,661 $ 559 $ 3,944 $ (115)
</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 Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net income (loss) as reported $ 1,661 $ 559 $ 3,944 $ (115)
Dividends on preferred stock - - - (274)
Accretion to redemption value of preferred
stock and warrants - - - (2,153)
Net income (loss) attributable to common
stockholders $ 1,661 $ 559 $ 3,944 $ (2,542)
NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic $ 0.21 $ 0.08 $ 0.52 $ (0.40)
Diluted $ 0.21 $ 0.08 $ 0.50 $ (0.40)
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Shares used in basic 7,822 7,142 7,626 6,309
Dilutive effect of employee stock options 230 196 267 -
Dilutive effect of future issuable shares - - - -
Shares used in diluted 8,052 7,338 7,893 6,309
PRO FORMA DATA:
Net income (loss) attributable to common
stockholders $ (213)
Diluted net income (loss) per share
attributable to common stockholders $ (0.03)
Weighted average shares outstanding
used in diluted 6,699
</TABLE>
<PAGE>
<TABLE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<CAPTION>
Nine Months Ended
September 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period $ 3,944 $ (115)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 10,366 9,233
Compensation expense related to option issuances 48 1,961
Gain on sale of property and equipment - (14)
Deferred income taxes (2,601) (918)
Cumulative effect of change in accounting principle - 205
Changes in operating assets and liabilities, net of acquisitions 6,435 (500)
Net cash provided by operating activities 18,192 9,852
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash (34,752) (4,964)
Acquisition costs (1,454) (244)
Purchase of property and equipment, net (9,554) (3,117)
Other assets 375 (56)
Net cash used in investing activities (45,385) (8,381)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 15,952 52,620
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 (538) (8,118)
Net borrowings (payments) on revolving loans under Credit Agreement 29,750 (24,485)
Payments on term loans under Credit Agreement - (13,500)
Net cash provided by (used in) financing activities 43,219 (351)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 90 (287)
NET INCREASE IN CASH 16,116 833
CASH, beginning of period 23,548 18,906
CASH, end of period $ 39,664 $ 19,739
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 nine months ended September 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 Harrington 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 $6.6 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 $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 nine months ended
September 30, 1999 $ 3,944
Other Comprehensive Income -
Foreign currency translation adjustment 315 315
Comprehensive income for the nine months
ended September 30, 1999 $ 4,259
Balance, September 30, 1999 $ (507)
</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 nine months ended
September 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 September 30, 1999, we had
approximately $41.0 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 22,500
students enrolled as of October 31, 1999 compared to
approximately 15,900 students as of October 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 third
quarter 1999, EBITDA was $7.0 million, up 59% from $4.4 million
for third quarter 1998. For the nine months ended September 30,
1999, EBITDA was $18.2 million, up 75% from $10.4 million for the
same period in 1998. Excluding the before-tax non-cash
compensation charge of $1.9 million, EBITDA for the nine months
ended September 30, 1998 would have been $12.3 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.
<PAGE>
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.
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), distance learning costs, 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 Harrington 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, Inc. for a
purchase price of approximately $6.6 million.
<PAGE>
Results of Operations
<TABLE>
The following table summarizes our operating results as a
percentage of net revenue:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net 90.1 % 90.6 % 91.5 % 91.7 %
Other, net 9.9 9.4 8.5 8.3
Total net revenue 100.0 100.0 100.0 100.0
OPERATING EXPENSES:
Educational services and facilities 41.7 41.7 41.4 41.5
General and administrative 45.7 45.8 46.5 46.2
Depreciation and amortization 6.7 9.1 6.9 9.2
Compensation expense related to the initial
public offering - - - 2.0
Total operating expenses 94.1 96.6 94.8 98.9
Income from operations 5.9 3.4 5.2 1.1
INTEREST EXPENSE, net (0.7) (0.7) (0.6) (0.9)
Income before provision for income taxes and
cumulative effect of change in accounting principle 5.2 2.7 4.6 0.2
PROVISION FOR INCOME TAXES 2.2 1.1 2.0 0.1
Income before cumulative effect of change in
accounting principle 3.0 1.6 2.6 0.1
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of taxes - - - (0.2)
NET INCOME (LOSS) 3.0 1.6 2.6 (0.1)
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS 3.0 % 1.6 % 2.6 % (2.5) %
</TABLE>
Revenue. Net tuition and registration fee revenue for third
quarter 1999 was $50.1 million, up $18.4 million or 58.0%
compared to third quarter 1998. On a same school basis, the
37.7% increase was primarily due to a 21.2% increase in
average student population, tuition increases, and changes in student
enrollment mix. For the nine months ended September 30, 1999, net
tuition and registration fee revenue was $137.1 million, up $45.4
million or 49.5% compared to the same period last year. Of this
amount, $19.8 million was due to added net tuition revenue for
schools acquired during and after the 1998 period. On a same
school basis, the increase was 30.6% and was also due to tuition
increases, as well as an increase in average student population
of 24.6%.
Other revenue, net, for third quarter 1999 was $5.5 million, up
$2.2 million or 68.1% compared to third quarter 1998. For the
nine months ended September 30, 1999, other net revenue was $12.8
million, up $4.5 million or 54.6% compared to the same period
last year. These increases were due to an increase in student
population for schools owned during the 1998 period.
<PAGE>
Educational Services and Facilities. Educational services
and facilities expense for third quarter 1999 was $23.2 million,
up $8.6 million or 58.9% compared to third quarter 1998. On a
same school basis, this increase was $4.5 million, or
31.9%. For the nine months ended September 30, 1999 this
expense was $62.0 million, up $20.6 million or 49.8% compared to
the same period last year. On a same school basis, this increase
was $10.6 million, or 26.2%. These increases were mainly
attributable to the increase in average student population
mentioned above, as well as an increase in curriculum
development.
General and Administrative. General and administrative
expense for third quarter 1999 was $25.4 million, up $9.4 million
or 58.6% compared to third quarter 1998. On a same school basis,
this increase was $6.6 million and was mainly due to increased
advertising and marketing (including admissions) of $3.4 million
and planned corporate and regional infrastructure enhancements of
$1.8 million. For the nine months ended September 30, 1999 the
expenses were $69.6 million, up $23.4 million or 50.8% compared
to the same period last year. On a same school basis, this
increase was $16.0 million and was mainly due to increased
advertising and marketing (including admissions) of $7.7 million
and planned corporate and regional infrastructure enhancements of
$4.5 million.
Depreciation and Amortization. Depreciation and amortization
expense for third quarter 1999 was $3.7 million, up $0.6 million
or 17.6% compared to third quarter 1998. On a same school basis,
it decreased by 0.3% due to decreased amortization related
to non-compete agreements. For the nine months ended September 30,
1999 depreciation and amortization was $10.4 million, up $1.1
million or 12.3% compared to the same period last year. On a same
school basis, it decreased by 3.5% also due to decreased
amortization related to non-compete agreements.
Compensation Expense Related to the Initial Public Offering.
A before-tax, non-cash compensation charge of approximately
$1.9 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 third quarter
1999 was $0.4 million compared to $0.2 million in the same period
last year. For the nine months ended September 30, 1999 net
interest expense was $0.9 million compared to $1.0 million the
same period last year.
Provision for Income Taxes. The provision for income taxes
for third quarter 1999 was $1.3 million, up $0.9 million from
the same period last year. For the nine months ended September
30, 1999 the provision for income taxes was $3.0 million compared
to $0.1 million for the same period last year. These increases
were due to higher pretax income coupled with a 1.0 percentage
point higher effective tax rate.
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 third quarter 1999 was
$1.7 million compared to $0.6 million in the same period last
year due to the reasons discussed above. For the nine months
ended September 30, 1999 net income was $3.9 million compared to
a net loss of $0.1 million in the same period last year.
Net Income (Loss) Attributable to Common Stockholders. Net
income attributable to common stockholders increased to $1.7
million in the third quarter of 1999 from $0.6 million in the
third quarter of 1998. For the nine months ended September 30,
1999 net income attributable to common stockholders was $3.9
million compared to a net loss of $2.5 million in the same period
last year. These increases were 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 $18.2 million in the first nine months of 1999 from
$9.9 million in the first nine months of 1998, due primarily to
increases in net income and operating assets and liabilities.
Capital expenditures increased to $9.6 million in the first
nine months of 1999 from $3.1 million in the first nine 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 10% in 1999 from 14% in 1998, primarily due to increased
revenue at our schools acquired prior to September 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 October 29, 1999, we had $15.0
million of 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 September 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. 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 completed 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 and landlords.
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. 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 August 13, 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
are continuing to develop 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.
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.
<PAGE>
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 September 30,
1999 of 8.0% totaling $6.9 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 September 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 September 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 against Brown. In October, 1999 the
parties agreed in principal to a settlement in an amount which
will not be material to our business, results of operations or
financial condition. It is anticipated that the settlement
agreement will be executed by the parties in November, 1999.
Although outcomes cannot be predicted with certainty, we do
not believe 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 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 Current Reports on
Form 8-K during the third 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: November 1, 1999 By: /s/ JOHN M. LARSON
John M. Larson
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 1, 1999 By: /s/ PATRICK K. PESCH
Patrick K. Pesch
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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