<PAGE>
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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, 2000
[_] 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.)
2895 Greenspoint Parkway, Suite 600, 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 10, 2000, 10,121,977 shares of the registrant's Common Stock,
par value $.01, were outstanding.
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<PAGE>
CAREER EDUCATION CORPORATION
QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Unaudited Consolidated Balance Sheets as of June
30, 2000 and
December 31, 1999........................................... 3
Condensed Unaudited Consolidated Statements of Operations
for the three and six months ended June 30, 2000 and 1999... 4
Condensed Unaudited Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999............. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 13
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 13
Item 6. Exhibits and Reports on Form 8-K............................ 14
SIGNATURES............................................................... 15
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash......................................... $ 67,102 $ 44,745
Receivables, net............................. 20,638 15,941
Inventories, prepaid expenses and other
current assets.............................. 11,854 7,825
Deferred income tax assets................... 2,501 1,011
-------- --------
Total current assets....................... 102,095 69,522
-------- --------
PROPERTY AND EQUIPMENT, net.................... 78,687 69,296
INTANGIBLE ASSETS, net......................... 91,970 70,484
OTHER ASSETS................................... 3,909 1,222
-------- --------
TOTAL ASSETS................................... $276,661 $210,524
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt......... $ 3,633 $ 2,324
Accounts payable............................. 11,543 7,629
Accrued expenses and other current
liabilities................................. 6,978 16,679
Deferred tuition revenue..................... 17,930 17,103
-------- --------
Total current liabilities.................. 40,084 43,735
-------- --------
LONG-TERM DEBT, net of current maturities...... 48,389 47,615
DEFERRED INCOME TAX LIABILITIES................ 5,750 4,128
OTHER LONG-TERM LIABILITIES.................... 179 1,365
-------- --------
Total long-term liabilities................ 54,318 53,108
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued and
outstanding at June 30, 2000 and December
31, 1999.................................... -- --
Common stock, $.01 par value; 50,000,000
shares authorized; 20,215,246 and 15,753,534
shares issued and outstanding at June 30,
2000 and December 31, 1999, respectively.... 202 158
Additional paid-in capital................... 176,661 113,046
Accumulated other comprehensive loss......... (574) (372)
Retained earnings............................ 5,970 849
-------- --------
Total stockholders' investment............. 182,259 113,681
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT. $276,661 $210,524
======== ========
</TABLE>
3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Six Months Ended
Ended June 30, June 30,
---------------- -----------------
2000 1999 2000 1999
------- ------- -------- -------
(unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net...... $66,879 $44,842 $131,559 $86,963
Other, net.............................. 6,702 3,938 12,337 7,252
------- ------- -------- -------
Total net revenue..................... 73,581 48,780 143,896 94,215
------- ------- -------- -------
OPERATING EXPENSES:
Educational services and facilities..... 31,110 21,160 58,849 39,681
General and administrative.............. 32,842 22,421 64,640 43,349
Depreciation and amortization........... 5,124 3,561 9,686 6,635
------- ------- -------- -------
Total operating expenses.............. 69,076 47,142 133,175 89,665
------- ------- -------- -------
Income from operations................ 4,505 1,638 10,721 4,550
INTEREST EXPENSE, net..................... (171) (333) (296) (545)
------- ------- -------- -------
Income before provision for income taxes
and cumulative effect of change in
accounting principle................... 4,334 1,305 10,425 4,005
PROVISION FOR INCOME TAXES................ 1,907 561 4,526 1,722
------- ------- -------- -------
Income before cumulative effect of
change in accounting principle......... 2,427 744 5,899 2,283
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of taxes of $587.......... -- -- (778) --
------- ------- -------- -------
NET INCOME................................ $ 2,427 $ 744 $ 5,121 $ 2,283
======= ======= ======== =======
NET INCOME PER SHARE:
Basic
Income before cumulative effect of
change in accounting principle....... $ 0.13 $ 0.05 $ 0.35 $ 0.15
Cumulative effect of change in
accounting principle, net of taxes... -- -- (0.05) --
------- ------- -------- -------
Net Income.......................... $ 0.13 $ 0.05 $ 0.30 $ 0.15
======= ======= ======== =======
Diluted
Income before cumulative effect of
change in accounting principle....... $ 0.13 $ 0.05 $ 0.34 $ 0.15
Cumulative effect of change in
accounting principle, net of taxes... -- -- (0.05) --
------- ------- -------- -------
Net Income.......................... $ 0.13 $ 0.05 $ 0.29 $ 0.15
======= ======= ======== =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic................................... 18,319 15,630 17,070 15,052
------- ------- -------- -------
Diluted................................. 18,825 16,200 17,582 15,640
------- ------- -------- -------
</TABLE>
4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
2000 1999
-------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 5,121 $ 2,283
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization.......................... 9,686 6,635
Compensation expense related to stock options.......... 26 --
Deferred income taxes.................................. 5,452 (2,721)
Changes in operating assets and liabilities, net of
acquisitions.......................................... (20,416) 1,294
-------- --------
Net cash (used in) provided by operating activities.. (131) 7,491
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash....................... (23,468) (24,751)
Acquisition costs and financing transaction costs........ (1,396) (1,195)
Purchase of property and equipment, net.................. (9,136) (6,947)
Other assets............................................. -- 375
-------- --------
Net cash used in investing activities................ (34,000) (32,518)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................. 67,007 15,723
Equity issuance costs.................................... (4,225) (1,945)
Payments of amounts due and notes payable to former
owners of acquired businesses, capital lease obligations
and other long-term debt................................ (4,197) (14)
Net borrowings (payments) on revolving loans under Credit
Agreement............................................... (2,000) 21,751
-------- --------
Net cash provided by financing activities............ 56,585 35,515
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................... (97) 78
-------- --------
NET INCREASE IN CASH....................................... 22,357 10,566
CASH, BEGINNING OF PERIOD.................................. 44,745 23,548
-------- --------
CASH, END OF PERIOD........................................ $ 67,102 $ 34,114
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations for purchase of equipment...... $ 2,578 $ --
Shares of common stock for license fee................... -- 2,000
======== ========
</TABLE>
5
<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, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2000. The condensed
consolidated balance sheet at December 31, 1999 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, 1999, that are included in our annual report on Form 10-K.
Note 2--Public Offering of Common Stock
On May 10, 2000, we sold 2,025,000 shares of common stock at $32.50 per
share pursuant to a public offering. The net proceeds to us from the sale of
the shares of common stock, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, were approximately
$61.6 million. We used $28.5 million of the offering net proceeds to repay
indebtedness under our credit facility and the remaining $33.1 million is
being used for general corporate purposes.
Note 3--Business Acquisitions
The Cooking and Hospitality Institute of Chicago, Inc.
On February 1, 2000, we acquired all of the outstanding capital stock of
The Cooking and Hospitality Institute of Chicago, Inc. The purchase price was
approximately $5.5 million, subject to adjustment. The acquisition was
accounted for as a purchase and the purchase price exceeded the fair market
value of assets acquired and liabilities assumed, resulting in goodwill of
approximately $5.1 million.
California Culinary Academy, Inc.
On April 3, 2000, we closed the acquisition of California Culinary Academy,
Inc. The purchase price was approximately $20.0 million. We also assumed
approximately $3.0 million of the debt of California Culinary Academy, Inc.
The acquisition was accounted for as a purchase and the purchase price
exceeded the fair market value of assets acquired and liabilities assumed,
resulting in goodwill of approximately $18.3 million.
SoftTrain Institute, Inc.
On July 28, 2000, we closed the acquisition of SoftTrain Institute, Inc.
The purchase price was approximately $0.5 million, subject to adjustment. The
acquisition was accounted for as a purchase and the purchase price exceeded
the fair market value of assets acquired and liabilities assumed, resulting in
goodwill of approximately $0.5 million.
6
<PAGE>
Note 4--Comprehensive Income
The disclosure of comprehensive income and accumulated other comprehensive
income, which encompasses net income and foreign currency translation
adjustments, is as follows:
<TABLE>
<CAPTION>
Six Months
Ended June
30,
--------------
2000 1999
------ ------
<S> <C> <C>
Net Income................................................. $5,121 $2,283
Other Comprehensive (Loss) Income
Foreign currency translation adjustment.................. (202) 289
------ ------
Comprehensive Income....................................... $4,919 $2,572
====== ======
</TABLE>
Note 5--Recent Accounting Pronouncement
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on
the recognition, presentation, and disclosure of revenue in financial
statements. The SAB outlines basic criteria that must be met before
registrants may recognize revenue, including persuasive evidence of the
existence of an arrangement, the delivery of products or services, a fixed and
determinable sales price, and reasonable assurance of collection. SAB 101 is
required to be adopted in the fourth fiscal quarter of the first fiscal year
beginning after December 15, 1999.
Prior to the release of SAB 101, our revenue recognition policy was in
compliance with generally accepted accounting principles. Effective January 1,
2000, we adopted this change in accounting principle to comply with the
specific provisions and guidance of SAB 101. SAB 101 requires us to recognize
revenue related to application and registration fees over the student benefit
period. Through December 31, 1999, we recognized application and registration
fees as revenue upon receipt. As a result, we recognized a cumulative net of
tax charge of $0.8 million, in the first quarter of 2000.
Note 6--Assets Held For Sale
As of June 30, 2000, we had approximately $2.7 million in real estate
property held for sale. This property was acquired as a result of our purchase
of California Culinary Academy, Inc. This amount is included in other assets
on the accompanying condensed unaudited consolidated balance sheet.
Note 7--Stock Split
Our Board of Directors announced a 2-for-1 stock split to be effected in
the form of a stock dividend. The dividend will be payable on August 25, 2000
to shareholders of record on August 14, 2000. All share and per share amounts
in the accompanying financial statements have been retroactively adjusted to
reflect this stock dividend.
Note 8--Reclassification
We have reclassified direct contract training expenses in 1999 from general
and administrative expenses to educational services and facilities expense to
conform to the 2000 presentation.
7
<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 2000 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 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 21,800 students enrolled as of July 31, 2000. We
have 28 campuses located in 15 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:
. visual communication and design technologies
. information technology
. 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 is a result of capital
improvements and increased amortization is a result of added goodwill.
We believe that EBITDA, while not a substitute for generally accepted
accounting principles' measures of operating results, is an important measure
of our financial performance and that of our schools. Our EBITDA increased
85%, from $5.2 million for the second quarter of 1999 to $9.6 million in the
second quarter of 2000. For the six months ended June 30, 2000, EBITDA
increased 82%, from $11.2 million to $20.4 million in the same period in 1999.
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. 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, we refund the portion of 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.
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.
8
<PAGE>
Other revenue consists of bookstore sales, placement fees, dormitory and
cafeteria fees, contract training fees, rental income and restaurant revenue.
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, direct contract training
costs and owned facility costs.
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 the previous owners of our schools.
Acquisitions
On February 1, 2000, we acquired all of the outstanding capital stock of
The Cooking and Hospitality Institute of Chicago, Inc. The purchase price was
approximately $5.5 million, subject to adjustment. The acquisition was
accounted for as a purchase and the purchase price exceeded the fair market
value of assets acquired and liabilities assumed, resulting in goodwill of
approximately $5.1 million.
On April 3, 2000, we closed the acquisition of California Culinary Academy,
Inc. The purchase price was approximately $20.0 million. We also assumed
approximately $3.0 million of debt of California Culinary Academy, Inc. The
acquisition was accounted for as a purchase and the purchase price exceeded
the fair market value of assets acquired and liabilities assumed, resulting in
goodwill of approximately $18.3 million.
On July 28, 2000, we closed the acquisition of SoftTrain Institute, Inc.
The purchase price was approximately $0.5 million, subject to adjustment. The
acquisition was accounted for as a purchase and the purchase price exceeded
the fair market value of assets acquired and liabilities assumed, resulting in
goodwill of approximately $0.5 million.
9
<PAGE>
Results of Operations
The following table summarizes our operating results as a percentage of net
revenue:
<TABLE>
<CAPTION>
Six Months
Three Months Ended Ended June
June 30, 30,
-------------------- ------------
2000 1999 2000 1999
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Revenue:
Tuition and registration fees, net....... 90.9% 91.9% 91.4% 92.3%
Other, net............................... 9.1 8.1 8.6 7.7
--------- --------- ----- -----
Total net revenue...................... 100.0 100.0 100.0 100.0
--------- --------- ----- -----
Operating expenses:
Educational services and facilities...... 42.3 43.4 40.9 42.1
General and administrative............... 44.6 46.0 44.9 46.0
Depreciation and amortization............ 7.0 7.3 6.7 7.1
--------- --------- ----- -----
Total operating expenses............... 93.9 96.7 92.5 95.2
--------- --------- ----- -----
Income from operations................. 6.1 3.3 7.5 4.8
Interest expense, net...................... (0.2) (0.7) (0.2) (0.6)
--------- --------- ----- -----
Income before provision for income taxes
and cumulative effect of change in
accounting principle.................... 5.9 2.6 7.3 4.2
Provision for income taxes 2.6 1.2 3.1 1.8
--------- --------- ----- -----
Income before cumulative effect of change
in accounting principle................. 3.3 1.4 4.2 2.4
Cumulative effect of change in accounting
principle, net ........................... -- -- (0.5) --
--------- --------- ----- -----
Net income................................. 3.3 1.4 3.7 2.4
========= ========= ===== =====
</TABLE>
Revenue. Net tuition and registration fee revenue increased 49%, from $44.8
million in the second quarter of 1999 to $66.9 million in the second quarter
of 2000. The increase was due to an approximate 21% increase in the student
population for the schools owned prior to the second quarter of 1999, tuition
increases effective after the second quarter of 1999 and student enrollment
mix. The increase was also due to added net tuition and registration fee
revenue of $7.1 million for the schools acquired after the first quarter of
1999. For the six months ended June 30, 2000, net tuition and registration fee
increased 51%, from $87.0 million to $131.6 million primarily due to reasons
mentioned above and added net tuition and registration fee revenue of $16.6
million for schools acquired after January 1999.
Other net revenue increased 70%, from $3.9 million in the second quarter of
1999 to $6.7 million in the second quarter of 2000, primarily due to the
increase in student population mentioned above and added other revenue of $1.6
million for the schools acquired after the first quarter of 1999. For the six
months ended June 30, 2000, other net revenue increased 70%, from $7.3 million
to $12.3 million primarily due to reasons mentioned above and added other
revenue of $3.4 million for the schools acquired after January 1999.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 47%, from $21.1 million in the second quarter of
1999 to $31.1 million in the second quarter of 2000. The increase was
primarily due to the costs associated with the increase in student population
mentioned above, an increase in contract training costs, as well as an
increase in curriculum development activities. The increase was also due to
added educational services and facilities expense of $4.7 million for the
schools acquired after the first quarter of 1999. For the six months ended
June 30, 2000 educational services and facilities expense increased 48%, from
$39.7 million to $58.8 million primarily due to the reasons mentioned above
and added educational services and facilities expense of $9.9 million for the
schools acquired after January 1999.
10
<PAGE>
General and Administrative Expense. General and administrative expense
increased 46%, from $22.4 million in the second quarter of 1999 to $32.8
million in the second quarter of 2000. The increase was primarily attributable
to $4.2 million of increased advertising and marketing (including admissions)
for the schools owned prior to the second quarter of 1999, $2.0 million in
expenses related to planned corporate and regional infrastructure enhancements
and $2.6 million of added general and administrative expenses for the schools
acquired after the first quarter of 1999. For the six months ended June 30,
2000, general and administrative expense increased 49%, from $43.3 million to
$64.6 million primarily due to the reasons mentioned above and added general
and administrative expenses of $7.2 million for the schools acquired after
January 1999.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 44%, from $3.6 million in the second quarter of 1999 to $5.1
million in the second quarter of 2000. The increase was primarily due to
capital expenditures for the schools acquired prior to the second quarter of
1999 and added depreciation expense of $0.3 million for the schools acquired
after the first quarter of 1999. Amortization expense decreased 8%, from $1.2
million in the second quarter of 1999 to $1.1 million in the second quarter of
2000, primarily due to the decline of amortization of non-competition
agreements and goodwill for the schools acquired prior to the second quarter
of 1999 offset by added amortization for the schools acquired after the first
quarter of 1999. For the six months ended June 30, 2000 depreciation and
amortization expense increased 46%, from $6.6 million to $9.7 million. The
increase was primarily due to the reasons mentioned above and added
depreciation expense of $0.7 million for the schools acquired after January
1999. Amortization expense decreased 4%, from $2.3 million in the first six
months of 1999 to $2.2 million in the first six months of 2000, primarily due
to the reasons mentioned above offset by added amortization expense of $0.4
million for the schools acquired after January 1999.
Net Interest Expense. Net interest expense decreased 49%, from $0.3 million
in the second quarter of 1999 to $0.2 million in the second quarter of 2000.
The decrease was primarily due to the reduction in indebtedness following our
May 2000 public offering. For the six months ended June 30, 2000, net interest
expense decreased 46%, from $0.5 million to $0.3 million due to the reasons
mentioned above.
Provision for Income Taxes. The provision for income taxes increased 240%,
from $0.6 million in the second quarter of 1999 to $1.9 million in the second
quarter of 2000 as a result of increases in pretax income. For the six months
ended June 30, 2000, the provision for income taxes increased 163%, from $1.7
million to $4.5 million due to the reasons mentioned above.
Income before Cumulative Effect of Change in Accounting Principle. Net
income increased 226%, from $0.7 million in the second quarter of 1999 to $2.4
million in the second quarter of 2000 due to the reasons mentioned above. For
the six months ended June 30, 2000, net income before cumulative effect of
change in accounting principle increased 158%, from $2.3 million to $5.9
million due to the reasons mentioned above.
Cumulative Effect of Change in Accounting Principle. We adopted Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, as of January 1, 2000
resulting in a net of tax charge of $0.8 million. SAB 101 requires us to
recognize revenue related to application and registration fees over the
student benefit period rather than as revenue upon receipt.
Net Income. Net income increased 226%, from $0.7 million in the second
quarter of 1999 to $2.4 million in the second quarter of 2000, due to the
reasons mentioned above. For the six months ended June 30, 2000, net income
increased 124%, from $2.3 million to $5.1 million due to the reasons mentioned
above.
Liquidity and Capital Resources
On May 10, 2000, we sold 2,025,000 shares of common stock at $32.50 per
share pursuant to a public offering. The net proceeds to us from the sale of
the shares of common stock, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, were approximately
$61.6 million.
11
<PAGE>
We used $28.5 million of the offering net proceeds to repay indebtedness under
our credit facility and the remaining $33.1 million is being used for general
corporate purposes.
We finance our operating activities and our internal growth through cash
generated from operations. We finance acquisitions through funding from a
combination of additional equity investments, credit facilities and remaining
cash generated from operations. Net cash provided by operating activities
decreased from $7.5 million for the first six months of 1999 to net cash used
in operating activities of $0.1 million for the first six months of 2000. The
decrease was primarily due to approximately $3.0 million of severance costs
and other liabilities related to acquisitions. Additionally, during the first
six months of 2000, we paid approximately $6.5 million more in tax payments
than in 1999 as a result of our increased profitability.
Capital expenditures increased from $6.9 million in the first six months of
1999 to $9.1 million in the first six months of 2000. This increase was
primarily due to investments in leasehold improvements on new and expanded
facilities and capital equipment as a result of increasing student population.
We would normally expect capital expenditures to increase as new schools are
acquired or opened, student population increases and current facilities and
equipment are upgraded and expanded.
Our net receivables at June 30, as a percentage of net revenue for the
first six months, increased to 14% in 2000 from 11% in 1999. Based upon past
experience and judgment, we establish an allowance for doubtful accounts with
respect to tuition receivables.
We have a $90.0 million line of credit and can 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 June 30, 2000, we had approximately $2.5 million of
outstanding letters of credit and had approximately $39.0 million in
outstanding borrowings under our credit facility. As a result, at June 30,
2000, our remaining credit availability under the credit agreement was
approximately $48.5 million.
The DOE requires that we keep unbilled Title IV Program funds that are
collected in separate cash 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 program are
held in a separate cash account until certain conditions are satisfied. As of
June 30, 2000, 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.
Year 2000 Compliance
We have not experienced any year 2000 problems, nor have our operations
been affected by any year 2000 failures of third parties on which we rely.
Although we have not experienced any year 2000 problems to date, we plan to
continue to monitor the situation closely, as year 2000 problems could still
arise.
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<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. We estimate that the book value of each of our debt
instruments approximated its fair value at June 30, 2000.
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 book value of the assets and liabilities of these
operations at June 30, 2000 approximated their fair value.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Our annual meeting of stockholders was held on May 12, 2000.
(b) Our stockholders voted as follows to elect two Class II directors to
our board of directors:
<TABLE>
<CAPTION>
Authority Broker
Directors: For: Withheld: Non-Votes:
---------- --------- --------- ----------
<S> <C> <C> <C>
Wallace O. Laub............................... 6,683,181 -- --
Keith K. Ogata................................ 6,683,002 -- --
</TABLE>
13
<PAGE>
In addition to Mr. Laub and Mr. Ogata, the following directors terms of
office as directors continued after the meeting: Robert E. Dowdell , Thomas B.
Lally, John M. Larson and Patrick K. Pesch.
(c) 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:
<TABLE>
<CAPTION>
Broker
For: Against: Abstentions: Non-Votes:
---- --------- ------------ ----------
<S> <C> <C> <C>
4,365,275 1,849,658 1,220 566,669
</TABLE>
(d) 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, 2000.
<TABLE>
<CAPTION>
Broker
For: Against: Abstentions: Non-Votes:
---- -------- ------------ ----------
<S> <C> <C> <C>
6,781,708 -- 1,114 --
</TABLE>
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K on April 11, 2000 to report the
consummation of our acquisition of California Culinary Academy, Inc. (Items 5
and 7 of Form 8-K).
We filed a Current Report on Form 8-K on April 26, 2000 filing a press
release dated April 25, 2000 (Items 5 and 7 of Form 8-K).
14
<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
/s/ John M. Larson
By:__________________________________
Date: August 14, 2000 John M. Larson
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2000 /s/ Patrick K. Pesch
By:__________________________________
Patrick K. Pesch
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
