<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 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 November 3, 2000, 20,304,992 shares of the registrant's Common Stock,
par value $.01, were outstanding.
<PAGE>
CAREER EDUCATION CORPORATION
QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PART I--FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Item 1. Financial Statements
Condensed Unaudited Consolidated Balance Sheets as of
September 30, 2000 and December 31, 1996.................. 3
Condensed Unaudited Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and
1999...................................................... 4
Condensed Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 5
Notes to Condensed Unaudited 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.. 14
PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................. 15
Item 6. Exhibits and Reports on Form 8-K........................... 15
SIGNATURES.............................................................. 16
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.............................................. $ 40,447 $ 44,745
Receivables, net.................................. 31,332 15,941
Inventories, prepaid expenses and other current
assets........................................... 14,429 7,825
Deferred income tax assets........................ 2,890 1,011
-------- --------
Total current assets............................ 89,098 69,522
-------- --------
PROPERTY AND EQUIPMENT, net......................... 80,804 69,296
INTANGIBLE ASSETS, net.............................. 92,059 70,484
OTHER ASSETS........................................ 3,943 1,222
-------- --------
TOTAL ASSETS........................................ $265,904 $210,524
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt.............. $ 4,454 $ 2,324
Accounts payable.................................. 13,368 7,629
Accrued expenses and other current liabilities.... 11,498 16,679
Deferred tuition revenue.......................... 24,482 17,103
-------- --------
Total current liabilities....................... 53,802 43,735
-------- --------
LONG-TERM DEBT, net of current maturities........... 15,616 47,615
DEFERRED INCOME TAX LIABILITIES..................... 6,250 4,128
OTHER LONG-TERM LIABILITIES......................... 2,073 1,365
-------- --------
Total long-term liabilities..................... 23,939 53,108
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at
September 30, 2000 and December 31, 1999......... -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 20,291,560 and 15,753,534 shares
issued and outstanding at September 30, 2000 and
December 31, 1999, respectively.................. 203 158
Additional paid-in capital........................ 178,318 113,046
Accumulated other comprehensive loss.............. (719) (372)
Retained earnings................................. 10,361 849
-------- --------
Total stockholders' investment.................. 188,163 113,681
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT...... $265,904 $210,524
======== ========
</TABLE>
3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended September Nine Months Ended
30, September 30,
--------------- ------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net...... $74,007 $50,094 $205,566 $137,057
Other, net.............................. 8,254 5,511 20,591 12,763
------- ------- -------- --------
Total net revenue..................... 82,261 55,605 226,157 149,820
------- ------- -------- --------
OPERATING EXPENSES:
Educational services and facilities..... 34,003 23,379 92,852 63,060
General and administrative.............. 35,246 25,216 99,886 68,565
Depreciation and amortization........... 5,278 3,731 14,964 10,366
------- ------- -------- --------
Total operating expenses.............. 74,527 52,326 207,702 141,991
------- ------- -------- --------
Income from operations................ 7,734 3,279 18,455 7,829
INTEREST INCOME (EXPENSE)................. 108 (366) (188) (911)
------- ------- -------- --------
Income before provision for income taxes
and cumulative effect of change in
accounting principle................... 7,842 2,913 18,267 6,918
PROVISION FOR INCOME TAXES................ 3,451 1,252 7,977 2,974
------- ------- -------- --------
Income before cumulative effect of
change in accounting principle......... 4,391 1,661 10,290 3,944
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of taxes of
$587..................................... -- -- (778) --
------- ------- -------- --------
NET INCOME................................ $ 4,391 $ 1,661 $ 9,512 $ 3,944
======= ======= ======== ========
NET INCOME PER SHARE:
Basic
Income before cumulative effect of
change in
accounting principle................. $ 0.22 $ 0.11 $ 0.56 $ 0.26
Cumulative effect of change in
accounting
principle, net of taxes.............. -- -- (0.04) --
------- ------- -------- --------
Net Income.......................... $ 0.22 $ 0.11 $ 0.52 $ 0.26
======= ======= ======== ========
Diluted
Income before cumulative effect of
change in
accounting principle................. $ 0.21 $ 0.10 $ 0.55 $ 0.25
Cumulative effect of change in
accounting
principle, net of taxes.............. -- -- (0.04) --
------- ------- -------- --------
Net Income.......................... $ 0.21 $ 0.10 $ 0.51 $ 0.25
======= ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................. 20,267 15,644 18,143 15,252
------- ------- -------- --------
Diluted................................. 21,138 16,104 18,773 15,785
======= ======= ======== ========
</TABLE>
4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 9,512 $ 3,944
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 14,964 10,366
Compensation expense related to stock options.......... 39 48
Loss on sale of property and equipment................. 22 --
Deferred income taxes.................................. 5,539 (2,601)
Changes in operating assets and liabilities, net of
acquisitions.......................................... (20,212) 6,435
-------- --------
Net cash provided by operating activities............ 9,864 18,192
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash....................... (26,151) (34,752)
Acquisition costs and financing transaction costs........ (1,577) (1,454)
Purchase of property and equipment, net.................. (15,479) (9,554)
Other assets............................................. -- 375
-------- --------
Net cash used in investing activities................ (43,207) (45,385)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................. 67,453 15,952
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............................................... (3,526) (538)
Net borrowings (payments) on revolving loans under Credit
Agreement............................................... (30,500) 29,750
-------- --------
Net cash provided by financing activities............ 29,202 43,219
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................... (157) 90
-------- --------
NET INCREASE (DECREASE) IN CASH ........................... (4,298) 16,116
CASH, beginning of period.................................. 44,745 23,548
-------- --------
CASH, end of period........................................ $ 40,447 $ 39,664
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations for purchase of equipment...... $ 4,341 $ --
Shares of common stock for license fee................... 1,000 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 nine months ended
September 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 4,050,000 shares of common stock at $16.25 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. 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 $4.8 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 $18.2 million.
SoftTrain Institute Inc.
On July 28, 2000, we acquired all of the outstanding capital stock of
SoftTrain Institute Inc. The purchase price was approximately $0.5 million.
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.
Retter Business College Inc.
On October 2, 2000, we acquired all of the outstanding capital stock of
Retter Business College Inc. The purchase price was approximately $0.4
million. 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 $0.4 million.
6
<PAGE>
Note 4--Comprehensive Income
Comprehensive income and accumulated other comprehensive income, which
encompasses net income and foreign currency translation adjustments, is as
follows:
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Net Income.......................................... $ 9,512 $ 3,944
Changes in Other Comprehensive (Loss) Income
Foreign currency translation adjustment............ (347) 315
Comprehensive Income................................ $ 9,165 $ 4,259
</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. This new accounting
pronouncement did not have a significant effect on 1999 net income and the
cumulative effect of the accounting change.
Note 6--Assets Held For Sale
As of September 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 approved a 2-for-1 stock split effected in the form
of a stock dividend. The dividend was paid on August 25, 2000 to shareholders
of record on August 14, 2000. All share and per share amounts in the
accompanying financial statements and in the body of this Form 10-Q have been
retroactively adjusted to reflect this stock dividend.
Note 8--Change in Accounting 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.
Note 9--Subsequent Event
On October 24, 2000, we entered into an Agreement and Plan of Merger
pursuant to which we will acquire all of the shares of EduTrek International.
Inc., which owns and operates American InterContinental University (AIU).
EduTrek will become a wholly-owned subsidiary of Career Education Corporation.
We have agreed to issue 1.2 million shares of our common stock and pay $2.5
million in cash for all of the outstanding shares of EduTrek. We will also
fund approximately $37.0 million in assumed EduTrek debt and other
obligations. This transaction is expected to close in January 2001 and will be
accounted for under the purchase method of accounting. Completion of the
transaction is subject to a number of conditions, including regulatory and
EduTrek shareholder approvals. R. Steven Bostic, the Chairman and Chief
Executive Officer of EduTrek and his affiliates, along with another
significant shareholder, have agreed to vote in favor of the merger agreement
and have given us a proxy to vote their shares in favor of the merger.
Together, these shareholders have the right to cast approximately 93% of the
votes at the special meeting.
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 14 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 29,000 students enrolled as of October 31, 2000.
We have 30 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
86%, from $7.0 million for the third quarter of 1999 to $13.0 million in the
third quarter of 2000. For the nine months ended September 30, 2000, EBITDA
increased 84%, from $18.2 million to $33.4 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 terms, which are
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.
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.
8
<PAGE>
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. 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 $4.8 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 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 $18.2 million.
On July 28, 2000, we acquired all of the outstanding capital stock of
SoftTrain Institute Inc. The purchase price was approximately $0.5 million.
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.
On October 2, 2000, we acquired all of the outstanding capital stock of
Retter Business College Inc. The purchase price was approximately $0.4
million. 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 $0.4 million.
9
<PAGE>
Results of Operations
The following table summarizes our operating results as a percentage of net
revenue:
<TABLE>
<CAPTION>
Three
Months Nine Months
Ended Ended
September September
30, 30,
------------ ------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUE:
Tuition and registration fees, net............ 90.0% 90.1% 90.9% 91.5%
Other, net.................................... 10.0 9.9 9.1 8.5
----- ----- ----- -----
Total net revenue........................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Educational services and facilities........... 41.3 42.1 41.0 42.1
General and administrative.................... 42.9 45.3 44.2 45.8
Depreciation and amortization................. 6.4 6.7 6.6 6.9
----- ----- ----- -----
Total operating expenses.................... 90.6 94.1 91.8 94.8
----- ----- ----- -----
Income from operations...................... 9.4 5.9 8.2 5.2
INTEREST INCOME (EXPENSE)....................... 0.1 (0.7) (0.1) (0.6)
----- ----- ----- -----
Income before provision for income taxes and
cumulative
effect of change in accounting principle..... 9.5 5.2 8.1 4.6
PROVISION FOR INCOME TAXES...................... 4.2 2.2 3.6 2.0
----- ----- ----- -----
Income before cumulative effect of change in
accounting principle......................... 5.3 3.0 4.5 2.6
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net...................... -- -- (0.3) --
----- ----- ----- -----
NET INCOME ..................................... 5.3 3.0 4.2 2.6
===== ===== ===== =====
</TABLE>
Revenue. Net tuition and registration fee revenue increased 48%, from $50.1
million in the third quarter of 1999 to $74.0 million in the third quarter of
2000. The increase was due to an approximate 20% increase in the student
population for the schools owned prior to the third quarter of 1999, tuition
increases effective after the third quarter of 1999 and student enrollment
mix. The increase was also due to added net tuition and registration fee
revenue of $5.5 million for the schools acquired after the third quarter of
1999.
For the nine months ended September 30, net tuition and registration fee
increased 50%, from $137.1 million in 1999 to $205.6 million in 2000 primarily
due to reasons mentioned above and added net tuition and registration fee
revenue of $25.7 million for schools acquired after the January 4, 1999
acquisition of Harrington Institute of Design.
Other net revenue increased 50%, from $5.5 million in the third quarter of
1999 to $8.3 million in the third quarter of 2000, primarily due to the
increase in student population mentioned above and added other revenue of $1.7
million for the schools acquired after the third quarter of 1999.
For the nine months ended September 30, other net revenue increased 61%,
from $12.8 million in 1999 to $20.6 million in 2000 primarily due to reasons
mentioned above and added other revenue of $5.0 million for the schools
acquired after the January 4, 1999 acquisition of Harrington Institute of
Design.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 45%, from $23.4 million in the third quarter of
1999 to $34.0 million in the third 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 $4.1 million for the schools
acquired after the third quarter of 1999.
10
<PAGE>
For the nine months ended September 30, educational services and facilities
expense increased 47%, from $63.1 million in 1999 to $92.9 million in 2000
primarily due to the reasons mentioned above and added educational services
and facilities expense of $15.2 million for the schools acquired after the
January 4, 1999 acquisition of Harrington Institute of Design.
General and Administrative Expense. General and administrative expense
increased 40%, from $25.2 million in the third quarter of 1999 to $35.2
million in the third quarter of 2000. The increase was primarily attributable
to $4.4 million of increased advertising and marketing (including admissions)
for the schools owned prior to the third quarter of 1999, $1.7 million in
expenses related to planned corporate and regional infrastructure enhancements
and $2.4 million of added general and administrative expenses for the schools
acquired after the third quarter of 1999.
For the nine months ended September 30, general and administrative expense
increased 46%, from $68.6 million in 1999 to $99.9 million in 2000 primarily
due to the reasons mentioned above and added general and administrative
expenses of $10.7 million for the schools acquired after the January 4, 1999
acquisition of Harrington Institute of Design.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 41%, from $3.7 million in the third quarter of 1999 to $5.3
million in the third quarter of 2000. The increase was primarily due to
capital expenditures for the schools acquired prior to the third quarter of
1999 and added depreciation expense of $0.2 million for the schools acquired
after the third quarter of 1999. Amortization expense decreased 9%, from $1.3
million in the third quarter of 1999 to $1.2 million in the third quarter of
2000, primarily due to the decline of amortization of non-competition
agreements and goodwill for the schools acquired prior to the third quarter of
1999 offset by added amortization for the schools acquired after the third
quarter of 1999.
For the nine months ended September 30, depreciation and amortization
expense increased 44%, from $10.4 million in 1999 to $15.0 million in 2000.
The increase was primarily due to the reasons mentioned above and added
depreciation expense of $0.9 million for the schools acquired after the
January 4, 1999 acquisition of Harrington Institute of Design. Amortization
expense decreased 6%, from $3.6 million in the first nine months of 1999 to
$3.4 million in the first nine months of 2000, primarily due to the reasons
mentioned above offset by added amortization expense of $0.5 million for the
schools acquired after the January 4, 1999 acquisition of Harrington Institute
of Design.
Net Interest Income (Expense). Net interest changed from an expense of $0.4
million in the third quarter of 1999 to income of $0.1 million in the third
quarter of 2000. The change was primarily due to the reduction in indebtedness
following our May 2000 public offering.
For the nine months ended September 30, 2000, net interest expense
decreased 79%, from $0.9 million to $0.2 million due to the reasons mentioned
above.
Provision for Income Taxes. The provision for income taxes increased 176%,
from $1.3 million in the third quarter of 1999 to $3.5 million in the third
quarter of 2000 as a result of increases in pretax income and an increase in
our effective tax rate from 43 to 44%.
For the nine months ended September 30, 2000, the provision for income
taxes increased 168%, from $3.0 million to $8.0 million due to the reasons
mentioned above.
Income before Cumulative Effect of Change in Accounting Principle. Income
before cumulative effect of change in accounting principle increased 164%,
from $1.7 million in the third quarter of 1999 to $4.4 million in the third
quarter of 2000 due to the reasons mentioned above.
For the nine months ended September 30, 2000, income before cumulative
effect of change in accounting principle increased 161%, from $3.9 million to
$10.3 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 164%, from $1.7 million in the third
quarter of 1999 to $4.4 million in the third quarter of 2000, due to the
reasons mentioned above.
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For the nine months ended September 30, 2000, net income increased 141%,
from $3.9 million to $9.5 million due to the reasons mentioned above.
Recent Developments
On October 24, 2000, we entered into an Agreement and Plan of Merger
pursuant to which we will acquire all of the shares of EduTrek International.
Inc., which owns and operates American InterContinental University (AIU).
EduTrek will become a wholly-owned subsidiary of Career Education Corporation.
We have agreed to issue 1.2 million shares of our common stock and pay $2.5
million in cash for all of the outstanding shares of EduTrek. We will also
fund approximately $37.0 million in assumed EduTrek debt and other
obligations. This transaction is expected to close in January 2001 and will be
accounted for under the purchase method of accounting. Completion of the
transaction is subject to a number of conditions, including regulatory and
EduTrek shareholder approvals. R. Steven Bostic, the Chairman and Chief
Executive Officer of EduTrek, and his affiliates, along with another
significant shareholder, have agreed to vote in favor of the merger agreement
and have given us a proxy to vote their shares in favor of the merger.
Together, these shareholders have the right to cast approximately 93% of the
votes at the special meeting.
We remain confident that we will be able to meet or exceed current
consensus analyst estimates for earnings per share for the fourth quarter of
2000 and for 2001 even though the transaction will be dilutive to us in 2001.
Earnings per share attributable to the merger are expected to become accretive
in 2002.
Founded in 1970, AIU has seven campuses located in Atlanta (Buckhead and
Dunwoody), Dubai, Ft. Lauderdale, London, Los Angeles and Washington D.C. with
approximately 4,500 students. EduTrek is teaching- out the Washington D.C.
campus and this operation will be closed. The University is accredited by the
Commission on Colleges of the Southern Association of Colleges and Schools
(SACS).
Liquidity and Capital Resources
On May 10, 2000, we sold 4,050,000 shares of common stock at $16.25 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.
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 $18.2 million for the first nine months of 1999 to $9.9 million
for the first nine months of 2000. The decrease was partially due to
approximately $3.0 million of severance costs and other liabilities related to
acquisitions. Additionally, during the first nine months of 2000, we paid
approximately $7.0 million more in tax payments than in 1999 as a result of
our increased profitability.
Capital expenditures increased from $9.6 million in the first nine months
of 1999 to $15.5 million in the first nine 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 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 September 30, 2000 increased from September 30, 1999
due to the increase in student population and higher priced programs. Based
upon past experience and judgment, we establish an allowance for doubtful
accounts with respect to tuition receivables.
Our inventories, prepaid expenses and other current assets at September 30,
2000 increased from September 30, 1999 primarily due to the increase in
prepaid construction and rent related to school facililty expansion.
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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 September 30, 2000, we had
approximately $3.4 million of outstanding letters of credit and had
approximately $10.5 million in outstanding borrowings under our credit
facility. As a result, at September 30, 2000, our remaining credit
availability under the credit agreement was approximately $76.1 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
September 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.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains certain statements that 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," "remain confident" 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:
. costs, delays and other difficulties related to the proposed merger with
EduTrek;
. 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;
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. 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 current and future 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 September 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 September 30, 2000 approximated their fair value.
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PART II--OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On July 25, 2000, we issued 39,120 shares of our common stock to Le Cordon
Bleu Limited in connection with the license by CEC of the Le Cordon Bleu
Restaurant Management Program in the United States and Canada. The shares were
issued pursuant to an exemption under Section 4(2) of the Securities Act of
1933. This issuance was made without general solicitation or advertising. We
have entered into an agreement providing for certain registration rights to Le
Cordon Bleu Limited.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 10.11--Employment Agreement dated as of August 1, 2000
between the Registrant and John M. Larson.
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 2000.
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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
Date: November 6, 2000 By:__________________________________
John M. Larson
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 6, 2000 /s/ PATRICK K. PESCH
By:__________________________________
Patrick K. Pesch
Senior Vice President and
Chief Executive Officer
(Principal Financial and
Accounting Officer)
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