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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 0-23245
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CAREER EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3932190
(State of Incorporation) (I.R.S. Employer ID No.)
2800 West Higgins Road, Suite 790, 60195
Hoffman Estates, Illinois (zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (847) 781-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the $35.13 per share closing sale
price of the registrant's Common Stock on March 22, 2000, was approximately
$219,711,521. For purposes of this calculation, the Registrant's directors and
executive officers have been assumed to be affiliates.
The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 22, 2000 was 7,951,182.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Notice of Annual Meeting and Proxy Statement for our Annual
Meeting of Stockholders, scheduled to be held on May 12, 2000, are incorporated
by reference into Part III of this Report.
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CAREER EDUCATION CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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Page
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<C> <S> <C>
PART I................................................................... 1
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 23
ITEM 3. LEGAL PROCEEDINGS........................................... 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 23
PART II.................................................................. 24
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 24
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............. 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 35
PART III................................................................. 36
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ......... 36
ITEM 11. EXECUTIVE COMPENSATION...................................... 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 36
PART IV.................................................................. 37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 37
</TABLE>
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PART I
ITEM 1. BUSINESS
The discussion below contains certain forward-looking statements, as such
term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Special Note Regarding Forward-looking Statements" on page 34 for a discussion
of risks and uncertainties that could cause or contribute to such material
differences.
Overview
We are a provider of private, for-profit postsecondary education in North
America, with approximately 23,400 students enrolled as of February 1, 2000. We
operate 27 campuses located in 15 states and two Canadian provinces. Our
schools enjoy long operating histories and offer a variety of bachelor's
degree, associate's degree and non-degree programs in career-oriented
disciplines. We have experienced significant growth both internally and through
acquisitions with our net revenue increasing from $19.4 million in 1995 to
$216.8 million in 1999. In addition, our net income increased from $0.1 million
in 1995 to $10.9 million in 1999.
We were founded in January 1994 by John M. Larson, our Chairman, President
and Chief Executive Officer, who has over 25 years of experience in the career-
oriented education industry. We were formed to capitalize on opportunities in
the large and highly fragmented postsecondary school industry. Since our
inception, we have completed 17 acquisitions. We have acquired schools that we
believe possess strong curricula, leading reputations and broad marketability
but that have been undermanaged from a marketing and financial standpoint. We
seek to apply our expertise in operations, marketing and curricula development,
as well as our financial strength, to improve the performance of these schools.
Our schools offer educational programs principally in the following four
career-related fields of study, identified by us as areas with highly
interested and motivated students, strong entry-level employment opportunities
and ongoing career and salary advancement potential:
. Visual Communication and Design Technologies: These programs include desktop
publishing, graphic design, fashion design, interior design, graphic imaging,
webpage design and animation.
. Information Technology: These programs include PC/LAN, PC/Net, computer
technical support, computer network operation, computer information
management and computer programming.
. Business Studies: These programs include business administration and business
operations.
. Culinary Arts: These programs include culinary arts, restaurant management
and pastry arts.
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The schools we have acquired are summarized in the following table:
<TABLE>
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Year Date Principal Degree
School Founded Acquired Curricula(1) Granting
------ ------- -------- ------------ --------
<S> <C> <C> <C> <C>
Al Collins Graphic Design School 1978 1/94 IT, VC Yes
Tempe, AZ
Brooks College 1970 6/94 VC Yes
Long Beach, CA
Allentown Business School 1869 7/95 B, IT, VC Yes
Allentown, PA
Brown Institute 1946 7/95 CA, IT, VC Yes
Mendota Heights, MN
Western Culinary Institute 1983 10/96 CA No
Portland, OR
School of Computer Technology 1967 2/97 CA, IT Yes
Fairmont, WV
Pittsburgh, PA
The Katharine Gibbs Schools 1911 5/97 B, IT, VC Yes
Boston, MA
Melville, NY
Montclair, NJ(2)
New York, NY
Norwalk, CT(2)
Piscataway, NJ(3)
Providence, RI(3)
International Academy of
Merchandising & Design 1977 6/97 VC Yes
Chicago, IL
Tampa, FL(4)
International Academy of Design 1983 6/97 VC No
Montreal, PQ
Toronto, ON
California School of Culinary Arts 1994 3/98 CA No
South Pasadena, CA
Scottsdale Culinary Institute 1986 7/98 CA Yes
Scottsdale, AZ
Harrington Institute of Interior
Design 1931 1/99 VC Yes
Chicago, IL
McIntosh College 1896 3/99 B, CA, IT Yes
Dover, NH
Briarcliffe College 1966 4/99 B, IT, VC Yes
Bethpage, NY
Patchogue, NY
Brooks Institute of Photography 1945 6/99 VC Yes
Santa Barbara, CA
Washington Business School 1950 12/99 B No
Vienna, VA
The Cooking and Hospitality
Institute of Chicago 1983 2/00 CA Yes
Chicago, IL
</TABLE>
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(1) The programs offered by our schools include business studies (B), culinary
arts (CA), information technology (IT), and visual communication and design
technologies (VC).
(2) The Gibbs campuses in Norwalk, Connecticut and Montclair, New Jersey are
now using the name Gibbs College.
(3) Does not offer degree programs.
(4) This campus is now using the name International Academy of Design.
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Industry Background
Based on estimates for 1996 by the Department of Education's National Center
for Education Statistics, postsecondary education is a $225 billion industry,
with over 14 million students obtaining some form of postsecondary education.
Of this total, approximately 3.2 million students are enrolled in approximately
4,600 private, degree-granting schools. Federal funds available to support
postsecondary education exceed $40 billion each year and have grown steadily
over the last two decades. Additionally, the federal government guaranteed over
$32 billion in student loans in 1997 and is expected to guarantee loans at
comparable levels in the future. State, local and private funds for career-
oriented training are also available.
Several national economic, demographic and social trends are converging to
contribute to the growing demand for career-oriented education:
Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological skills required for entry level jobs are spurring demand for
specialized training which, in many cases, is not provided by traditional two
and four year colleges. The U.S. Department of Labor projects that between 1996
and 2006 jobs requiring (1) a bachelor's degree are expected to increase
approximately 24%, (2) an associate's degree are expected to increase
approximately 31% and (3) postsecondary vocational training are expected to
increase approximately 14%. As of December 31, 1999, approximately 65% of our
U.S. students were enrolled in bachelor's or associate's degree programs and
the remaining 35% of our U.S. students were enrolled in vocational
diploma/certificate programs. As of December 31, 1999, approximately 9% of our
students were enrolled in our Canadian schools. Furthermore, career-oriented
schools generally have the ability to react quickly to the changing needs of
the nation's business and industrial communities. Additionally, to meet the new
workplace demands, many major companies are now using career-oriented
institutions to provide customized training for their employees on a
contractual basis. Small to medium-sized companies are also using proprietary
career-oriented schools to fill their needs for training to maintain or
increase the skill levels of their employees.
Increasing Numbers of High School Graduates. Currently, U.S. high school
graduates represent over 2.6 million new prospective postsecondary students
each year, the largest pool of potential enrollees. Over the 18 years prior to
1993, the number of high school graduates had been declining. However, this
trend has changed favorably as children of the "baby boom" generation are
entering their high school years. These members of the "echo boom," as it is
commonly known, are expected to boost enrollment in postsecondary educational
programs to as high as 15.8 million students by 2006, an increase of over 10%
from approximately 14.3 million in the fall of 1996.
Growing Demand for Postsecondary Education. High school graduates and adults
are seeking postsecondary education in increasing numbers. According to the
U.S. Department of Commerce, approximately 65% of all 1996 high school
graduates continued their education that same year, compared with 53% a decade
earlier. In addition, enrollment in postsecondary programs is expected to
increase substantially as individuals seek to enhance their skills or re-train
for new job requirements. In part because of the recent trend toward corporate
downsizing, the National Center for Education Statistics estimates that over
the next several years initial enrollments in postsecondary education
institutions by working adults will increase more rapidly than initial
enrollments by recent high school graduates. The number of adults enrolled in
postsecondary education programs in the U.S. is estimated by the National
Center for Education Statistics to reach 6.2 million in 2000, or 41% of the
total number of people enrolled.
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Recognition of the Value of Postsecondary Education. We believe that
prospective students are increasingly recognizing the income premium and other
improvements in career prospects associated with a postsecondary education. On
average, (1) a female with an associate's degree earns 33% more than a female
high school graduate, and a male with an associate's degree earns 19% more than
a male high school graduate, while (2) a female with a bachelor's degree earns
57% more than a female high school graduate, and a male with a bachelor's
degree earns 53% more than a male high school graduate. Independent research
studies have demonstrated that prospective students consider these benefits in
making their education decisions.
Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent years
has forced educational institutions to cut back spending on general operations.
As a result, some schools have become underfunded and overcrowded. This trend
may provide an opportunity for proprietary institutions to serve, at more
competitive prices, the postsecondary education needs of individuals who would
have otherwise attended public schools.
Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of military personnel has declined by 36% since
1987, with the aggregate number of individuals on active duty in the military
services declining from 2.2 million in 1987 to 1.4 million in 1998. This has
left an educational void to be filled by other sources, including proprietary
career-oriented schools.
We believe that private, for-profit, career-oriented schools are uniquely
positioned to take advantage of these national trends. We also believe that
similar factors are creating a favorable climate for career-oriented
postsecondary education in Canada and other international markets.
Business and Operating Strategy
Our business and operating strategy has enabled us to achieve significant
improvements in the performance of our schools. We believe this strategy will
enable us to continue to capitalize on the favorable economic, demographic and
social trends which are driving demand for career-oriented education, thereby
strengthening our position as a premier, professionally managed system of
career-oriented postsecondary educational institutions. The key elements of our
business and operating strategy are as follows:
Focusing on Core Curricula. Our schools offer educational programs
principally in four career-related fields of study:
. visual communication and design technologies, offered at 18 campuses
. information technology, including Internet and intranet technology, offered
at 15 campuses
. business studies, offered at 12 campuses
. culinary arts, offered at seven campuses
We perceive a growing demand by employers for individuals possessing skills
in these particular fields. We also believe there are many entry-level
positions and ongoing career and salary advancement potential for individuals
who have received advanced training in these areas. We recognize that these
employment opportunities have attracted highly interested and motivated
students. These students include both recent high school graduates and adults
seeking formal training in these fields as well as degrees, diplomas and
certificates evidencing their knowledge and skills. Our experience and
expertise in these attractive areas of study enable us to differentiate
ourselves from many of our competitors and to effectively tailor our
acquisition and marketing plans.
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Adapting and Expanding Educational Programs. We strive to meet the changing
needs of our students and the employment market. We continually refine and
adapt our courses to ensure that both students and employers are satisfied with
the quality and breadth of our educational programs. Through various means,
including student and employer surveys and curriculum advisory boards comprised
of business and community members, our schools regularly evaluate their program
offerings and consider revisions to existing classes and programs, as well as
the introduction of new courses and programs of study within our core
curricula. We selectively duplicate programs that have been successful
elsewhere in our school system. In 1999, we successfully duplicated nine
programs and plan to continue this curricula migration in the future. For
example, we introduced visual communication programs at three of our Gibbs
schools and at the School of Computer Technology in Pittsburgh. Brown Institute
became the first U.S. campus to offer the Le Cordon Bleu culinary program. Al
Collins Graphic Design School started a new program in both traditional and
computer animation. The International Academy of Design in Toronto launched a
program in digital television production.
Investing for Future Growth. We make substantial investments in our people,
facilities, management information systems and classroom technologies to
prepare for continued growth. We devote particular attention to attracting and
retaining both corporate and school-level management, and focus on employee
development in order to facilitate internal promotions. We make substantial
investments in facilities and classroom technologies to attract, retain and
prepare students for the increasing technical demands of the workplace.
Additionally, we have made significant investments in our management
information systems to standardize applications and processes across our
schools in order to maintain effective and expedient communication between our
schools and corporate management, as well as to ensure the smooth integration
of newly acquired schools.
Emphasizing School Management Autonomy and Accountability. We provide
significant autonomy and appropriate performance-based incentives to our
campus-level managers, which we believe offers important benefits for the
organization. We believe these policies foster an important sense of personal
responsibility for achieving campus performance objectives. We also believe our
willingness to grant local autonomy provides us and our schools with a
significant advantage in recruiting and retaining highly-motivated individuals
with an entrepreneurial spirit. Management of each of our campuses is
principally directed by a campus president and local managers, who are
accountable for the campus' operations and profitability. Corporate strategy,
finance and accounting consolidation functions are, however, centralized at our
executive offices in Hoffman Estates, Illinois. When we acquire a new school,
we evaluate the capabilities of existing campus management personnel, and
typically retain a significant portion, which contributes to our ability to
rapidly integrate acquired schools into our system. We also determine the
acquired school's needs for additional or stronger managers in key areas and,
where necessary, take appropriate action by hiring new managers or assigning
experienced staff to the school's campuses.
Direct Response Marketing. We seek to increase school enrollment and
profitability through intensive local, regional and national direct response
marketing programs designed to maximize each school's market penetration. We
also use the Internet to attract potential students and believe that this
medium will be an increasingly important marketing tool. Because many of our
schools have been significantly under-marketed prior to their acquisition, we
believe that major benefits can result from carefully crafted, targeted
marketing programs that leverage schools' curriculum strength and brand name
recognition. After every school acquisition, we design a marketing program
tailored to the particular school to highlight its strengths and to improve
student lead generation and student enrollment rates. Our management uses a
diversified media, direct response approach, including direct mail, Internet-
based advertising, infomercials, other television-based advertising, newspaper
advertising and other print media, to attract potential students. We place
particular emphasis on high school recruitment because it produces a steady
supply of new students.
Improving Student Retention. We emphasize the retention of students, from
initial enrollment to completion of their courses of study because, as at other
postsecondary educational institutions, a substantial portion of our students
never finish their educational programs for personal, financial or academic
reasons.
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Substantial increases in revenue and profitability can be achieved through
modest improvements in student retention rates. Our costs to keep current
students in school are much less than the expense of the marketing efforts
associated with attracting new students; therefore, student retention efforts,
if successful, are extremely beneficial to operating results. We strive to
improve retention by treating students as valued customers. We consider student
retention the responsibility of the entire staff of each school, from
admissions to faculty and administration to career counseling services, and
provide resources and support for the retention efforts developed by our local
school administrators. School personnel typically employ an approach based upon
establishing personal relationships with students; for example, students may
receive a telephone call from a school counselor or faculty member if they miss
classes. In addition, our corporate staff regularly tracks retention rates at
each school and provides feedback and support to the efforts of local school
administrators. As of December 31, 1999, our retention rate was approximately
77%. This rate was determined in accordance with the standards of the
Accrediting Council for Independent Colleges and Schools, which determines
retention rates by dividing the total number of student dropouts by the sum of
(1) beginning student population, (2) new starts and (3) student re-enters.
Emphasizing Employment of Graduates. We believe that the high rates of
employment for graduates of our schools enhance the overall reputation of the
schools as well as their ability to attract new students. High placement rates
also lead to low student loan default rates, which are necessary to allow our
schools to continue to participate in the federal student financial aid
programs. We consider student placement to be a high priority and allocate a
significant amount of time and resources to placement services. Due at least in
part to this emphasis, 91.8% of our students that graduated during the academic
year ended June 30, 1999 who were available for employment found employment
relating to their fields of study within six months of graduation. We are
committed to maintaining or improving these graduate employment rates and newly
acquired schools will be expected to meet similar graduate employment success
standards.
Growth Strategy
We believe we can achieve superior long-term growth in revenue and
profitability by continuing to expand existing operations and acquire
additional schools in attractive markets. We believe we can achieve additional
growth in the future by establishing new campuses and also by entering new
service areas and recruiting internationally.
Expanding Existing Operations. We believe that our existing 27 campuses can
achieve significant internal growth in enrollment, revenue and profitability.
We are executing our business and operating strategy, including all of the
elements described above, to accomplish this growth. We believe that expansion
of operations at our existing schools, along with acquisitions of new schools,
will be the primary generators of our growth in the near term.
Acquiring Additional Schools. To date, we have grown by acquiring new
schools in the U.S. and Canada and then applying our expertise in marketing and
school management to increase enrollment, revenue and profitability at those
schools. We expect that this process will continue to be one of the most
important elements of our growth strategy. We may also acquire operations
outside North America where we believe significant opportunities exist. We have
an active acquisition program and from time to time engage in, and are
currently engaged in, evaluations of, and discussions with, possible
acquisition candidates, including evaluations and discussions relating to
acquisitions that may be material in size or scope.
We make selective acquisitions of for-profit, career-oriented schools which
have capable faculty and operations staff, as well as quality educational
programs, which stand to benefit from our educational focus, marketing and
operating strengths. We target schools which we believe have the potential to
generate superior financial performance. Generally, such schools demonstrate
the following characteristics:
. "Schools of Choice"--Possessing leading reputations in career-oriented
disciplines within local, regional and national markets
. Success--Demonstrating the ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards
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. Marketable Curricula--Offering programs that provide students with relevant
training and the skills necessary to obtain attractive jobs and advance in
their selected fields
. Broad Marketability--Attracting students from each of the high school, adult,
foreign and contract training market segments
. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract and prepare students for
the demands of the increasingly competitive workplace
We believe that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the significant
cost of developing new educational programs necessary to meet changing demands
of the employment market. We believe that a substantial number of schools
exhibiting the characteristics described above exist in the U.S. and Canadian
markets and such schools can be successfully integrated into our marketing and
administrative structure. We believe that competition in Canada is not
currently as intense as in the U.S. Few of the largest U.S. operators of
postsecondary career-oriented schools currently have a significant Canadian
presence. We believe that, given our existing Canadian operations, we are well
positioned to take advantage of these opportunities.
We analyze acquisition targets for their long-term profit potential,
enrollment potential and long-term demographic trends, concentration of likely
employers within the region, level of competition, facility costs and
availability and quality of management and faculty. We carefully investigate
any potential acquisition target for its history of regulatory compliance, both
as an indication of future regulatory costs and compliance issues and as an
indication of the school's overall condition. Significant regulatory compliance
issues in the school's past will generally remove a school from our
consideration as an acquisition candidate.
After we complete an acquisition, we immediately begin to apply our business
strategy to boost enrollment and improve the acquired school's profitability.
We assist acquired schools in achieving their potential through a highly
focused and active management role, as well as through capital contributions.
We selectively commit resources to improve marketing, advertising,
administration and regulatory compliance at each acquired school. We may also
commit further resources to enhance management depth. We retain acquired
schools' brand names to take advantage of their established reputation in
local, regional and national markets as "schools of choice."
By acquiring new schools, we are also able to realize economies of scale in
terms of our management information systems, accounting and audit functions,
employee benefits and insurance procurement. We also benefit from the exchange
of ideas among school administrators regarding faculty development, student
retention programs, recruitment, curriculum, financial aid and student
placement programs.
Establishing New Campuses. Although, to date, we have added new campuses
only through acquisitions, we plan to develop, open and operate new campuses
ourselves. We will most likely establish these new campuses as additional
locations of existing institutions, but we may also establish campuses as
entirely separate, free-standing institutions. Opening new campuses would
enable us to capitalize on new markets or geographic locations that exhibit
strong enrollment potential and/or the potential to establish a successful
operation in one of our core curricula areas. We believe that this strategy
will allow us to continue to grow rapidly even if appropriate acquisition
opportunities are not readily available.
Entering New Service Areas. While we expect that our current career-oriented
school operations will continue to provide the substantial majority of our
revenue in the near term, we plan to further develop new education-related
services which we believe offer strong long-term growth potential. In 1999, we
introduced our first distance learning program, which offers educational
products and services through the Internet and other distribution channels. We
also plan to expand our contract training business, which provides customized
training on a contract basis for business and government organizations, and
which is currently a limited part of the operations of a few of our schools.
Although we have not yet actively targeted the growing market for contract
training services, we believe that contract training can become a much more
significant part of our business.
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Recruiting International Students. Although all of our current operations
are located in North America, we believe that trends similar to those impacting
the market for postsecondary career-oriented education in the U.S. and Canada
are occurring outside of North America. As a result, we believe that there may
be significant international opportunities in private, for-profit postsecondary
education. We recently launched marketing efforts in selected countries to
increase international student enrollment at our schools.
Student Recruitment
Our schools seek to attract students with both the desire and ability to
complete their academic programs. Therefore, to produce interest among
potential students, each of our schools engages in a wide variety of marketing
activities.
We believe that the reputation of our schools in local, regional and
national business communities and the recommendations of satisfied former
students are important factors contributing to success in recruiting new
students. Each school's admissions office is charged with marketing the
school's programs through a combination of admissions representatives, direct
mailings and radio, Internet, television and print media advertising, in
addition to providing the information needed by prospective students to assist
them in making their enrollment decisions.
As of December 31, 1999, our schools employed approximately 300 admissions
representatives, each of whom focuses his or her efforts on one or more of the
following areas: (1) out-of-area/correspondence recruiting, (2) high school
recruiting or (3) in-house/local recruiting. Correspondence representatives
work with students who live outside of the immediate school area to generate
interest through correspondence with potential enrollees who have learned of
the school through regional or national advertising. We believe that we are
able to significantly boost enrollment by targeting students outside of the
local population. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on our school campus. The
interpersonal relationships formed with high school counselors and faculty may
have significant influence over a potential student's choice of school. In
1999, approximately 31% of our student population was under the age of 20. We
believe that the relationships of our schools' representatives with the
counseling departments of high schools are good and that the brand awareness
and placement rates of our schools assist representatives in gaining access to
counselors. In-house representatives are also available to speak with
prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and
advise students interested in specific careers to determine the likelihood of
their success in completing their educational programs. The admissions
representatives are full-time, salaried employees of the schools. Regulations
of the Department of Education prevent us from giving our U.S. employees
incentive compensation based, directly or indirectly, upon the number of
students recruited.
We also engage in significant direct mail campaigns. We purchase mailing
lists from a variety of sources, and we mail brochures regularly during the
course of the year, with frequency determined by the number of school starts in
a given year. We believe direct mailings offer a fast and cost-effective way to
reach a targeted population.
In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, some initiatives have been successfully utilized
on a national basis. We have found infomercials to be a particularly effective
tool nationally, because their length enables schools to convey a substantial
amount of information about their students, their faculty, their facilities
and, most importantly, their course offerings. We also believe that the
personal flavor of the presentation typical of infomercials is well-suited to
attracting potential applicants. As an additional marketing tool, all of our
schools have established web sites, which can be easily accessed for
information about these schools and their educational programs. Although we
retain independent advertising agencies, we design and produce a portion of our
direct marketing and multi-media advertising and communications in-house,
through Market Direct, Inc., a wholly-owned subsidiary. While substantially all
of Market Direct's operations involve designing and
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producing advertising for us, Market Direct also provides these services to
other businesses outside of the postsecondary education industry as
opportunities arise.
We closely monitor the effectiveness of our marketing efforts. We estimate
that, in 1999, admissions representatives were responsible for attracting
approximately 36% of student enrollments, direct mailings were responsible for
approximately 11%, television, radio and print media advertising were
responsible for approximately 41%, Internet advertising was responsible for
approximately 6%, and the remaining approximately 6% was attributable to
various other methods.
Student Admissions and Retention
The admissions and entrance standards of each school are designed to
identify those students who are best equipped to meet the requirements of their
chosen fields of study. The most important qualifications for students include
a strong desire to learn, passion for their area of interest, initiative and a
high likelihood of successfully completing their programs. These
characteristics are generally identified through personal interviews conducted
by admissions representatives. We believe that a success-oriented student body
results in higher retention and placement rates, increased satisfaction on the
part of students and their employers and lower student default rates on
government loans. To be qualified for admission to one of our schools, each
applicant must have a high school diploma or a General Education Development
certificate. Many of our schools also require that applicants obtain certain
minimum scores on academic assessment examinations.
We recognize that our ability to retain students until graduation is an
important indicator of our success and that modest improvements in retention
rates can result in meaningful increases in school revenue and profitability.
As with other postsecondary educational institutions, many of our students do
not complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff members
at each of our campuses strive to establish personal relationships with
students. Each campus devotes staff resources to advising students regarding
academic and financial matters, part-time employment and other matters that may
affect their success. However, while there may be many contributors, each
campus has one administrative employee specifically responsible for monitoring
and coordinating the student retention efforts. In addition, our corporate
staff regularly tracks retention rates at each campus and provides feedback and
support to appropriate local campus administrators.
Curriculum Development and Faculty
We believe that curriculum is the single most important component of our
operations, because students choose, and employers recruit from, career-
oriented schools based on the type and quality of technical education offered.
The curriculum development efforts of our schools are a product of their
operating partnership with students and the business and industrial
communities.
The relationship of each of our schools with the business community plays a
significant role in the development and adaptation of school curriculum. Each
school has one or more program advisory boards composed of members of the local
and regional business community who are engaged in businesses directly related
to the educational offerings provided by the school. These boards provide
valuable input to the school's education department, which allows the school to
keep its programs current and provide graduates with the training and skills
that these employers seek.
We also endeavor to enhance and maintain the relevancy of our curricula by
soliciting ideas through student and employer surveys and by requiring students
in selected programs to complete an internship during their school experience.
We have developed a number of techniques designed both to gain valuable
industry insight for ongoing curriculum development and enhance the overall
student experience. These techniques include (1) classroom discussions with
industry executives, (2) part-time job placement within a student's industry of
choice and (3) classroom case studies that are based upon actual industry
issues.
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Our schools are in continuous contact with employers through their faculty,
many of whom are industry professionals. The schools hire a significant number
of part-time faculty holding positions in business and industry because
specialized knowledge is required to teach many of the schools' courses and to
provide students with current, industry-specific training. The schedules of
business and industry professionals often permit them to teach the many evening
courses offered by our schools. Unlike traditional four-year colleges,
instructors in our schools are not awarded tenure and are evaluated, in part,
based upon student evaluations. Our schools employ approximately 1,700 faculty
members, of which approximately 35% are full-time employees and approximately
65% have been hired on a part-time, adjunct basis.
School Administration
We provide significant operational autonomy and appropriate performance-
based compensation to local school administrators who have demonstrated the
ability to undertake such responsibility, based on our belief that success is
driven by performance at the local level through enrollment growth, student
retention rates and placement rates. In addition, each of our schools requires,
to a certain extent, different resources and operating tactics due to a variety
of factors, including curriculum, demographics, geographic location and size.
Management of each of our schools is principally in the hands of a school
president who has accountability for the school's operations and profitability.
Each of our schools has five primary operating departments: admissions,
financial aid, education, placement and accounting.
Corporate strategy, finance and accounting consolidation functions are
centralized at our corporate headquarters. Our corporate staff develops long-
term and short-term operating strategies for the schools and works closely with
local administrators to accomplish their goals and ensure adherence to our
strategy. We maintain stringent quality standards and controls at both the
corporate and individual school levels. Activities at the corporate level
include regular reporting processes which track the vital statistics of each
school's operations, including leads, enrollments, retention rates, placements,
and financial data. These reports provide real-time data which allow management
to monitor the performance of each campus. Each operating department at the
campus level is also required to compile quantitative reports at regular
intervals, including reports on admissions, financial aid, academic performance
and placement.
We use a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
Tuition and Fees
Currently, total tuition for completion of a diploma/certificate program
offered by our schools, assuming full-time attendance, ranges from $5,400 to
$28,000, for completion of an associate's degree program ranges from $12,450 to
$28,000, and for completion of a bachelor's degree program ranges from $45,000
to $51,300. In addition to these tuition amounts, students at our schools
typically must purchase textbooks and supplies as part of their educational
programs.
Our institutions bill students for their tuition and other institutional
charges based on the specific instructional format or formats of the school's
educational programs. Each institution's refund policies must meet the
requirements of the Department of Education and such institution's state and
accrediting agencies. Generally, under the Department of Education's
requirements, if a first-time student ceases attendance before the point in
time that is 60% of the period of enrollment for which the student has been
charged, the institution will refund institutional charges based on the amount
of time for which the student was charged but did not attend. After a student
has attended 60% or more of such period of enrollment, the institution will
retain 100% of the institutional charges for that period of enrollment. After
the student's first enrollment period, the institution refunds institutional
charges for subsequent periods of enrollment based on the number of weeks
remaining in the period of enrollment in which the student withdrew. In certain
circumstances, institutions must apply state refund requirements when
determining refunds for students.
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Graduate Employment
We believe that employment of graduates of our schools in occupations
related to their fields of studies is critical to the reputation of the schools
and their ability to continue to recruit students successfully. We believe that
our schools' most successful form of recruiting is through referrals from
satisfied graduates. A strong placement office is important to maintain and
elevate the school's reputation, as well as manage the rate at which former
students default on their loans.
We devote a significant amount of time and resources to student placement,
which we believe to be the ultimate indicator of our success. We believe that
our average placement rate is attractive to prospective students. Student
placement is a top priority of each of our schools beginning on the first day
of student enrollment. This approach heightens the students' awareness of the
placement department and keeps students focused on their goal--job placement
within their field of choice. Moreover, each of our schools includes career
development instruction in our curricula, which includes the preparation of
resumes, cover letters, networking and other essential job-search tools.
Placement office resources are regularly available to our graduates. With such
assistance, our graduates find employment with a wide variety of businesses
located not only in the schools' local markets but also regionally and
nationally.
Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates. As of
December 31, 1999, approximately 75 employees worked in the placement
departments of our campuses. Placement counselors participate in professional
organizations, advisory boards, trade shows and community events to keep
apprised of industry trends and maintain relationships with key employers.
Partnerships with local and regional businesses are established through
internships and curriculum development programs and facilitate placement of
graduates in local and regional businesses. The placement department also
assists current students in finding part-time jobs while attending school.
These part-time placements often lead to permanent positions.
Based on survey information received from graduating students and employers,
we believe that of the 8,648 students graduating from our schools during the
academic year ending June 30, 1999, 91.8% of the 7,941 available graduates,
which excludes students who are continuing their education, are in active
military service or are disabled or deceased, as well as students from foreign
countries who are legally ineligible to work in the U.S., obtained employment
in fields related to their program of study within six months following their
graduation.
The reputation of Gibbs and Washington Business School allows them to charge
fees to employers upon placement of many of their students. Our other schools
do not currently receive such placement fees, nor, we believe, do any of our
principal proprietary competitors. We believe that, as an additional source of
revenue, we may be able to replicate these placement fee programs at some of
our other schools.
Technology
We are committed to providing our students access to the technology
necessary for developing skills required to succeed in the careers for which
they are training. Through regular consultation with business representatives,
we ensure that all our schools provide their students with industry-current
computer hardware, computer software and equipment meeting industry-specific
technical standards. In each program, students use the types of equipment that
they will eventually use in their careers of choice. For example, graphic
animation students use sophisticated computer multimedia animation and digital
video editing equipment and supplies, and visual communication and design
technologies students make significant use of technologies for computer-related
design and layout and digital pre-press applications.
Employees
As of December 31, 1999, we had a total of approximately 1,800 full-time and
1,300 part-time employees. We do not have any collective bargaining agreements
with our employees. We consider our relations with our employees to be good.
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Competition
The postsecondary education market is highly fragmented and competitive,
with no single institution having a significant market share. Our schools
compete with traditional public and private two-year and four-year colleges and
universities, other proprietary schools, including those that offer distance
learning programs, and alternatives to higher education such as immediate
employment and military service. Private and public colleges and universities
may offer courses of study similar to those of our schools. Some public
institutions are able to charge lower tuition than our schools due in part to
government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary schools.
However, tuition at private, non-profit institutions is, on average, higher
than the average tuition rates of our schools. Other proprietary career-
oriented schools also offer programs that compete with those of our schools. We
believe that our schools compete with other educational institutions
principally based upon quality of their educational programs, reputation in the
business community, costs of programs and graduates' ability to find
employment. Some of our competitors in both the public and private sectors may
have substantially greater financial and other resources than us.
Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established strict standards for
student loan default rates, required intensified scrutiny by state education
agencies and accrediting agencies and created more stringent standards for the
evaluation of an institution's financial responsibility and administrative
capability. As a result, some career-oriented schools have been forced to close
because they lacked sufficient quality or financial resources or could not
manage the increased regulatory burden. At the same time, despite increasing
demand, potential new entrants face significant barriers to entry due to the
highly regulated nature of the industry and the considerable expense of start-
up operations.
Financial Aid and Regulation
Our schools and students in the U.S. and Canada participate in a wide
variety of government-sponsored financial aid programs. For this reason, our
schools are subject to extensive regulatory requirements imposed by government
funding agencies and other bodies. For the 1999 fiscal year, we derived
approximately 71% of our total net revenue on a cash basis from such financial
aid received by our students. We estimate that over 75% of our students receive
government-sponsored financial aid. Our students also finance their education
through family contributions and individual resources.
Nature of Federal Support for Postsecondary Education in the U.S. While many
states support public colleges and universities primarily through direct state
subsidies, the federal government provides a substantial part of its support
for postsecondary education in the form of grants and loans to students who can
use those funds at any institution that has been certified as eligible by the
Department of Education. These federal programs are authorized by Title IV of
the Higher Education Act of 1965, as amended, and are collectively referred to
as the "Title IV Programs."
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the Higher Education Act as the difference
between the cost of attending the institution and the amount a student can
reasonably contribute to that cost. All recipients of Title IV Program funds
must maintain a satisfactory grade point average and progress in a timely
manner toward completion of their program of study.
Students at our schools receive grants, loans and work opportunities to fund
their education under the following Title IV Programs, although not every
campus participates in all programs: (1) the Federal Family Education Loan
("FFEL") program, (2) the William D. Ford Federal Direct Loan ("FDL") program,
(3) the Federal Pell Grant ("Pell") program, (4) the Federal Supplemental
Educational Opportunity Grant ("FSEOG") program, (5) the Federal Perkins Loan
("Perkins") program and (6) the Federal Work-Study ("FWS") program.
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FFEL. Loans made under the FFEL program are federally guaranteed. Loans are
made by banks and other lending institutions, but if a student or parent
defaults on a loan, payment is guaranteed by a federally recognized guaranty
agency, which is then reimbursed by the Department of Education. Students with
financial need qualify for interest subsidies while in school and during grace
periods. Our schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make and guarantee FFEL loans.
FDL. Under the FDL program, students or their parents may obtain loans
directly from the Department of Education rather than from commercial lenders.
The conditions on FDL loans are generally the same as on loans made under the
FFEL program.
Pell. Under the Pell program, the Department of Education makes grants to
students who demonstrate financial need.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. An institution is required to make a 25% matching contribution for
all federal funds received under this program.
Perkins. Perkins loans are made from a revolving institutional account, 75%
of which is capitalized by the Department of Education and the remainder by the
institution. Each institution is responsible for collecting payments on Perkins
loans from its former students and lending those funds to currently enrolled
students.
FWS. Under the FWS program, federal funds are used to pay up to 75% of the
cost of part-time employment of eligible students to perform work for the
institution or certain off-campus organizations. The remaining 25% is paid by
the institution or the employer.
Regulation of Federal Student Financial Aid Programs for U.S. Schools. To
participate in the Title IV Programs, an institution must be authorized to
offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the
Department of Education and certified as eligible by the Department of
Education. The Department of Education will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the Higher Education Act and the Department of
Education's extensive regulations regarding institutional eligibility. An
institution must also demonstrate its compliance to the Department of Education
on an ongoing basis. These standards are applied primarily on an institutional
basis, with an institution defined as a main campus and its additional
locations, if any. Under this definition, each of our U.S. campuses is a
separate institution, except for Briarcliffe-Patchogue, which is an additional
location of Briarcliffe-Bethpage, Gibbs-Piscataway, which is an additional
location of Gibbs-Montclair, and the School of Computer Technology-Fairmont,
which is an additional location of the School of Computer Technology-
Pittsburgh. All of our U.S. schools currently participate in the Title IV
Programs.
The substantial amount of federal funds disbursed through the Title IV
Programs and the large numbers of students and institutions participating in
those programs have led to instances of fraud, waste and abuse. As a result,
Congress has required the Department of Education to increase its level of
regulatory oversight of institutions to ensure that public funds are properly
used. Under the Higher Education Act, accrediting agencies and state licensing
agencies also have responsibilities for overseeing institutions' compliance
with Title IV Program requirements. As a result, each of our institutions is
subject to frequent reviews and detailed oversight and must comply with a
complex framework of laws and regulations. Because the Department of Education
periodically revises its regulations and changes its interpretation of existing
laws and regulations, we cannot assure you that the Department of Education
will agree with our understanding of each Title IV Program requirement.
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Significant factors relating to the Title IV Programs that could adversely
affect us include the following:
Legislative Action. Political and budgetary concerns significantly affect
the Title IV Programs. Congress must reauthorize the Higher Education Act
approximately every six years. The most recent reauthorization in October 1998
reauthorized the Higher Education Act for an additional five years. Congress
reauthorized all of the Title IV Programs in which our schools participate,
generally in the same form and at funding levels no less than for the prior
year. While the 1998 reauthorization of the Higher Education Act made numerous
changes to Title IV Program requirements, we believe that these changes will
not have a material adverse effect on our business, results of operations or
financial condition. Changes made by the 1998 reauthorization of the Higher
Education Act include:
. expanding the adverse effects on institutions of high student loan
default rates,
. increasing from 85% to 90% the portion of a proprietary institution's
revenue that may be derived each year from the Title IV Programs,
. revising the refund standards that require an institution to return a
portion of the Title IV Program funds for students who withdraw from
school,
. giving the Department of Education flexibility to continue an
institution's Title IV participation without interruption in some
circumstances following a change of ownership or control,
. changing the formula for calculating the interest rate on FFEL and FDL
loans and
. modifying the definition of default from 180 days to 270 days past due
for loans payable in monthly installments.
In addition, Congress reviews and determines federal appropriations for the
Title IV Programs on an annual basis. Congress can also make changes in the
laws affecting the Title IV Programs in those annual appropriations bills and
in other laws it enacts between the Higher Education Act reauthorizations.
Since a significant percentage of our revenue is derived from the Title IV
Programs, any action by Congress that significantly reduces Title IV Program
funding or the ability of our schools or students to participate in the Title
IV Programs could have a material adverse effect on our business, results of
operations or financial condition. Legislative action may also increase our
administrative costs and require us to adjust our practices in order for our
schools to comply fully with the Title IV Program requirements.
Cohort Default Rates. A significant component of Congress' initiative to
reduce abuse in the Title IV Programs is the imposition of limitations on
institutions whose former students default on the repayment of their federally
guaranteed or funded student loans above specific rates. All of our
institutions have implemented aggressive student loan default management
programs aimed at reducing the likelihood of students failing to repay their
loans in a timely manner. Those programs emphasize the importance of students
meeting loan repayment requirements and provide for extensive loan counseling,
methods to increase student persistence and completion rates and graduate
employment rates, and proactive borrower contacts after students cease
enrollment.
An institution's cohort default rate under the FFEL and FDL programs is
calculated on an annual basis as the rate at which student borrowers scheduled
to begin repayment on their loans in one federal fiscal year default on those
loans by the end of the next federal fiscal year. An institution whose cohort
default rates equal or exceed 25% for three consecutive years will no longer
be eligible to participate in the FFEL, FDL or Pell programs for the remainder
of the federal fiscal year in which the Department of Education determines
that such institution has lost its eligibility and for the two subsequent
federal fiscal years. An institution whose cohort default rate under the FFEL
or FDL program for any federal fiscal year exceeds 40% may have its
eligibility to participate in all of the Title IV Programs limited, suspended
or terminated by the Department of Education.
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None of our institutions had a FFEL or FDL cohort default rate of 25% or
greater for either of the last two federal fiscal years. The following table
sets forth the FFEL and FDL cohort default rates for our institutions for
federal fiscal years 1997, 1996 and 1995, the most recent years for which the
Department of Education has published such rates:
<TABLE>
<CAPTION>
FFEL and FDL
Cohort Default
Rate
----------------
School 1997 1996 1995
------ ---- ---- ----
<S> <C> <C> <C>
Al Collins Graphic Design School
Tempe, AZ............................................. 14.7% 15.4% 13.8%
Allentown Business School
Allentown, PA......................................... 13.4 9.7 10.7
Briarcliffe College
Bethpage & Patchogue, NY.............................. 10.2 13.3 15.1
Brooks College
Long Beach, CA........................................ 19.3 21.1 17.8
Brooks Institute of Photography
Santa Barbara, CA..................................... 4.4 9.7 9.0
Brown Institute
Mendota Heights, MN................................... 14.9 17.4 18.1
California School of Culinary Arts*
South Pasadena, CA.................................... -- -- --
The Cooking and Hospitality Institute of Chicago
Chicago, IL........................................... 13.1 11.9 19.8
Harrington Institute of Interior Design
Chicago, IL........................................... 7.8 6.8 5.4
International Academy of Merchandising & Design
Chicago, IL........................................... 11.3 13.8 15.5
Tampa, FL............................................. 10.0 11.2 13.4
The Katharine Gibbs Schools
Boston, MA............................................ 17.3 16.2 16.9
Melville, NY.......................................... 10.6 12.7 15.8
Montclair, NJ and Piscataway, NJ...................... 16.1 14.5 15.8
New York, NY.......................................... 11.2 17.3 14.5
Norwalk, CT........................................... 11.0 16.0 27.0
Providence, RI........................................ 14.0 14.9 14.7
McIntosh College
Dover, NY............................................. 9.3 6.8 11.3
School of Computer Technology
Pittsburgh, PA and Fairmont, WV....................... 11.1 12.9 11.2
Scottsdale Culinary Institute
Scottsdale, AZ........................................ 5.9 4.0 6.1
Washington Business School
Vienna, VA............................................ 7.9 10.7 18.1
Western Culinary Institute
Portland, OR.......................................... 9.2 9.8 14.3
</TABLE>
- --------
*California School of Culinary Arts did not begin participating in the FFEL or
FDL programs until being acquired by us in March 1998, and therefore it has
not yet received a FFEL or FDL cohort default rate.
An institution whose cohort default rate under the FFEL or FDL program
equals or exceeds 25% for any one of the three most recent federal fiscal
years, or whose cohort default rate under the Perkins program exceeds 15% for
any year, may be placed on provisional certification status by the Department
of Education for up to four years. Eight of our institutions have Perkins
cohort default rates in excess of 15% for students who
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were scheduled to begin repayment in the 1997-98 federal award year, the most
recent year for which such rates have been calculated. The Perkins cohort
default rates for these eight institutions ranged from 20.0% to 100.0%. These
rates include four institutions that previously notified the Department of
Education that they are no longer participating in the Perkins program. To
date, the Department of Education has placed only three of our institutions,
Allentown, Gibbs-Melville and Gibbs-Montclair, on provisional certification for
their cohort default rates. Each institution was placed on provisional
certification for its Perkins default rate, either alone or in combination with
other reasons. Total Perkins loans disbursed during 1997-98 represented less
than 1% of our total net revenue. See "--Eligibility and Certification
Procedures."
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy specific standards of financial responsibility.
The Department of Education evaluates institutions for compliance with these
standards each year, based on the annual audited financial statements of the
institution or its parent corporation, and following a change of control of the
institution.
Under regulations which took effect July 1, 1998, the Department of
Education calculates the institution's composite score based on its:
. equity ratio, which measures the institution's capital resources, ability
to borrow and financial viability,
. primary reserve ratio, which measures the institution's ability to
support current operations from expendable resources and
. net income ratio, which measures the institution's ability to operate at
a profit.
An institution that does not meet the Department of Education's minimum
composite score may demonstrate its financial responsibility by posting a
letter of credit in favor of the Department of Education in an amount equal to
at least 50% of the Title IV Program funds received by the institution during
its prior fiscal year or posting such letter of credit in an amount equal to at
least 10% of the Title IV Program funds received by the institution during its
prior fiscal year and accepting other conditions on its participation in the
Title IV Programs.
In periodic reviews of our financial statements for 1997 and prior years, as
well as our February 28, 1998 balance sheet reflecting the results of our
initial public offering, the Department of Education questioned certain
accounting issues and found that we and some of our institutions when measured
on an individual basis failed the numeric tests under the Department of
Education's former and current standards of financial responsibility. To
satisfy the Department of Education's concerns, we posted letters of credit on
behalf of all institutions we had acquired between October 1996 and July 1998.
After reviewing our 1998 audited financial statements in February 1999, the
Department of Education concluded in April 1999 that we satisfied its standards
of financial responsibility and subsequently released letters of credit
totaling $17.6 million.
Under a separate standard of financial responsibility, an institution that
has made late student refunds in either of its last two fiscal years must post
a letter of credit with the Department of Education in an amount equal to 25%
of the total Title IV Program refunds paid by the institution in its prior
fiscal year. Based on this standard, we currently have posted a total of
$144,700 in letters of credit with respect to two Gibbs campuses and two
International Academy of Merchandising & Design campuses.
Change of Ownership or Control. When we acquire an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
change of ownership resulting in a change of control as defined by the
Department of Education. Upon such a change of control, an institution's
eligibility to participate in the Title IV Programs may be suspended until it
has applied for and been recertified by the Department of Education as an
eligible institution under our ownership, which requires that the institution
also reestablish its state authorization and accreditation. If an institution
is recertified following a change of control, it will be on a provisional
basis.
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The 1998 reauthorization of the Higher Education Act provides that the
Department of Education may provisionally and temporarily certify an
institution undergoing a change of control under certain circumstances while
the Department of Education reviews the institution's application. The
Department of Education has been implementing this amendment to the Higher
Education Act and has issued the applicable regulations to take effect on July
1, 2000. The Department of Education has provided such temporary certification
to each institution we have acquired since January 1999 in periods of time
ranging from 10 to 40 days after closing.
Each U.S. institution we have acquired has undergone a certification review
under our ownership and has been certified to participate in the Title IV
Programs. Eleven of our U.S. institutions are presently participating in Title
IV Programs under provisional certification and the remaining eleven have been
granted regular certification.
Some other types of transactions can also cause a change of control. The
Department of Education, state education agencies and the accrediting agencies
that accredit our schools have their own definitions of when a transaction is
deemed a change of control. With respect to a publicly traded corporation, such
as us, Department of Education regulations provide that a change of control
occurs when there is an event that would obligate that corporation to file a
Current Report on Form 8-K with the Securities and Exchange Commission
disclosing a change of control. This standard is subject to interpretation by
the Department of Education and we cannot predict how the Department of
Education will apply this standard in the future. The Department of Education
is reconsidering this standard as part of its current rulemaking procedure. If
the Department of Education issues a new regulation to revise this standard,
such regulation would take effect no earlier than July 1, 2001. A significant
purchase or disposition of our common stock could be determined by the
Department of Education to be a change of control under this standard. Most of
the states and accrediting agencies include the sale of a controlling interest
of common stock in the definition of a change of control. A change of control
under the definition of one of these agencies would require the affected
institution to reaffirm its state authorization or accreditation. The
requirements to obtain such reaffirmation from the states and accrediting
agencies with jurisdiction over our schools vary widely.
The potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our capital stock.
Opening Additional Schools and Adding Educational Programs. The Higher
Education Act generally requires that proprietary institutions be fully
operational for two years before applying to participate in the Title IV
Programs. However, an institution that is certified to participate in the Title
IV Programs may establish an additional location and apply to participate in
the Title IV Programs at that location without reference to the two-year
requirement, if such additional location satisfies all other applicable
eligibility requirements. Our expansion plans are based, in part, on our
ability to open new campuses as additional locations of our existing
institutions.
Generally, an institution that is eligible to participate in the Title IV
Programs may add a new educational program without Department of Education
approval if that new program leads to an associate level or higher degree and
the institution already offers programs at that level, or if it prepares
students for gainful employment in the same or related occupation as an
educational program that has previously been designated as an eligible program
at that institution and meets minimum length requirements. If an institution
erroneously determines that an educational program is eligible for the Title IV
Programs, the institution would likely be liable for repayment of the Title IV
Program funds provided to students in that educational program. We do not
believe that current Department of Education regulations will create
significant obstacles to our plans to add new programs.
Some of the state education agencies and accrediting agencies with
jurisdiction over our campuses also have requirements that may affect schools'
ability to open a new campus, acquire an existing campus, establish an
additional location of an existing institution or begin offering a new
educational program. We do not believe that these standards will have a
material adverse effect on our expansion plans.
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The "90/10 Rule." Under a provision of the Higher Education Act commonly
referred to as the "90/10 Rule," a proprietary institution, such as each of our
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, it derived more than 90% of its
revenue for any fiscal year from the Title IV Programs. Any institution that
violates this rule becomes ineligible to participate in the Title IV Programs
as of the first day of the fiscal year following the fiscal year in which it
exceeds 90%, and is unable to apply to regain its eligibility until the next
fiscal year. If one of our institutions violated the 90/10 Rule and became
ineligible to participate in the Title IV Programs but continued to disburse
Title IV Program funds, the Department of Education would require the
institution to repay all Title IV Program funds received by the institution
after the effective date of the loss of eligibility.
We have calculated that, for the past five years, none of our institutions
has derived more than 83% of its revenue from the Title IV Programs. We
regularly monitor compliance with this requirement to minimize the risk that
any of our institutions would derive more than the maximum percentage of its
revenue from the Title IV Programs for any fiscal year. If an institution
appeared likely to approach the maximum percentage threshold, we would evaluate
making changes in student funding and financing to ensure compliance with the
rule.
Administrative Capability. The Department of Education assesses the
administrative capability of each institution that participates in the Title IV
Programs under a series of separate standards. Failure to satisfy any of the
standards may lead the Department of Education to find the institution
ineligible to participate in the Title IV Programs or to place the institution
on provisional certification as a condition of its participation. One standard
which applies to programs with the stated objective of preparing students for
employment requires the institution to show a reasonable relationship between
the length of the program and the entry-level job requirements of the relevant
field of employment. We believe we have made the required showing for each of
our applicable programs. Short-term educational programs that provide less than
600 clock hours, 16 semester hours or 24 quarter hours of instruction must
demonstrate that 70% of all students who enroll in such programs complete them
within a prescribed time and that 70% of the graduates of such programs obtain
employment in the occupation for which they were trained within a prescribed
time. Some of the Gibbs institutions offer such short-term programs, but
students enrolled in these programs represent a small percentage of our total
enrollment. To date, the applicable institutions have been able to establish
that their short-term educational programs meet the required completion and
placement percentages.
Other standards provide that an institution may be found to lack
administrative capability and be placed on provisional certification if its
student loan default rate under the FFEL and FDL programs is 25% or greater for
any of the three most recent federal fiscal years, or if its Perkins cohort
default rate exceeds 15% for any federal award year. Three of our institutions
have been placed on provisional certification or determined by the Department
of Education to lack administrative capability due to their Perkins default
rates, either alone or in conjunction with other reasons.
An additional standard prohibits an institution from providing any
commission, bonus or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to any person or entity
engaged in any student recruitment, admission or financial aid awarding
activity. We believe that our current compensation plans are in compliance with
the Higher Education Act standards, although the regulations of the Department
of Education do not establish clear criteria for compliance.
Eligibility and Certification Procedures. The Higher Education Act and its
implementing regulations require each institution to apply to the Department of
Education for continued certification to participate in the Title IV Programs
at least every six years, or when it undergoes a change of control. The
Department of Education may place an institution on provisional certification
status if it finds that the institution does not fully satisfy all of the
eligibility and certification standards. The Department of Education may
withdraw an institution's provisional certification without advance notice if
the Department of Education determines that the institution is not fulfilling
all material requirements, and may more closely review an institution that is
provisionally certified if it applies for approval to open a new location or
make any other significant change.
18
<PAGE>
Provisional certification does not otherwise limit an institution's access to
Title IV Program funds. Also, substantial changes (i.e. changes in an
institution's accrediting agency or state authorizing agency, as well as
changes to an institution's structure or certain basic educational features)
require Department of Education approval.
An institution seeking certification to participate in the Title IV Programs
after a change of control will be provisionally certified for a limited period,
following which the institution must reapply for continued certification. If at
that time the institution satisfies all conditions for full certification, the
Department of Education will recertify the institution and remove the
provisional status. Otherwise, the Department of Education may recertify the
institution on a continued provisional basis. Each institution that we have
acquired was initially certified by the Department of Education for
participation in the Title IV Programs under our ownership on a provisional
basis. Eight of our institutions remain on provisional certification status
because the initial period of their provisional certification has not expired.
Three institutions have been recertified by the Department of Education upon
the expiration of their initial provisional period, but remain on provisional
status for other reasons. Allentown, Gibbs-Melville and Gibbs-Montclair are on
provisional certification status because their Perkins cohort default rate at
the time of the Department of Education's review was above 30%, and each
institution was told that it would remain on provisional certification until it
reduced its Perkins default rate below 30%.
Compliance with Regulatory Standards and Effect of Regulatory Violations.
Our schools are subject to audits and program compliance reviews by various
external agencies, including the Department of Education, state authorizing
agencies, guaranty agencies and accrediting agencies. The Higher Education Act
and its implementing regulations also require that an institution's
administration of Title IV Program funds be audited annually by an independent
accounting firm, and the resulting audit report submitted to the Department of
Education for review. If the Department of Education or another regulatory
agency determined that one of our institutions improperly disbursed Title IV
Program funds or violated a provision of the Higher Education Act or the
Department of Education's regulations, that institution could be required to
repay such funds, and could be assessed an administrative fine. The Department
of Education could also subject the institution to heightened cash monitoring,
under which the institution's federal funding requests are more carefully
reviewed by the Department of Education, or the Department of Education could
transfer the institution from the advance system of receiving Title IV Program
funds to the reimbursement system, under which an institution must disburse its
own funds to students and document the students' eligibility for Title IV
Program funds before receiving such funds from the Department of Education.
Violations of Title IV Program requirements could also subject us or our
schools to other civil and criminal penalties.
Significant violations of Title IV Program requirements by us or any of our
institutions could be the basis for a proceeding by the Department of Education
to limit, suspend or terminate the participation of the affected institution in
the Title IV Programs. Generally, such a termination extends for 18 months
before the institution may apply for reinstatement of its participation. There
is no proceeding pending to fine us or any of our institutions or to limit,
suspend or terminate any of our institutions' participation in the Title IV
Programs, and we have no reason to believe that any such proceeding is
contemplated. Any such action that substantially limited our schools'
participation in the Title IV Programs could have a material adverse effect on
our business, results of operations or financial condition.
State Authorization for U.S. Schools
We are subject to extensive regulation in each of the 15 states in which we
currently operate schools and in other states in which our schools recruit
students. Each of our campuses must be authorized by the applicable state
agency or agencies to operate and grant degrees or diplomas to its students. In
addition, state authorization is required for an institution to become and
remain eligible to participate in the Title IV Programs. Currently, each of our
U.S. campuses is authorized by the applicable state agency or agencies.
19
<PAGE>
The level of regulatory oversight varies substantially from state to state.
In some states, the campuses are subject to licensure by an agency that
regulates proprietary schools and also by a separate higher education agency.
State laws establish standards for instruction, qualifications of faculty,
location and nature of facilities, financial policies and other operational
matters. State laws and regulations may limit our ability to operate or to
award degrees or diplomas or offer new degree programs. Some states prescribe
standards of financial responsibility that are different from those prescribed
by the Department of Education. We believe that each of our campuses is in
substantial compliance with state authorizing and licensure laws. If any one of
our campuses lost its state authorization, the campus would be unable to offer
its programs and we would be forced to close that campus. Closing one of our
campuses for any reason could have a material adverse effect on our business,
results of operations or financial condition.
Accreditation for U.S. Schools
Accreditation is a non-governmental process through which an institution
submits to a qualitative review by an organization of peer institutions.
Accrediting agencies primarily examine the academic quality of the
institution's instructional programs, and a grant of accreditation is generally
viewed as confirmation that an institution's programs meet generally accepted
academic standards. Accrediting agencies also review the administrative and
financial operations of the institutions they accredit to ensure that each
institution has the resources to perform its educational mission.
Accreditation by an accrediting agency recognized by the Department of
Education is required for an institution to be certified to participate in the
Title IV Programs. Accrediting agencies must adopt specific standards in
connection with their review of postsecondary institutions to be recognized by
the Department of Education. All of our U.S. campuses are accredited by an
accrediting agency recognized by the Department of Education. Fifteen of our
campuses are accredited by the Accrediting Council for Independent Colleges and
Schools ("ACICS"), five of our campuses are accredited by the Accrediting
Commission of Career Schools and Colleges of Technology ("ACCSCT"), one of our
campuses is accredited by the Accrediting Commission for Community and Junior
Colleges of the Western Association of Schools and Colleges, one of our
campuses is accredited by the National Association of Schools of Art and
Design, one of our campuses is accredited by the New England Association of
Schools and Colleges--Commission on Technical and Career Institutions and one
of our campuses is accredited by the Middle States Association of Colleges and
Schools--Commission on Higher Education. In addition, four of our campuses'
interior design programs are accredited by the Foundation for Interior Design
Education Research and two of our campuses' culinary arts programs are
accredited by the American Culinary Federation Educational Institute
Accrediting Commission, accrediting agencies which are not recognized by the
Department of Education.
An accrediting agency may place a campus on "reporting" status to monitor
one or more specified areas of performance. A campus placed on reporting status
is required to report periodically to its accrediting agency on that campus'
performance in the specified areas. ACICS has placed one campus, International
Academy of Merchandising & Design-Tampa, on financial reporting status. This
campus has submitted all requested data in the identified area to its
accrediting agency. The placement of one campus on reporting status has not had
a material adverse effect on our business, results of operations or financial
condition, and we do not believe that it will have that effect in the future.
Canadian Regulation
Depending on their province of residence, our Canadian students may receive
loans under the Canada Student Loan Program, the Ontario Student Loans Plan and
the Quebec Loans and Bursaries Program. Canadian schools must meet eligibility
standards to administer these programs and must comply with extensive statutes,
rules, regulations and requirements. We believe our Canadian schools currently
hold all necessary registrations, approvals and permits and meet all
eligibility requirements to administer these governmental financial aid
programs. If our Canadian schools cannot meet these and other eligibility
standards or fail to comply with applicable requirements, it could have a
material adverse effect on our business, results of operations or financial
condition.
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<PAGE>
Ontario. The Ontario Ministry of Training, Colleges and Universities
("Ontario Ministry") provides financial assistance to eligible students through
the Ontario Student Assistance Plan ("OSAP"). This plan includes two main
components, the Canada Student Loan Program and the Ontario Student Loans Plan.
For our International Academy of Design school in Toronto to maintain its right
to administer OSAP it must, among other things, be registered and in good
standing under the Ontario Private Vocational Schools Act and abide by the
rules, regulations and administrative manuals of the Canada Student Loan
Program, Ontario Student Loans Plan and other OSAP-related programs. In order
to attain initial eligibility, an institution has to establish that it has (1)
been in good standing under the Ontario Private Vocational Schools Act for at
least 12 months, (2) offers an eligible program for at least 12 months and (3)
graduates at least one class in an eligible program that satisfied specific
requirements with respect to class size and graduation rate. Pursuant to
Ontario Ministry rules, during the first two years of initial eligibility, an
institution has its administration of OSAP independently audited, and full
eligibility is not granted until these audits confirmed that the school is
properly administering OSAP. Our International Academy of Design school in
Toronto has been granted full eligibility. Under Ontario Ministry rules, our
Toronto school must advise the Ontario Ministry before the school takes any
material action that may result in its failure or inability to meet any rules,
regulations or requirements related to OSAP.
In order for our International Academy of Design school in Toronto to
establish a new branch, it must obtain OSAP-designation from the Ontario
Ministry. We do not believe that OSAP's requirements will create significant
obstacles to our plans to acquire additional institutions or open new branches
in Ontario.
Our International Academy of Design school in Toronto may submit
applications for loans only to students enrolled in educational programs that
have been designated as OSAP-eligible by the Ontario Ministry. To be eligible,
among other things, a program must be registered with the Private Vocational
Schools Unit of the Ontario Ministry, must be of a minimum length and must lead
to a diploma or certificate. We do not anticipate that these program approval
requirements will create significant problems with respect to our plans to add
new educational programs.
Under Ontario Ministry rules, an institution cannot automatically acquire
OSAP designation through the acquisition of other OSAP-eligible institutions.
When there is a change of ownership, including a change in controlling
interest, in a non-incorporated OSAP-eligible institution, the Ontario Ministry
will require evidence of the institution's continued capacity to properly
administer the program before extending OSAP designation to the new owner. We
do not believe that this offering will be considered a change of ownership for
purposes of OSAP. Given that the Ontario Ministry periodically revises its
regulations and other requirements and changes its interpretations of existing
laws and regulations, we cannot assure you that the Ontario Ministry will agree
with our understanding of each requirement.
Our International Academy of Design school in Toronto is required to audit
its OSAP administration annually and the Ontario Ministry is authorized to
conduct its own audits of our administration of these programs. We have
complied with these requirements on a timely basis. Based on the most recent
annual compliance audits, our International Academy of Design school in Toronto
is in substantial compliance with OSAP requirements and we believe that the
school continues to be in substantial compliance with these requirements.
The Ontario Ministry has the authority to take any measures it deems
necessary to protect the integrity of the administration of OSAP. If the
Ontario Ministry deems a failure to comply to be minor, the Ontario Ministry
will advise us of the deficiency and provide us with an opportunity to remedy
it. If the Ontario Ministry deems the failure to comply to be serious in
nature, the Ontario Ministry has the authority to: (1) condition our continued
OSAP designation upon our meeting specific requirements during a specific time
frame; (2) suspend our OSAP designation; or (3) revoke our OSAP designation.
When the Ontario Ministry determines that any non-compliance in our OSAP
administration is serious, the Ontario Ministry has the authority to contract
with an independent auditor, at our expense, to conduct a full audit in order
to quantify the deficiencies and to require repayment of all loan amounts. In
addition, the Ontario Ministry may impose a penalty up to the amount of the
damages assessed in the independent audit.
21
<PAGE>
Adopting a practice similar to that of the U.S. Department of Education, the
Ontario Ministry calculates for each school student loan default rates on the
basis of incidences of default and expresses the default rates as a percentage
of the total number of loans issued to students attending that school.
Beginning with loans issued in the 1998-99 award year (August 1, 1998 to July
31, 1999), institutions with a 1997 default rate which is 15 percentage points
or more above the 1997 provincial average of 23.5% (i.e. 38.5%) will be
required to share the cost of defaults. In the 1999-2000 award year, this
policy will apply to institutions with a 1997 default rate 10 percentage points
or more above 23.5% (i.e. 33.5%). In the 2000-2001 award year, this policy will
apply to institutions with a 1999 default rate above 28.5%. For the 2001-2002
award year, this policy will apply to institutions with a 2000 default rate of
25.0%. Our International Academy of Design school in Toronto had a default rate
of 16.7% in 1999, 23.8% in 1998, and 31.3% in 1997.
For the purpose of calculating default rates, student loan
recipients/defaulters are assigned to the last institution they attended. An
Ontario student loan is in default when the Ontario government has paid a
bank's claim for an inactive loan. A loan is inactive when no payments were
made by the student for at least 90 days. The overall default rate for Ontario
post-secondary institutions (which includes universities, colleges and private
vocational schools) is 18.2%, a decrease of 3.9% from the 1998 default rate of
22.1%. The 1999 default rate for the private vocational school sector, as a
whole, is 31.0%.
The Ontario Ministry has recently stated that while the decrease in the
overall default rate is encouraging, it remains, from the Ontario government's
perspective, unacceptably high. The Ontario Ministry's business plan requires
that the overall default rate for Ontario post-secondary institutions be
reduced to 10.0% within the next three years, failing which the institution in
question will be responsible for sharing the cost of defaults.
Recent changes to federal bankruptcy legislation exempts federal and
provincial student loans from being included in bankruptcy proceedings for a
10-year period following a student's completion of his or her studies.
We may only operate a private vocational school in Ontario if the school is
registered under the Ontario Private Vocational Schools Act. Upon payment of
the prescribed fee and satisfaction of the conditions prescribed by the
regulations under the Ontario Private Vocational Schools Act and by the Private
Vocational Schools Unit of the Ontario Ministry, an applicant or registrant
such as our International Academy of Design school in Toronto is entitled to
registration or renewal of registration to conduct or operate a private
vocational school unless:
. the school cannot reasonably be expected to be financially responsible in
the conduct of the private vocational school,
. the past conduct of the officers or directors provides reasonable grounds
for belief that the operations of the school will not be carried on in
accordance with relevant law and with integrity and honesty,
. it can reasonably be expected that the course or courses of study or the
method of training offered by the school will not provide the skill and
knowledge requisite for employment in the vocation or vocations for which
the applicant or registrant is offering instruction, and
. the applicant is carrying on activities that are, or will be, if the
applicant is registered, in contravention of the Ontario Private
Vocational Schools Act or the regulations under that Act.
An applicant for registration to conduct or operate a private vocational
school is required to submit with the application a bond in an amount
determined in accordance with the regulations under the Ontario Private
Vocational Schools Act. Our International Academy of Design school in Toronto
is currently registered under the Ontario Private Vocational Schools Act for
both of its locations, and we do not believe that there will be any impediment
to renewal of such registrations on an annual basis.
The Ontario Private Vocational Schools Act provides that a "registration" is
not transferable. However, the Private Vocational Schools Unit of the Ontario
Ministry takes the position that a purchase of shares of a private vocational
school does not invalidate the school's registration under the Ontario Private
Vocational Schools Act.
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If our International Academy of Design school in Toronto is convicted of
violating the Ontario Private Vocational Schools Act or the regulations under
that Act, the school can be fined up to $25,000 Canadian dollars.
Quebec. Our Quebec students may receive loans under the Quebec Loans and
Bursaries Program subject to student eligibility criteria. Under an Act
Respecting Private Education, our International Academy of Design school in
Montreal may not operate as a private educational institution without holding a
permit issued by the Quebec Minister of Education. Permits cannot be
transferred without the written authorization of the Quebec Minister and we
must notify that Minister of any amalgamation, sale or transfer affecting our
Quebec school. The Quebec Minister can modify or revoke our permit in certain
circumstances, such as if we do not comply with the conditions, restrictions or
prohibitions of the permit or if we are to become insolvent. We must be
provided with a chance to present our views before our permit can be revoked.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and our 27 campuses are located in 15 states and two Canadian
provinces. Each campus contains teaching facilities, including modern
classrooms, laboratories and, in the case of the schools with culinary arts
programs, large, well-equipped kitchens. Admissions and administrative offices
are also located at each campus. Additionally, Brooks' campus includes a
dormitory and student cafeteria, and Western, Scottsdale Culinary and The
Cooking and Hospitality Institute of Chicago lease and operate restaurants in
conjunction with their culinary arts program.
We lease all of our facilities, except the primary Gibbs facility in
Montclair, New Jersey and the facility at Brooks Institute of Photography,
which we own. As of December 31, 1999, we owned approximately 28,500 square
feet and leased approximately 1.2 million square feet. The leases have
remaining terms ranging from less than one year to ten years.
We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We have plans to lease approximately 180,000
additional square feet in 2000 to accommodate our growth. We believe that our
schools can acquire any necessary additional capacity on reasonably acceptable
terms. We devote capital resources to facility improvements and expansions as
necessary.
ITEM 3. LEGAL PROCEEDINGS
We and our institutions 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
November 1999 a settlement agreement was executed by the parties and the suit
was dismissed, with prejudice.
Although outcomes cannot be predicted, we do not believe that any legal
proceeding to which we are a party will have a material adverse effect on our
business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been quoted on the Nasdaq National Market (the
"National Market") under the symbol "CECO" since January 29, 1998.
The following table sets forth the range of high and low sales prices per
share for our common stock as reported on the National Market, where the stock
trades under the symbol "CECO," for the periods indicated. The initial public
offering price of our common stock on January 28, 1998 was $16.00 per share.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998:
First Quarter (from January 29, 1998).................... $22.13 $17.63
Second Quarter........................................... 27.50 21.50
Third Quarter............................................ 26.75 17.38
Fourth Quarter........................................... 30.00 14.13
1999:
First Quarter............................................ $37.00 $27.50
Second Quarter........................................... 39.00 29.88
Third Quarter............................................ 34.00 23.00
Fourth Quarter........................................... 38.50 21.94
</TABLE>
The closing price of our common stock as reported on the National Market on
March 22, 2000 was $35.13 per share. As of March 22, 2000, there were 23
holders of record of our common stock.
We have never paid a cash dividend on our common stock. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future and we
plan to retain our earnings to finance future growth. The declaration and
payment of dividends on our common stock are subject to the discretion of our
board of directors. Our board's decision to pay future dividends will depend on
general business conditions, the effect on our financial condition and other
factors our board may consider to be relevant. Our ability to pay dividends on
our common stock is limited if we are not in compliance with the terms of our
credit agreement or we fail to meet a specified leverage ratio.
24
<PAGE>
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Our selected statement of operations data
set forth below for the years ended December 31, 1999, 1998, and 1997 and the
balance sheet data as of December 31, 1999, 1998, and 1997 are derived from our
audited consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands,
except per share data)
<S> <C> <C> <C>
Statement of Operations Data:
Revenue:
Tuition and registration fees, net............. $199,057 $132,926 $ 74,842
Other, net..................................... 17,747 11,306 7,756
-------- -------- --------
Total net revenue............................ 216,804 144,232 82,598
Operating Expenses:
Educational services and facilities............ 85,490 57,151 34,620
General and administrative..................... 96,406 63,856 37,542
Depreciation and amortization.................. 14,557 12,163 8,121
Compensation expense related to the initial
public offering............................... -- 1,961 --
-------- -------- --------
Total operating expenses..................... 196,453 135,131 80,283
-------- -------- --------
Income from operations.......................... 20,351 9,101 2,315
Interest expense, net........................... 1,153 1,250 3,108
-------- -------- --------
Income (loss) before provision for income taxes,
extraordinary item and cumulative effect of
change in accounting principle................. 19,198 7,851 (793)
Provision (benefit) for income taxes............ 8,255 3,350 (331)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... 10,943 4,501 (462)
Extraordinary loss on early extinguishment of
debt (net of taxes of $233).................... -- -- (418)
-------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle........................ 10,943 4,501 (880)
Cumulative effect of change in accounting
principle (net of taxes of $149)............... -- (205) --
-------- -------- --------
Net income (loss)............................... $ 10,943 $ 4,296 $ (880)
======== ======== ========
Income (loss) attributable to common
stockholders:
Income (loss) before extraordinary item, and
cumulative effect of change in accounting
principle..................................... $ 10,943 $ 4,501 $ (462)
Dividends on preferred stock (1)............... -- (274) (2,159)
Accretion to redemption value of preferred
stock and warrants (2)........................ -- (2,153) (6,268)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle, attributable to common stockholders. 10,943 2,074 (8,889)
Extraordinary loss, net......................... -- -- (418)
Cumulative effect of change in accounting
principle, net................................. -- (205) --
-------- -------- --------
Net income (loss) attributable to common
stockholders................................... $ 10,943 $ 1,869 $ (9,307)
======== ======== ========
Net income (loss) attributable to common
stockholders:
Basic.......................................... $ 1.42 $ 0.29 $ (12.12)
======== ======== ========
Diluted........................................ $ 1.38 $ 0.27 $ (12.12)
======== ======== ========
Other Data:
EBITDA (3)...................................... $ 34,908 $ 21,264 $ 10,436
EBITDA margin (3)............................... 16.1% 14.7% 12.6%
Capital expenditures, net....................... 12,169 6,383 3,822
Student population (4).......................... 22,500 15,900 13,000
Number of Campuses (5).......................... 26 20 18
<CAPTION>
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash............................................ $ 44,745 $ 23,548 $ 18,906
Working capital................................. 25,787 15,994 13,806
Total assets.................................... 210,524 132,887 117,617
Total debt...................................... 49,939 22,617 64,035
Redeemable preferred stock and warrants......... -- -- 40,160
Total stockholders' investment.................. 113,681 84,636 (7,404)
</TABLE>
25
<PAGE>
- --------
(1) Represents the dividends paid on, or added to the redemption value of
outstanding preferred stock. See Note 3 of the Notes to our Consolidated
Financial Statements.
(2) See Note 3 of the Notes to our Consolidated Financial Statements.
(3) EBITDA equals earnings before interest expense, taxes, depreciation and
amortization, including amortization of debt discount and deferred
financing costs. EBITDA margin equals EBITDA as a percentage of net
revenue. We have included information concerning EBITDA and EBITDA margin
because we believe they allow for a more complete analysis of our results
of operations. EBITDA and EBITDA margin should not be considered as
alternatives to, nor is there any implication that they are more meaningful
than, any measure of performance or liquidity as promulgated under GAAP.
(4) Represents the approximate total student population at our schools as of
October 31.
(5) Represents the total number of campuses operated by us as of the end of the
period.
ITEM 7. 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 34 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
Selected Historical Consolidated Financial Data and our Consolidated Financial
Statements and Notes thereto appearing elsewhere herein.
Background and Overview
We are a provider of private, for-profit postsecondary education in North
America, with approximately 23,400 students enrolled as of February 1, 2000. We
operate 27 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. For the year ended
December 31, 1999, EBITDA was $34.9 million, up 64 percent from $21.3 million
for 1998. Excluding a before-tax non-cash compensation charge of $2.0 million,
EBITDA for 1998 would have been $23.2 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.
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<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. 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, 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 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 28, 1997, we acquired all of the outstanding capital stock of
the School of Computer Technology for a purchase price of approximately $4.9
million. In addition, we paid approximately $1.8 million to the former owners
of the School of Computer Technology pursuant to non-competition agreements.
On May 31, 1997, we acquired all of the outstanding capital stock of Gibbs
for a purchase price of approximately $19.0 million. In addition, we paid $7.0
million to the former owner of Gibbs pursuant to a non-competition agreement.
On June 30, 1997, we acquired all of the outstanding capital stock of the
International Academy of Merchandising & Design for an initial purchase price
of $3.0 million, which amount was further increased by $4.7 million during
1998, based on the results of the International Academy of Merchandising &
Design operations and the calculation of the final purchase price adjustment.
In addition, we paid $2.0 million to the former owners of the International
Academy of Merchandising & Design pursuant to covenants not-to-compete.
Also on June 30, 1997, we acquired all of the capital stock of International
Academy of Design for a purchase price of $6.5 million. In addition, we paid
$2.0 million to the former owners of International Academy of Design pursuant
to covenants not-to-compete.
On March 13, 1998, we acquired all of the outstanding capital stock of
Southern California School of Culinary Arts for a purchase price of
approximately $1.0 million.
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<PAGE>
On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale Culinary. The purchase price was approximately $9.9 million.
On January 4, 1999, we acquired all of the outstanding shares of capital
stock of Harrington. The purchase price was approximately $3.5 million.
On March 9, 1999, we acquired certain assets and assumed certain liabilities
of McIntosh. The purchase price was approximately $5.0 million.
On April 1, 1999, we acquired all of the outstanding shares of capital stock
of Briarcliffe. The purchase price was approximately $20.6 million.
Effective June 1, 1999, we acquired all of the outstanding shares of capital
stock of Brooks Institute of Photography. The purchase price was approximately
$6.6 million.
On December 3, 1999, we acquired all of the outstanding shares of capital
stock of Washington Business School. The purchase price was approximately $3.0
million.
On December 6, 1999, we entered into an agreement whereby we will acquire
California Culinary Academy, Inc. The acquisition is subject to a number of
conditions, but is expected to close in early April 2000. We anticipate that
the purchase price will be approximately $20 million. We will also assume
approximately $3 million of debt of the Academy.
Effective February 1, 2000, we acquired all of the outstanding shares of
capital stock of The Cooking and Hospitality Institute of Chicago. The purchase
price was approximately $5.5 million.
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<PAGE>
Results of Operations
The following table summarizes our operating results as a percentage of net
revenue for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenue:
Tuition and registration fees, net................ 91.8% 92.2% 90.6%
Other, net........................................ 8.2 7.8 9.4
----- ----- -----
Total net revenue.............................. 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Educational services and facilities............... 39.4 39.6 41.9
General and administrative........................ 44.5 44.3 45.5
Depreciation and amortization..................... 6.7 8.4 9.8
Compensation related to the initial public
offering......................................... -- 1.4 --
----- ----- -----
Total operating expenses....................... 90.6 93.7 97.2
----- ----- -----
Income from operations............................. 9.4 6.3 2.8
Interest expense, net.............................. 0.5 0.9 3.8
----- ----- -----
Income (loss) before provision for taxes,
extraordinary item and cumulative effect of change
in accounting principle........................... 8.9 5.4 (1.0)
Provision (benefit) for income taxes............... 3.8 2.3 (0.4)
----- ----- -----
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle......................................... 5.1 3.1 (0.6)
Extraordinary loss on early extinguishment of debt
(net of taxes).................................... -- -- (0.5)
Cumulative effect of change in accounting principle
(net of taxes).................................... -- (0.1) --
----- ----- -----
Net income (loss).................................. 5.1 3.0 (1.1)
===== ===== =====
Net income (loss) attributable to common
stockholders...................................... 5.1% 1.3% (11.3)%
===== ===== =====
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Net tuition and registration fee revenue increased 50%, from $132.9
million in 1998 to $199.1 million in 1999. The increase was due to an
approximate 18% increase in the average student population at our schools which
we owned prior to 1998, tuition increases effective in 1999 and student
enrollment mix. The increase was also due to added net tuition and registration
fee revenue of $27.1 million for schools acquired during and after 1998. Other
net revenue increased 57%, from $11.3 million in 1998 to $17.7 million in 1999,
due primarily to the schools acquired during and after 1998.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 50%, from $57.2 million in 1998 to $85.5 million
in 1999. Of this increase, $14.0 million was attributable to schools owned
prior to 1998 and $14.3 million was attributable to schools acquired during and
after 1998. These increases were primarily due to the increase in average
student population mentioned above, as well as an increase in curriculum
development.
General and Administrative Expense. General and administrative expense
increased 51%, from $63.9 million in 1998 to $96.4 million in 1999. The
increase was primarily attributable to $11.2 million of expenses for schools
acquired during and after 1998, costs totaling $6.6 million related to planned
corporate and regional infrastructure enhancements and increased advertising
and marketing (including admissions) of $10.4 million for schools owned prior
to 1998.
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<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 20%, from $12.2 million in 1998 to $14.6 million in 1999. The
increase was due to increased capital expenditures for schools owned prior to
1998 and related increased depreciation expense of $1.2 million in 1999.
Additionally, depreciation expense increased $1.4 million due to the
depreciation expense for schools acquired during and after 1998. Amortization
expense decreased from $5.1 million in 1998 to $4.9 million in 1999, primarily
due to the decline of amortization of non-competition agreements and goodwill
for the acquisition of schools prior to 1998.
Compensation Expense Related to the Initial Public Offering. A before-tax,
non-cash compensation charge of approximately $2.0 million was recorded
pursuant to amended stock option agreements with two stockholders upon
consummation of our initial public offering in February 1998.
Net Interest Expense. Net interest expense decreased 8%, from $1.3 million
in 1998 to $1.2 million in 1999. The decrease was primarily due to a reduction
of indebtedness resulting from the application of the net proceeds of a public
offering of common stock in March 1999.
Provision for Income Taxes. The provision for income taxes increased from
$3.4 million in 1998 to $8.3 million in 1999 as a result of changes in pretax
income.
Net Income before Extraordinary Item and Cumulative Effect of Change in
Accounting Principle. Net income before extraordinary item and cumulative
effect of change in accounting principle increased to a net income of $10.9
million in 1999 from a net income of $4.5 million in 1998.
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. Net income increased to $10.9 million in 1999 from $4.3 million
in 1998, due to the factors noted above.
Net Income Attributable to Common Stockholders. Net income attributable to
common stockholders increased from $1.9 million in 1998 to $10.9 million in
1999. The primary reason for this increase was due to the increase in net
income discussed above and decreases in dividends on preferred stock and
accretion to redemption value of preferred stock and warrants in connection
with our initial public offering.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue. Net tuition and registration fee revenue increased 78%, from $74.8
million in 1997 to $132.9 million in 1998, due to an approximate 21% increase
in the average number of students attending the schools which were owned by us
during 1997 and tuition increases effective in 1998 for these schools, as well
as added net tuition and registration fee revenue of $42.8 million for schools
acquired during and after 1997. Other net revenue increased 46%, from $7.8
million in 1997 to $11.3 million in 1998, due to the schools owned during the
1997 period.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 65%, from $34.6 million in 1997 to $57.2 million
in 1998. Of this increase, $5.9 million was attributable to the increase in
student population for schools owned during 1997 and $16.6 million was
attributable to the addition of educational services and facilities for schools
acquired during and after 1997.
General and Administrative Expense. General and administrative expense
increased 70%, from $37.5 million in 1997 to $63.9 million in 1998. The
increase was primarily attributable to $11.9 million of expenses for schools
acquired during and after 1997, costs totaling $3.9 million related to
increased personnel at the corporate level to enhance our infrastructure, and
increased advertising and marketing (including admissions) of $8.8 million for
schools owned during 1997. The increase in advertising and marketing expenses
reflected, in part, the fact that the former owners of the acquired schools had
reduced their expenditures in these areas prior to our acquisition of the
schools.
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<PAGE>
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 50%, from $8.1 million in 1997 to $12.2 million in 1998. The increase
was due to increased capital expenditures for schools owned during 1997 and
related increased depreciation expense of $0.3 million in 1998. Additionally,
depreciation expense increased $2.2 million due to the depreciation expense for
schools acquired during and after 1997. Amortization expense increased from
$3.5 million in 1997 to $5.1 million in 1998, primarily due to additional
amortization of non-competition agreements and goodwill for the acquisition of
schools after 1997.
Compensation Expense Related to the Initial Public Offering. A before-tax,
non-cash compensation charge of approximately $2.0 million was recorded
pursuant to amended stock option agreements with two stockholders upon
consummation of our initial public offering in February 1998.
Net Interest Expense. Net interest expense decreased 60%, from $3.1 million
in 1997 to $1.3 million in 1998. The decrease was primarily due to a reduction
of indebtedness resulting from the application of the net proceeds of a initial
public offering of common stock in February 1998.
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes increased from a $0.3 million benefit in 1997 to a $3.4 million provision
in 1998 as a result of changes in pretax income (loss).
Net Income (Loss) before Extraordinary Item and Cumulative Effect of Change
in Accounting Principle. Net income (loss) before extraordinary item and
cumulative effect of change in accounting principle increased to a net income
of $4.5 million in 1998 from a net loss of $0.5 million in 1997.
Extraordinary Item. During 1997, we recorded an extraordinary expense of
$0.4 million, net of tax, due to the early retirement of debt related to a
credit facility which was terminated and replaced by our current credit
facility.
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 (loss) increased to a net income of $4.3
million in 1998 from a net loss of $0.9 million in 1997, due to the factors
noted above.
Net Income (Loss) Attributable to Common Stockholders. Net income (loss)
attributable to common stockholders increased from a loss of $9.3 million in
1997 to net income of $1.9 million in 1998. The primary reason for this
increase was due to the increase in net income (loss) discussed above and
decreases in dividends on preferred stock and accretion to redemption value of
preferred stock and warrants in connection with our initial public offering.
Seasonality
Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our schools experience a seasonal
increase in new enrollments in the fall, traditionally when the largest numbers
of new high school graduates begin postsecondary education. Furthermore,
although we encourage year-round attendance at all schools, some schools have
summer breaks for some of their programs. As a result of these factors, total
student enrollment and net revenue are typically highest in the fourth quarter,
which is October through December, and lowest in the second quarter, which is
April through June, of our fiscal year. Our costs and expenses do not, however,
fluctuate as significantly on a quarterly basis, except for admissions and
advertising costs as these are typically higher in the second and third quarter
in support of seasonally high enrollments. We anticipate that these trends will
continue.
Liquidity and Capital Resources
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
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<PAGE>
remaining cash generated from operations. On March 17, 1999 we sold 530,000
shares of common stock pursuant to a public offering resulting in net proceeds
to us of approximately $13.8 million. Net cash provided by operating activities
increased to $34.2 million in 1999 from $22.2 million in 1998, due primarily to
increases in net income, depreciation and amortization, deferred income taxes,
and changes in operating assets and liabilities offset by the decrease in the
non-cash compensation expense related to options.
Capital expenditures increased to $12.2 million in 1999 from $6.4 million in
1998. These increases were primarily due to investments in capital equipment as
a result of increasing student population. We expect capital expenditures to
continue to increase as new schools are acquired or opened, student population
increases and current facilities and equipment are upgraded and expanded.
Our net receivables as a percentage of net revenue decreased to 7% in 1999
from 9% in 1998. This change was primarily due to increased revenues at schools
acquired during 1998 coupled with better asset management. Based upon past
experience and judgment, we establish an allowance for doubtful accounts with
respect to tuition receivables. When a student withdraws, the receivable
balance attributable to such student is charged to this allowance for doubtful
accounts. Our historical bad debt expense as a percentage of gross student
revenue for the years ended December 31, 1999, 1998 and 1997 has ranged from
3.6% to 1.8%.
On March 31, 1999, we amended our credit agreement to increase our line of
credit from $60.0 million to $90.0 million and to obtain letters of credit up
to $50.0 million, although outstanding letters of credit reduce the revolving
credit facility availability. 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 December 31, 1999, we had approximately $0.8 million of
outstanding letters of credit and $41.0 million of outstanding borrowings under
our credit facility. As a result, at December 31, 1999, our remaining credit
availability under the credit agreement was approximately $48.2 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
December 31, 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.
Year 2000 Compliance
The Year 2000 Problem. Many 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,
32
<PAGE>
1999. For example, 01/01/00 could be processed as 01/01/2000 or 01/01/1900.
There could also be problems with other dates, such as September 9, 1999, which
was a date traditionally used as a default date by computer programmers. These
problems may cause IT systems and non-IT systems to suffer miscalculations,
malfunctions or disruptions. These problems are commonly referred to as "Year
2000" problems. In late 1997, we began our audit, testing and remediation
project to assess our exposure to Year 2000 problems both because of our own IT
systems and non-IT systems and because of the systems of our significant
vendors, including those who process and disburse student financial aid for us.
The discussion below details our efforts to ensure Year 2000 compliance.
Our State of Readiness. We completed all of our Year 2000 testing in
December, 1999. Based on our testing, we believe that our IT systems and non-IT
systems, which, if not Year 2000 compliant, could have material adverse effect
on us, as well as the financial and accounting systems, including those
necessary for financial aid, of our significant third party vendors are Year
2000 compliant. We also believe that our material non-IT systems, as well as
those of our landlords, utility providers and other providers that we control
are Year 2000 compliant. Since January 1, 2000, we have had no material
disruptions or other problems related to Year 2000 issues. However, despite our
testing, assurances from vendors and providers and the lack of Year 2000 issues
to date, we cannot be certain that our systems or those of our vendors and
providers do not contain undetected errors associated with the Year 2000.
The Risks Associated with Our Year 2000 Issues. To date, the cost of
remediating our internal Year 2000 problems and the lost opportunity costs
arising from diversion of our personnel to Year 2000 problems have not had a
material adverse effect on our business, results of operations or financial
condition. We spent approximately $300,000 replacing non-compliant servers and
desktop computers and upgrading servers and desktop computers. We do not
anticipate spending any additional material amounts on Year 2000 compliance;
however, we cannot assure you that we will not incur additional costs in
connection with Year 2000 problems.
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 their tuition in a timely matter. Because we derive
approximately 70% of our revenue from U.S. federal student financial aid
programs, such delay is likely to have a material adverse effect on our
business, results of operations and financial condition. To date, we do not
believe that the Department of Education has experienced any disruptions
associated with the Year 2000, and our students have not experienced any delays
in tuition payments as a result of the Year 2000. However, we cannot be certain
that disruptions or delays will not occur in the future.
Contingency Plans. At this time, we believe that we and our significant
vendors are Year 2000 compliant. However, to avoid interruptions of our
operations, we have developed 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.
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 effective
beginning the first fiscal quarter of the first fiscal year beginning after
December 15, 1999.
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<PAGE>
Prior to the release of SAB 101, our revenue recognition policy was in
compliance with generally accepted accounting principles. Effective January 1,
2000, we will adopt a change in accounting principle to comply with the
specific provisions and guidance of SAB 101. SAB 101 will require us to
recognize revenue related to application and registration fees over the
contract period. Through December 31, 1999, we have recognized application and
registration fees as revenue upon receipt. We are currently in the process of
estimating the cumulative effect of this accounting change and do not believe
that this change will have a material impact on our financial position or
operating results. The effect will be recorded in the first quarter of fiscal
year 2000.
Special Note Regarding Forward-Looking Statements
This Form 10-K contains certain statements which reflect our expectations
regarding our future growth, results of operation, performance and business
prospects and opportunities. Wherever possible, words such as "anticipate,"
"believe," "plan," "expect" and similar expressions have been used to identify
these "forward-looking" statements. These statements reflect 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 implementation of our operating and growth strategy,
risks inherent in operating private for-profit postsecondary education
institutions, risks associated with general economic and business conditions,
charges and costs related to acquisitions, and our ability to: successfully
integrate our acquired institutions and continue our acquisition strategy,
attract and retain students at our institutions, meet regulatory and
accrediting agency requirements, compete with enhanced competition and new
competition in the education industry, and 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 our
revolving credit agreement, which have variable interest rates tied to the
prime and LIBOR rates. The weighted average annual interest rate of borrowings
under the credit agreement was 8.5% at December 31, 1999. In addition, we had
debt with fixed annual rates of interest of 7.0% or less totaling $2.0 million
at December 31, 1999. We estimate that the book value of each of our debt
instruments approximated its fair value at December 31, 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 book value of the assets and liabilities of these operations at
December 31, 1999 approximated their fair value.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of December 31, 1999 and 1998 and the
consolidated statements of operations, cash flows and stockholders' investment
are for each of the years ended December 31, 1999, 1998 and 1997:
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets, page F-2.
Consolidated Statements of Operations, page F-3.
Consolidated Statements of Cash Flows, page F-5.
Consolidated Statements of Stockholders' Investment, page F-6.
Notes to Consolidated Financial Statements, page F-8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from
the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" of the definitive Proxy Statement to be filed in connection with our
2000 Annual Meeting of Stockholders (the "2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 2000 Proxy Statement captioned "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from
the section of the 2000 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from
the sections of the 2000 Proxy Statement captioned "EXECUTIVE COMPENSATION" and
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION."
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K or
incorporated by reference as set forth below:
1. Financial Statements of Career Education Corporation and its
subsidiaries.
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets at December 31, 1999 and 1998, page F-2.
Consolidated Statements of Operations for the years ended December
31, 1999, 1998 and 1997, page F-3.
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997, page F-5.
Consolidated Statements of Stockholders' Investment for the years
ended December 31, 1999, 1998 and 1997, page F-6.
Notes to Consolidated Financial Statements, page F-8.
2. Financial Statement Schedules:
Included in Note 16 to our Consolidated Financial Statements.
3. (a) Exhibits:
<TABLE>
<C> <S>
*2.1 Asset Purchase Agreement dated as of September 30, 1996, among the
Registrant, WCI Acquisition, Ltd., Phillips Educational Group of Portland,
Inc., and Phillips Colleges, Inc. Schedules and exhibits to this Asset
Purchase Agreement have not been included herewith, but will be furnished
supplementally to the Commission upon request.
*2.2 Stock Sale Agreement dated as of April 7, 1997, between K-III Prime
Corporation, Inc. and the Company. Schedules and exhibits to this Stock
Sale Agreement have not been included herewith, but will be furnished
supplementally to the Commission upon request.
*2.3 Stock Purchase Agreement dated as of June 30, 1997, among IAMD Acquisition
I, Ltd. and Clem Stein, Jr., Marion Stein, Leonard Rutstein, Barbara Ann
Scott King, Thomas V. King, William W. Wirtz and David Powell. Schedules
and exhibits to this Stock Purchase Agreement have not been included
herewith but will be furnished supplementally to the Commission upon
request.
*2.4 Share Purchase Agreement dated as of June 30, 1997, among the Company and
Clem Stein, Jr., Leonard Rutstein, Barbara Ann Scott King and Lawrence N.
Gross. Schedules and exhibits to this Share Purchase Agreement have not
been included herewith, but will be furnished supplementally to the
Commission upon request.
**2.5 Asset Purchase Agreement dated as of July 1, 1998 by and among Scottsdale
Institute, Inc., an Arizona corporation, The Frank G. and Elizabeth S.
Leite Revocable Trust dated April 14, 1992, Frank G. Leite and Elizabeth
S. Leite, and SCI Acquisition I, Ltd., a Delaware Corporation. Schedules
and exhibits to this Asset Purchase Agreement have not been included
herewith, but will be furnished supplementally to the Commission upon
request.
+3.1 Amended and Restated Certificate of Incorporation of the Company.
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
+3.2 Amended and Restated By-laws of the Company.
*4.1 Form of specimen stock certificate representing Common Stock.
***4.2 Amended and Restated Credit Agreement dated as of October 26, 1998 among
the Company, as borrower, the Co-Borrowers named therein, the lenders
named therein, LaSalle National Bank, as administrative agent and The Bank
of Nova Scotia as foreign currency agent. Schedules and exhibits to this
Credit Agreement have not been included herewith, but will be furnished
supplementally to the Commission upon request.
****4.3 Amendment No. 1 and Consent to the Amended and Restated Credit Agreement,
dated as of February 24, 1999, by and between the Parties.
****4.4 Amendment No. 2 to the Amended and Restated Credit Agreement, dated as of
March 31, 1999, by and between the Parties.
*10.1 Career Education Corporation 1995 Stock Option Plan, as amended.+++
*10.2 Form of Option Agreement under the Company's 1995 Stock Option Plan.+++
*10.3 Career Education Corporation 1998 Employee Incentive Compensation Plan.+++
*10.4 Form of Option Agreement under the Company's 1998 Employee Incentive
Compensation Plan.+++
*10.5 Career Education Corporation 1998 Non-Employee Directors' Stock Option
Plan.+++
*10.6 Form of Option Agreement under the Company's 1998 Non-Employee Directors'
Stock Option Plan.+++
*10.7 Career Education Corporation 1998 Employee Stock Purchase Plan.
*10.8 Amended and Restated Option Agreement dated as of July 31, 1995, between
the Company and John M. Larson, and Amendment thereto dated as of October
20, 1997.+++
*10.9 Supplemental Option Agreement dated July 31, 1995, between the Company and
John M. Larson.+++
*10.10 Amended and Restated Option Agreement dated as of July 31, 1995, between
the Company and Robert E. Dowdell, and Amendment thereto dated as of
October 20, 1997.+++
*10.11 Employment and Non-Competition Agreement dated as of October 9, 1997,
between the Company and John M. Larson.+++
*10.12 Form of Indemnification Agreement for Directors and Executive Officers.+++
*10.13 Career Education Corporation Amended and Restated Stockholders' Agreement
dated as of July 31, 1995, as amended on February 28, 1997 and May 30,
1997.
*10.14 Registration Rights Agreement dated as of July 31, 1995, between the
Company, Electra Investment Trust P.L.C. and Electra Associates, Inc., and
Amendment No. 1 thereto.
*10.15 Securities Purchase Agreement dated as of July 31, 1995 among the Company,
Electra Investment Trust P.L.C. and Electra Associates, Inc. (the "Electra
1995 Agreement").
*10.16 Securities Purchase Agreement dated as of February 28, 1997, among the
Company, Heller Equity Capital Corporation, Electra Investment Trust
P.L.C., Robert E. Dowdell, John M. Larson, Wallace O. Laub and Constance
L. Laub and William A. Klettke (the "February 1997 Agreement").
*10.17 Securities Purchase Agreement dated as of May 30, 1997 among the Company,
Heller Equity Capital Corporation, Electra Investment Trust P.L.C. and
William A. Klettke (the "May 1997 Agreement").
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
*10.18 Form of Management Fee Agreement between the Company and each of its
subsidiaries.
*10.19 Form of Tax Sharing Agreement between the Company and each of its
subsidiaries.
+10.20 Registration Rights Agreement between the Company and Heller Equity
Capital Corporation.
+10.21 Agreement between the Company and Heller Equity Capital Corporation,
regarding designation of directors of the Company.
++10.22 Stock Purchase Agreement dated as of November 25, 1998 by and between the
Company and Robert C. Marks and the Robert C. Marks Trust dated October 9,
1997.
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP with respect to financial statements of
Career Education Corporation and Subsidiaries.
27 Financial Data Schedule.
</TABLE>
- --------
* Incorporated herein by reference to our Registration Statement on Form S-
1, effective as of January 28, 1998.
** Incorporated herein by reference to our Report on Form 8-K dated August
14, 1998.
*** Incorporated herein by reference to our Registration Statement on Form S-
1, effective as of March 17, 1999.
****Incorporated herein by reference to our Quarterly Report on Form 10-Q for
the period ended March 31, 1999.
+ Incorporated herein by reference to our Annual Report on Form 10-K for the
year ended December 31, 1997.
++ Incorporated herein by reference to our Report on Form 8-K dated January
19, 1999.
+++ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit on this Form 10-K.
(b) Reports on Form 8-K:
During the last quarter of the period covered by this Form 10-K, we did
not file any Current Reports on Form 8-K.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March 2000.
Career Education Corporation
/s/ Patrick K. Pesch
By: _________________________________
Patrick K. Pesch
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John M. Larson Chairman of the Board, March 27, 2000
____________________________________ President, Chief Executive
John M. Larson Officer (Principal
Executive Officer) and a
Director
/s/ Patrick K. Pesch Senior Vice President and March 27, 2000
____________________________________ Chief Financial Officer
Patrick K. Pesch (Principal Financial and
Accounting Officer)
/s/ Robert E. Dowdell Director March 27, 2000
____________________________________
Robert E. Dowdell
/s/ Thomas B. Lally Director March 27, 2000
____________________________________
Thomas B. Lally
/s/ Wallace O. Laub Director March 27, 2000
____________________________________
Wallace O. Laub
/s/ Keith K. Ogata Director March 27, 2000
____________________________________
Keith K. Ogata
</TABLE>
40
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Career Education Corporation:
We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 1999 and 1998 and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Career
Education Corporation and Subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
January 20, 2000 (except with respect
to the matter discussed in
the last paragraph of Note
5, as to which the date is
February 1, 2000)
F-1
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash..................................................... $ 44,745 $23,548
Receivables--
Students, net of allowance for doubtful accounts of
$2,723 and $2,127 at December 31, 1999 and 1998,
respectively.......................................... 13,595 11,408
Other.................................................. 2,346 999
Inventories, prepaid expenses and other current assets... 7,825 4,514
Deferred income tax assets............................... 1,011 459
-------- --------
Total current assets................................. 69,522 40,928
-------- --------
PROPERTY AND EQUIPMENT, net................................ 69,296 46,403
INTANGIBLE ASSETS, net..................................... 70,484 42,645
DEFERRED INCOME TAX ASSETS................................. -- 865
OTHER ASSETS............................................... 1,222 2,046
-------- --------
TOTAL ASSETS............................................... $210,524 $132,887
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $ 2,324 $ 317
Accounts payable......................................... 7,629 2,425
Accrued expenses--
Payroll and related benefits........................... 5,535 2,944
Income taxes........................................... 5,470 4,321
Other.................................................. 5,674 4,768
Deferred tuition revenue................................. 17,103 10,159
-------- --------
Total current liabilities............................ 43,735 24,934
-------- --------
LONG-TERM DEBT, net of current maturities.................. 47,615 22,300
DEFERRED INCOME TAX LIABILITIES............................ 4,128 --
OTHER LONG-TERM LIABILITIES................................ 1,365 1,017
COMMITMENTS AND CONTINGENCIES..............................
STOCKHOLDERS' INVESTMENT:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at December
31, 1999 and 1998....................................... $ -- $ --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 7,876,767 and 7,152,896 shares issued and
outstanding at December 31, 1999 and 1998, respectively. 79 72
Additional paid-in capital............................... 113,125 95,481
Accumulated other comprehensive income................... (372) (822)
Retained earnings (accumulated deficit).................. 849 (10,095)
-------- --------
Total stockholders' investment....................... 113,681 84,636
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT............. $210,524 $132,887
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-2
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
REVENUE:
Tuition and registration fees, net............... $199,057 $132,926 $74,842
Other, net....................................... 17,747 11,306 7,756
-------- -------- -------
Total net revenue.............................. 216,804 144,232 82,598
OPERATING EXPENSES:
Educational services and facilities.............. 85,490 57,151 34,620
General and administrative....................... 96,406 63,856 37,542
Depreciation and amortization.................... 14,557 12,163 8,121
Compensation expense related to the initial
public offering................................. -- 1,961 --
-------- -------- -------
Total operating expenses....................... 196,453 135,131 80,283
-------- -------- -------
Income from operations......................... 20,351 9,101 2,315
INTEREST EXPENSE, NET.............................. 1,153 1,250 3,108
-------- -------- -------
Income (loss) before provision for income
taxes, extraordinary item and cumulative
effect of change in accounting principle ..... 19,198 7,851 (793)
PROVISION (BENEFIT) FOR INCOME TAXES............... 8,255 3,350 (331)
-------- -------- -------
Net income (loss) before extraordinary item and
cumulative effect of change in accounting
principle..................................... 10,943 4,501 (462)
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT,
net of taxes of $233.............................. -- -- (418)
-------- -------- -------
Income (loss) before cumulative effect of
change in accounting principle................ 10,943 4,501 (880)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of taxes of $149................... -- (205) --
-------- -------- -------
NET INCOME (LOSS).................................. $ 10,943 $ 4,296 $ (880)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS--(continued)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ $10,943 $ 4,501 $ (462)
Dividends on preferred stock...................... -- (274) (2,159)
Accretion to redemption value of preferred stock
and warrants..................................... -- (2,153) (6,268)
------- ------- -------
Income (loss) before extraordinary item and
cumulative effect of change in
accounting principle attributable to common
stockholders.................................... 10,943 2,074 (8,889)
Extraordinary loss................................ -- -- (418)
Cumulative effect of change in accounting
principle........................................ -- (205) --
------- ------- -------
Net income (loss) attributable to common
stockholders.................................... $10,943 $ 1,869 $(9,307)
======= ======= =======
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 1.42 $ 0.32 $(11.58)
Extraordinary loss............................... -- -- (0.54)
Cumulative effect of change in accounting
principle....................................... -- (0.03) --
------- ------- -------
Net income (loss).............................. $ 1.42 $ 0.29 $(12.12)
======= ======= =======
Diluted--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 1.38 $ 0.30 $(11.58)
Extraordinary loss............................... -- -- (0.54)
Cumulative effect of change in accounting
principle....................................... -- (0.03) --
------- ------- -------
Net income (loss).............................. $ 1.38 $ 0.27 $(12.12)
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................. 7,685 6,521 768
======= ======= =======
Diluted........................................... 7,939 6,797 768
======= ======= =======
PRO FORMA INFORMATION (unaudited):
Income (loss) attributable to common
stockholders--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle attributable to common stockholders,
as reported..................................... $10,943 $ 2,074 $(8,889)
Dividends on preferred stock..................... -- 274 2,159
Accretion to redemption value of preferred stock
and warrants.................................... -- 2,055 6,100
------- ------- -------
Pro forma income (loss) before extraordinary item
and cumulative effect of change in
accounting principle attributable to common
stockholders..................................... 10,943 4,403 (630)
Extraordinary loss............................... -- -- (418)
Cumulative effect of change in accounting
principle....................................... -- (205) --
======= ======= =======
Pro forma net income (loss) attributable to
common stockholders............................ $10,943 $ 4,198 $(1,048)
======= ======= =======
Pro forma diluted income (loss) per share
attributable to common stockholders--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 1.38 $ 0.63 $ (0.20)
Extraordinary loss............................... -- -- (0.14)
Cumulative effect of change in accounting
principle....................................... -- (0.03) --
------- ------- -------
Net income (loss)................................ $ 1.38 $ 0.60 $ (0.34)
======= ======= =======
Pro forma diluted weighted average number of common
and common stock equivalent shares outstanding..... 7,939 7,029 3,048
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ 10,943 $ 4,296 $ (880)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Depreciation, amortization and debt discount. 14,557 12,163 8,239
Warrants issued to a bank.................... -- -- 180
Deferred income taxes........................ 750 (1,311) (1,013)
Extraordinary loss on early extinguishment of
debt........................................ -- -- 418
Cumulative effect of change in accounting
principle................................... -- 205 --
Compensation expense related to options...... 61 2,212 --
Gain on sale of property and equipment....... -- (14) --
Changes in operating assets and liabilities,
net of acquisitions--
Receivables, net........................... (2,914) (4,237) (5,208)
Inventories, prepaid expenses and other
current assets............................ (2,804) 814 (3,959)
Deposits and other non-current assets...... 704 (352) --
Accounts payable........................... 4,517 (1,383) 4,808
Accrued expenses and other liabilities..... 4,692 8,031 392
Deferred tuition revenue................... 3,685 1,803 (3,171)
-------- -------- --------
Net cash provided by (used in) operating
activities.............................. 34,191 22,227 (194)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash............. (42,136) (5,860) (39,855)
Acquisition and financing transaction costs.... (1,554) (372) (1,516)
Purchases of property and equipment, net....... (12,169) (6,383) (3,822)
Other assets................................... -- (73) (21)
Proceeds from sale of property and equipment... -- 332 --
-------- -------- --------
Net cash used in investing activities.... (55,859) (12,356) (45,214)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock....................... 16,623 52,765 30
Issuance of warrants........................... -- -- 4,789
Issuance of redeemable preferred stock and
warrants...................................... -- -- 17,556
Dividends paid on preferred stock.............. -- (47) (495)
Equity and debt financing costs................ (2,094) (7,085) (1,021)
Book overdraft................................. -- -- (683)
Payments of long-term debt..................... (1,568) (8,295) (513)
Net payments on revolving credit facility...... -- -- (8,239)
Proceeds from term loan facility............... -- -- 3,400
Repayment of term loan facility................ -- -- (11,650)
Net proceeds from (payments on) revolving loans
under Credit Agreement........................ 29,750 (28,735) 39,985
Proceeds from issuance of term loans under
Credit Agreement.............................. -- -- 15,000
Payments on term loans under Credit Agreement.. -- (13,500) (1,500)
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. 42,711 (4,897) 56,659
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... 154 (332) (143)
-------- -------- --------
NET INCREASE IN CASH............................. 21,197 4,642 11,108
CASH, beginning of year.......................... 23,548 18,906 7,798
-------- -------- --------
CASH, end of year................................ $ 44,745 $ 23,548 $ 18,906
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class D Class E Common Stock
---------------- ---------------- ------------------ ---------------- ---------------- ------------------
5,625,600 $0.01 937,600 $0.01 937,600 $0.01 937,600 $0.01 1,875,200 $0.01 50,000,000 $0.01
Shares Par Shares Par Shares Par Shares Par Shares Par Shares Par
Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value
---------- ----- ---------- ----- ---------- ------- ---------- ----- ---------- ----- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1996........... 49,224 492 47,818 478 655,382 6,554 -- -- 15,452 155 -- --
Net loss.......... -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation.......
Total
comprehensive
income..........
Issuance of
warrants.......... -- -- -- -- -- -- -- -- -- -- -- --
Exercise of
warrants.......... -- -- -- -- -- -- -- -- 928 9 -- --
Dividends paid.... -- -- -- -- -- -- -- -- -- -- -- --
Dividends on
preferred stock... -- -- -- -- -- -- -- -- -- -- -- --
Preferred stock
and warrant
accretion......... -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1997........... 49,224 492 47,818 478 655,382 6,554 -- -- 16,380 164 -- --
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation....... -- -- -- -- -- -- -- -- -- -- -- --
Total
comprehensive
income .........
Preferred stock
and warrant
accretion......... -- -- -- -- -- -- -- -- -- -- -- --
Dividends......... -- -- -- -- -- -- -- -- -- -- -- --
Compensatory
options........... -- -- -- -- -- -- -- -- -- -- -- --
Conversion of
preferred and
common stock...... (49,224) (492) (47,818) (478) (655,382) (6,554) -- -- (16,380) (164) 3,192,037 31,920
Issuance of
common stock...... -- -- -- -- -- -- -- -- -- -- 3,288,279 32,883
Warrants
exercised......... -- -- -- -- -- -- -- -- -- -- 657,267 6,573
Options
exercised......... -- -- -- -- -- -- -- -- -- -- 15,313 153
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1998........... -- $ -- -- $ -- -- $ -- -- $-- -- $ -- 7,152,896 $71,529
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation....... -- -- -- -- -- -- -- -- -- -- -- --
Total
comprehensive
income
Compensatory
options........... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
common stock...... -- -- -- -- -- -- -- -- -- -- 606,915 6,069
Options
exercised......... -- -- -- -- -- -- -- -- -- -- 116,956 1,170
Share issuance
obligation........ -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- --------- -------
BALANCE, December
31, 1999........... -- $ -- -- $ -- -- $ -- -- $-- -- $ -- 7,876,767 $78,768
======= ===== ======= ===== ======== ======= === ==== ======= ===== ========= =======
<CAPTION>
Total
Amount
-------
<S> <C>
BALANCE, December
31, 1996........... 7,679
Net loss.......... --
Foreign currency
translation.......
Total
comprehensive
income..........
Issuance of
warrants.......... --
Exercise of
warrants.......... 9
Dividends paid.... --
Dividends on
preferred stock... --
Preferred stock
and warrant
accretion......... --
-------
BALANCE, December
31, 1997........... 7,688
Net income........ --
Foreign currency
translation....... --
Total
comprehensive
income .........
Preferred stock
and warrant
accretion......... --
Dividends......... --
Compensatory
options........... --
Conversion of
preferred and
common stock...... 24,232
Issuance of
common stock...... 32,883
Warrants
exercised......... 6,573
Options
exercised......... 153
-------
BALANCE, December
31, 1998........... $71,529
Net income........ --
Foreign currency
translation....... --
Total
comprehensive
income
Compensatory
options........... --
Issuance of
common stock...... 6,069
Options
exercised......... 1,170
Share issuance
obligation........ --
-------
BALANCE, December
31, 1999........... $78,768
=======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT--(Continued)
<TABLE>
<CAPTION>
Warrants
---------- Accumulated
Class E Additional Other Total
Common Paid-in Comprehensive Accumulated Stockholders'
Stock Capital Income Deficit Investment
---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... -- 59,809 -- (2,656,959) (2,589,471)
---------- ------------ --------- ----------- ------------
Net loss.............. -- -- -- (879,608) (879,608)
Foreign currency
translation.......... -- -- (296,602) -- (296,602)
------------
Total comprehensive
income............. (1,176,210)
Issuance of warrants.. 4,788,563 -- -- -- 4,788,563
Exercise of warrants.. (11,136) 11,127 -- -- --
Dividends paid........ -- -- -- (495,400) (495,400)
Dividends on preferred
stock................ -- -- -- (1,663,137) (1,663,137)
Preferred stock and
warrant
accretion............ -- -- -- (6,268,478) (6,268,478)
---------- ------------ --------- ----------- ------------
BALANCE, December 31,
1997................... 4,777,427 70,936 (296,602) (11,963,582) (7,404,133)
---------- ------------ --------- ----------- ------------
Net income............ -- -- -- 4,296,048 4,296,048
Foreign currency
translation.......... -- -- (525,238) -- (525,238)
------------
Total comprehensive
income............. 3,770,810
Preferred stock and
warrant accretion.... -- -- -- (2,152,834) (2,152,834)
Dividends............. -- -- -- (274,424) (274,424)
Compensatory options.. -- 2,171,635 -- -- 2,171,635
Conversion of
preferred and common
stock................ -- 38,746,072 -- -- 38,770,304
Issuance of common
stock................ -- 45,786,186 -- -- 45,819,069
Warrants exercised.... (4,777,427) 8,540,301 -- -- 3,769,447
Options exercised..... -- 165,499 -- -- 165,652
---------- ------------ --------- ----------- ------------
BALANCE, December 31,
1998................... -- 95,480,629 (821,840) (10,094,792) 84,635,526
---------- ------------ --------- ----------- ------------
Net income............ -- -- -- 10,943,383 10,943,383
Foreign currency
translation.......... -- -- 450,269 -- 450,269
------------
Total comprehensive
income............. 11,393,652
Compensatory options.. -- 61,167 -- -- 61,167
Issuance of common
stock................ -- 15,124,165 -- -- 15,130,234
Options exercised..... -- 1,459,263 -- -- 1,460,433
Share issuance
obligation........... -- 1,000,000 -- -- 1,000,000
---------- ------------ --------- ----------- ------------
BALANCE, December 31,
1999................... $ -- $113,125,224 $(371,571) $ 848,591 $113,681,012
========== ============ ========= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
1. DESCRIPTION OF THE COMPANY
Career Education Corporation ("CEC", collectively with its subsidiaries "we"
or "our") owns and operates companies which provide private, for-profit
postsecondary education in North America. We have 26 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
2. STOCK OFFERINGS
On February 4, 1998, we sold 3,277,500 shares of our common stock at $16.00
per share pursuant to an initial public offering ("IPO"). The net proceeds from
the offering of $45.6 million were used to repay borrowings under the Credit
Agreement (Note 6) totaling $41.5 million and amounts owed to former owners of
acquired businesses of $4.1 million (Note 6) which were outstanding at that
time. Prior to the consummation of the IPO, all outstanding shares of all
series of preferred stock and accumulated dividends were converted into
2,423,485 shares of common stock and warrants (except for redeemable warrants
exercisable into 32,947 shares of Class E common stock) to purchase 624,320
shares of common stock were exercised. Subsequent to December 31, 1997 and
prior to the consummation of the IPO, we also authorized one class of preferred
stock and one class of common stock, increased the number of authorized shares
of common stock to 50,000,000 and completed a 9.376-for-1 stock split. The
effect of the split has been retroactively reflected for all periods presented
in the accompanying consolidated financial statements.
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 of approximately
$13.8 million were used for general corporate purposes.
3. SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of CEC and our
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in the consolidation. The results of operations
of all acquired businesses have been consolidated for all periods subsequent to
the date of acquisition.
b. Concentration of Credit Risk
We extend unsecured credit for tuition to a significant portion of the
students who are in attendance at the campuses operated by our subsidiaries. A
substantial portion of credit extended to students is repaid through the
students' participation in various federally funded financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). The following table presents the amounts and percentages of the
Company's U.S. institutions' cash receipts collected from Title IV Programs for
the years ended December 31, 1999, 1998 and 1997 (such amounts were determined
based upon each U.S. institution's cash receipts for the twelve-month period
ended December 31, pursuant to the regulations of the United States Department
of Education ("DOE") at 34 C.F.R. (S) 600.5) (amounts in thousands):
F-8
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
For the Year Ended
December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Total Title IV funding....................... $131,019 $ 90,086 $54,963
Total cash receipts.......................... $197,673 $132,553 $85,047
Total Title IV funding as a percentage of
total cash receipts......................... 66% 68% 65%
</TABLE>
We generally complete and approve the financial aid packet of each student
who qualifies for financial aid prior to the student's beginning class in an
effort to enhance the collectibility of our unsecured credit. Transfers of
funds from the financial aid programs are made in accordance with DOE
requirements. Changes in DOE funding of Title IV Programs could impact our
ability to attract students.
c. Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
approximately $24,238,000, $16,915,000 and $10,640,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
d. Inventories
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
e. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the useful lives of the
related assets. Leasehold improvements and assets recorded under capital leases
are amortized on a straight-line basis over their estimated useful lives or
lease terms, whichever is shorter. Maintenance, repairs and minor renewals and
betterments are expensed; major improvements are capitalized. The estimated
cost basis and useful lives of property and equipment at December 31, 1999 and
1998, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998 Life
------- ------- -------------
<S> <C> <C> <C>
Land....................................... $ 3,858 $ 375
Buildings and improvements................. 1,603 471 13-35 years
Classroom equipment, courseware and other
instructional materials................... 60,380 44,754 1-18 years
Furniture, fixtures and equipment.......... 13,899 7,722 3-10 years
Leasehold improvements..................... 13,970 7,266 life of lease
Vehicles................................... 110 17 3-5 years
------- -------
93,820 60,605
Less--Accumulated depreciation and
amortization.............................. 24,524 14,202
------- -------
$69,296 $46,403
======= =======
</TABLE>
The gross cost of assets recorded under capital leases included above
amounts to $9,010,000 and $1,291,000 at December 31, 1999 and 1998,
respectively. The accumulated amortization related to these assets included
above is $2,544,000 and $955,000 at December 31, 1999 and 1998, respectively.
F-9
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
f. Intangible Assets
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
5. Goodwill is being amortized on a straight-line basis over their estimated
useful lives. Covenants not-to-compete are being amortized either on a
straight-line or accelerated basis over their useful lives. At December 31,
1999 and 1998, the cost basis and useful lives of intangible assets consist of
the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998 Life
------- ------- ---------
<S> <C> <C> <C>
Goodwill................................... $68,461 $38,080 40 years
Covenants not-to-compete................... 13,365 13,055 2-5 years
Other intangibles.......................... 2,000 -- 10 years
------- -------
83,826 51,135
Less--Accumulated amortization............. 13,342 8,490
------- -------
$70,484 $42,645
======= =======
</TABLE>
On an ongoing basis, we review intangible assets and other long-lived assets
for impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. To date, no such events or changes in circumstances
have occurred. If such events or changes in circumstances occur, we will
recognize an impairment loss if the undiscounted future cash flows expected to
be generated by the asset (or acquired business) are less than the carrying
value of the related asset. The impairment loss would adjust the asset to its
fair value.
g. Revenue Recognition
Revenue is derived primarily from programs taught at our schools. Tuition
revenue is recognized on a straight-line basis over the length of the
applicable program. Dormitory and cafeteria revenues charged to students are
recognized on a straight-line basis over the length of the students' program.
Other dormitory and cafeteria revenues are recognized as earned. Textbook sales
and other revenues are recognized as services are performed. If a student
withdraws, future revenue is reduced by the amount of the refund due to the
student. Refunds are calculated in accordance with federal, state and
accrediting agency standards. Deferred tuition revenue represents the portion
of payments received but not earned and is reflected as a current liability in
the accompanying consolidated balance sheets as such amount is expected to be
earned within the next year.
h. Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
i. Income Taxes
We file a consolidated federal income tax return and provide for deferred
income taxes under the asset and liability method of accounting. This method
requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
F-10
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
j. Fair Value of Financial Instruments
The carrying value of current assets and liabilities reasonably approximates
their fair value due to their short maturity periods. The carrying value of our
debt obligations reasonably approximates their fair value as the stated
interest rate approximates current market interest rates of debt with similar
terms.
k. Accretion to Redemption Value of Preferred Stock and Warrants
Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants, which was accreted over the earliest period redemption could
occur using the effective interest method. The redemption values are based on
the estimated fair market values of the classes of stock and consider the
amounts we received for the sale of equity instruments, prices paid for
acquired businesses and our operations.
l. Income (Loss) Per Share Attributable to Common Stockholders
We compute earnings per share in accordance with Financial Accounting
Standard No. 128 "Earnings Per Share" which requires two calculations: basic
earnings per share and diluted earnings per share. The calculations primarily
differ by excluding dilutive common stock equivalents, convertible securities
and contingently issuable securities using the treasury method, when computing
basic earnings per share. The weighted average number of common shares used in
determining basic and diluted net income (loss) per share attributable to
common stockholders for the years ended December 31, 1999, 1998 and 1997 is as
follows (in thousands):
<TABLE>
<CAPTION>
For the Year
Ended
December 31,
----------------
1999 1998 1997
----- ----- ----
<S> <C> <C> <C>
Common shares outstanding (basic)........................ 7,685 6,521 768
Common stock equivalents................................. 195 259 --
Common stock contingently issuable....................... 59 17 --
----- ----- ---
Diluted.................................................. 7,939 6,797 768
===== ===== ===
</TABLE>
For the year ended December 31, 1997, antidilutive common stock equivalents
totaling 568,332 were excluded from diluted weighted average number of common
shares outstanding.
Supplemental pro forma diluted income (loss) before extraordinary item and
cumulative effect of change in accounting principle and net income (loss) per
share attributable to common stockholders, had the debt retirement in
connection with the consummation of the IPO occurred at the beginning of the
year, would have been $(2.59) and $(2.73), respectively for the year ended
December 31, 1997 and $0.33 and $0.30, respectively, for the year ended
December 31, 1998. This earnings per share data is computed based upon
historical information adjusted for the reduction in interest expense resulting
from the application of net proceeds from the IPO to reduce our indebtedness
and pro forma weighted average number of shares of common stock outstanding
which reflect the assumed sale of common stock in the IPO resulting in net
proceeds sufficient to pay indebtedness as described in Note 2.
m. Unaudited Pro Forma Diluted Net Income (Loss) per Share Attributable to
Common Stockholders
Unaudited pro forma diluted income (loss) before extraordinary item and
cumulative effect of change in accounting principle and net income (loss) per
share attributable to common stockholders is based on the
F-11
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
weighted average number of shares of common stock and common stock equivalents
outstanding after retroactive adjustments for (i) the stock split described in
Note 2 for all periods presented, (ii) shares of redeemable preferred stock
converted into shares of common stock (determined by dividing the liquidation
value, including paid-in-kind dividends, by the initial public offering price
of $16.00 per share), (iii) the exercise of warrants to purchase shares of
common stock, (iv) the conversion of all existing classes of common stock into
a single new class of common stock and (v) common stock equivalents (if
dilutive) using the treasury stock method.
Supplemental pro forma information assumes that the debt retirement in
connection with the consummation of the IPO occurred at the beginning of the
year and considers the conversion of preferred stock and exercise of warrants.
Supplemental unaudited pro forma diluted income (loss) before extraordinary
item and cumulative effect of change in accounting principle and supplemental
pro forma net income (loss) per share attributable to common stockholders,
would have been $0.05 and $(0.03), respectively, for the year ended December
31, 1997 and $0.64 and $0.61, respectively, for the year ended December 31,
1998.
n. Stock-Based Compensation
We account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS
No. 123) related to options and warrants issued to employees and directors.
Expense associated with stock options and warrants issued to non-employees/non-
directors is recorded in accordance with SFAS No. 123.
o. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"), which establishes standards for the reporting of comprehensive
income. This pronouncement requires that all items recognized under accounting
standards as components of comprehensive income, as defined in the
pronouncement, be reported in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income includes
all changes in equity during a period except those resulting from investments
by owners and distributions to owners. We have adopted SFAS No. 130 at December
31, 1998 and have restated the Statements of Stockholders' Investment for all
periods presented to reflect comprehensive income and accumulated other
comprehensive income.
p. Foreign Currency Translation
We acquired the International Academy of Design, an entity with operations
in Canada, on June 30, 1997. At December 31, 1999, 1998 and 1997, revenues and
expenses related to these operations have been translated at average exchange
rates in effect at the time the underlying transactions occurred. Transaction
gains or losses are included in income. Assets and liabilities of this
subsidiary have been translated at the year-end exchange rate, with gains and
losses resulting from such translation being included in accumulated other
comprehensive income.
F-12
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
q. Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
For the Year Ended
December 31,
----------------------
1999 1998 1997
------ ------- ------
(in thousands)
<S> <C> <C> <C>
CASH PAID FOR--
Interest.............................................. $1,389 $ 1,534 $3,008
Taxes, excluding a refund of $900,000 in 1998......... 6,200 1,860 2,446
====== ======= ======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and
warrants............................................. -- $(2,153) $6,268
Dividends on preferred stock added to liquidation
value................................................ -- (227) 1,663
Capital lease obligations for purchase of equipment... 6,180 -- --
Shares of common stock for license fee................ 2,000 -- --
Conversion of all Class A, B, C, and E common stock
and all series of redeemable preferred stock into
3,192,037 shares of common stock in connection with
the IPO. Value of the redeemable preferred stock at
the date of conversion............................... -- 38,776 --
====== ======= ======
</TABLE>
r. Segment Information
We operate in one industry segment. Operations in geographic regions outside
the United States are not significant.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-
Up Activities." SOP 98-5 requires that all nongovernmental entities expense the
costs of start-up activities (which include organization costs) as these costs
are incurred. As prescribed by the literature, we adopted the provisions of SOP
98-5 in the fourth quarter of 1998, effective January 1, 1998, and recorded a
net of tax charge of $205,000 representing the cumulative effect of the change
in accounting principle.
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 effective
beginning the first 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 will adopt a change in accounting principle to
comply with the specific provisions and guidance of SAB 101. SAB 101 will
require us to recognize revenue related to application and registration fees
over the contract period. Through December 31, 1999, we have recognized
application and registration fees as revenue upon receipt. We are currently in
the process of estimating the cumulative effect of this accounting change and
do not believe that this change will have a material impact on our financial
position or operating results. The effect will be recorded in the first quarter
of fiscal year 2000.
F-13
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
5. BUSINESS ACQUISITIONS
School of Computer Technology, Inc. (SCT)
On February 28, 1997, through SCT Acquisition, Ltd., we acquired 100% of the
outstanding shares of capital stock of School of Computer Technology, Inc. This
acquisition was accounted for as a purchase and, accordingly, the acquired
assets and assumed liabilities have been recorded at their estimated fair
market values at the date of the acquisition. The purchase price, as adjusted,
of approximately $4,944,000 exceeded the estimated fair market value of net
assets acquired and liabilities assumed, resulting in goodwill of approximately
$3,111,000. In connection with the purchase, we entered into a three-year
covenant not-to-compete agreement with each of the former owners of the school
for a total price of $1,750,000.
At closing, we paid $400,000 to the former owners, deposited $5,000,000 into
escrow, and assumed a $1,800,000 note payable due to the former owners. Funds
paid were raised through the issuance of $2,000,000 of Series D preferred stock
and warrants and $3,400,000 of bank borrowings. The note was paid in 1999.
The Katharine Gibbs Schools, Inc. (Gibbs)
On May 31, 1997, we acquired 100% of the outstanding shares of capital stock
of The Katharine Gibbs Schools, Inc. Gibbs has seven wholly-owned subsidiaries,
each of which owns and operates separate campuses. This acquisition was
accounted for as a purchase and, accordingly, the acquired assets and assumed
liabilities have been recorded at their estimated fair market values at the
date of the acquisition. The purchase price of approximately $19,029,000
exceeded the fair market value of net assets acquired and liabilities assumed,
resulting in goodwill of approximately $8,434,000. In connection with the
purchase, we also entered into a covenant not-to-compete agreement with the
former owner of the schools in exchange for $7,000,000. The covenant not-to-
compete restricts the former owners' ability to own or operate certain types of
for-profit postsecondary schools for five years.
At closing, we paid $5,400,000 to the former owner and deposited $18,850,000
into escrow with borrowings of $12,500,000 from a new bank financing
arrangement and $15,000,000 which was raised through the issuance of Series D
preferred stock.
International Academy of Merchandising & Design (IAMD)
On June 30, 1997, through IAMD, Acquisition I, Ltd. we acquired 100% of the
outstanding shares of capital stock of International Academy of Merchandising &
Design ("IAMD") for $3,000,000. Subsequent to the purchase, IAMD Acquisition I,
Ltd. merged with and into IAMD and assumed its name. In 1998, the purchase
price was increased by approximately $4,700,000, pursuant to the earn-out
provision in the purchase agreement. This acquisition was accounted for as a
purchase and, accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair market values at the date of the
acquisition. The purchase price exceeded the fair market value of net assets
acquired and liabilities assumed, resulting in goodwill of approximately
$8,395,000.
In connection with the purchase, we also entered into covenant not-to-
compete agreements with the former owners of the school in exchange for
$2,000,000. The covenant not-to-compete restricts the former owners' ability to
own or operate certain types of for-profit postsecondary schools for four
years.
On June 30, 1997, we paid $100,000 to the former owners, issued $1,500,000
in notes payable to the former owners and issued letters of credit totaling
$3,400,000 to secure amounts owed to the former owners to consummate these
transactions. The funds to consummate these transactions were obtained through
the issuance of Series D preferred stock and warrants and bank borrowings. The
notes and letters of credit were paid upon the consummation of the IPO.
F-14
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
International Academy of Design (IAD)
On June 30, 1997, we purchased 100% of the capital stock of International
Academy of Design for $6,500,000. This acquisition was accounted for as a
purchase and, accordingly, the acquired assets and assumed liabilities have
been recorded at their estimated fair market values at the date of the
acquisition. The purchase price exceeded the fair market value of net assets
acquired and liabilities assumed, resulting in goodwill of approximately
$5,850,000.
In connection with the purchase, we entered into covenant not-to-compete
agreements with the former owners of the school in exchange for $2,000,000. The
covenant not-to-compete restricts the former owners' ability to own or operate
certain types of postsecondary vocational schools for four years.
On June 30, 1997, we paid $3,820,000 to the former owners, deposited
$2,120,000 into escrow, and issued $2,550,000 in notes payable to the former
owners to consummate these transactions. The funds to consummate these
transactions were obtained through the issuance of Series D preferred stock and
warrants and bank borrowings. The notes were paid upon consummation of the IPO.
Southern California School of Culinary Arts, Ltd. (SCSCA)
On March 13, 1998, through CA Acquisitions, Ltd., we acquired 100% of the
outstanding shares of capital stock of Southern California School of Culinary
Arts, Ltd. for $1,000,000. 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 $1,235,000.
Scottsdale Culinary Institute, Inc. (SCI)
On July 31, 1998, through SCI Acquisitions, Ltd., we acquired certain assets
and assumed certain liabilities of Scottsdale Culinary Institute, Inc. for
approximately $9,900,000. 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 $8,272,000.
Harrington Institute of Interior Design, Inc. (Harrington)
On January 4, 1999, we acquired all of the outstanding shares of capital
stock of Harrington Institute of Interior Design, Inc. for approximately
$3,540,000. 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 $2,724,000.
McIntosh College, Inc. (McIntosh)
On March 9, 1999, we acquired certain assets and assumed certain liabilities
of McIntosh College, Inc. for approximately $4,968,000. 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
$4,619,000.
Briarcliffe College, Inc. (Briarcliffe)
On April 1, 1999, we acquired all of the outstanding shares of capital stock
of Briarcliffe College, Inc. for approximately $20,639,000. 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
$17,624,000.
F-15
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Brooks Institute of Photography, Inc. (BIP)
On June 1, 1999, through Brooks Institute of Photography, LLC, we acquired
all of the outstanding shares of capital stock of Brooks Institute of
Photography, Inc. for approximately $6,553,000. 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
$2,208,000.
Washington Business School, Inc. (WBS)
On December 3, 1999, through WBS Acquisitions, Ltd., we acquired all of the
outstanding shares of capital stock of Washington Business School, Inc. for
approximately $3,000,000. The acquisition was accounted for as a purchase and
the purchase price, subject to adjustment, exceeded the fair value of assets
acquired and liabilities assumed, resulting in goodwill of approximately
$3,024,000.
California Culinary Academy, Inc. (CCA)
On December 6, 1999, we entered into an agreement whereby we will acquire
California Culinary Academy, Inc. The acquisition is subject to a number of
conditions, but is expected to close in early April 2000. We anticipate that
the purchase price will be approximately $20 million. We will also assume
approximately $3 million of debt of the Academy.
Pro Forma Results of Operations
The following unaudited pro forma results of operations (in thousands,
except per share amounts) for the years ended December 31, 1999, 1998 and 1997,
assumes that business acquisitions consummated subsequent to January 1, 1997
described above occurred at the beginning of the year preceding the year of the
acquisition. The unaudited pro forma results below are based on historical
results of operations, include adjustments for depreciation, amortization,
interest and taxes and do not necessarily reflect actual results that would
have occurred.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Net revenue........................................ $225,531 $175,696 $111,310
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle......................................... 10,553 3,429 (1,516)
Net income (loss).................................. 10,553 3,224 (1,934)
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle attributable to common stockholders..... 10,553 1,002 (9,944)
Net income (loss) attributable to common
stockholders...................................... 10,553 797 (10,362)
======== ======== ========
Basic income (loss) per share attributable to
common stockholders--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 1.37 $ 0.15 $ (12.95)
======== ======== ========
Net income (loss)................................ $ 1.37 $ 0.12 $ (13.49)
======== ======== ========
Diluted income (loss) per share attributable to
common stockholders--
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... $ 1.33 $ 0.15 $ (12.95)
======== ======== ========
Net income (loss)................................ $ 1.33 $ 0.12 $ (13.49)
======== ======== ========
</TABLE>
F-16
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The Cooking and Hospitality Institute of Chicago, Inc. (CHIC)
Effective February 1, 2000, we acquired all of the outstanding shares of
capital stock of The Cooking and Hospitality Institute of Chicago, Inc. for
approximately $5,500,000, subject to adjustment. The acquisition was accounted
for as a purchase and the purchase price, based upon a preliminary allocation,
exceeded the fair value of assets acquired and liabilities assumed, resulting
in goodwill of approximately $5,000,000.
6. DEBT
Our debt at December 31, 1999 and 1998, consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Revolving loans under Credit Agreement with a syndicate of
banks as discussed below...................................... $41,000 $11,250
Note payable to former owners of SCI, repaid in February 1999.. -- 9,000
Notes payable to former owners of acquired businesses bearing
annual interest at rates up to 7%............................. 2,029 1,829
Equipment under capital leases, secured by related equipment,
discounted at a weighted average interest rate of 5.13%....... 6,521 523
Other.......................................................... 389 15
------- -------
49,939 22,617
Less--Current portion.......................................... 2,324 317
------- -------
$47,615 $22,300
======= =======
</TABLE>
On May 30, 1997, we entered into a credit agreement (the "Credit Agreement")
with a bank (syndicated on September 25, 1997) and prepaid approximately
$21,187,000 of outstanding revolving credit notes, term loans and other
obligations under our previous credit agreement with borrowings from term loans
and revolving credit notes which were permitted under the Credit Agreement at
that time. Subsequently, the Credit Agreement has been amended from time to
time. Under the current amended Credit Agreement, we can borrow up to
$90,000,000 under a revolving credit facility ("Revolving Loans") and can
obtain up to $50,000,000 in letters of credit; however, outstanding letters of
credit reduce the revolving credit facility availability. The amended Credit
Agreement matures on October 26, 2003. Borrowings under the amended Credit
Agreement bear interest, payable quarterly, at 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 at LIBOR, plus a specified number of basis points,
ranging from 75 to 200, (based upon our leverage ratio), at our election.
At December 31, 1999, we had outstanding $41,000,000 in revolving credit
borrowings and outstanding letters of credit totaling approximately $816,000
(to meet certain Department of Education financial responsibility requirements)
under the Credit Agreement. At December 31, 1999, all borrowings were at the
bank's prime rate which was 8.5% at December 31, 1999.
Under our previous bank credit agreement, which we entered into in 1995,
(the "Agreement") we were permitted to borrow, on a consolidated basis,
$8,000,000 under a revolving credit note and $12,000,000 through a term loan.
On May 30, 1997, in connection with entering into the Credit Agreement and
prepaying all amounts outstanding under the previous agreement, we expensed
prepayment penalty fees and unamortized deferred financing costs and recorded
an extraordinary loss on the early extinguishment of debt of $651,000, net of
related tax benefit of $233,000.
F-17
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
CEC and our subsidiaries have collectively guaranteed repayment of amounts
outstanding under the Credit Agreement. In addition, we have pledged the stock
of our subsidiaries as collateral for repayment of the debt. We may voluntarily
make principal prepayments but are required if we generate excess cash flows,
as defined, sell certain assets, or upon the occurrence of certain other
events. Under the Credit Agreement we are limited in our ability to take
certain actions, including paying dividends, as defined, selling or disposing
of certain assets or subsidiaries, making annual rental payments in excess of
15% of consolidated revenues in any given year, and issuing subordinated debt
in excess of $5,000,000, among other things. We are required to maintain
certain financial ratios, including a quarterly interest coverage ratio of at
least 1.75:1, certain levels of consolidated net worth, and funded debt to
consolidated earnings before interest, taxes, depreciation, and amortization of
3.50:1, among others. At December 31, 1999, we were in compliance with the
covenants of the Credit Agreement, as amended.
We intend to refinance amounts owed to former owners of acquired businesses
noted above through availability under our Credit Agreement and, therefore,
such amounts have been classified as long-term.
At December 31, 1999, future annual principal payments of debt are as
follows (in thousands):
<TABLE>
<S> <C>
2000.............................................................. $ 2,324
2001.............................................................. 2,912
2002.............................................................. 1,575
2003.............................................................. 42,616
2004 and thereafter............................................... 512
-------
Total............................................................. $49,939
=======
</TABLE>
7. STOCKHOLDERS' INVESTMENT
In connection with the consummation of the IPO on February 4, 1998, we
amended and restated our certificate of incorporation to authorize a total of
50,000,000 shares of common stock ("Common Stock") and authorize 1,000,000
shares of preferred stock, with a par value of $0.01, and converted all classes
of common stock described below into one class of Common Stock, with a par
value of $0.01, at a rate of 9.376 shares of Common Stock for every share of
existing common stock. The shares of common stock disclosed in these financial
statements and notes hereto retroactively reflect this split.
Prior to the IPO we had Class A, B, C, D and E common stock. Class A and
Class B common stock had voting rights while Class C, D and E common stock was
nonvoting. Class B common stock was convertible into shares of Class A common
stock at any time at the discretion of the holder at a ratio of 1:1. Class C
common stock was convertible into shares of either Class A common stock or
Class B common stock at any time at the discretion of the holder at a ratio of
1:1. Class D common stock was convertible into shares of Class A common stock,
subject to certain restrictions. Class E common stock could only be converted
into shares of Class A common stock upon the occurrence of certain events.
On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
United States and Canada in connection with our culinary education programs. We
have developed a curriculum with Le Cordon Bleu for use at our culinary schools
and have issued Le Cordon Bleu 50,601 shares of Common Stock. Subsequent to
December 31, 1999 we will issue an additional 50,601 shares of Common Stock as
final payment for the exclusive rights to the developed curriculum and license
rights. Under this agreement we also pay Le Cordon Bleu royalties based on
tuition collected from students enrolled in Le Cordon Bleu programs at our
schools. The agreement expires on December 31, 2008, but can be renewed for two
five-year successive terms.
F-18
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
8. REDEEMABLE PREFERRED STOCK
In connection with the IPO consummated on February 4, 1998, all classes of
redeemable preferred stock described below were converted into 2,423,233 shares
of Common Stock by dividing the liquidation value of preferred stock on that
date (including all accrued paid-in-kind dividends) by $16.00, the initial
public offering price of the common stock.
Series A and D
Series A and D preferred stock had a stated value of $1,000 per share, and
its holders were entitled to receive dividends at an annual rate of 7% of the
liquidation value per share ($1,000 per share plus dividends, as defined).
Dividends were paid in equal semiannual installments on January 31 and July 31
of each year by increasing the liquidation value of the Series A and D
preferred stock. The mandatory redemption value of the Series A and D preferred
stock was increased to reflect these dividends.
On February 28, 1997, we entered into a securities purchase agreement with
existing common and preferred stockholders to raise funds for acquisitions. The
securities purchase agreement gave the stockholders the right to purchase up to
7,500 shares of Series D preferred stock for $1,000 per share and receive
warrants to purchase 83,671 shares of Class E common stock at an exercise price
of $.01 per share. Under this securities purchase agreement, we issued 7,500
shares of Series D preferred stock and warrants to purchase 83,671 shares of
Class E common stock to existing stockholders in connection with the
acquisitions of SCT and Gibbs. The proceeds were allocated to preferred stock
and warrants based upon their relative market values after considering issuance
costs.
On May 30, 1997, we entered into another securities purchase agreement with
existing common and preferred stockholders to raise funds for additional
acquisitions. The securities purchase agreement gave the stockholders the right
to purchase up to an additional 15,000 shares of Series D preferred stock for
$1,000 per share and receive warrants to purchase 339,280 shares of Class E
common stock at an exercise price of $.01 per share. Under this securities
purchase agreement, we issued 15,000 shares of Series D preferred stock and
warrants to purchase 339,280 shares of Class E common stock to existing
stockholders in connection with the acquisitions of Gibbs, IAMD and IAD. The
proceeds were allocated to preferred stock and warrants based upon their
relative market values after considering issuance costs.
Series B
Series B preferred stock had a stated value of $1,000 per share, and its
holders were not entitled to any dividends on any outstanding shares.
Series C
Series C preferred stock had a stated value of $1,000 per share, and its
holders were entitled to receive cash dividends at an annual rate of 10% of the
liquidation value per share ($1,000 per share plus undeclared dividends as
defined). Dividends were payable in equal quarterly installments on each March
31, June 30, September 30 and December 31. To the extent dividends were
declared and not paid, they were added to the liquidation value. We paid all
dividends through December 31, 1997 on Series C preferred stock.
F-19
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
9. REDEEMABLE WARRANTS
In connection with the issuance of Series C preferred stock, we issued
warrants exercisable into 237,072 shares of Class D common stock. These
warrants were subject to adjustment, exercisable at any time, and had an
exercise price of $.01 per share. These warrants were adjusted to be 202,297
based upon the results of our operations through December 31, 1997 and were
exercised in connection with the IPO (Note 2) during 1998. We accreted the
difference between the value of the warrants at the date of issuance and the
IPO date using the effective interest method.
In connection with our previous credit agreement (Note 6), we issued
warrants exercisable into 20,618 shares (subject to adjustment under certain
circumstances) of Class D common stock. The warrants were exercisable at any
time and had an exercise price of $.01 per share. Based upon the terms and
provisions of the credit and warrant agreements, we assigned a value (based
upon the relative fair market value of the debt and warrants) of $79,997 to
these warrants. The fair market value of the warrants was determined with
reference to the exercise price of the warrants, the fair market value of our
common stock at the date the warrants were issued (considering its recent sale
of stock to third parties) and the period the warrants can be exercised. In
connection with the sales of Series D preferred stock through the various
securities purchase agreements, the warrants were exchanged for warrants (with
similar put and call features) to purchase 20,618 shares of Class E common
stock and also increased to include additional warrants to purchase 12,329
shares of Class E common stock. The value of these additional warrants,
totaling approximately $180,000 (based upon a Black-Scholes option pricing
model with assumptions as described in Note 10) was recorded as interest
expense in 1997. The warrant holder exercised the warrants in 1998.
10. STOCK OPTIONS AND WARRANTS
Stock Options
During 1994, certain stockholders were granted options to purchase up to a
total of approximately 13.5% of the outstanding shares of our common stock.
These options, which have an exercise price of $0.01 per share, were to be
earned and become exercisable based upon certain financial returns earned and
realized in a cash payment by certain stockholders and are subject to other
conditions. In July 1995, the option agreements were amended to reduce the
total number of shares of common stock for which the options could be exercised
to 11.5% of the outstanding shares, and a supplemental option agreement was
entered into entitling one of these stockholders to purchase 20,618 shares of
common stock at $0.01 per share. The supplemental option vests over a five year
period. Under the supplemental option agreement, additional options to purchase
a total of 8,579 shares of common stock at an exercise price of $0.01 per share
were issued in 1997. These options vest over the same period as the initial
supplemental option.
On October 20, 1997, the original option agreements were further amended to
fix the number of shares that the stockholders may exercise only upon
completion of the IPO. Under these amended agreements, in addition to the
options issued under the supplemental option agreement, the stockholders may
purchase an aggregate of 122,615 shares of our common stock at any time after
the IPO closing, but prior to January 31, 2004. These options fully vested upon
the IPO closing. We recorded compensation expense of approximately $2.0 million
related to these agreements in 1998.
During 1995, we adopted the 1995 Stock Option Plan. Under this plan we can
grant up to 160,568 options exercisable into shares of Class E common stock to
certain members of management. The options vest and become exercisable in five
equal annual installments commencing with the first anniversary of the grant,
and expire 10 years from the date of grant, or earlier under certain
circumstances. Options issued under the 1995 Stock Option Plan to purchase
92,101 shares of common stock were fully vested upon the consummation of the
IPO.
F-20
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
During 1998, we approved the 1998 Employee Incentive Compensation Plan. The
plan provides for us to grant stock options, stock appreciation rights,
restricted stock, deferred stock and other awards which are exercisable into
shares of common stock to our directors, officers, employees and consultants.
Stock options may be either incentive stock options or nonqualified stock
options. No stock option or appreciation right shall be exercisable more than
ten years after the date of grant. During 1999 we amended the plan to reserve
1.35 million shares of common stock for distribution pursuant to awards issued
under the plan.
During 1998, we approved the 1998 Non-Employee Directors' Stock Option
Plan. The plan provides for us to grant options to purchase shares of common
stock to directors. Each person who is a non-employee director shall be
granted an option to purchase 8,000 shares of common stock upon becoming a
director and on an annual basis, as long as such director continues to serve
as a director, shall receive an option to purchase 6,000 shares of common
stock. Each option becomes exercisable over a three year period and expires
ten years from the date of grant. We have reserved 200,000 shares of common
stock for issuance under the plan.
Stock option activity under all of our stock option plans is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price Range Price
--------- ------------ --------
<S> <C> <C> <C>
Outstanding as of December 31, 1996......... 105,874 $ 0.01- 3.88 $ 3.13
Granted................................... 77,361 0.01-14.71 12.97
Cancelled................................. (2,672) 3.88 3.88
--------- ------------ ------
Outstanding as of December 31, 1997......... 180,563 0.01-14.71 7.33
--------- ------------ ------
Granted................................... 760,665 0.01-26.25 18.37
Exercised................................. (15,313) 0.01-16.00 8.18
Cancelled................................. (16,531) 14.71-26.25 16.95
--------- ------------ ------
Outstanding as of December 31, 1998......... 909,384 0.01-26.25 16.38
--------- ------------ ------
Granted................................... 619,550 23.63-37.25 29.99
Exercised................................. (116,956) 0.01-26.25 5.32
Cancelled................................. (180,681) 14.71-37.25 26.89
--------- ------------ ------
Outstanding as of December 31, 1999......... 1,231,297 $ 0.01-37.25 $22.73
========= ============ ======
Stock options exercisable at
December 31, 1997......................... 44,367 $ 0.01- 3.88 $ 2.35
========= ============ ======
December 31, 1998......................... 260,422 $ 0.01-26.25 $ 3.93
========= ============ ======
December 31, 1999......................... 302,118 $ 0.01-37.25 $12.23
========= ============ ======
</TABLE>
The following table summarizes information about all stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Number Weighted Number
Outstanding Weighted Average Exercisable Weighted
as of Average Remaining at Average
Exercise Price Ranges December 31, 1999 Exercise Price Contractual Life December 31, 1999 Exercise Price
--------------------- ----------------- -------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.01-$ 3.88........... 136,810 $ 1.31 5.72 136,810 $ 1.31
$13.85-$16.00........... 257,987 15.73 7.96 83,918 15.50
$19.75-$26.875.......... 592,250 25.28 9.06 71,390 25.79
$28.00-$37.25........... 244,250 35.96 9.36 10,000 37.25
--------- ------ ---- ------- ------
$ 0.01-$37.25........... 1,231,297 $22.73 8.52 302,118 $12.23
========= ====== ==== ======= ======
</TABLE>
F-21
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
The fair value of each option is estimated on the date of grant based on the
Black-Scholes option pricing model and assumptions used to value the options.
The weighted average fair value of the options granted during the years ended
December 31, 1999, 1998 and 1997 and assumptions used to value the options are
as follows:
<TABLE>
<CAPTION>
For the Year Ended
---------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Dividend yield..................................... -- -- --
Risk-free interest rate............................ 6.0% 8.0% 6.8%
Volatility......................................... 60% 60% --
Expected life...................................... 7 10 10
Weighted average fair value of options granted..... $17.02 $14.48 $2.58
</TABLE>
Warrants
During 1997, in connection with the issuance of Class D preferred stock
through the various securities purchase agreements, we issued warrants
exercisable into a total of 422,951 shares of Class E common stock. These
warrants were exercisable at any time, had an exercise price of $.01 per share
and all warrants were exercised in connection with the consummation of the IPO.
A summary of warrant activity, including redeemable warrants, is as follows:
<TABLE>
<CAPTION>
Shares Under Warrant
-------------------------------
Class D Class E
Common Stock Common Stock
--------------- ---------------
Shares Price Shares Price
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Outstanding as of December 31, 1996......... 257,690 0.01 -- --
Issued.................................... -- -- 435,281 0.01
Cancelled................................. (34,776) 0.01 -- --
Exercised................................. -- -- (928) 0.01
Exchanged................................. (20,618) 0.01 20,618 0.01
-------- ----- -------- -----
Outstanding as of December 31, 1997......... 202,296 0.01 454,971 0.01
Exercised................................. (202,296) 0.01 (454,971) 0.01
-------- ----- -------- -----
Outstanding as of December 31, 1998......... -- $ -- -- $ --
======== ===== ======== =====
</TABLE>
The fair value of each warrant is estimated on the date of grant based on
the Black-Scholes option pricing model assuming among other things, no dividend
yield, a risk-free interest rate of 6.59%, an expected volatility of 0.70 and
expected life of 8-10 years.
Pro Forma Results
Had we accounted for our stock options in accordance with SFAS No. 123, pro
forma income (loss) before extraordinary item and cumulative effect of change
in accounting principle and net income (loss), and
F-22
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
pro forma income (loss) before extraordinary item and cumulative effect of
change in accounting principle and net income (loss) attributable to common
stockholders would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998 1997
------- ------ -------
<S> <C> <C> <C>
Pro forma income (loss) before extraordinary item
and cumulative effect of change in accounting
principle.......................................... $10,156 $3,754 $ (505)
Pro forma net income (loss)......................... 10,156 3,549 (923)
Pro forma income (loss) before extraordinary item
and cumulative effect of change in accounting
principle attributable to common stockholders...... 10,156 1,327 (8,932)
Pro forma net income (loss) attributable to common
stockholders....................................... 10,156 1,122 (9,350)
======= ====== =======
Pro forma diluted income (loss) before extraordinary
item and cumulative effect of change in accounting
principle per share attributable to common
stockholders....................................... $ 1.28 $ 0.20 $(11.63)
======= ====== =======
Pro forma diluted net income (loss) per share
attributable to common stockholders................ $ 1.28 $ 0.17 $(12.17)
======= ====== =======
</TABLE>
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the options
vest and additional awards may also be granted.
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Current--
Federal....................................... $5,026 $ 3,688 $ 685
State and local............................... 1,430 973 (3)
Foreign....................................... 1,049 -- --
------ ------- -------
Total current............................... 7,505 4,661 682
------ ------- -------
Deferred--
Federal....................................... 576 (923) (578)
State and local............................... 139 (182) (76)
Foreign....................................... 35 (206) (359)
------ ------- -------
Total deferred.............................. 750 (1,311) (1,013)
------ ------- -------
Total provision (benefit) for income taxes...... $8,255 $ 3,350 $ (331)
====== ======= =======
</TABLE>
F-23
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate...... 34.0% 34.0% (34.0)%
Foreign taxes............................... 1.8 (0.3) (8.7)
State and local income taxes, net of Federal
benefit.................................... 5.4 6.7 (6.6)
Permanent differences and other............. 1.8 2.3 7.6
------- ------- --------
Effective income tax rate................... 43.0% 42.7% (41.7)%
======= ======= ========
</TABLE>
Components of deferred income tax assets and liabilities consist of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- ------
<S> <C> <C>
Deferred income tax assets:
Tax net operating loss carryforwards................... $ 623 $1,788
Stock options.......................................... 541 872
State tax credit....................................... 441 --
Allowance for doubtful accounts........................ 796 320
Covenants not-to-compete............................... 3,462 2,086
Deferred rent obligation............................... 549 245
Other.................................................. 215 243
------- ------
Total deferred income tax assets..................... 6,627 5,554
------- ------
Deferred income tax liabilities:
Depreciation and amortization.......................... 9,744 4,134
Other.................................................. -- 95
------- ------
Total deferred income tax liabilities................ 9,744 4,229
------- ------
Net deferred income tax (liability) asset............ $(3,117) $1,325
======= ======
</TABLE>
We have purchased certain tax net operating loss carryforwards in
connection with our business acquisitions. At December 31, 1999, we have
federal and state tax net operating loss carryforwards totaling $1.0 million
and $2.7 million, respectively. We have not recorded a valuation allowance
because we believe that deferred income tax assets will be realized in the
future.
12. COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to occasional lawsuits, investigations and claims arising
out of the normal conduct of our business. In certain cases, claims against
acquired businesses relating to events which occurred during the periods we
did not own them are indemnified by the former owners. Management does not
believe the outcome of any pending claims will have a material adverse impact
on our financial position or results of operations.
Leases
We rent most of our school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through 2009. The
facility leases require us to make monthly payments covering rent, taxes,
insurance and maintenance costs. Rent expense, exclusive of taxes, insurance
and maintenance of the facilities and equipment, for the years ended December
31, 1999, 1998 and 1997 was approximately $19,542,000, $14,304,000, and
$8,049,000, respectively.
F-24
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
Future minimum lease payments under these leases as of December 31, 1999,
are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
------- --------- --------
<S> <C> <C> <C>
2000............................................. 2,553 19,213 21,766
2001............................................. 2,426 18,103 20,529
2002............................................. 1,477 15,051 16,528
2003............................................. 129 13,354 13,483
2004............................................. 125 11,755 11,880
2005 and thereafter.............................. 497 58,522 59,019
------ -------- --------
7,207 $135,998 $143,205
======== ========
Less--Portion representing interest at a weighted
average rate of 5.13%........................... 686
------
Principal payments............................... 6,521
Less--Current portion............................ 2,269
------
$4,252
======
</TABLE>
13. REGULATORY
Our U.S. schools are subject to extensive regulation by federal and state
governmental agencies and accrediting bodies. In particular, the Higher
Education Act ("HEA"), and the regulations promulgated thereunder by the U.S.
Department of Education ("DOE"), subject our U.S. schools to significant
regulatory scrutiny on the basis of numerous standards that schools must
satisfy in order to participate in the various federal student financial
assistance programs under Title IV of the HEA ("Title IV Programs").
To participate in the Title IV Programs, an institution must be authorized
to offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the DOE
and certified as eligible by the DOE. The DOE will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the DOE's extensive regulations
regarding institutional eligibility. An institution must also demonstrate its
compliance to the DOE on an ongoing basis.
Political and budgetary concerns significantly affect the Title IV Programs.
Congress must reauthorize the HEA approximately every six years. The most
recent reauthorization in October 1998 reauthorized the HEA for an additional
five years (the "1998 HEA Reauthorization"). Congress reauthorized all of the
Title IV Programs in which our schools participate, generally in the same form
and at funding levels no less than for the prior year. Changes made by the 1998
HEA Reauthorization include (i) expanding the adverse effects on schools of
high student loan default rates, (ii) increasing from 85% to 90% the portion of
a proprietary school's revenue that may be derived each year from the Title IV
Programs, (iii) revising the refund standards that require an institution to
return a portion of the Title IV Program funds for students who withdraw from
school, and (iv) giving the DOE flexibility to continue an institution's Title
IV participation without interruption in some circumstances following a change
of ownership or control.
A significant component of Congress' initiative to reduce abuse in the Title
IV Programs has been the imposition of limitations on institutions whose former
students default on the repayment of their federally guaranteed or funded
student loans above specific rates (cohort default rate). An institution whose
cohort
F-25
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
default rates equal or exceed 25% for three consecutive years will no longer be
eligible to participate in the FFEL, FDL or Pell programs. An institution whose
cohort default rate under the FFEL or FDL programs for any federal fiscal year
exceeds 40% may have its eligibility to participate in all of the Title IV
Programs limited, suspended or terminated by the DOE.
All institutions participating in the Title IV Programs must satisfy
specific standards of financial responsibility. Based on the institution's
annual audited financial statements, the DOE evaluates institutions for
compliance with these standards each year and following a change of ownership
of the institution. In reviewing our financial statements, it has been the
DOE's practice to measure financial responsibility on the basis of the
financial statements of both our institutions and CEC on a consolidated basis.
Under new regulations which took effect July 1, 1998, the DOE calculates the
institution's composite score based on its (i) equity ratio, which measures the
institution's capital resources, ability to borrow and financial viability;
(ii) primary reserve ratio, which measures the institution's ability to support
current operations from expendable resources; and (iii) net income ratio, which
measures the institution's ability to operate at a profit. An institution that
does not meet the DOE's minimum composite score may demonstrate its financial
responsibility by posting a letter of credit in favor of the DOE in an amount
equal to at least 50% of the Title IV Program funds received by the institution
during its prior fiscal year or posting such letter of credit in an amount
equal to at least 10% of the Title IV Program funds received by the institution
during its prior fiscal year and accepting other conditions on its
participation in the Title IV Programs.
We filed our audited 1998 financial statements with the DOE early in 1999 to
ask it to release most, if not all, of our outstanding letters of credit and to
increase or eliminate the Title IV Program funding limitation for SCSCA. At
December 31, 1998, we believed, based on our audited 1998 financial statements,
that we satisfied each of the DOE's standards of financial responsibility and
may participate in Title IV Programs without additional monitoring. The DOE
responded by eliminating $17.6 million in letters of credit, reducing the
remaining letters of credit to $144,700, and eliminating the Title IV Program
funding limitation for SCSCA.
The DOE also assesses the administrative capability of each institution that
participates in the Title IV Programs. In addition, each institution is
required to apply to the DOE for continued certification to participate in the
Title IV Programs at least every six years, or when it undergoes a change of
control.
When we acquire an institution that is eligible to participate in the Title
IV Programs, that institution undergoes a change of ownership resulting in a
change of control ("change of control") as defined by the DOE. Upon a change of
control, an institution's eligibility to participate in the Title IV Programs
may be suspended until it has applied for and been recertified by the DOE as an
eligible institution under our ownership, which requires that the institution
also reestablish its state authorization and accreditation. If an institution
is recertified following a change of control, it will be on a provisional
basis. The 1998 HEA Reauthorization provides that the DOE may provisionally and
temporarily certify an institution undergoing a change of control under certain
circumstances while the DOE reviews the institution's application. The DOE has
been implementing this amendment to the 1998 HEA and has issued the applicable
regulations to take effect on July 1, 2000. The DOE has provided such temporary
certification to each institution we have acquired since January 1999 in
periods of time ranging from 10 to 40 days after closing. Each of the U.S.
institutions we have acquired has undergone a certification review under our
ownership and has been certified to participate in the Title IV Programs, with
the exception of Washington Business School, which we acquired on December 3,
1999 and is currently operating on a temporary provisional basis.
F-26
<PAGE>
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999, 1998 and 1997
In Canada, there are several government programs which provide students
attending eligible institutions with government funding. The provisions
governing an eligible institution vary by province and generally require an
institution's programs qualifying for funding to meet certain rules and
regulations and also to have the administration of the program independently
audited.
14. EMPLOYEE BENEFIT PLANS
We maintain a contributory profit sharing plan established pursuant to the
provisions of Section 401(k) of the Internal Revenue Code that provides
retirement benefits for our eligible employees. This plan requires matching
contributions to eligible employees. Our matching contributions were
$1,033,000, $699,000 and $400,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
We maintain an employee stock purchase plan which provides for the issuance
of up to 500,000 shares of common stock to be purchased by our eligible
employees through periodic offerings. Our employees may purchase common stock
through payroll deductions (not to exceed $20,000 per person within any
calendar year) at 85% of the fair market value. As of December 31, 1999,
employees have cumulatively purchased 37,093 shares under the Employee Stock
Purchase Plan.
15. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
<TABLE>
<CAPTION>
1999 Quarters First Second Third Fourth
------------- ------- ------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net revenue................................... $45,435 $48,780 $55,605 $66,984
Income from operations........................ 2,912 1,638 3,279 12,522
Income before extraordinary item and
cumulative effect of change in accounting
principle.................................... 1,539 744 1,661 6,999
Net income.................................... 1,539 744 1,661 6,999
Net income per share:
Basic........................................ $ 0.21 $ 0.10 $ 0.21 $ 0.89
Diluted...................................... 0.20 0.09 0.21 0.86
<CAPTION>
1998 Quarters First Second Third Fourth
------------- ------- ------- ------- -------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Net revenue................................... $32,597 $32,325 $34,994 $44,316
Income (loss) from operations................. (656) 588 1,210 7,959
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle.................................... (696) 227 559 4,411
Net income (loss)............................. (901) 227 559 4,411
Net income (loss) per share:
Basic........................................ $ (0.72) $ 0.03 $ 0.08 $ 0.62
Diluted...................................... (0.72) 0.03 0.08 0.59
</TABLE>
16. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charges to Increase Balance
Beginning Operating Due to Amounts at End
of Period Expenses Acquisitions Written-off of Period
---------- ---------- ------------ ----------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Student receivable
allowance activity for
the year ended
December 31, 1999..... $2,127 $6,697 $ 361 $(6,462) $2,723
Student receivable
allowance activity for
the year ended
December 31, 1998..... 1,516 4,983 71 (4,443) 2,127
Student receivable
allowance activity for
the year ended
December 31, 1997..... 455 1,400 1,040 (1,379) 1,516
</TABLE>
F-27
<PAGE>
EXHIBIT 21
CAREER EDUCATION CORPORATION
SUBSIDIARIES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Subsidiary Jurisdiction
---------- of Incorporation
----------------
- -------------------------------------------------------------------------------
<S> <C>
Al Collins Graphic Design School, Ltd., Delaware
d/b/a Al Collins Graphic Design School
- -------------------------------------------------------------------------------
Allentown Business School, Ltd., Delaware
d/b/a Allentown Business School
- -------------------------------------------------------------------------------
Brooks College, Ltd., Delaware
d/b/a Brooks College
- -------------------------------------------------------------------------------
Brown Institute, Ltd., Delaware
d/b/a Brown Institute
- -------------------------------------------------------------------------------
CEC Management, Inc. Illinois
- -------------------------------------------------------------------------------
The Cooking and Hospitality Institute of Chicago, Inc., Illinois
d/b/a The Cooking and Hospitality Institute of Chicago
- -------------------------------------------------------------------------------
Harrington Institute of Interior Design, Inc., Illinois
d/b/a Harrington Institute of Interior Design
- -------------------------------------------------------------------------------
IAMD Limited (holding company) Delaware
- -------------------------------------------------------------------------------
International Academy of Merchandising & Design, Ltd. Illinois
- -------------------------------------------------------------------------------
International Academy of Merchandising & Design, Inc., Florida
d/b/a International Academy of Design
- -------------------------------------------------------------------------------
International Academy of Merchandising and Design (Canada) Ontario
Ltd.,
d/b/a International Academy of Design-Toronto
- -------------------------------------------------------------------------------
International Academy of Design, Inc., Quebec
a.k.a. Academie Internationale du Design Inc.,
d/b/a International Academy of Design-Montreal and
d/b/a Academie Internationale du Design-Montreal
- -------------------------------------------------------------------------------
CEC Holdings I, Inc. Delaware
- -------------------------------------------------------------------------------
Briarcliffe College, Inc., New York
d/b/a Briarcliffe College
- -------------------------------------------------------------------------------
Brooks Institute of Photography, L.L.C. Delaware
d/b/a Brooks Institute of Photography
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Montclair, Inc., New Jersey
d/b/a Gibbs College-Montclair
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Piscataway, Inc., New Jersey
d/b/a Katharine Gibbs School-Piscataway
- -------------------------------------------------------------------------------
The Katharine Gibbs Corporation - New York, New York
d/b/a Katharine Gibbs School-New York
- -------------------------------------------------------------------------------
The Katharine Gibbs Corporation - Mellville, New York
d/b/a Katharine Gibbs School-Melville
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Norwalk, Inc., Connecticut
d/b/a/ Gibbs College-Norwalk
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Providence, Inc., Rhode Island
d/b/a Katharine Gibbs School-Providence
- -------------------------------------------------------------------------------
The Katharine Gibbs School of Boston, Inc., a private Massachusetts
two-year college,
d/b/a Katharine Gibbs School-Boston
- -------------------------------------------------------------------------------
LCB Culinary School, LLC Delaware
- -------------------------------------------------------------------------------
McIntosh College, Inc., Delaware
d/b/a McIntosh College
- -------------------------------------------------------------------------------
Washington Business School, Ltd., Delaware
d/b/a Washington Business School
d/b/a Washington Business School of Northern Virginia
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Subsidiary Jurisdiction
---------- of Incorporation
----------------
- -------------------------------------------------------------------------------
<S> <C>
Market Direct, Inc. Illinois
- -------------------------------------------------------------------------------
School of Computer Technology, Inc., Delaware
d/b/a Computer Tech and d/b/a International Culinary Academy
- -------------------------------------------------------------------------------
Scottsdale Culinary Institute, Ltd., Delaware
d/b/a Scottsdale Culinary Institute
- -------------------------------------------------------------------------------
Southern California School of Culinary Arts, Ltd. Delaware
d/b/a California School of Culinary Arts
- -------------------------------------------------------------------------------
Western Culinary Institute, Ltd., Delaware
d/b/a Western Culinary Institute
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Annual Report on Form 10-K into CAREER EDUCATION
CORPORATION's previously filed Registration Statements File Nos. 333-60339,
333-60335 and 333-84403.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 44,745
<SECURITIES> 0
<RECEIVABLES> 18,664
<ALLOWANCES> (2,723)
<INVENTORY> 1,468
<CURRENT-ASSETS> 69,522
<PP&E> 93,820
<DEPRECIATION> (24,524)
<TOTAL-ASSETS> 210,524
<CURRENT-LIABILITIES> 43,735
<BONDS> 47,615
0
0
<COMMON> 79
<OTHER-SE> 113,602
<TOTAL-LIABILITY-AND-EQUITY> 210,524
<SALES> 0
<TOTAL-REVENUES> 216,804
<CGS> 0
<TOTAL-COSTS> 196,453
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,697
<INTEREST-EXPENSE> 1,153
<INCOME-PRETAX> 19,198
<INCOME-TAX> 8,255
<INCOME-CONTINUING> 10,943
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,943
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.38
</TABLE>
