<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended: March 31, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to .
Commission File Number: 0-23245
Career Education Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-3932190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2895 Greenspoint Parkway, Suite 600, Hoffman Estates, IL 60195
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 781-3600
2800 West Higgins Road, Suite 790, Hoffman Estates, IL 60195
(Former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
As of May 2, 2000, 7,958,909 shares of the registrant's Common Stock, par
value $.01, were outstanding.
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CAREER EDUCATION CORPORATION
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Unaudited Consolidated Balance Sheets as of March
31, 2000 and December 31, 1999............................... 3
Condensed Unaudited Consolidated Statements of Operations for
the three months ended March 31, 2000 and 1999............... 4
Condensed Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 2000 and 1999............... 5
Notes to Condensed Consolidated Financial Statements.......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 13
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 14
SIGNATURES................................................................ 15
</TABLE>
2
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 42,343 $ 44,745
Receivables, net...................................... 15,645 15,941
Inventories, prepaid expenses and other current
assets............................................... 10,889 7,825
Deferred income tax assets............................ 1,251 1,011
-------- --------
Total current assets................................ 70,128 69,522
-------- --------
PROPERTY AND EQUIPMENT, net............................. 71,282 69,296
INTANGIBLE ASSETS, net.................................. 74,846 70,484
OTHER ASSETS............................................ 1,257 1,222
-------- --------
TOTAL ASSETS............................................ $217,513 $210,524
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt.................. $ 2,760 $ 2,324
Accounts payable...................................... 9,420 7,629
Accrued expenses and other current liabilities........ 13,704 16,679
Deferred tuition revenue.............................. 20,181 17,103
-------- --------
Total current liabilities........................... 46,065 43,735
-------- --------
LONG-TERM DEBT, net of current maturities............... 47,916 47,615
DEFERRED INCOME TAX LIABILITIES......................... 4,994 4,128
OTHER LONG-TERM LIABILITIES............................. 1,613 1,365
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at March
31, 2000 and December 31, 1999.......................
Common stock, $.01 par value; 50,000,000 shares
authorized; 7,951,182 and 7,876,767 shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively......................................... 79 79
Additional paid-in capital............................ 113,704 113,125
Accumulated other comprehensive loss.................. (401) (372)
Retained earnings..................................... 3,543 849
-------- --------
Total stockholders' investment...................... 116,925 113,681
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT.......... $217,513 $210,524
======== ========
</TABLE>
3
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
----------------
2000 1999
------- -------
<S> <C> <C>
REVENUE:
Tuition and registration fees, net.......................... $64,680 $42,121
Other, net.................................................. 5,635 3,314
------- -------
Total net revenue......................................... 70,315 45,435
------- -------
OPERATING EXPENSES:
Educational services and facilities......................... 27,739 18,521
General and administrative.................................. 31,798 20,928
Depreciation and amortization............................... 4,562 3,074
------- -------
Total operating expenses.................................. 64,099 42,523
------- -------
Income from operations.................................... 6,216 2,912
INTEREST EXPENSE, net......................................... 125 212
------- -------
Income before provision for income taxes and cumulative
effect of change in accounting principle................... 6,091 2,700
PROVISION FOR INCOME TAXES.................................... 2,619 1,161
------- -------
Net income before cumulative effect of change in
accounting principle..................................... 3,472 1,539
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of
taxes of $587................................................ (778) --
------- -------
NET INCOME.................................................... $ 2,694 $ 1,539
======= =======
NET INCOME PER SHARE:
Basic--
Income before cumulative effect of change in accounting
principle................................................ $ 0.44 $ 0.21
Cumulative effect of change in accounting principle, net
of taxes................................................. (0.10) --
------- -------
Net income.............................................. $ 0.34 $ 0.21
======= =======
Diluted--
Income before cumulative effect of change in accounting
principle................................................ $ 0.42 $ 0.20
Cumulative effect of change in accounting principle, net
of taxes................................................. (0.09) --
------- -------
Net income.............................................. $ 0.33 $ 0.20
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic....................................................... 7,910 7,235
======= =======
Diluted..................................................... 8,197 7,552
======= =======
</TABLE>
4
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-----------------
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,694 $ 1,539
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 4,562 3,074
Compensation expense related to the stock option
issuances.............................................. 13 --
Deferred income taxes................................... 740 958
Changes in operating assets and liabilities, net of
acquisitions........................................... (1,847) 2,039
------- --------
Net cash provided by operating activities............. 6,162 7,610
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash........................ (3,047) (13,469)
Acquisition and financing transaction costs............... (369) (286)
Purchase of property and equipment, net................... (2,979) (4,413)
Other assets.............................................. -- 375
------- --------
Net cash used in investing activities................. (6,395) (17,793)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. 441 15,548
Equity issuance costs..................................... -- (1,595)
Payments of amounts due and notes payable to former owners
of acquired businesses, capital lease obligations and
other long-term debt..................................... (599) (66)
Net borrowings (payments) on revolving loans under Credit
Agreement................................................ (2,000) 4,000
------- --------
Net cash provided by (used in) financing activities... (2,158) 17,887
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (11) 20
------- --------
NET INCREASE (DECREASE) IN CASH............................. (2,402) 7,724
CASH, beginning of period................................... 44,745 23,548
------- --------
CASH, end of period......................................... $42,343 $ 31,272
======= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations for purchase of equipment....... $ 996 $ --
Shares of common stock for license fee.................... $ -- $ 2,000
======= ========
</TABLE>
5
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1--Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 2000. The condensed
consolidated balance sheet at December 31, 1999 has been derived from the
audited consolidated financial statements at that date, but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For additional information,
refer to the consolidated financial statements and footnotes for the year
ended December 31, 1999 that are included in our annual report on Form 10-K.
Note 2--Public Offering of Common Stock
On March 29, 2000, we filed a registration statement with the Securities and
Exchange Commission regarding a proposed public offering of 2,150,000 shares
of Common Stock. We expect to be issuing and selling 1,500,000 of such shares
of common stock and the remaining 650,000 will be offered by selling
stockholders. If the offering is completed, the net proceeds to us from the
sale of the shares of common stock, after deducting the discounts, commissions
and estimated offering expenses payable by us will be used to repay
indebtedness under our credit facility and for general corporate purposes. We
will not receive any of the proceeds from the shares of Common Stock sold by
the selling stockholders.
Note 3--Business Acquisitions
The Cooking and Hospitality Institute of Chicago, Inc.
On February 1, 2000, we acquired all of the outstanding capital stock of The
Cooking and Hospitality Institute of Chicago, Inc. The purchase price was
approximately $5.5 million, subject to adjustment. The acquisition was
accounted for as a purchase and the purchase price exceeded the fair market
value of net assets acquired and liabilities assumed, resulting in goodwill of
approximately $5.1 million.
California Culinary Academy, Inc.
On April 3, 2000, we closed the acquisition of California Culinary Academy,
Inc. The purchase price was approximately $20.0 million, subject to
adjustment. We also assumed approximately $3.0 million of the debt of
California Culinary Academy, Inc. The acquisition will be accounted for as a
purchase.
6
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
Note 4--Comprehensive Income
The disclosure of comprehensive income and accumulated other comprehensive
income, which encompasses net income and foreign currency translation
adjustments, is as follows:
<TABLE>
<CAPTION>
Three Months
Ended March
31,
--------------
2000 1999
------ ------
<S> <C> <C>
Net Income....................................................... $2,694 $1,539
Other Comprehensive (Loss) Income
Foreign currency translation adjustment........................ (29) 105
------ ------
Comprehensive Income............................................. $2,665 $1,644
====== ======
</TABLE>
Note 5--Recent Accounting Pronouncement
On December 3, 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on
the recognition, presentation, and disclosure of revenue in financial
statements. The SAB outlines basic criteria that must be met before registrants
may recognize revenue, including persuasive evidence of the existence of an
arrangement, the delivery of products or services, a fixed and determinable
sales price, and reasonable assurance of collection. SAB 101 is required to be
adopted in the second fiscal quarter of the first fiscal year beginning after
December 15, 1999.
Prior to the release of SAB 101, our revenue recognition policy was in
compliance with generally accepted accounting principles. Effective January 1,
2000, we adopted this change in accounting principle to comply with the
specific provisions and guidance of SAB 101. SAB 101 requires us to recognize
revenue related to application and registration fees over the student benefit
period. Through December 31, 1999, we recognized application and registration
fees as revenue upon receipt. As a result, we recognized a cumulative net of
tax charge of $0.8 million, in the first quarter of 2000.
Note 6--Debt
As of March 31, 2000, we had approximately $39.0 million of borrowings
outstanding under our Credit Facility. Additionally, we had approximately $0.8
million of outstanding letters of credit as of such date.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our actual growth, results,
performance and business prospects and opportunities in 2000 and beyond could
differ materially from those expressed in, or implied by, any such forward-
looking statements. See "Special Note Regarding Forward-Looking Statements" on
page 13 for a discussion of risks and uncertainties that could cause or
contribute to such material differences.
The following discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and attached Notes appearing
elsewhere in this document.
Background and Overview
We are a provider of private, for-profit postsecondary education in North
America, with approximately 22,900 students enrolled as of April 24, 2000. We
have 28 campuses located in 15 states and two Canadian provinces. Our schools
enjoy long operating histories and offer a variety of bachelor's degree,
associate degree and non-degree programs in career-oriented disciplines within
our core curricula of:
. visual communication and design technologies
. information technology
. business studies
. culinary arts
We have experienced significant growth both internally and through
acquisitions. We have invested significant amounts of capital in the hiring of
additional personnel and increased marketing and capital improvements at each
of the schools we have acquired. The increased costs of personnel and marketing
are expensed as incurred and are reflected in general and administrative
expenses. Additional depreciation is a result of capital improvements and
increased amortization is a result of added goodwill.
We believe that EBITDA, while not a substitute for generally accepted
accounting principles' measures of operating results, is an important measure
of our financial performance and that of our schools. Our EBITDA increased 80
percent, from $6.0 million in the first quarter of 1999 to $10.8 million in the
first quarter of 2000. We believe that EBITDA is particularly meaningful due
principally to the role acquisitions have played in our development. Our rapid
growth through acquisitions has resulted in significant non-cash depreciation
and amortization expense, because a significant portion of the purchase price
of a school acquired by us is generally allocated to fixed assets, goodwill and
other intangible assets. As a result of our ongoing acquisition strategy, non-
cash amortization expense may continue to be substantial.
Our principal source of revenue is tuition collected from our students. The
academic year is at least 30 weeks in length, but varies both by individual
school and program of study. The academic year is divided by term, which is
determined by start dates, which vary by school and program. Payment of each
term's tuition may be made by full cash payment, financial aid and/or an
installment payment plan. If a student withdraws from school prior to the
completion of the term, we refund the portion of tuition already paid which is
attributable to the period of the term that is not completed. Revenue is
recognized ratably over the period of the student's program.
Our campuses charge tuition at varying amounts, depending not only on the
particular school, but also upon the type of program and the specific
curriculum. On average, our campuses increase tuition one or more times
annually.
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.
8
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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, contract training 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 1, 2000, we acquired all of the outstanding capital stock of The
Cooking and Hospitality Institute of Chicago, Inc. The purchase price was
approximately $5.5 million, subject to adjustment. The acquisition was
accounted for as a purchase and the purchase price exceeded the fair market
value of net assets acquired and liabilities assumed, resulting in goodwill of
approximately $5.1 million.
On April 3, 2000, we closed the acquisition of California Culinary Academy,
Inc. The purchase price was approximately $20.0 million, subject to
adjustment. We also assumed approximately $3.0 million of debt of California
Culinary Academy, Inc. The acquisition will be accounted for as a purchase.
9
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Results of Operations
The following table summarizes our operating results as a percentage of net
revenue for the period indicated.
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
--------------
2000 1999
------ ------
<S> <C> <C>
REVENUE:
Tuition and registration fees, net........................... 92.0% 92.7%
Other, net................................................... 8.0 7.3
------ ------
Total net revenue.......................................... 100.0 100.0
------ ------
OPERATING EXPENSES:
Educational services and facilities.......................... 39.5 40.8
General and administrative................................... 45.2 46.0
Depreciation and amortization................................ 6.5 6.8
------ ------
Total operating expenses................................... 91.2 93.6
------ ------
Income from operations....................................... 8.8 6.4
INTEREST EXPENSE, net.......................................... 0.1 0.5
------ ------
Income before provision for income taxes and cumulative
effect of change in accounting principle.................... 8.7 5.9
PROVISION FOR INCOME TAXES..................................... 3.8 2.5
------ ------
Income before cumulative effect of change in accounting
principle................................................... 4.9 3.4
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net....... (1.1) --
------ ------
NET INCOME..................................................... 3.8% 3.4%
====== ======
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31,
1999
Revenue. Net tuition and registration fee revenue increased 54%, from $42.1
million in the first quarter of 1999 to $64.7 million in the first quarter of
2000. The increase was due to an approximate 19% increase in the average
student population at our schools which we owned prior to 1999, tuition
increases effective after the first quarter of 1999 and student enrollment
mix. The increase was also due to added net tuition and registration fee
revenue of $14.0 million from schools acquired during and after 1999. Other
net revenue increased 70%, from $3.3 million in the first quarter of 1999 to
$5.6 million in the first quarter of 2000, primarily due to the schools
acquired during and after 1999.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 50%, from $18.5 million in the first quarter of
1999 to $27.7 million in the first quarter of 2000. Of this increase, $4.5
million was attributable to schools owned prior to 1999 and $4.7 million was
attributable to schools acquired during and after 1999. These increases were
primarily due to the increase in average student population mentioned above,
as well as an increase in curriculum development activities.
General and Administrative Expense. General and administrative expense
increased 52%, from $20.9 million in the first quarter of 1999 to $31.8
million in the first quarter of 2000. The increase was primarily attributable
to $4.0 million of expenses for schools acquired during and after 1999, costs
totaling $2.5 million related to planned corporate and regional infrastructure
enhancements and increased advertising and marketing (including admissions) of
$3.3 million for schools owned prior to 1999.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 48%, from $3.1 million in the first quarter of 1999 to $4.6 million
in the first quarter of 2000. The increase was primarily due to
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capital expenditures for schools acquired during and after 1999 and related
increased depreciation expense of $0.4 million in 2000. Additionally,
depreciation expense increased $1.1 million due to additional depreciation
expense associated with capital expenditures for schools owned prior to 1999.
Amortization expense remained constant at $1.1 million, primarily due to the
decline of amortization of non-competition agreements and goodwill for the
schools acquired prior to 1999, offset by the amortization of goodwill for
schools acquired during and after 1999.
Net Interest Expense. Net interest expense decreased 41%, from $0.2 million
in the first quarter of 1999 to $0.1 million in the first quarter of 2000. The
decrease was primarily due to the reduction in indebtedness following our
March 1999 public offering.
Provision for Income Taxes. The provision for income taxes increased from
$1.2 million in the first quarter of 1999 to $2.6 million in the first quarter
of 2000 as a result of increases in pretax income.
Net Income before Cumulative Effect of Change in Accounting Principle. Net
income before cumulative effect of change in accounting principle increased
126%, from $1.5 million in the first quarter of 1999 to $3.5 million in the
first quarter of 2000, due to the factors noted above.
Cumulative Effect of Change in Accounting Principle. We adopted Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, as of January 1, 2000
resulting in a net of tax charge of $0.8 million. SAB 101 requires us to
recognize revenue related to application and registration fees over the
student benefit period rather than as revenue upon receipt.
Net Income. Net income increased 75%, from $1.5 million in the first quarter
of 1999 to $2.7 million in the first quarter of 2000, due to the factors noted
above.
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 remaining
cash generated from operations. Net cash provided by operating activities
decreased from $7.6 million in the first quarter of 1999 to $6.2 million in
the first quarter of 2000, due primarily to decreases in the operating assets
and liabilities offset by increases in net income and depreciation and
amortization.
Capital expenditures decreased from $4.4 million in the first quarter of
1999 to $3.0 million in the first quarter of 2000 due primarily to the first
quarter of 1999 being unusually high due to a facility move of the School of
Computer Technology/Pittsburgh and its International Culinary Academy. We
would normally expect capital expenditures to increase as new schools are
acquired or opened, student population increases and current facilities and
equipment are upgraded and expanded.
Our net receivables at March 31 as a percentage of net revenue for the first
quarter decreased from 23% in 1999 to 22% in 2000. This change was primarily
due to increased revenues at schools acquired prior to 1999 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.
On March 31, 1999, we amended our credit agreement dated October 26, 1998 to
increase our line of credit from $60.0 million to $90.0 million. We may now
obtain letters of credit up to $50.0 million. Outstanding letters of credit
reduce the revolving credit facility availability under our credit agreement.
Our credit agreement
11
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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. As of March 31, 2000, we had approximately $0.8 million of
outstanding letters of credit and $39.0 million of outstanding borrowings
under our credit facility. As a result, at March 31, 2000, our remaining
credit availability under the credit agreement was approximately $50.2
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
March 31, 2000, we held nominal amounts of such funds in separate accounts.
The restrictions on any cash held in these accounts have not significantly
affected our ability to fund daily operations.
Year 2000 Compliance
The Year 2000 Problem. Many information technology ("IT") hardware and
software systems and non-IT systems containing embedded technology, such as
microcontrollers and microchip processors, can only process dates with six
digits, for example, 03/17/98, instead of eight digits, for example,
03/17/1998. This limitation may cause IT systems and non-IT systems to
experience problems processing information with dates after December 31, 1999.
For example, 01/01/00 could be processed as 01/01/2000 or 01/01/1900. There
could also be problems with other dates, such as September 9, 1999, which was
a date traditionally used as a default date by computer programmers. These
problems may cause IT systems and non-IT systems to suffer miscalculations,
malfunctions or disruptions. These problems are commonly referred to as "Year
2000" problems. In late 1997, we began our audit, testing and remediation
project to assess our exposure to Year 2000 problems both because of our own
IT systems and non-IT systems and because of the systems of our significant
vendors, including those who process and disburse student financial aid for
us. The discussion below details our efforts to ensure Year 2000 compliance.
Our State of Readiness. 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.
12
<PAGE>
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.
Special Note Regarding Forward-Looking Statements
This Form 10-Q 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
educational 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 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to the impact of interest rate changes, foreign currency
fluctuations and changes in the market value of our investments. We have not
entered into interest rate caps or collars or other hedging instruments.
Our exposure to changes in interest rates is limited to borrowings under
revolving credit agreements, which have variable interest rates tied to the
prime and LIBOR rates. We estimate that the book value of each of our debt
instruments approximated its fair value at March 31, 2000.
We are subject to fluctuations in the value of the Canadian dollar vis-a-vis
the U.S. dollar. Our investment in our Canadian operations is not significant
and the book value of the assets and liabilities of these operations at March
31, 2000 approximated their fair value.
13
<PAGE>
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27--Financial Data Schedule
(b) Reports on Form 8-K.
We filed a Current Report on Form 8-K on April 11, 2000 to report the
consummation of our acquisition of California Culinary Academy, Inc. (Items
5 and 7 of Form 8-K).
We filed a Current Report on Form 8-K on April 26, 2000 filing a press
release dated April 25, 2000 relating to our first quarter earnings. (Items
5 and 7 of Form 8-K).
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Career Education Corporation
/s/ John M. Larson
Date: May 3, 2000 By: _________________________________
John M. Larson
Chairman, President and Chief
Executive Officer (Principal
Executive Officer)
Date: May 3, 2000 /s/ Patrick K. Pesch
By: _________________________________
Patrick K. Pesch
Senior Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer)
15
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