<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---- OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
---- OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-26040
---------------
COMPUTER LEARNING CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-3501869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11350 RANDOM HILLS ROAD, SUITE 240
FAIRFAX, VIRGINIA 22030
(Address of principal executive offices) (Zip Code)
</TABLE>
(703) 359-9333
(Registrant's telephone number, including area code)
--------------
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
CLASS OUTSTANDING AT DECEMBER 10, 1998
Common Stock, $.01 par value 17,442,187
</TABLE>
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1
<PAGE> 2
COMPUTER LEARNING CENTERS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations................................................................ 3
Consolidated Balance Sheets.......................................................................... 4
Consolidated Statements of Cash Flows................................................................ 5
Notes to Consolidated Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 12
Item 3. Quantitative and Qualitative Disclosures about Market Risks................................... 22
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 22
Item 2. Changes in Securities......................................................................... 23
Item 3. Defaults Upon Senior Securities............................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders........................................... 24
Item 5. Other Information............................................................................. 24
Item 6. Exhibits and Reports on Form 8-K.............................................................. 24
SIGNATURES............................................................................................. 24
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
--------------------------------- ------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
Revenues............................................. $37,076 $25,682 $108,405 $68,650
Costs and expenses:
Costs of instruction and services 24,707 14,413 68,551 37,940
Selling and promotional......................... 5,515 4,018 15,985 11,032
General and administrative...................... 3,419 1,897 10,183 5,408
Provision for doubtful accounts................. 2,540 1,321 6,555 3,314
Amortization of intangible assets............... 141 91 416 272
------- ------- -------- -------
36,322 21,740 101,690 57,966
Income from operations............................... 754 3,942 6,715 10,684
Interest income, net................................. 36 341 455 1,054
Gain on sale of investment securities................ -- -- 279 --
------- ------- -------- -------
Income before income taxes........................... 790 4,283 7,449 11,738
Provision for income taxes........................... 317 1,688 2,971 4,822
------- ------- -------- -------
Net income...................................... $ 473 $ 2,595 $ 4,478 $ 6,916
======= ======= ======== =======
Earnings per share of common stock:
Basic........................................... $ 0.03 $ 0.16 $ 0.26 $ 0.44
======= ======= ======== =======
Diluted......................................... $ 0.03 $ 0.15 $ 0.25 $ 0.41
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE> 4
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, JANUARY 31, OCTOBER 31,
1998 1998 1997
----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 7,620 $ 24,377 $ 25,940
Accounts receivable, net.................................. 60,390 48,114 39,331
Prepaid expenses and other current assets................. 8,358 5,719 5,771
--------------- ---------------- ----------------
Total current assets................................. 76,368 78,210 71,042
--------------- ---------------- ----------------
Fixed assets, net.............................................. 36,347 25,199 20,647
Long-term accounts receivable, net............................. 8,468 7,330 7,117
Other long-term assets......................................... 4,640 4,532 4,194
--------------- ---------------- ----------------
Total assets......................................... $ 125,823 $ 115,271 $ 103,000
=============== ================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 2,665 $ 1,574 $ 2,406
Accrued employee expenses................................. 1,674 3,025 2,688
Accrued other expenses.................................... 5,761 6,519 3,772
Deferred revenues......................................... 55,786 48,231 41,583
--------------- ---------------- ----------------
Total current liabilities............................ 65,886 59,349 50,449
--------------- ---------------- ----------------
Long-term deferred revenues.................................... 2,880 3,713 2,754
Other long-term liabilities.................................... 2,423 1,454 1,092
--------------- ---------------- ----------------
Total liabilities.................................... 71,189 64,516 54,295
--------------- ---------------- ----------------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
authorized shares, no shares issued or
outstanding......................................... -- -- --
Common stock, $.01 par value, 35,000,000
authorized shares; 17,442,187, 16,239,236
and 16,031,088 shares issued and
outstanding, respectively............................ 174 162 160
Additional paid-in capital................................ 35,657 34,525 34,066
Accumulated other comprehensive income.................... 12 160 143
Retained earnings......................................... 18,791 15,908 14,336
--------------- ---------------- ----------------
Total stockholders' equity........................... 54,634 50,755 48,705
--------------- ---------------- ----------------
Total liabilities and stockholders' equity........... $ 125,823 $ 115,271 $ 103,000
=============== ================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE> 5
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
PERIOD ENDED
OCTOBER 31,
----------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................................... $ 4,478 $ 6,916
Adjustments to reconcile net income to cash (used for)
provided by operating activities:
Provision for doubtful accounts........................................... 6,555 3,314
Depreciation.............................................................. 4,802 2,821
Amortization of intangible assets......................................... 416 272
Deferred tax benefit...................................................... -- (752)
Changes in net assets and liabilities:
Accounts receivable....................................................... (16,003) (13,851)
Prepaid expenses and other current assets................................. (2,771) (1,436)
Long-term accounts receivable............................................. (1,790) (4,562)
Other long-term assets.................................................... (379) (160)
Trade accounts payable.................................................... 302 627
Accrued employee expenses................................................. (1,444) 554
Accrued other expenses.................................................... (1,756) 2,555
Deferred revenues......................................................... 3,807 14,097
Long-term deferred revenues............................................... (833) 1,412
Other long-term liabilities............................................... 1,350 310
---------------- ---------------
Cash (used for) provided by operating activities..................... (3,266) 12,117
----------------- ---------------
Cash flows from investing activities:
Capital expenditures........................................................... (14,391) (13,897)
Cash from acquired companies................................................... 932 --
---------------- ---------------
Cash used for investing activities................................... (13,459) (13,897)
---------------- ---------------
Cash flows from financing activities:
Repayments of long-term debt................................................... (518) --
Exercise of stock options...................................................... 486 770
---------------- ---------------
Cash (used for) provided by financing activities..................... (32) 770
---------------- ---------------
Net decrease in cash and cash equivalents........................................... (16,757) (1,010)
---------------- ---------------
Cash and cash equivalents, beginning of period...................................... 24,377 26,950
---------------- ---------------
Cash and cash equivalents, end of period............................................ $ 7,620 $ 25,940
================ ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED,
EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1- BASIS OF PRESENTATION:
The interim consolidated financial statements of Computer Learning
Centers, Inc. (the "Company" or "CLC") as of and for the three and nine months
ended October 31, 1998 and 1997 have been prepared in accordance with the rules
and regulations of the Securities and Exchange Commission ("SEC") with respect
to Form 10-Q and reflect all normal recurring adjustments that are, in the
opinion of management, necessary for a fair statement of results for the interim
periods presented. Pursuant to such rules and regulations, certain footnotes in
the audited financial statements for fiscal year 1998 included in the Company's
Annual Report on Form 10-K ("1998 Annual Report") have been omitted.
These financial statements should be read in conjunction with the 1998
Annual Report as filed with the SEC. The Company's consolidated balance sheet as
of January 31, 1998 was derived from the audited financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Certain reclassifications have been made to prior period amounts to
conform with the current period presentation.
2. - ACQUISITIONS:
On February 17, 1998, the Company acquired Markerdowne Corporation
("Markerdowne") d/b/a Computer Learning Centers Paramus ("CLC Paramus"), a
privately-held provider of information technology education and training based
in Paramus, New Jersey. The acquisition, which qualified as a tax free
reorganization, was accounted for as a pooling of interests in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" ("APB 16").
The acquisition was completed by issuing 510,287 shares of CLC Common Stock in
exchange for substantially all of the right, title and interest in the assets
and assumption of substantially all of the liabilities of CLC Paramus. CLC
Paramus had calendar 1997 annual revenues of approximately $6.7 million and
served approximately 800 students. Current and prior years' financial statements
were not restated due to the immateriality of Markerdowne to the Company. In
connection with this acquisition, the Company incurred $292 of expenses related
to certain legal and accounting fees, which are reflected in the fiscal 1999
results of operations.
On February 20, 1998, the Company acquired Delta College, a Montreal,
Quebec-based, privately-held provider of information technology education and
training. The acquisition was accounted for as a pooling of interests in
accordance with APB 16, and was completed by means of an exchange of all
outstanding shares of Delta College for 548,408 shares of CLC Common Stock.
Delta College reported revenues of approximately $6.7 million for its fiscal
year ended June 30, 1997 and served approximately 800 students at three
locations: Montreal, Laval and Brossard. Current and prior years' financial
statements were not restated due to the immateriality of Delta College to the
Company. In connection with this acquisition, the Company incurred $175 of
expenses related to certain legal and accounting fees, which are reflected in
the fiscal 1999 results of operations.
3. - ACCOUNTS RECEIVABLE:
Student accounts receivable are initially established for the balance of
course tuition at the time a student enrolls in the Learning Center and consist
of financial aid, third-party and self-pay receivable balances. Financial aid
receivables are student receivable balances expected to be paid through federal
student financial assistance funds administered pursuant to Title IV of the
Higher Education Act of 1965, as amended ("Title IV"). Third-party student
receivable balances are those expected to be paid by employer companies or
various
6
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
non-Title IV federal and state agencies. Self-pay student receivables consist of
those amounts to be paid by the student. The Company makes available to
qualifying students alternative financing arrangements ("CLC financing") which
help fund their education. Dependent upon the creditworthiness of the
individual, CLC financing may be offered to assist students with meeting their
financial obligations related to attending CLC. The Company requires students
receiving CLC financing to make regular monthly payments. Depending on the level
of financing extended to students, payment plans offered generally range from
six months to three years. All amounts due to the Company in periods beyond one
year are classified as long-term receivables.
When a student withdraws, tuition paid in excess of earned tuition
revenues is refunded based on the applicable refund policy and tuition revenues
earned in excess of tuition paid remains as an account receivable. Based on
comparison to historical levels, the Company provides for estimated student
withdrawals, as reductions to accounts receivable and related deferred revenue
balances, thus stating these amounts at estimated net realizable value.
Accounts receivable balances are reviewed no less frequently than
quarterly for the purpose of determining appropriate levels of allowance for
doubtful accounts. The Company establishes the allowance for doubtful accounts
using an objective model which applies various expected loss percentages to
aging categories based on historical bad debt experience. The Company writes off
accounts receivable balances by recording a reduction in its allowance for
doubtful accounts when they are deemed to be uncollectible (delinquent for more
than 120 days). Any recoveries of previously written off accounts receivable are
recorded as increases to the allowance for doubtful accounts.
As of October 31, 1998 and 1997, net accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
OCTOBER 31, 1998
----------------------------------------------------------
CURRENT LONG TERM TOTAL
-------------- ------------ ---------------
<S> <C> <C> <C>
Accounts receivable........................ $ 78,517 $ 12,639 $ 91,156
Student withdrawal allowance............... (12,816) (2,172) (14,988)
Allowance for doubtful accounts............ (5,311) (1,999) (7,310)
-------------- ------------ --------------
$ 60,390 $ 8,468 $ 68,858
============== ============ ==============
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1997
----------------------------------------------------------
CURRENT LONG TERM TOTAL
-------------- ------------ ---------------
<S> <C> <C> <C>
Accounts receivable........................ $ 51,757 $ 9,209 $ 60,966
Student withdrawal allowance............... (9,427) (1,309) (10,736)
Allowance for doubtful accounts............ (2,999) (783) (3,782)
------------- ------------ -------------
$ 39,331 $ 7,117 $ 46,448
============= ============ =============
</TABLE>
4. - CREDIT FACILITY:
Effective October 30, 1998, the Company increased its available credit
facility from $8.5 million to $20.0 million. This credit facility consists of a
revolving line of credit, with a convertible term loan component. The amount of
the available term loan component was also increased from $2 million to $7
million and if used, would mature ratably over a five year period. Any
outstanding amounts borrowed under the revolving line of credit are payable upon
its termination in October 2000. The credit agreement requires maintenance of
certain financial ratios and contains other restrictive covenants including
limitations on purchases and sales of assets. The Company is in compliance with
all financial ratio requirements and covenants as of and for the period ended
October 31, 1998.
7
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. - EARNINGS PER SHARE:
Earnings per share data have been calculated to reflect the provisions of
SFAS No. 128. The details of the earnings per share calculations for the three
and nine months ended October 31, 1998 and 1997 follow:
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
<S> <C> <C> <C>
QUARTER ENDED OCTOBER 31, 1998
Earnings per share of common stock -- basic.................... $ 473 17,331,159 $0.03
Dilutive securities:
Stock options............................................. -- 322,615 --
-------- ---------- -----
Earnings per share of common stock -- diluted.................. $ 473 17,653,774 $0.03
-------- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
<S> <C> <C> <C>
QUARTER ENDED OCTOBER 31, 1997
Earnings per share of common stock -- basic.................... $ 2,595 15,998,430 $0.16
Dilutive securities:
Stock options............................................. -- 1,041,650 --
----------- ---------- -----
Earnings per share of common stock -- diluted.................. $ 2,595 17,040,080 $0.15
----------- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
<S> <C> <C> <C>
NINE MONTHS ENDED OCTOBER 31, 1998
Earnings per share of common stock -- basic.................... $ 4,478 17,268,569 $0.26
Dilutive securities:
Stock options............................................. -- 832,312 --
----------- ---------- -----
Earnings per share of common stock -- diluted.................. $ 4,478 18,100,881 $0.25
----------- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
------ ------ ---------
<S> <C> <C> <C>
NINE MONTHS ENDED OCTOBER 31, 1997
Earnings per share of common stock -- basic.................... $ 6,916 15,818,870 $0.44
Dilutive securities:
Stock options............................................. -- 1,174,800 --
----------- ---------- -----
Earnings per share of common stock -- diluted.................. $ 6,916 16,993,670 $0.41
----------- ---------- -----
</TABLE>
6. - LITIGATION:
On March 10, 1998, the Attorney General of Illinois ("AG") filed a
complaint against the Company in Circuit Court in Cook County, Illinois,
asserting that the Company had violated the Illinois Private Business and
Vocational Schools Act and the Illinois Consumer Fraud and Deceptive Business
Practices Act (the "Acts") at its Schaumburg Learning Center. The complaint
alleged that the Company, at the Schaumburg Learning Center, failed to provide
certain educational services and resources and misrepresented certain
information respecting services, resources, occupational opportunities and
student outcomes. The complaint sought suspension of the Schaumburg Center's
charter to operate within Illinois, restitution to persons alleged to have been
injured by the conduct of the Schaumburg Learning Center, costs, civil penalties
totaling $100 for violations of the Acts and an additional civil penalty of $50
for each alleged violation of each of the Acts, committed with intent to
defraud. On June 4, 1998, the Company timely filed an answer denying all of the
material allegations set forth in the complaint.
On June 8, 1998, the Company and the AG reached an agreement settling the
litigation filed on March 10, 1998. As a result of the settlement, which was
approved by the Circuit Court in Cook County, Illinois, the Company agreed to
make a voluntary contribution of $90 to the AG's consumer education fund,
establish a
8
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
four-year program to annually provide $95 worth of computer hardware and
software to schools, programs, community sites and other non-profit or public
institutions in the Chicago area and $10 worth of training in computer skills
annually at the Company's Schaumburg and Chicago Learning Centers for teachers
and other community-based personnel to enable them to make the most effective
use of the computer equipment. The Company has fulfilled the first year of its
agreement with the AG. The Company has also taken various measures required of
it to comply with the agreement with the AG, including implementation of an
ombudsman program and binding arbitration to resolve student complaints. Failure
of the Company to comply with the terms of the agreement with the AG may give
rise to a violation of the consent decree settling the lawsuit brought by the
AG, which in turn may result in adverse action against the Company including
suspension or termination of the Company's licenses to operate within Illinois
and other sanctions. The loss of operating authority in Illinois could have a
material adverse effect on the Company.
On March 13, 1998, a class action lawsuit was filed against the Company in
the United States District Court for the Central District of California on
behalf of all purchasers of Company Common Stock from April 30, 1997 through
March 10, 1998. Over the following two months, eight similar cases were filed in
United States District Courts: two in the Central District of California; five
in the Northern District of Illinois; and one in the Eastern District of
Virginia. The complaints allege violations of the Securities Exchange Act of
1934, including allegations that the Company was experiencing "operations
difficulties" and failed to disclose the alleged difficulties. The complaints
also allege that Company insiders realized profits by trading their shares of
Company stock while in possession of material adverse information. All of the
complaints were filed on behalf of classes of shareholders of Company Common
Stock beginning as early as March 11, 1997 and ending as late as April 7, 1998.
All of these shareholder lawsuits have been consolidated and transferred to the
United States District Court for the Eastern District of Virginia. Discovery has
commenced and is scheduled to conclude on January 29, 1999. No trial date has
been set. The Company is unable to estimate the outcome of the matter or any
potential liability.
On May 5, 1998, a class action lawsuit was filed against the Company in
the Superior Court of New Jersey in Bergen County, New Jersey, on behalf of all
students who attended a Learning Center in New Jersey within six years of May 5,
1998. The complaint alleges, among other things, that the Company, at its
Learning Centers located in the state of New Jersey, failed to provide certain
educational services and resources, misrepresented certain information
respecting services, resources, occupational opportunities and student outcomes
and violated the New Jersey Consumer Fraud Act. The Company is unable to
estimate the outcome of the matter or any potential liability.
On May 19, 1998, a lawsuit was filed against the Company in the District
Court of Harris County, Texas, on behalf of six former students of the Houston
Learning Center. Subsequently, the petition was amended to seek certification as
a class action lawsuit and removed to the U.S. District Court for the Southern
District of Texas, Houston Division. The complaint alleges, among other things,
that the Company, at its Learning Centers located in the state of Texas, failed
to provide certain educational services and resources, misrepresented certain
information respecting services, resources, occupational opportunities and
student outcomes, and violated the Texas Deceptive Trade Practices Act. The
Company is unable to estimate the outcome of the matter or any potential
liability.
On June 1, 1998, a lawsuit was filed against the Company in the District
Court of Harris County, Texas, by seven former students who enrolled in the same
class at the Houston Learning Center in March 1997. The petition alleges, among
other things, that the Company, at its Houston Learning Center, failed to
provide plaintiffs with certain educational services and resources,
misrepresented certain information respecting
9
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
services, resources, occupational opportunities and student outcomes and
violated the Texas Deceptive Trade Practices Act. The Company is unable to
estimate the outcome of this matter or any potential liability.
On September 29, 1998, a lawsuit was filed against the Company in the
Superior Court of Los Angeles County, California, by two former students who
enrolled at the Los Angeles Learning Center in February 1995. The complaint
alleges, among other things, that the Company, at its Los Angeles Learning
Center, failed to provide plaintiffs with certain educational services and
resources, misrepresented certain information respecting services, resources,
occupational opportunities and student outcomes and violated the California
Education Code and the California Business and Professions Code. The Company is
unable to estimate the outcome of this matter or any potential liability.
On November 6, 1998, a lawsuit was filed against the Company in the
District Court of Harris County, Texas, by six former students who enrolled in
the same class at the Houston Learning Center. The petition alleges, among other
things, that the Company, at its Houston Learning Center, failed to provide
plaintiffs with certain educational services and resources, misrepresented
certain information respecting services, resources, occupational opportunities
and student outcomes and violated the Texas Deceptive Trade Practices Act. The
Company is unable to estimate the outcome of this matter or any potential
liability.
The Company intends to defend itself vigorously in the above lawsuits;
however, there can be no assurance that the Company will be successful in
defending itself in any of these proceedings. Even if the Company prevails on
the merits in such litigation, the Company expects to incur significant legal
and other defense costs as a result of such proceedings. These proceedings could
involve substantial diversion of the time of some members of management, and an
adverse determination in, or settlement of, such litigation could involve the
payment of significant amounts, or could include terms in addition to such
payments, which could have a severe impact on the Company's business, financial
condition and results of operations.
7. - REGULATORY MATTERS:
Under the standards of financial responsibility of the U.S. Department of
Education ("DOE"), if an institution's annual financial aid compliance audit or
a review by another regulatory agency finds that the institution made refunds
late (as defined by DOE regulation) to 5% or more of its students in either of
the two most recent fiscal years, the institution is required to post a letter
of credit in favor of the DOE 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, on August 31, 1998, the Company posted a $1.5 million letter of credit
with respect to all Learning Centers except Delta College, and the Somerville,
Methuen and Paramus Learning Centers.
The DOE reviewed the Company's administration of federal student financial
aid programs at its Alexandria and Manassas Learning Centers, respectively. The
DOE's report, issued in September 1998, contained numerous findings of
noncompliance with DOE regulations. The Company has responded to each of the
findings raised in the report and negotiations aimed at their resolution are
continuing. The findings raised in this report do not affect the continued
eligibility of any of the Company's Learning Centers to participate in federal
student aid programs or the manner in which such funds are disbursed.
The Maryland Higher Education Commission ("MHEC") and Texas Workforce
Commission ("TWC") reviewed programs at the Company's Laurel, Maryland and
Houston, Texas Learning Centers, respectively. In October 1998, the MHEC issued
its report citing several findings of regulatory noncompliance. The TWC's
reports, issued in October 1998, contains findings related to their
investigation of student complaints at the Houston Learning Center. The Company
is in the initial stages of resolving the findings resulting from these
10
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
reviews. In both of these states the Company has entered discussions with the
respective state agency and does not anticipate that the actions taken by either
state will jeopardize the licenses of either Learning Center.
During the quarter ended October 31, 1998, the Company accrued $548
representing the estimated costs associated with resolving the findings included
in its open regulatory matters. In regard to the Alexandria, Manassas and
Houston Learning Center reviews, the Company does not believe that the
resolution of the findings associated with these regulatory matters will have a
severe impact on the Company. In regard to the Laurel Learning Center review,
the Company is unable to estimate the outcome of this matter or any potential
liability.
8. - COMPREHENSIVE INCOME:
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Other comprehensive income includes
foreign currency translation adjustments, and net unrealized gains and losses on
investments in equity securities. Total comprehensive income is summarized as
follows:
<TABLE>
<CAPTION>
THIRD QUARTER NINE MONTHS
------------- -----------
1998 1997 1998 1997
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Net income.......................................... $ 473 $ 2,595 $ 4,478 $ 6,916
Reclassification - realized gain on securities
held for investment........................ --- --- (160) ---
Other comprehensive income.......................... 14 8 12 31
--------- -------- ---------- --------
Total comprehensive income.......................... $ 487 $ 2,603 $ 4,330 $ 6,947
========= ======== ========== ========
</TABLE>
9. - SUBSEQUENT EVENTS:
Due to declines in the market value of the Company's Common Stock, as of
December 14, 1998, most outstanding options under the Company's Long Term
Incentive Plan and 1995 Stock Incentive Plan (the "Stock Plans") were
exercisable at prices which substantially exceeded the market value of the
Common Stock. In view of such declines in market value and in keeping with the
Company's philosophy of utilizing equity incentives to motivate and retain
qualified employees, the Board of Directors adopted amendments to regain the
incentive intended to be provided by options to purchase shares of the Company's
Common Stock. Under these amendments, stock options held on December 14, 1998,
by optionees other than directors and executive officers, which were granted
under the Stock Plans and which had an exercise price greater than $6.50 per
share were amended to reduce their exercise price to $5.0625 per share, which
was the closing price of the Company's Common Stock on December 14, 1998. The
amended options have the same vesting provisions as the original options to
which they relate except they will not be exercisable during the six-month
period beginning December 14, 1998 and ending June 13, 1999. Options covering an
aggregate of 212,800 shares of Common Stock were amended by this action.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause the Company's actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results" and "Part II, Item 1 -- Legal
Proceedings."
RESULTS OF OPERATIONS
The following table sets forth statement of operations data of the
Company expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
PERIOD ENDED OCTOBER 31,
--------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Revenues.................................... 100.0% 100.0%
Costs and expenses:
Costs of instruction and services...... 66.6 56.1
Selling and promotional................ 14.9 15.6
General and administrative............. 9.2 7.4
Provision for doubtful accounts........ 6.9 5.1
Amortization of intangible assets...... 0.4 0.4
-------- --------
98.0 84.6
-------- --------
Income from operations...................... 2.0 15.4
Interest income............................. 0.1 1.3
Gain on sale of investment securities....... -- --
-------- --------
Income before income taxes.................. 2.1 16.7
Provision for income taxes.................. 0.8 6.6
-------- --------
Net income.................................. 1.3% 10.1%
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE-MONTH
PERIOD ENDED OCTOBER 31,
--------------------------------------------
1998 1997
---------------- ------------------
<S> <C> <C>
Revenues.................................... 100.0% 100.0%
Costs and expenses:
Costs of instruction and services...... 63.2 55.2
Selling and promotional................ 14.8 16.1
General and administrative............. 9.4 7.9
Provision for doubtful accounts........ 6.0 4.8
Amortization of intangible assets...... 0.4 0.4
-------- --------
93.8 84.4
-------- --------
Income from operations...................... 6.2 15.6
Interest income............................. 0.4 1.5
Gain on sale of investment securities....... 0.3 --
-------- --------
Income before income taxes.................. 6.9 17.1
Provision for income taxes.................. 2.8 7.0
-------- --------
Net income.................................. 4.1% 10.1%
======= =======
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 1998 ("THIRD QUARTER OF 1998") COMPARED WITH THE
THREE MONTHS ENDED OCTOBER 31, 1997 ("THIRD QUARTER OF 1997").
Revenues increased 44% to $37.1 million in the third quarter of 1998 from
$25.7 million in the third quarter of 1997 primarily due to the opening of six
new Learning Centers since the beginning of the second quarter of 1997 and the
growing popularity of the Company's higher tuition programs. In addition to the
opening of the six new Learning Centers, the Company acquired Boston Education
Corporation ("BEC") on December 23, 1997, Markerdowne on February 17, 1998, and
Delta College on February 20, 1998, which added six Learning Centers. In the
third quarter of 1998, these twelve new Learning Centers collectively
contributed 83% of the total revenue growth.
The number of students attending Learning Center programs as of the end of
the quarter increased 37% to 11,629 in the third quarter of 1998 from 8,459 in
the third quarter of 1997. In the third quarter of 1998, enrollments at Learning
Centers opened more than two fiscal years ("same centers") decreased by 613 or
18% from the comparable period of the prior year while enrollments at Learning
Centers opened or acquired during the last two fiscal years ("new centers"),
increased by 1,369 from the comparable period of the prior year. Collectively,
enrollments increased by 756 or 21% for the third quarter of 1998 versus the
third quarter of 1997. When evaluating the enrollment growth above, the Company
views all Learning Centers opened during the last two fiscal years as "new" in
order to account for the start-up period inherent in new center openings.
Accounts receivable (both long and short-term) net of reserves increased
48% year over year as compared to a 58% increase in revenue during the one-year
period ending October 31, 1998. The larger percentage increase in revenue as
compared to accounts receivable can be attributed to the following:
When students enroll at CLC, accounts receivable are established for the
balance of course tuition with a corresponding amount recorded as deferred
revenue. While the accounts receivable balance may be paid at any
12
<PAGE> 13
time during the course, deferred revenue is recognized ratably as tuition
revenue over the period of instruction, regardless of when accounts receivable
are paid.
Since accounts receivable balances increase immediately by the full unpaid
tuition amount when students enroll, while tuition revenues are earned ratably
over the period of instruction, there will not be a direct correlation between
the percentage increases in tuition revenues (and correspondingly, deferred
revenues) and in accounts receivable balances. This "lag" effect of revenues to
receivables, is further pronounced during the initial operations of a new
Learning Center since tuition revenues will be minimal when compared to
corresponding accounts receivable balances. Additionally, Learning Centers in
their second year of operations (those opened in fiscal 1998) contribute
significantly to the lag effect due to the large levels of growth occurring in
year two versus year one of operations. Conversely, in periods of declining
enrollments of the larger and more established Learning Centers (as experienced
in the twelve months ending October 31, 1998), the relative percentage of
accounts receivable growth will decline faster than the relative percentage of
revenue growth. The following summarizes the actual Learning Center openings and
acquisitions for the last two fiscal years.
<TABLE>
<CAPTION>
FISCAL FISCAL
LEARNING CENTER OPENINGS/ACQUISITIONS 1999 1998
---------------------------------------------------- --------- -------
<S> <C> <C>
First Quarter....................................... 5 --
Second Quarter...................................... 1 2
Third Quarter....................................... -- 1
-----
Fourth Quarter...................................... 3
------
Total..................................... 6 6
===== =======
</TABLE>
Costs of instruction and services increased 71% to $24.7 million in the
third quarter of 1998 from $14.4 million in the third quarter of 1997 due
primarily to the direct costs necessary to support the increase in student
population. These direct costs consist primarily of faculty and staff
compensation and related benefits, and facility costs (including rent and
depreciation). Instruction costs and services as a percentage of revenues
increased to 66.6% in the third quarter of 1998 from 56.1% in the third quarter
of 1997. This increase in cost of instruction and services as a percentage of
revenue is primarily attributable to the start up of three Learning Centers
since January 1998, lower enrollments during the third quarter of 1998 at
several of the Company's more established Learning Centers, decreasing
enrollment at Advantec Institutes as retail operations of their programs were
phased-out, and increased expense profiles of acquisitions with respect to
revenues generated at those Centers. Due to the start up period inherent in
Learning Center open less than one year, the ratio of cost of instruction and
services to revenues generated at those Centers typically is very high as fixed
costs typically exceed revenues during their first year. Lower enrollments at
some of the Company's more established Learning Centers resulted in a higher
ratio of cost of instruction due to decreased revenues without a corresponding
decrease in fixed costs.
Selling and promotional expenses increased 37% to $5.5 million in the
third quarter of 1998 from $4.0 million in the third quarter of 1997 due
primarily to increased marketing and advertising necessary to support the growth
in student enrollments. Selling and promotional expenses as a percentage of
revenues decreased to 14.9% in the third quarter of 1998 from 15.6% in the third
quarter of 1997 primarily due to increased efficiencies associated with the
Company's marketing efforts, particularly those realized by the opening of new
Learning Centers within established Learning Center markets.
General and administrative expenses increased 80% to $3.4 million in the
third quarter of 1998 from $1.9 million in the third quarter of 1997, primarily
as a result of increased legal fees associated with regulatory reviews coupled
with the establishment of a $548,000 regulatory operating reserve to provide for
estimated obligations associated with various regulatory matters. Also
contributing to this increase is increased staff at the Company's corporate
offices to support the growth of the business. General and administrative
expenses as a percentage of revenues increased to 9.2% in the third quarter of
1998 from 7.4% in the third quarter of 1997.
Provision for doubtful accounts increased 92% to $2.5 million in the third
quarter of 1998 from $1.3 million in the third quarter of 1997, primarily due to
the increase in revenues of 44% and related accounts receivable balances.
Provision for doubtful accounts as a percentage of revenues increased to 6.9% in
the third quarter of
13
<PAGE> 14
1998 from 5.1% in the third quarter of 1997. The Company attributes this
increase to a shift in student enrollments to higher priced tuition programs,
which typically have higher amounts of self-pay accounts receivable after
application of available financial aid. The self-pay receivables have
historically had lower collection rates than loans from traditional third-party
lenders.
Amortization of intangible assets equaled $141,000 in the third quarter of
1998 versus $91,000 in the third quarter of 1997. The increase in expense
relates to the amortization of a non-compete agreement associated with the
acquisition of Markerdowne.
The Company realized net interest income of $36,000 in the third quarter
1998, compared to net interest income of $341,000 in the third quarter 1997.
This decrease can be attributed to a decrease in interest generated from lower
average invested cash balances.
NINE MONTHS ENDED OCTOBER 31, 1998 COMPARED WITH THE NINE MONTHS ENDED
OCTOBER 31, 1997
Revenues increased 58% to $108.4 million for the nine months ended October
31, 1998 from $68.7 million for the comparable period of the prior year
primarily due to an increase in enrollments at the Company's new centers and the
growing popularity of the Company's higher tuition programs. For the nine months
ended October 31,1998, the twelve new Learning Centers, opened or acquired,
collectively contributed 67% of the total revenue growth.
For the nine months ended October 31, 1998, enrollments at Learning
Centers opened more than two fiscal years decreased by 1,177 or 13% from the
nine months ended October 31, 1997 while enrollments at Learning Centers opened
or acquired during the last two fiscal years increased by 3,194, contributing a
collective 22% increase for the nine months ended October 31, 1998 versus the
comparable period for the prior year. The number of students attending Learning
Center programs as of October 31, 1998 increased 37% to 11,629 from 8,459 from
the comparable period of the prior year.
Costs of instruction and services increased 81% to $68.6 million for the
nine months ended October 31, 1998 from $37.9 million for the comparable period
of the prior year due primarily to the direct costs necessary to support the
increase in student population. These direct costs consist primarily of faculty
and staff compensation and related benefits, and facility costs (including rent
and depreciation). Instruction costs and services as a percentage of revenues
increased to 63.2% for the nine months ended October 31, 1998 from 55.2% for the
comparable period of the prior year. This increase in cost of instruction and
services as a percentage of revenue is primarily attributable to the start up of
three Learning Centers since January 1998, lower enrollments during the period
at several of the Company's more established Learning Centers, decreasing
enrollment at Advantec Institutes as the retail operations were phased out, and
increased expense profiles of acquisitions with respect to revenues generated at
those Centers.
Selling and promotional expenses increased 45% to $16.0 million for the
nine months ended October 31, 1998 from $11.0 million for the comparable period
of the prior year primarily due to increased marketing and advertising necessary
to support the growth in student enrollments. Selling and promotional expenses
as a percentage of revenues decreased to 14.8% for the nine months ended October
31, 1998 from 16.1% for the comparable period of the prior year primarily due to
increased efficiencies associated with the Company's marketing efforts,
particularly those realized by the opening of new Learning Centers within
established Learning Center markets.
General and administrative expenses increased 88% to $10.2 million for the
nine months ended October 31, 1998 from $5.4 million for the comparable period
of the prior year primarily as a result of increased legal and professional fees
related to the settlement with the Illinois Attorney General, the establishment
of a $548,000 operating reserve to provide for estimated obligations resulting
from various regulatory matters, as well as expenses related to the acquisitions
of Markerdowne and Delta College. Collectively, these expenses amounted to
approximately $4.4 million or 92% of the $4.8 million increase in general and
administrative expenses incurred during the nine months ended October 31, 1998
versus the comparable period from the prior year.
14
<PAGE> 15
General and administrative expenses as a percentage of revenues increased to
9.4% for the nine months ended October 31, 1998 from 7.9% for the comparable
period of the prior year.
Provision for doubtful accounts increased 98% to $6.6 million for the nine
months ended October 31, 1998 from $3.3 million for the comparable period of the
prior year primarily due to the increase in revenues of 58% and related accounts
receivable balances. Provision for doubtful accounts as a percentage of revenues
increased to 6.0% for the nine months ended October 31, 1998 from 4.8% for the
comparable period of the prior year. The Company attributes this increase to a
shift in student enrollments to higher priced tuition programs, which typically
have higher amounts of self-pay accounts receivable after application of
available financial aid. The self-pay receivables have historically had lower
collection rates than loans from traditional third-party lenders.
Amortization of intangible assets equaled $416,000 for the nine months
ended October 31, 1998 versus $272,000 for the comparable period of the prior
year. This increase relates to amortization of a non-compete agreement
associated with the acquisition of Markerdowne.
The Company realized net interest income of $455,000 for the nine months
ended October 31, 1998 versus $1,054,000 for the comparable period of the prior
year primarily due to a decrease in interest generated from lower average
invested cash balances.
During the nine months ending October 31, 1998, the Company realized a
gain of $279,000 from the sale of investment securities. The securities were
obtained in November 1995 pursuant to a demutualization of the Company's health
insurance carrier.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by approximately $16.8
million for the nine-month period ended October 31, 1998. Cash generated from
operations for the nine months ended October 31, 1998 compared to the prior year
period decreased by approximately $15.4 million primarily due to lower net
income resulting from higher costs of instruction and services and
administrative expenses. Cash used in operations has also increased due to
prepayments of federal and state taxes and timing differences between revenue
recognition and related cash receipts.
Effective October 30, 1998, the Company increased its available credit
facility from $8.5 million to $20.0 million. This credit facility consists of a
revolving line of credit, with a convertible term loan component. The amount of
the available term loan component was also increased from $2 million to $7
million and if used, would mature ratably over a five year period. Any
outstanding amounts borrowed under the revolving line of credit are payable upon
its termination in October 2000. The credit agreement requires maintenance of
certain financial ratios and contains other restrictive covenants including
limitations on purchases and sales of assets. The Company is in compliance with
all financial ratio requirements and covenants as of and for the period ended
October 31, 1998.
The Company continuously reviews its cash flow, and seeks strategies to
provide favorable returns on its capital. In evaluating the Company's
anticipated capital needs and cash resources, the Company's Board of Directors
authorized a program to repurchase up to 1,000,000 shares of the Company's
common stock over a two year period ending August 31, 2000. As of November 30,
1998, the Company had not purchased any stock under this program.
The Company believes its available cash on hand, cash provided by
operating activities and existing lines of credit will be sufficient to meet the
Company's cash requirements for at least the next twelve months. Thereafter, the
Company will continue to evaluate all sources of capital available to it,
including bank financing and additional equity or debt offerings, to satisfy
ongoing working capital and capital expenditure requirements.
15
<PAGE> 16
U.S. DEPARTMENT OF EDUCATION ("DOE") REGULATION AND REVIEW
Under the standards of financial responsibility of the DOE, if an
institution's annual financial aid compliance audit or a review by another
regulatory agency finds that the institution made refunds late to 5% or more of
its students in either of the two most recent fiscal years, the institution is
required to post a letter of credit in favor of the DOE 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, on August 31, 1998, the Company posted a
$1.5 million letter of credit with respect to all Learning Centers except Delta
College, and the Boston and Paramus Learning Centers.
On September 14, 1998, the Company received a program review report from
the DOE on the DOE's program review of the administration of the federal student
financial assistance programs by the Company's Alexandria and Manassas Learning
Centers for the period July 1, 1996 through June 30, 1998. The report raised a
number of issues, including the schools' attendance policies and attendance
tracking system, measurement of students' academic progress through their
programs, timeliness of student refunds, disbursement of financial aid to
individual students who did not satisfy all relevant eligibility criteria, and
the schools' overall administrative capability. The report admonished the
Company that the appearance of the same findings in subsequent reviews of the
Alexandria and Manassas Learning Centers could give rise to adverse action
against those Learning Centers but did not refer those Learning Centers for
further proceedings based on this review. The Company has responded to all of
the findings in the program review report, agreeing with certain findings and
disagreeing with others. The Company and the DOE are currently in negotiations
in an effort to resolve this matter. If the Company and the Department do not
reach agreement on any or all of the issues cited in the report, the matter may,
at the Company's request, be presented to a DOE administrative judge, who will
review the facts and law and make a finding respecting institutional monetary
liability, if any. That finding may in turn be appealed by either the Company or
the DOE to the Secretary of Education. The decision of the Secretary constitutes
final action by the DOE, and may be further appealed by the Company in federal
court. The Company does not believe the resolution of the report, whether by
negotiations or through administrative adjudication, will have a material
adverse effect on the Company as a whole.
REAUTHORIZATION OF THE HIGHER EDUCATION ACT OF 1965, AS AMENDED ("HEA")
In October 1998, the U.S. Congress enacted legislation extending the HEA,
the federal law that authorizes the Title IV Programs, until September 30, 2004.
This legislation, most of the relevant provisions of which became effective
October 1, 1998, reauthorized all of the Title IV Programs in which the
Company's Learning Centers participate. Although in general all of the material
program provisions and requirements remain in the same form and funding was
authorized at the same or higher levels, the legislation did make certain
changes in the Title IV Programs of potential relevance to the Company. Chief
among these is an increase in the adverse effect of high student loan default
rates on schools, an increase in the amount of revenues an institution may
derive from the Title IV Programs from 85% to 90%, therefore allowing a slightly
higher reliance on Title IV support, and revisions to the process for
recertifying an institution's participation in the Title IV Programs following a
change of ownership or control so that the DOE may allow an institution to
continue uninterrupted participation in the Title IV Programs provided it meets
certain substantive and procedural requirements.
STUDENT LOAN DEFAULTS
Under the HEA, an educational institution may lose its eligibility to
participate in some or all Title IV Programs if defaults on the repayment of
student loans guaranteed or provided by the federal government exceed certain
rates. Any institution that is determined to have cohort default rates ("CDR")
equal to or exceeding 25% for three consecutive federal fiscal years is subject
to immediate loss of eligibility to participate in the Federal Family Education
Loan ("FFEL"), Federal Direct Loan ("FDL") and Pell Grant programs for the
remainder of the federal fiscal year in which the DOE makes such determination
and the subsequent two federal fiscal years. Furthermore, an institution whose
CDR on FFEL or FDL loans for any federal fiscal year exceeds 40% may have its
eligibility to participate in all Title IV Programs limited, suspended or
terminated.
16
<PAGE> 17
In October 1998, the DOE notified the Company of the Learning Centers'
Fiscal Year 1996 CDRs for the FFEL and FDL programs. The 1996 CDRs are
calculated on the basis of the number of students who entered repayment on their
federal student loans during the federal fiscal year ended September 30, 1996
and defaulted on those loans by September 30, 1997. None of the Company's
Learning Centers received a 1996 CDR of 25% or more. Based on the official data
received from the DOE, the Company has calculated that the weighted average 1996
CDR for all of its U.S.-based Learning Centers was 15.5%. All Learning Centers,
regardless of their cohort default rates, have adopted default management plans.
STATE AUTHORIZATION AND ACCREDITATION
By letter dated April 3, 1998, from the State Superintendent of Education
of the State of Illinois, to the Schaumburg Learning Center (the "Letter"), the
Illinois State Board of Education ("ISBE"), the agency of the State of Illinois
that authorizes the Schaumburg Learning Center, notified the Schaumburg Learning
Center that ISBE had determined that certain activities and procedures of the
Schaumburg Learning Center were not in compliance with the Illinois Private
Business and Vocational Schools Act ("Schools Act"). The Letter directed the
Company to report by April 21, 1998 on actions taken to correct the deficiencies
cited in the Letter and to demonstrate by May 6, 1998 that the deficiencies have
been corrected. The Letter further notified the Company that the Superintendent
would proceed to a hearing on the issue of whether the license of the Schaumburg
Learning Center should be placed on probation, suspended or revoked for a period
of one year if the violations of the Schools Act were not corrected. The Letter
also directed that the Schaumburg Learning Center cease and desist from all
marketing and student enrollment activities until May 6, 1998.
On April 21, 1998, the Company timely submitted its initial response to
the ISBE and, in part on the basis of such response, on May 7, 1998, the ISBE
removed the cease and desist order thereby allowing the Company to resume normal
marketing and student enrollment activities at the Schaumburg Learning Center.
While this review remains open and additional information has been provided to
ISBE, the Company believes that it will be able to satisfy the ISBE that the
Schaumburg Learning Center is operated in substantial compliance with the
Schools Act and that the review will be concluded with no material adverse
effect on the Company.
On October 21, 1998, the Maryland Higher Education Commission ("MHEC")
issued a Notice of Deficiencies (the "Notice") regarding the Company's Laurel
Learning Center. The Notice questioned certain practices of the Laurel Center,
notably in the area of admissions testing, proposed various corrective actions
to be taken by the Laurel Learning Center regarding record-keeping and other
policies and procedures, and proposed various refunds to be made to certain
former students. The Notice also directed the Laurel Center to suspend
certification of certain veterans education benefits for newly enrolling
students, and proposed administrative fines totaling $80,000. On November 10,
1998, the Company timely appealed the Notice and has entered into discussions
with MHEC staff aimed at resolving the matter. If the Company and the MHEC staff
do not reach agreement on any or all of the issues cited in the report, the
matter will be heard by the full MHEC Commission, which will review the facts
and law and make a finding. That finding may in turn be judicially appealed by
the Company. The Company is unable to estimate the outcome of this matter or any
potential liability.
On October 29, 1998, the Texas Workforce Commission ("TWC") issued three
separate complaint investigation reports regarding complaints submitted to TWC
by a total of seven former students at the Houston Learning Center. The reports
concluded that certain of the complaints made by these students were
substantiated and others were not substantiated. Respecting the complaints which
the TWC investigators reported as substantiated, the reports proposed, among
other things, that various corrective actions be taken and that various refunds
be made to certain students, including but not limited to the named
complainants. The TWC also notified the Houston Learning Center that it would
not act on new program approval requests until the issues raised in the reports
are resolved to TWC's satisfaction. The Company has entered into discussions
with TWC staff aimed at resolving the matter. If the Company and TWC staff do
not reach agreement on any or all of the issues cited in the report, the TWC may
initiate action against the Houston Learning Center respecting its authority to
operate or seek to impose restrictions on its operation, and may impose a
monetary
17
<PAGE> 18
fine. Any such action would be subject to administrative and judicial
review in accordance with the provisions of applicable Texas law. The Company
does not believe the resolution of the report, whether by negotiations or
through administrative adjudication, will have a material adverse effect either
on the Houston Learning Center or on the Company as a whole.
The loss of state authorization by an existing Learning Center or the
failure of a new or newly acquired Learning Center to obtain state authorization
would render the affected Learning Center ineligible to participate in the Title
IV Programs, could affect its accreditation and would have a material adverse
effect on the Company.
Accreditation by an accrediting agency recognized by the DOE is required
in order for an institution to become and remain eligible to participate in the
Title IV Programs. In addition, most states require institutions operating
therein to become and continue to be accredited as a condition of continuing
state authorization, particularly with regard to the issuance of degrees. All of
the Company's Learning Centers are accredited by the Accrediting Council for
Independent Colleges and Schools ("ACICS"), which is an accrediting agency
recognized by the DOE. Seven of the twenty-three U.S.-based Learning Centers are
due for renewal of accreditation during fiscal 1999. The loss of accreditation
by an existing Learning Center or the failure of a new or newly acquired
Learning Center to obtain accreditation would render the affected Learning
Center ineligible to participate in the Title IV Programs, could affect its
state authorization and would have a material adverse effect on the Company.
HEIGHTENED CASH MONITORING
On April 6, 1998, the Company was notified by the DOE that, based upon
DOE's monitoring of recent litigation involving the Company and certain student
complaints lodged against the Company, it placed all Learning Centers on a
"heightened cash monitoring status." This status allows all Learning Centers to
continue to receive federal student financial assistance funds so long as the
funds requested are drawn after they have been credited to student accounts and
CLC subsequently provides evidence of such credit and other supporting
information to DOE. The DOE does not consider "heightened cash monitoring
status" to represent either an adverse or punitive action. This action by DOE
does not have any continuing effect on the availability or timing of financial
assistance to the Company's students, nor does it have a material effect on the
Company's cash flow or operating results.
CANADIAN REGULATION
Students who are residents of the province of Quebec are eligible to
receive loans and bursaries ("grants") from the Quebec Loans and Bursaries
Program ("QLBP"). Under the QLBP, student financial assistance is initially
provided in the form of a loan. Delta College (the "Company"), is subject to the
Act Respecting Private Education ("ARPE") in Quebec. In accordance with ARPE, in
order to operate a private educational institution, the Company must hold a
permit issued by the Quebec Minister of Education (the "QME") for the
institution itself and for the educational services to be provided. The QME will
issue the permit after consulting with the Commission Consultative de
l'Enseignement Prive (the "Commission") concerning the particular institution
and the educational services to determine if such institution and services meet
certain qualifying conditions. Permits cannot be transferred without the written
authorization of the QME, and any entity holding a permit must advise the QME of
any consolidation, sale or transfer affecting such entity. Prior to any action,
the QME, after consultation with the Commission, has the authority to modify or
revoke a permit where the holder of the permit, among other things: does not
comply with the conditions, restrictions or prohibitions relating to the
institution or, is about to become insolvent. Prior to any action, the QME must
provide the institution with an opportunity to present its views before revoking
a permit. Given that the QME periodically revises its regulations and other
requirements and changes its interpretations of existing laws and regulations,
there can be no assurance that the QME will agree with the Company's
understanding of each requirement of the QME.
The Company does not believe that the QME's requirements will create
significant obstacles to its plans to acquire additional institutions, or open
new branches in Quebec or that the QME's requirements will create significant
obstacles to its plans to add new educational programs at Delta College, in
Quebec. In addition, the
18
<PAGE> 19
Company does not believe that there will be any impediment to renewal of the
permit issued to Delta College, in Quebec, under the ARPE.
The legislative and regulatory requirements related to student financial
assistance programs in Quebec have recently changed. Effective May 1, 1999, the
amount of financial assistance a student is eligible for could be less than the
amount of financial assistance historically received. For students that have a
remaining tuition balance not funded by Quebec's financial assistance programs,
the Company may make available to qualifying students alternative financing
arrangements to help fund their education. This change in regulation may affect
the eligibility for student financial assistance of the students attending
Delta College, which in turn, could materially adversely affect the Company's
business, results of operations and financial condition.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, including without limitation those
set forth below under the caption "Part II Item 1 - Legal Proceedings", could
cause actual results to differ materially from those contained in forward
looking statements made in this Report on Form 10-Q and presented elsewhere
by management from time to time.
POTENTIAL ADVERSE EFFECTS OF REGULATION
The Company is dependent on the authorization of the applicable agency or
agencies of each state within which a Learning Center is located to allow it to
operate and to grant degrees or diplomas to students. State authorization is
also required in order for an institution to become and remain eligible to
participate in the Title IV Programs. The Company is subject to extensive and
varying regulation in each of the states in which the Learning Centers currently
operate.
The loss of state authorization by an existing Learning Center or the
failure of a new or newly acquired Learning Center to obtain state authorization
would render the affected Learning Center ineligible to participate in the Title
IV Programs, could affect its accreditation and would have a material adverse
effect on the Company.
As educational institutions that participate in various federal and state
financial aid programs, the Company and the Learning Centers are subject to
extensive governmental regulation. In particular, the HEA, and the regulations
promulgated thereunder, subject the Company, the Learning Centers and all other
higher education institutions eligible to participate in the Title IV Programs
to significant regulatory scrutiny. The termination or material limitation of
the ability of the Company or any of the Learning Centers to participate in the
Title IV Programs would have a material adverse effect on the Company.
Because certain statutory and regulatory provisions impose significant
requirements on the Company and the Learning Centers and because the agencies
administering these regulations have not in all instances fully developed
administrative interpretations of certain of the statutory and regulatory
provisions, it is not clear how such requirements will be applied and
interpreted. In addition, changes in or new interpretations of the HEA, its
implementing regulations or other applicable laws, rules or regulations could
have a material adverse effect on the accreditation, authorization to operate in
various states, permissible activities or costs of doing business of the Company
or one or more of the Learning Centers. The failure to maintain or renew any
required regulatory approvals, accreditations or authorizations by the Company
or any of the Learning Centers would have a material adverse effect on the
Company.
CONTROL BY GENERAL ATLANTIC ENTITIES; POTENTIAL ADVERSE REGULATORY EFFECTS OF
CHANGE OF CONTROL
General Atlantic Corporation ("GAC"), General Atlantic Partners II, L.P.
("GAP") and GAP-CLC Partners, L.P. ("GAP-CLC") (collectively, the "General
Atlantic Entities") beneficially own approximately 17.0% of the outstanding
shares of Common Stock. Consequently, the General Atlantic Entities, and GAC in
particular, will continue to have significant influence over the policies and
affairs of the Company and may be in a position to determine the outcome of
corporate actions requiring stockholder approval, including the election of
directors,
19
<PAGE> 20
the adoption of amendments to the Company's Certificate of Incorporation and
the approval of mergers and sales of the Company's assets.
Because of the control position of the General Atlantic Entities, any
disposition of CLC's Common Stock by the General Atlantic Entities or issuance
of stock by the Company that results in a loss of control by the General
Atlantic Entities may have material adverse consequences for the Company under
applicable federal and state regulations and accrediting agency requirements,
including potential loss of eligibility to participate in the Title IV Programs.
Upon a change of ownership resulting in a change in control of the Company, as
defined in the HEA and the DOE's regulations, each Learning Center could lose
its eligibility to participate in the Title IV Programs for an indeterminate
period of time while they apply to regain eligibility, with the loss of a
portion, or all, of their Title IV funding during the reapproval period. The
October 1998 revisions to the HEA provide that the DOE may, but is not required,
to allow an institution to continue uninterrupted participation in the Title IV
Programs on a provisional basis if it meets certain substantive and procedural
requirements, but the DOE has not yet indicated how it will implement this
provision. A change of control also would have significant regulatory
consequences for the Company at the state level and could affect the
accreditation of the Learning Centers.
The HEA and the DOE's regulations include the sale of a controlling
interest of common stock of an institution or its parent corporation in the
definition of a change of control. For a publicly traded corporation, DOE
regulations specify that a change of control occurs when an event takes place
that gives rise to the obligation to file a report on Form 8-K with the
Securities and Exchange Commission reporting a change of control. Most states
and accrediting agencies have similar requirements, but they do not uniformly
define a change of control. If the Company experiences a change of control under
the DOE's standards and a material number of its Learning Centers lose access to
Title IV Program funding for an extended period, it would have a material
adverse effect on the Company.
COMPETITION
The post-secondary adult education and training market is highly
fragmented, with no single institution or company holding a dominant market
share. The Company competes for students with vocational and technical training
schools, degree-granting colleges and universities, continuing education
programs and commercial training programs. Certain public and private colleges
may offer programs similar to those of the Learning Centers at a lower tuition
cost due in part to substantial government subsidies, foundation grants,
tax-deductible contributions or other financial resources not available to
proprietary institutions.
DEPENDENCE ON NEW PROGRAMS; RISKS ASSOCIATED WITH CHANGES IN TECHNOLOGY AND
GROWTH
The market for the Company's programs and services is characterized by
rapidly-changing requirements and characteristics, and the Company's ability to
develop and offer new programs and services and to open new locations is subject
to extensive state and federal regulation and accrediting agency requirements.
If the Company is unable, for financial, regulatory or other reasons, to develop
and offer new programs and services in a timely manner in response to changes in
the industry, or if programs and services offered by the Company fail to gain or
maintain widespread commercial acceptance, the Company's business may be
materially and adversely affected.
The Company offers training programs and services for rapidly-changing
information technology. The introduction of information products embodying new
technologies and the emergence of new information system standards or services
may adversely affect the Company's ability to market its programs and services.
This may require the Company to make substantial expenditures in order to
develop new programs and services and to acquire new faculty, equipment and
facilities. If the Company is unable, for financial, regulatory or other
reasons, to make those expenditures or acquisitions, the Company's business may
be materially and adversely affected.
The Company's ability to meet its future operating and financial goals
will depend upon the Company's ability to successfully implement its growth
strategy which will include the introduction of new locations, as
20
<PAGE> 21
well as the potential acquisition of assets and programs complementary to the
Company's operations. The Company's success in this area will depend on its
ability to successfully integrate such new locations, assets and businesses.
There can be no assurance that the Company will be able to implement or manage
expansion effectively.
DEPENDENCE UPON KEY EMPLOYEES
The Company's success depends to a significant extent upon the continued
service of its executive officers and other key personnel. None of the Company's
executive officers or key employees, other than the Chief Executive Officer, the
Chief Financial Officer and the Vice President of Operations are subject to an
employment or non-competition agreement. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the Company. The Company's future success will depend in part upon its
continuing ability to attract and retain highly qualified personnel. There can
be no assurance that the Company will be successful in attracting and retaining
such personnel.
YEAR 2000 COMPLIANCE
The Year 2000 computer issue (commonly referred to as "Y2K") exists
because many computer systems and applications currently use two-digit date
fields to designate a year. When the century date change occurs, date-sensitive
systems will recognize the year 2000 as 1900, or not at all. This inability to
recognize or properly treat the year 2000 may cause systems to process critical
information incorrectly. The Company does not expect to incur any significant
expenditure related to the Y2K problem with its primary information systems.
Although the Company does not anticipate it will be affected by Y2K
problems in its own systems, it may be adversely affected by Y2K problems of its
vendors, banking and governmental relationships, as well as the Company's leased
facilities. The Company is currently in the assessment phase of evaluating the
readiness of its significant suppliers, business partners, banks, and government
agencies to determine the extent to which the Company may be vulnerable in the
event that those parties fail to properly remediate their own Y2K issues. The
Company's operations and liquidity largely depend upon the federal student
funding provided by Title IV Programs for its students. Processing of
applications for this funding is handled by the DOE's computer systems. The DOE
has stated that its systems will be Y2K compliant in early calendar year 1999
and that various schools will be able to run tests of the remediated systems
during the first half of calendar year 1999; however, the Company is unable to
independently assess the DOE's progress to date and no test dates have been
announced yet. Any prolonged interruption would have a material adverse impact
on the education industry and, accordingly, upon the Company's business, results
of operations, liquidity and financial condition.
The Company believes that the most reasonably likely worst case scenario
for the Y2K issue would be that the third parties with whom it has relationships
would cease or not successfully complete their Y2K remediation efforts. If this
were to occur, the Company would encounter disruptions to its business that
could have a severe impact on its results of operations. The Company could be
severely impacted by widespread economic or financial market disruption or by
Y2K computer system failures at the DOE.
To date the Company's remediation costs associated with the Y2K problem
have not been material, nor does the Company expect to incur any material costs
in the future with respect to its own readiness. The Company is in the process
of developing an appropriate contingency plan in the event that it should suffer
business interruptions due to Y2K problems with third parties.
21
<PAGE> 22
GENERAL
Because of these and other factors, past financial performance should not
be considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of the Company's Common Stock may be subject to wide fluctuations
in response to quarter-to-quarter variations in operating results, general
conditions in the education and training industry, changes in earnings estimates
and recommendations by analysts or other events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not Applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On March 10, 1998, the Attorney General of Illinois ("AG") filed a
complaint against the Company in Circuit Court in Cook County, Illinois,
asserting that the Company had violated the Illinois Private Business and
Vocational Schools Act and the Illinois Consumer Fraud and Deceptive Business
Practices Act (the "Acts") at its Schaumburg Learning Center. The complaint
alleged that the Company, at the Schaumburg Learning Center, failed to provide
certain educational services and resources and misrepresented certain
information respecting services, resources, occupational opportunities and
student outcomes. The complaint sought suspension of the Schaumburg Center's
charter to operate within Illinois, restitution to persons alleged to have been
injured by the conduct of the Schaumburg Learning Center, costs, civil penalties
totaling $100,000 for violations of the Acts and an additional civil penalty of
$50,000 for each alleged violation of each of the Acts, committed with intent to
defraud. On June 4, 1998, the Company timely filed an answer denying all of the
material allegations set forth in the complaint.
On June 8, 1998, the Company and the AG reached an agreement settling the
litigation filed on March 10, 1998. As a result of the settlement, which was
approved by the Circuit Court in Cook County, Illinois, the Company agreed to
make a voluntary contribution of $90,000 to the AG's consumer education fund,
establish a four-year program to annually provide $95,000 worth of computer
hardware and software to schools, programs, community sites and other non-profit
or public institutions in the Chicago area and $10,000 worth of training in
computer skills annually at the Company's Schaumburg and Chicago Learning
Centers for teachers and other community-based personnel to enable them to make
the most effective use of the computer equipment. The Company has fulfilled the
first year of its agreement with the AG. The Company has also taken various
measures required of it to comply with certain operational and reporting
requirements set forth in its agreement with the AG, including implementation of
an ombudsman program and binding arbitration to expeditiously review and resolve
student complaints. Failure of the Company to comply with the terms of the
agreement with the AG may give rise to a violation of the consent decree
settling the lawsuit brought by the AG, which in turn may result in adverse
action against the Company including suspension or termination of the Company's
licenses to operate within Illinois and other sanctions. The loss of operating
authority in Illinois could have a material adverse effect on the Company.
On March 13, 1998, a class action lawsuit was filed against the Company in
the United States District Court for the Central District of California on
behalf of all purchasers of Company Common Stock from April 30, 1997 through
March 10, 1998. Over the following two months, eight additional similar cases
were filed in United States District Courts: two in the Central District of
California; five in the Northern District of Illinois; and one in the Eastern
District of Virginia. The complaints allege violations of the Securities
Exchange Act of 1934, including allegations that the Company was experiencing
"operations difficulties" and failed to disclose the alleged difficulties. The
complaints also allege that Company insiders realized profits by trading their
shares of Company stock while in possession of material adverse information. All
of the complaints were filed on behalf of classes of shareholders of Company
Common Stock beginning as early as March 11, 1997 and ending as late as April 7,
1998. All of these shareholder lawsuits have been consolidated and transferred
to the United
22
<PAGE> 23
States District Court for the Eastern District of Virginia. Discovery has
commenced and is scheduled to conclude on January 29, 1999. No trial date has
been set. The Company is unable to estimate the outcome of the matter or any
potential liability.
On May 5, 1998, a class action lawsuit was filed against the Company in
the Superior Court of New Jersey in Bergen County, New Jersey, on behalf of all
students who attended a Learning Center in New Jersey within six years of May 5,
1998. The complaint alleges, among other things, that the Company, at its
Learning Centers located in the State of New Jersey, failed to provide certain
educational services and resources, misrepresented certain information
respecting services, resources, occupational opportunities and student outcomes
and violated the New Jersey Consumer Fraud Act. The Company is unable to
estimate the outcome of the matter or any potential liability.
On May 19, 1998, a lawsuit was filed against the Company in the District
Court of Harris County, Texas, on behalf of six former students of the Houston
Learning Center. Subsequently, the petition was amended to seek certification as
a class action lawsuit and removed to the U.S. District Court for the Southern
District of Texas, Houston Division. The complaint alleges, among other things,
that the Company, at its Learning Centers, located in the state of Texas, failed
to provide certain educational services and resources, misrepresented certain
information respecting services, resources, occupational opportunities and
student outcomes, and violated the Texas Deceptive Trade Practices Act. The
Company is unable to estimate the outcome of the matter or any potential
liability.
On June 1, 1998, a lawsuit was filed against the Company in the District
Court of Harris County, Texas, by seven former students who enrolled in the same
class at the Houston Learning Center in March 1997. The petition alleges, among
other things, that the Company, at its Houston Learning Center, failed to
provide plaintiffs with certain educational services and resources,
misrepresented certain information respecting services, resources, occupational
opportunities and student outcomes and violated the Texas Deceptive Trade
Practices Act. The Company is unable to estimate the outcome of this matter or
any potential liability.
On September 29, 1998, a lawsuit was filed against the Company in the
Superior Court of Los Angeles County, California, by two former students who
enrolled at the Los Angeles Learning Center in February 1995. The complaint
alleges, among other things, that the Company, at its Los Angeles Learning
Center, failed to provide plaintiffs with certain educational services and
resources, misrepresented certain information respecting services, resources,
occupational opportunities and student outcomes and violated the California
Education Code and the California Business and Professions Code. The Company is
unable to estimate the outcome of this matter or any potential liability.
On November 6, 1998, a lawsuit was filed against the Company in the
District Court of Harris County, Texas, by six former students who enrolled in
the same class at the Houston Learning Center. The petition alleges, among other
things, that the Company, at its Houston Learning Center, failed to provide
plaintiffs with certain educational services and resources, misrepresented
certain information respecting services, resources, occupational opportunities
and student outcomes and violated the Texas Deceptive Trade Practices Act. The
Company is unable to estimate the outcome of this matter or any potential
liability.
The Company intends to defend itself vigorously in the above lawsuits;
however, there can be no assurance that the Company will be successful in
defending itself in any of these proceedings. Even if the Company prevails on
the merits in such litigation, the Company expects to incur significant legal
and other defense costs as a result of such proceedings. These proceedings
could involve substantial diversion of the time of some members of management,
and an adverse determination in, or settlement of, such litigation could
involve the payment of significant amounts, or could include terms in addition
to such payments, which could have a severe impact on the Company's business,
financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
23
<PAGE> 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
A list of exhibits required to be filed as part of this report is set
forth in the Index to exhibits, which immediately precedes such exhibits and is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
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.
Date: December 15, 1998
COMPUTER LEARNING CENTERS, INC.
By: /s/ CHARLES L. COSGROVE
----------------------------
Charles L. Cosgrove
Vice President and Chief
Financial Officer
(Principal Financial Officer)
24
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO. IN THIS FILING
- -------------- ----------- -----------------------
<S> <C> <C>
3.1 Second Amended and Restated Certificate Incorporated by reference to Exhibit 3.1
of Incorporation of the Registrant, as of the Registrant's report on Form 10-Q
amended for the quarter ended July 31, 1997 filed
September 9, 1997
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.4
Registrant of the Registrant's Form S-1 Registration
Statement as amended, filed March 29,
1995 (No. 33-90716)(the "Form S-1")
4.1 Form of Certificate for Shares of the Incorporated by reference to Exhibit 4.1
Registrant's Common Stock of the Form S-1
11.1 Statement re: Computation of Per Share Page
Earnings
27 Financial Data Schedule Page
</TABLE>
25
<PAGE> 1
EXHIBIT 11.1
COMPUTER LEARNING CENTERS, INC.
COMPUTATION OF EARNINGS PER SHARE
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTH FOR THE NINE MONTH
PERIOD ENDED OCTOBER 31, PERIOD ENDED OCTOBER 31,
--------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net income.................................. $ 473 $ 2,595 $ 4,478 $ 6,916
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding -- Basic...................... 17,331,159 15,998,430 17,268,569 15,818,870
Dilutive securities:
Options................................ 322,615 1,041,650 832,312 1,174,800
Weighted average number of common shares
outstanding -- Diluted.................... 17,653,774 17,040,080 18,100,881 16,993,670
Earnings per share:
Basic.................................. $ 0.03 $ 0.16 $ 0.26 $ 0.44
=========== =========== =========== ===========
Diluted................................ $ 0.03 $ 0.15 $ 0.25 $ 0.41
=========== =========== =========== ===========
</TABLE>
Share and per share amounts restated to reflect the January 1998 two for
one stock split and the April 1997 three for two stock split.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEET
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 7,620
<SECURITIES> 0
<RECEIVABLES> 84,570
<ALLOWANCES> (22,298)
<INVENTORY> 1,176
<CURRENT-ASSETS> 76,368
<PP&E> 53,420
<DEPRECIATION> (17,073)
<TOTAL-ASSETS> 125,823
<CURRENT-LIABILITIES> 65,886
<BONDS> 0
0
0
<COMMON> 174
<OTHER-SE> 54,460
<TOTAL-LIABILITY-AND-EQUITY> 125,823
<SALES> 0
<TOTAL-REVENUES> 108,405
<CGS> 0
<TOTAL-COSTS> 101,690
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 6,555
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,449
<INCOME-TAX> 2,971
<INCOME-CONTINUING> 4,478
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,478
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.25
</TABLE>
