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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT
(MARK ONE)
/X/
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended JANUARY 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
Commission file number 0-26040
COMPUTER LEARNING CENTERS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 36-3501869
(State or other jurisdiction of
incorporation or (I.R.S. Employer
organization) Identification
Number)
11350 RANDOM HILLS ROAD,
SUITE 240, 22030
FAIRFAX, VIRGINIA 22030 (Zip Code)
(Address of principal executive
offices)
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(703) 359-9333
(Telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
------------------------
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. /X/
Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the last sale price for such stock at April 29, 1998:
$212,263,933
Number of shares of Common Stock, $.01 par value, outstanding at April 29, 1998.
17,327,668
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
Company's definitive Proxy Statement for its 1998 Annual Meeting of
Stockholders, which will be filed pursuant to Regulation 14A within 120 days
after the end of the Company's last fiscal year.
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COMPUTER LEARNING CENTERS, INC.
FORM 10-K
INDEX
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PART I
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Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 19
Item 3. Legal Proceedings..................................................................... 20
Item 4. Submission of Matters to a Vote of Security Holders................................... 21
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 22
Item 6. Selected Financial Data............................................................... 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 24
Operations..........................................................................
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 33
Item 8. Financial Statements and Supplementary Data........................................... F-1
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial I-1
Disclosure..........................................................................
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PART III
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Item 10. Directors and Executive Officers of the Registrant.................................... I-1
Item 11. Executive Compensation................................................................ I-1
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ I-2
Item 13. Certain Relationships and Related Transactions........................................ I-2
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... I-4
Signatures........................................................................................ S-1
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PART I
ITEM 1. BUSINESS
Computer Learning Centers, Inc. ("CLC" or the "Company") provides
information technology and computer-related education and training. The Company
designs programs and courses to meet current information technology education
needs, offering instruction in rapidly growing technologies such as
client/server, databases, networking and object-oriented programming. Through
its accredited career programs, the Company offers associate degrees and
non-degree diplomas in six primary areas of study to adults seeking entry-level
jobs in information technology including: business applications; electronics,
systems and hardware; programming; networking; information technology support
and business applications with networking. In addition to its traditional career
and associate degree programs, the Company offers its Advantec Institute ("AI")
courses in intensive two to six-week formats for the continuing education and
training of information technology professionals.
On December 23, 1997, the Company acquired Boston Education Corp. ("BEC"), a
privately held provider of information technology education and training. The
acquisition, which was accounted for as a pooling of interests, was completed by
issuing 200,148 shares of CLC common stock. BEC had 1997 annual revenues of
approximately $5.2 million and serves approximately 650 students at its two
campuses: a main campus in Somerville, Massachusetts and a branch in Methuen,
Massachusetts.
On February 17, 1998 the company acquired Markerdowne Corporation 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 will be accounted for as a pooling of interests, was
completed by issuing 510,287 shares of CLC Common Stock. CLC Paramus had
calendar 1997 annual revenues of approximately $6.7 million and serves
approximately 800 students.
On February 20, 1998 the Company acquired Delta College, a Montreal,
Quebec-based, privately-held provider of information technology education and
training. The acquisition, which will be accounted for as a pooling of interests
was completed by means of an exchange of 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. Delta College serves
approximately 800 students at three locations: Montreal, Laval and Brossard.
The Company enrolls approximately 12,000 new students annually at its
twenty-five locations in the United States and Canada. Excluding the recent
fiscal 1999 acquisitions of CLC Paramus and Delta College, the Company enrolled
students at six new Learning Centers in fiscal 1998 at Cherry Hill, NJ, Ft.
Worth, TX, Woodhaven (Northeast Philadelphia), PA, Somerville, MA, Methuen, MA
and Atlanta, GA.
Computer Learning Centers, Inc. was incorporated in Delaware in March 1987.
The Company's executive offices are located at 11350 Random Hills Road, Suite
240, Fairfax, Virginia 22030, and its telephone number is 703-359-9333.
THE INFORMATION TECHNOLOGY EDUCATION AND TRAINING MARKET
The rapidly growing role of information technology in business and
government organizations is creating a significant and increasing demand for
information technology education and training. The factors driving this growth
in demand include the following:
- Information technology is evolving rapidly, often requiring those already
skilled in the field to learn new technologies or broaden their
understanding of existing applications. Examples include the widespread
migration by businesses from legacy mainframe computer systems to
client/server architectures and from conventional software technologies to
more contemporary approaches, such as relational databases, groupware and
object-oriented programming.
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- As corporate and governmental restructuring continues and employers seek
to improve productivity, an increasing number of functions are being
automated. As a result, corporate and government organizations need to
educate and train existing employees and displaced workers in a broader
range of software applications and other information technology skills.
- According to the U.S. Department of Education ("DOE"), the number of
students graduating from high school is expected to increase by
approximately 21% from 1995 to 2007. This growth will enlarge the pool of
candidates for career-oriented education and training, including education
and training in information technology skills.
Providers of information technology education and training include
vocational and technical training schools, degree-granting colleges and
universities, continuing education programs and commercial training programs.
Vocational and technical training schools range from relatively small local
market schools focused on teaching a single or limited number of skills to
larger institutions that offer information technology training as a subset of a
more diversified curriculum. Colleges and universities are structured primarily
to serve the needs of the full-time 18- to 24-year old student through four-year
programs that are lecture-based and focused on a theoretical presentation of the
subject matter rather than on teaching specific career-oriented skills.
Continuing education programs tend to cover a broad range of technical and
non-technical topics, and such programs generally do not focus on providing
career placement for their students. Commercial training providers generally
offer fast-paced, one- to five-day courses that are based on the assumption that
individuals have a basic familiarity with information technology concepts.
THE CLC APPROACH
The Company has designed a series of programs it believes are uniquely
suited to meet the information technology education and training needs of adults
pursuing information technology-related careers. In addition to its traditional
career programs aimed at equipping students for entry-level jobs, the Company
offers advanced, intensive skill-building courses through its AI course
offerings targeted to information technology professionals.
The Company's traditional career programs are designed to meet the needs of
adult students in a number of ways. The focused nature of each program of study
enables full-time students to complete their education and training and enter
the work force in as little as 8 to 16 months, while maintaining eligibility for
financial aid programs. CLC's program schedules are designed to accommodate its
students' need for flexibility through programs offered in modular formats with
new program start dates each month and convenient morning, afternoon and evening
hours. Each Learning Center is equipped with up-to-date computer hardware and
software for students' in-class use, and each program requires students to spend
at least 50% of their in-school time working directly on a computer. Learning
Center faculty members generally have direct experience working in the
information technology industry, enabling them to provide students with useful
career-related insights and guidance in connection with education and training.
CLC designs and operates its programs to provide students with efficient access
to various forms of government-supported financial assistance as well as private
financing sources. Finally, CLC provides its students with job placement
assistance, including assistance with resume writing, interview preparation and
employment searches for recent graduates and alumni.
The Company's AI programs are marketed directly to individuals, commercial
organizations and government employees. AI programs provide ongoing technology
training to information technology professionals through intensive two- to
six-week programs that focus on current and emerging technologies. AI programs
provide immediate skills training in technologies such as networking,
client/server, programming, databases and the Internet. Programs are offered at
AI training facilities in Tysons Corner and Alexandria, Virginia, Laurel,
Maryland and Houston, Texas as well as at client sites. The Company leverages
its existing relationships with employers, its career program facilities and its
resources and market responsiveness to expand its presence in the professional
education and training market.
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BUSINESS STRATEGY
The Company's objective is to strengthen and expand its position as one of
the leading providers of information technology education and training programs
for adults. To achieve this objective, the Company employs the following key
strategies:
ESTABLISH NEW LEARNING CENTERS. The Company continues to increase the
number of its Learning Centers throughout the United States. The expansion
includes opening new Learning Centers in areas of the country that the Company
currently serves, establishing Learning Centers in new geographical areas,
including Canada, and possibly acquiring organizations that offer attractive
opportunities.
BROADEN AVAILABILITY OF ASSOCIATE DEGREE PROGRAMS. The Company continues to
increase the availability of its existing associate degree programs at each of
the Learning Centers. The Company currently offers associate degree programs at
eight Learning Centers. The Company believes that expanding its current
degree-granting programs at existing Learning Centers and increasing scheduling
flexibility will enhance CLC's appeal to a larger population of students.
DEVELOP NEW PROGRAMS/ENHANCE EXISTING PROGRAMS. The Company capitalizes on
new market opportunities by monitoring changes in the information technology
industry and developing new education and training programs or enhancing current
offerings in response to those changes. The Company is currently evaluating
programs or program enhancements in Windows NT, information technology support
and Internet related technologies. The Company maintains relationships with a
wide network of employers who provide the Company with data on trends related to
computer and information technology skills.
EXPAND ADVANTEC INSTITUTE. The Company continues to increase the number of
AI course offerings and expand its AI programs to new locations. The Company
continues to leverage its existing relationships with past graduates and
employers and its resources and market responsiveness to meet the information
technology education and training requirements within companies and government
agencies.
IMPROVE STUDENT OUTCOMES. The Company seeks to continuously improve the
graduation and placement rates at its Learning Centers by providing extensive
academic services and placement assistance. The Company offers tutoring,
academic counseling and other services to its students to help them complete
their programs of study. In addition, the Company helps students prepare
resumes, conduct employment searches and sharpen interviewing skills through its
Graduate Placement Services Resource Center.
COMPANY PROGRAMS
CLC has designed a series of programs to meet the information technology
education and training needs of career-minded adults. In addition to its
traditional career programs aimed at preparing students for entry-level jobs,
the Company offers its AI courses for the continuing education and training of
information technology professionals.
CAREER PROGRAMS
The Learning Centers offer comprehensive career programs of study in six
areas of information technology including: business applications; electronics,
systems and hardware; programming; networking; information technology support
and business applications with networking. Each career program is designed to
teach the comprehensive information technology skills required to obtain an
entry-level job in the targeted information technology field. The Company offers
career programs that allow students to receive either a diploma or a degree.
Each diploma program generally follows a standard format ranging in length from
8 months for full-time students to 16 months for part-time students. Eight
Learning Centers offer associate degree programs in electronics, systems and
hardware; business applications with networking; and programming. These
associate degree programs combine the curricula from a diploma program with
state-mandated general education requirements and additional advanced material
to create 16-month
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(full-time) or 32-month (part-time) programs. Program curricula are generally
uniform across all Learning Centers and are offered in morning, afternoon and
evening sessions depending on market demand.
Career programs are delivered year-round in a modular format that provides
monthly start dates and allows students to complete their education in less time
than the Company believes is possible at many other institutions. Each program
consists of 8 to 16 modules, with each module lasting approximately one month
for full-time students and consisting of a single course with an intensive and
focused format. Full-time students typically attend classes for approximately
five hours per day, five days per week, with sessions available three evenings
per week for part-time students.
In CLC's career programs, students spend at least 50% of their time in
computer labs performing hands-on workplace simulations and their remaining time
in classrooms attending lectures and participating in group discussions. Each
module is delivered according to an outline and instructor's guide that links an
appropriate textbook or books together with visual aids and lab activities to
achieve a specific set of student performance outcomes and proficiencies. To
foster a professional work environment, the Company requires that students
attend classes in business attire. The Company designs and updates curricula to
meet current information technology industry standards, offering instruction in
widely-used computer applications and information technologies to provide
students with marketable skills. In addition, the Company regularly evaluates
its curricula and eliminates those elements relating to technologies that have
become obsolete or offer significantly fewer or less attractive job
opportunities for graduates.
The primary focus of each career program is to prepare students for
employment in their fields of study upon graduation. Graduates of the business
applications and networking programs have obtained employment as PC specialists,
help desk administrators and executive, technical and accounting support
personnel. Graduates of the electronics, systems and hardware program, have
obtained employment as technicians in computer support and network installation
and as specialists in the repair of commercial and industrial data processing
equipment. The Company's programming curriculum prepares graduates for
employment as computer programmers, database administrators and systems
analysts. The networking program is designed to prepare students to obtain
certification as Certified Novell Engineers and to obtain employment as network
administrators, engineers and systems analysts. Graduates of the information
technology support program have obtained employment as computer support
specialists, help desk operators, and user support analysts.
Tuition is fixed at the time of a student's initial enrollment. At January
31, 1998, tuition ranges were from $6,100 to $16,500 for diploma programs and
from $15,210 to $21,995 for associate degree programs.
ADVANTEC INSTITUTE
The Company currently offers AI courses at its Tysons Corner and Alexandria,
Virginia, Laurel, Maryland and Houston, Texas sites, as well as at client
locations. Through AI, the Company delivers training in two- to six-week
intensive programs designed to enhance the skills of information technology
professionals. The AI programs currently offered include local area network
engineering using Novell NetWare and Microsoft NT network operating systems,
application development using Oracle 7 and Microsoft (MCSE) development tools,
UNIX system administration, C and C++ programming languages and Internet
programming languages Java and Perl. Although AI courses are aimed at a
different market segment than the Company's traditional career programs, the
courses may utilize the same facilities and other resources and are offered
within two existing Learning Centers as well as at client locations as of
January 31, 1998.
At January 31, 1998, tuition ranges for AI courses were from $3,995 to
$6,995. In fiscal 1998, the Company provided AI training to numerous employees
of companies and government organizations, including Dyncorp, GTE Corporation,
Oracle Corporation, PRC/Litton, Inc., the United States Senate and House of
Representatives and the United States Department of Defense.
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CURRICULUM CRITERIA, REVIEW AND DEVELOPMENT
The Company has established specific criteria for its programs. Each career
program is designed to prepare students for information technology-related
entry-level jobs, while each AI course is designed for the retraining or ongoing
training of information technology professionals. Career and AI courses are
designed to engage adult students by employing hands-on teaching methods; train
students in computer technology widely used in the work place; respond to market
requirements and train students to satisfy those requirements; and optimize use
of the Company's resources.
The Company uses several means to ensure that its programs meet these
criteria. The Company regularly solicits input directly from employers through a
system of Employer Advisory Groups in each of its geographic market areas. These
advisory groups meet regularly to discuss the skills required in the information
technology field as well as to identify industry trends. In addition, an
independent third party firm tabulates monthly student surveys to help the
Company monitor faculty, course and school effectiveness and to gather student
input. Historically, student surveys have identified opportunities for
improvement, which have been implemented where appropriate, and have provided a
means of setting quantitative benchmarks. The Company maintains an internal
Strategic Product Planning Group that includes senior managers, faculty and
other employees. This group meets regularly to analyze input from market
research, the Employer Advisory Groups, students, faculty, consultants and
management. The Strategic Product Planning Group uses the input to guide the
Company's strategic direction and to make recommendations regarding the
Company's curricula. Curriculum recommendations are referred to faculty subject
matter experts and academic managers for review prior to formal development by
curriculum project leaders.
STUDENT CHARACTERISTICS
The Company's programs are targeted at adults seeking to expand their career
opportunities through the acquisition of technical skills and knowledge. At
January 31, 1998, 52% of CLC's students were college graduates or had some
college experience, including 10% who had four-year college degrees or higher
levels of educational attainment and 9% who had two-year degrees. At that time,
31% of CLC's students were between 18 and 22 years of age, 48% were between 23
and 34, and 21% were over 35. Approximately 58% of the student population was
male and 42% was female.
AI students typically are employed by companies and government agencies in
positions that require periodic training in current information technology.
Generally, these students are knowledgeable users of computers and related
technology.
STUDENT RECRUITMENT
The Company engages in a broad range of activities to make prospective
students aware of the programs of study available at the Learning Centers. These
activities include television, radio and newspaper advertising, direct mail
campaigns and listings in the yellow pages. Currently, all advertising is
directed at local markets where Learning Centers are located. The Company
monitors the effectiveness of its various marketing efforts by measuring the
number of resulting student enrollments. The Company estimates that for fiscal
1998, approximately 38% of its new enrollments resulted from television
advertising and approximately 31% of its new enrollments resulted from referrals
by current students and graduates.
The television advertising for each Learning Center is developed and
coordinated by CLC's senior management. All advertising includes a local
telephone number for direct responses and information about the Learning Center.
These responses are received by the admissions department of each Learning
Center, where the direct responses are recorded and tracked and then forwarded
to an admissions representative who responds to student inquiries. All
prospective student inquiries are handled at the local level, where an
admissions representative is assigned to each student from initial contact to
graduation.
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The Company markets its AI courses to information technology professionals,
companies and government agencies through print advertising, direct mailings,
radio, trade shows and conferences. The Company employs a sales staff that
pursues potential customer contacts resulting from these marketing efforts.
STUDENT ADMISSIONS AND RETENTION
The Company maintains admissions standards that require each career program
student to have proof of a high school diploma or a recognized equivalent such
as a General Education Development (GED) certificate. In addition, all career
program students must achieve a qualifying score on a scholastic level aptitude
exam recognized and approved by the DOE. The Company believes admission
requirements are important in ensuring that incoming career program students
have the necessary academic background and abilities to complete their selected
program of study.
Each Learning Center employs one director of admissions who oversees a staff
of admissions representatives. Admissions policies and procedures, along with
marketing materials, are established centrally and are monitored both centrally
and locally. Admissions representatives are responsible for scheduling an
initial appointment with an interested candidate, interviewing the candidate to
determine whether he or she meets admissions qualifications and has the
necessary motivation and ability to complete the Learning Center's intensive
programs of study, testing the candidate to determine his or her aptitude for
different programs and counseling qualified candidates about available career
paths. The Company's internal compliance department regularly reviews the
admissions processes and practices of the individual admissions representatives
to monitor compliance with the Company's policies and applicable state and
federal requirements.
The Company focuses significant staff resources on assisting students to
overcome the academic, financial and personal obstacles that can interfere with
a student's ability to complete his or her career program. Each Learning Center
employs a student services manager/counselor who is available to counsel
students encountering problems that interfere with their education. To help
students overcome financial obstacles, the Company assists students in finding
part-time employment when their resources in combination with available
financial aid are not adequate to meet their financial needs. Learning Centers'
management, faculty and staff performance is measured in part by their ability
to ensure that students successfully complete their programs of study. Curricula
are designed to include frequent progress reviews and performance measurements
of both students and faculty. Tutoring is available and encouraged for students
who need additional academic assistance. Student withdrawals prior to program
completion have negative regulatory, financial and marketing effects on an
educational institution. The weighted average Learning Center retention rate, as
calculated under standards of CLC's accrediting agency, the Accrediting Council
for Independent Colleges and Schools ("ACICS"), were 75% and 74%, respectively
for the twelve-month periods ended June 30, 1997 and 1996.
GRADUATE PLACEMENT SERVICES
The Graduate Placement Services Resource Center is a vital component of each
Learning Center's programs. It maintains job postings, coordinates employers'
recruiting efforts, provides on-line job search capabilities and maintains a
library of career and job search related publications. All career program
students are required to attend a 20-hour career development course, which is a
series of seminars related to resume writing, interview preparation and
employment searches.
Utilizing ACICS standards, for the twelve-month periods ended June 30, 1997
and 1996, approximately 83% and 84%, respectively, of the Company's net
placeable graduates obtained employment in a field related to their program of
study. Net placeable graduates excludes graduates who were not seeking
employment due to health-related situations, continued education or entered
military service. Students that graduated during the twelve-month period
beginning July 1 and ending June 30 and obtained
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employment in a field related to their program of study prior to the required
filing date of September 15 of each respective year are counted as graduates
placed.
Based on information from students and employers who have responded to
inquiries, the Company estimates the average annual starting salaries for
students who obtained employment in fields related to their education during the
twelve-month period ended June 30, 1997 were as follows:
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ESTIMATED
AVERAGE ANNUAL
LEARNING CENTER STARTING
PROGRAM GRADUATES PLACED SALARY
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Business Applications (Associate Degree and Diploma)............................ 1,397 $ 21,100
Programming (Associate Degree and Diploma)...................................... 1,288 $ 26,800
Electronics, Systems and Hardware (Associate Degree and Diploma)................ 499 $ 23,400
Networking (Diploma)............................................................ 455 $ 33,500
Business Applications with Networking (Diploma)................................. 272 $ 24,800
</TABLE>
Average annual starting salaries for Learning Center graduates vary among
Learning Centers depending on local employment conditions and other factors.
Employers of CLC graduates include small technology-oriented companies as well
as major corporations and agencies and their affiliates, including MCI
Telecommunications, EDS, International Business Machines Corporation, Bank of
America, Hewlett Packard, B.F. Goodrich and University of San Francisco.
FACULTY
The Company employs both full-time and part-time faculty who are hired in
accordance with criteria established by the Company, ACICS and applicable state
licensing authorities. Faculty members are carefully selected on the basis of
their knowledge and experience in the information technology field and their
ability to develop each student's potential. Faculty members generally have both
significant industry experience and educational and technical backgrounds.
Faculty members participate in a regular and systematic program of in-house
training to continuously improve instruction and curricula. Faculty members
participate in educational associations, professional organizations and
continuing education in their respective fields.
After completing each module, students evaluate faculty using a confidential
survey prepared and distributed directly to students, which is then tabulated by
an independent third party firm. The survey asks students to rate the faculty on
effectiveness, fairness, delivery and course content.
ADMINISTRATION AND EMPLOYEES
Each Learning Center is managed by a local administrative team headed by a
director who is accountable for the profitability, regulatory compliance,
maintenance of educational quality and placement success of the Learning Center.
Each director may report to an area manager who oversees the activities of
several Learning Centers grouped by geographic region. Learning Center directors
work closely with the area managers to implement marketing plans and curricula,
expand capacity and maintain facilities. The Company encourages Learning Center
directors to act autonomously in responding to local market conditions. Area
managers report directly to a regional manager, who in turn report directly to
the Company's Chief Operating Officer.
Each local administrative team also includes a director of admissions, a
financial aid administrator, a business office manager, a director of education
and a director of placement. As of January 31, 1998, the Company employed
approximately 967 full-time and 324 part-time employees. In addition, the
Company employed 162 CLC students under the Federal Work-Study Program. None of
the Company's employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are satisfactory.
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COMPETITION
The postsecondary 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 government subsidies, foundation grants, tax deductible contributions or
other financial resources not available to proprietary institutions.
The Company believes that the Learning Centers' fast paced and intensely
focused programs in information technology education and training help the
Company attract students. Students may choose CLC over its competitors because
of the Company's broad course offerings, relatively short programs, placement
services, reputation and starting salaries after graduation. Students may choose
CLC instead of a four-year college because they want to enter the work force in
a shorter period of time or because a four-year institution does not provide
students with the type of focused, comprehensive program that CLC offers. In
addition, flexible afternoon and evening courses allow students to maintain
their current jobs while attending the Company's programs.
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FINANCIAL AID AND REGULATION
FINANCING STUDENT EDUCATION
The majority of Learning Center students participate in one or a combination
of several of the federally supported student financial aid programs.
Approximately 73% of the Company's fiscal 1998 tuition revenues are funded from
the federal student financial aid programs under Title IV ("Title IV Programs")
of the Higher Education Act of 1965, as amended ("HEA").
The Title IV Programs are designed to provide financial assistance to
students who are enrolled or accepted for enrollment but whose financial
resources are inadequate to meet the full cost of their education. Eligibility
is determined on the basis of financial need, defined as the difference between
the cost of a program of study and the amount a student and his or her family
can reasonably be expected to contribute to educational expenses. The Company
uses the national standard need analysis system established by the HEA to
determine a student's need for Title IV Program funds. All recipients of
financial aid must maintain a satisfactory grade point average and progress
toward completion of a career program in order to participate in the Title IV
Programs. Any shortfall between available Title IV funding and a student's need
may be fulfilled by a Learning Center's own financing options.
TITLE IV PROGRAMS
Students at the Learning Centers receive grants and loans to fund the cost
of their education under the following Title IV Programs: (i) the Federal Family
Education Loan ("FFEL") programs, which program-funded tuitions accounting for
approximately 34% of the Company's revenues in fiscal 1998 and includes the
subsidized and unsubsidized Federal Stafford Loans and PLUS (parental) loans;
(ii) the William D. Ford Federal Direct Loan Program ("FDLP"), which
program-funded tuitions accounting for approximately 24% of the Company's
revenues in fiscal 1998 and includes subsidized and unsubsidized Federal Direct
Stafford loans and the Federal Direct PLUS loans; (iii) the Federal Pell Grant
("Pell") program, which program-funded tuitions accounting for approximately 13%
of the Company's revenues in fiscal 1998; (iv) the Federal Supplemental
Educational Opportunity Grant ("FSEOG") program, which program-funded tuitions
accounting for approximately 1% of the Company's revenues in fiscal 1998; (v)
the Federal Perkins ("Perkins") loan program, which program-funded tuitions
accounting for approximately 1% of the Company's revenues in fiscal 1998; and
(vi) the Federal Work-Study ("Work-Study") program, under which federal funds
are made available to provide part-time employment to eligible students based on
financial need and pursuant to which the Learning Centers employed approximately
378 students and paid $563,000 in total wages to these students in fiscal 1998.
The FSEOG, Perkins and Work-Study programs each requires the institutions to
make matching contributions in the amount of 25% of all federal funds the
institution receives under each program. In fiscal 1998, the 25% matching
contribution made by the Company amounted to $278,000 for the FSEOG program, and
$141,000 for the Work-Study program. The Company previously lost the Federal
Cash Contribution ("FCC") associated with the Perkins loan program because the
Learning Centers' combined Perkins cohort default rate exceeded the acceptable
regulatory threshold. Effective July 1, 1997, the Company regained utilization
of the FCC and the 25% matching contribution made by the Company during fiscal
1998 was $23,000.
AVAILABILITY OF LENDERS AND GUARANTORS
For a variety of reasons, the number of lenders willing to make federally
guaranteed student loans to students at certain proprietary institutions has
declined in recent years. Although there can be no assurance that the decline
will not affect the Company in the future, to date, this decline has not
affected the ability of Learning Center students to obtain federally guaranteed
loans. One lending institution currently provides approximately 28% of all loans
obtained by Learning Center students under the FFEL program. The Company
believes that other lenders would be willing to make such loans to its students
if such loans were no longer available from any of its current lenders. In
addition, if an eligible institution is unable to identify any lenders willing
to make FFEL program loans to the institution's students, the HEA requires that
each state secure the availability of a "lender of last resort" to make such
loans. Lenders of
11
<PAGE>
last resort are not required to provide PLUS loans, which program-funded
tuitions accounting for approximately 5% of the Company's revenues in fiscal
1998.
One student loan guaranty agency currently guarantees approximately 28% of
all FFEL loans made to Learning Center students. The Company believes that other
guaranty agencies would be willing to guarantee loans to Learning Center
students if any of its existing guaranty agencies ceased guaranteeing such loans
or reduced the volume of loans guaranteed. As of January 31, 1998, sixteen of
the seventeen Learning Centers eligible for Title IV Programs had at least two
guaranty agencies to provide guarantees under the federal student loan programs.
All states have a designated guaranty agency that the Company believes would
guarantee most, if not all, FFEL program loans made to Learning Center students
in that state. Given these state and federal provisions, the Company does not
believe that any reduction in the guaranty agencies currently guaranteeing FFEL
program loans made to Learning Center students would have a material adverse
effect on the Company.
REGULATION OF FEDERAL FINANCIAL AID PROGRAMS
To obtain and maintain participation in the Title IV Programs, each Learning
Center must comply with specific standards set forth in the HEA and the
regulations promulgated thereunder by the DOE. To participate in the Title IV
Programs, an institution must obtain certification by the DOE as an "eligible
institution," which requires, among other things, that the institution be
authorized by the state within which it operates to offer its educational
programs and be accredited by an accrediting agency recognized by the DOE as a
reliable authority as to the quality of the institution's educational programs.
In recent years, the United States Congress has required the DOE to increase
its level of regulatory oversight of schools to ensure that public funds are
properly used. Each institution must annually submit to the DOE an audit by an
independent accounting firm of that institution's compliance with Title IV
Program requirements, as well as audited financial statements. Institutions
participating in the Title IV Programs are required every four years to undergo
a review by the DOE of their qualifications to be recertified for continued
participation in the Title IV Programs. The DOE conducts compliance reviews,
which include on-site evaluations, of several hundred institutions each year and
directs student loan guaranty agencies to conduct additional reviews relating to
student loan programs. The Office of the Inspector General of the DOE also
conducts audits and investigations in certain circumstances. Under the HEA,
accrediting agencies also have responsibilities for overseeing institutions'
compliance with Title IV Program requirements. As a result, each participating
institution, including each of the Learning Centers, is subject to frequent and
detailed oversight and must comply with a complex framework of laws and
regulations or risk being required to repay Title IV Program funds, being placed
on provisional certification which subjects them to closer scrutiny by the DOE,
or losing their eligibility to participate in the Title IV Programs.
The process of reauthorizing the HEA by the Congress, which takes place
approximately every five years, has begun and is expected to be completed in
1998 or 1999. It is not possible to predict the outcome of the reauthorization
process. Although there is no present indication that the Congress will decline
to reauthorize the Title IV Programs, there can be no assurance that government
funding for the Title IV Programs will be maintained at current levels or that
the current requirements for student and institutional participation in such
programs will not be made more stringent.
Certain elements of the regulatory framework currently applicable to the
Company and the Learning Centers are described below. Except as otherwise noted
below, the Company must comply with applicable regulatory standards separately
with respect to each institution. For the purposes of these standards, an
"institution" is defined as a main campus and any additional locations of that
campus. Of the twenty Learning Centers operating as of January 31, 1998
(including the Centers acquired from BEC), eight are considered to be main
campuses and twelve are additional locations of a main campus. During fiscal
1998, seventeen Learning Centers participated in the Title IV Programs. Of the
remaining three, one Center became eligible to participate in Title IV Programs
in February 1998 and the other two Centers
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<PAGE>
(Somerville and Methuen), which were acquired in December 1997, are awaiting DOE
approval to resume Title IV participation following their change of ownership.
STUDENT LOAN DEFAULTS
Under the HEA, an educational institution may lose its eligibility to
participate in some or all of the Title IV Programs if defaults on the repayment
of student loans guaranteed or provided by the federal government exceed certain
rates. These rates are based on the repayment history of current and former
students on loans provided under certain FFEL programs, primarily the Stafford
loan program, as well as FDLP loans. A rate of student defaults (which may be an
FFEL cohort default rate, an FDLP cohort default rate or, for an institution
that has students entering repayment on both types of loans, a "weighted
average" cohort default rate) is calculated for each institution annually by
determining the rate at which students at that institution (the main campus and
its additional locations, if any) entering repayment in one federal fiscal year
ending September 30 ("FY") default by the end of the following federal fiscal
year.
Any institution that is determined to have cohort default rates equal to or
exceeding 25% for three consecutive federal fiscal years is subject to immediate
loss of eligibility to participate in the FFEL and FDLP 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
cohort default rate on FFEL or FDLP loans for any federal fiscal year exceeds
40% may have its eligibility to participate in all of the Title IV Programs
limited, suspended or terminated. An institution has the right to appeal the
accuracy of the DOE's calculations of its cohort default rates. Such appeals are
intended to correct any errors made in compiling the student repayment data and
to identify any material errors made in the third-party servicing and collection
of individual loans. Institutions remain eligible to participate in the FFEL
programs during the pendency of any such appeal. All Learning Centers,
regardless of their cohort default and FDLP rates, have adopted default
management plans.
The official FY 1995 cohort default rates published in November 1997 for the
eight Learning Center main campuses (plus their additional locations, if any)
participating in the Title IV Programs averaged 16.6% and ranged from a high of
23.9% to a low of 12.6% for that period. The average rate for all proprietary
institutions in the United States for the same period was 19.9%.
In September 1996, the DOE notified the Company that the Chicago Learning
Center lost its eligibility to participate in the FFEL programs due to three
consecutive federal fiscal years (FY1991-1993) of cohort default rates above
25%. The Company reapplied for participation into the FFEL programs and on
October 10, 1997 received notification from the DOE that the Chicago Learning
Center regained eligibility to participate in the FFEL programs. The Chicago
Learning Center is now eligible to participate in all of the Programs under
Title IV of the HEA.
The Philadelphia Learning Center's FY1994 cohort default rate as published
was 26.9%, which resulted in three consecutive years of default rates that
exceeded the 25% threshold. The Company appealed the FY1994 cohort default rate
with the DOE to challenge the accuracy of such rate. On November 6, 1997, the
Company received notification from the DOE that the Philadelphia Learning
Center's official FY1995 cohort default rate was 17.9%. The DOE considered the
Philadelphia Learning Center's official FY1995 cohort default rate in applying
the federal law regarding an institution's eligibility to participate in the
FFEL programs, and since this cohort default rate was below 25% and the
Philadelphia Learning Center's FY1994 cohort default rate appeal remained
pending, the Philadelphia Learning Center retained its eligibility to
participate in the FFEL programs. On November 10, 1997, the Company withdrew the
FY1994 cohort default rate appeal.
ADMINISTRATIVE CAPABILITY
DOE regulations specify criteria an institution must satisfy to establish
that the institution has the requisite "administrative capability" to
participate in the Title IV Programs. These criteria pertain to student loan
cohort default rates on FFEL, FDLP and Perkins loans, among other factors. Under
the
13
<PAGE>
DOE's regulations, a cohort default rate on FFEL or FDLP loans equal to or
exceeding 25% in any one of the three most recent federal fiscal years can be a
basis for the DOE to place that institution on provisional certification for up
to four years for lack of administrative capability. Provisional certification
generally allows an institution to continue to participate in the Title IV
Programs subject to conditions imposed by the DOE and, in the event of any
material violation of such conditions, subjects the institution to a loss of
eligibility without advance notice. The Learning Centers in Philadelphia and
Chicago are subject to provisional certification through July and December 2000,
respectively, due to their cohort default rates on FFEL loans.
The DOE's regulations also provide that an institution may be found to lack
administrative capability if its default rate for Perkins loans exceeds 15% for
any federal award year (July 1 through June 30). The Company administers its
Perkins loan funds on a Company-wide basis, and in the past all of the Learning
Centers have shared one Perkins loan cohort default rate. The Company had a
default rate for Perkins loans of 18.1% for the 1996-97 federal award year.
Tuitions funded by the Perkins program accounted for approximately 1% of the
Company's revenues in fiscal 1998. Thus, each of the Learning Centers could be
placed on provisional certification due to the Company's Perkins loan cohort
default rate. During fiscal 1998, two of the Company's Learning Centers were
recertified for full participation in the Title IV Programs notwithstanding the
Company's Perkins default rate.
FINANCIAL RESPONSIBILITY
The HEA and the DOE's regulations prescribe specific standards of financial
responsibility that institutions such as the Learning Centers must satisfy to
participate in the Title IV Programs. Historically, the DOE has evaluated the
financial condition of the Learning Centers on a consolidated basis. The
regulations allow the DOE to consider both combined and individual Learning
Center financial statements. Pursuant to the three principal standards, known as
the "numeric standards," an institution must have: (i) a positive tangible net
worth at the end of the institution's most recent fiscal year; (ii) an "acid
test" ratio (defined as the ratio of cash, cash equivalents and current accounts
receivable to current liabilities) of at least 1-to-1 at the end of the
institution's most recent fiscal year; and (iii) net operating results for the
institution's two most recent fiscal years that do not result in an aggregate
decrease in excess of 10% of the institution's tangible net worth as measured at
the beginning of the two-year period. At January 31, 1998, the Company reported
on a combined basis an acid test ratio of 1.22 to 1 and the Company believes
that on a combined basis, it has met all DOE standards of financial
responsibility. Additionally, the state of California requires that institutions
maintain a current ratio (defined as current assets to current liabilities) of
at least 1.25 to 1. At January 31, 1998, all of the Company's Learning Centers
operating in the state of California were in compliance with this requirement.
In November 1997, the DOE issued new regulations revising the DOE's
standards of financial responsibility. These new standards replace the tangible
net worth standard, the acid test ratio and the net operating loss test
described above with three different ratios: an equity ratio, a primary reserve
ratio and a net income ratio. The equity ratio measures the institution's
capital resources, ability to borrow and financial viability. The primary
reserve ratio measures the institution's ability to support current operations
from expendable resources. The net income ratio measures the ability of an
institution to operate at a profit. The results of each ratio are assigned a
strength factor score on a scale from negative 1 to positive 3, with negative 1
reflecting financial weakness and 3 reflecting financial strength. An
institution's strength factor scores are then weighted based on an assigned
weighting percentage for each ratio. The weighted scores for the three ratios
are then added together to produce a composite score for the institution. The
composite score must be at least 1.5 for the institution to be deemed
financially responsible by the DOE without the need for further oversight. These
new financial standards became effective for the Company's fiscal year beginning
February 1, 1998. The Company has calculated the application of these new
regulations to the Company's audited fiscal 1998 financial statements which
resulted in a composite score of 3.0. As such, the Company does not believe,
based on its current understanding of how the revised
14
<PAGE>
financial responsibility standards will be applied, that the application of
these standards will have a material adverse effect on the Company's financial
condition, results of operations or expansion plans.
If, based upon the above measures, the DOE determined that the Company or
any Learning Center were not financially responsible, the HEA provides that the
DOE must afford the Company an opportunity to demonstrate financial
responsibility through alternative means, most commonly by posting an
irrevocable letter of credit in favor of the Secretary of Education in an amount
equal to not less than one-half the Title IV Program funds received by the
affected Learning Center or Centers during the last complete award year (July 1
through June 30). In conjunction with the Company's request for recertification
of the two Learning Centers acquired from BEC, the DOE has found that those two
Centers lacked financial responsibility at the time they were acquired by the
Company and, as result, the DOE has requested that the Company, and the Company
will post a letter of credit in the amount of $2,850,000 as a condition of their
recertification.
INCENTIVE COMPENSATION
An additional requirement of the Title IV Programs prohibits an institution
from providing any commission, bonus or other incentive payment based directly
or indirectly on success in securing enrollments or financial aid to any person
or entity engaged in any student recruitment, admission or financial aid
awarding activity. The Company has implemented several compensation plans for
admissions representatives and other personnel involved in the operations of the
Learning Centers. The Company believes that its current compensation plans
comply with the requirements of the HEA. Although there can be no assurance that
the DOE will not find deficiencies in the Company's present or former
compensation plans, the Company has received a letter from the DOE concluding
that the Company's former compensation plan, as established in March 1993, was
in compliance with applicable law existing at that time.
THE 85/15 RULE
Another requirement of the HEA, commonly referred to as the "85/15 Rule,"
applies only to proprietary (i.e., for-profit) institutions, such as the
Learning Centers. Under the 85/15 Rule, a proprietary institution will lose its
eligibility to participate in the Title IV Programs for at least one fiscal year
if, under a modified cash basis of accounting, more than 85% of the
institution's applicable revenues for the prior fiscal year is derived from
Title IV Programs. The DOE has indicated that it will enforce the 85/15 Rule on
an institution-by-institution basis. Approximately 73% of the Company's revenues
in fiscal 1998 (ranging from a low of 41% to a high of 79% on an institution by
institution basis) were derived from tuitions funded by the Title IV Programs.
To reduce the risk that any Learning Center could lose its eligibility to
participate in the Title IV Programs under the 85/15 Rule, the Company closely
monitors the applicable revenues for each Learning Center on an ongoing basis
and is pursuing alternative sources of revenue and student financial assistance.
If any Learning Center were to lose its eligibility to participate in the Title
IV Programs under the 85/15 Rule, such loss would have a material adverse effect
on the Company.
RESTRICTIONS ON ADDING LOCATIONS
The HEA requires a proprietary educational institution to be in full
operation for two years before such institution can qualify to participate in
the Title IV Programs. However, the HEA and applicable regulations permit an
institution that is already qualified to participate in the Title IV Programs to
establish an additional location that may immediately qualify to participate in
the Title IV Programs without satisfying the two-year requirement so long as
such location satisfies all other applicable requirements for institutional
eligibility, including approval of the additional location by the institution's
accrediting agency and the relevant state authorizing agency. Excluding the BEC
acquisition, the Company opened four new Learning Centers in fiscal 1998. The
Company's expansion plans assume its continued ability to establish new Learning
Centers as additional locations of existing Learning Center main campuses
without incurring the two-year delay in participation in the Title IV Programs
that is applied to new institutions.
15
<PAGE>
Although state requirements and accrediting agency standards may in certain
instances limit the ability of the Company to establish additional locations in
certain areas and certain situations, the Company does not believe, based on its
current understanding of how these standards will be applied, that these
standards will have a material adverse effect on the Company or its expansion
plans.
POTENTIAL EFFECT OF REGULATORY VIOLATIONS
The violation of regulatory standards governing the Title IV Programs by the
Company or any of the Learning Centers could be the basis for the DOE to
initiate a proceeding to take one or more of the following actions: (a) seek
repayment of previously disbursed Title IV Program funds, (b) impose a fine, or
(c) limit, suspend or terminate the participation of the Company or the
particular Learning Center in the Title IV Programs. In addition, the DOE may
take emergency action temporarily to suspend an institution's participation in
the Title IV Programs without advance notice if the DOE determines that a
regulatory violation creates an imminent risk of the material loss of public
funds. Although there are no such proceedings pending, and the Company does not
believe any such proceeding is contemplated, if such a proceeding were initiated
against the Company or one or more individual Learning Centers and resulted in a
substantial curtailment of the Company's participation in the Title IV Programs,
the Company would be materially and adversely affected.
The DOE also may transfer a Learning Center from the "advance" system of
payment of Title IV Program funds, under which an institution requests and
receives funding from the DOE in advance based on anticipated need, to the
"reimbursement" system of payment, under which an institution must disburse
funds to students and document their eligibility for Title IV Program funds
before receiving funds from the DOE.
On April 3, 1998, the Company was notified by the DOE that, based upon their
monitoring of recent litigation involving the Company (refer to Item 3, "Legal
Proceedings") and certain student complaints lodged against the Company, the DOE
was placing all Learning Centers on a "heightened cash monitoring status." This
status allows all Learning Centers to continue to receive Title IV Program 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, as requested. The DOE does not consider
"heightened cash monitoring status" to represent either an adverse or punitive
action. The Company expects that this action by the DOE should not have any
effect on the availability or timing of Title IV funding to the Company's
students, nor should it have a material effect on the Company's cash flow or
operating results.
If a Learning Center lost its eligibility to participate in certain of the
Title IV Programs, or if the amount of available federal student financial aid
was reduced, the Company would seek to obtain alternative sources of revenue for
that Learning Center or provide alternative sources of funding for that Learning
Center's students. There are a number of private organizations that provide
loans to students. Although the Company believes that one or more private
organizations would be willing to provide loans to students attending a Learning
Center, there is no assurance that this would be the case, and the interest rate
and other terms of such student loans might not be as favorable as for Title IV
Program funds. Accordingly, the loss of eligibility of a Learning Center or
Centers to participate in the Title IV Programs would be expected to have a
material adverse effect on the Company even if the Company could arrange or
provide alternative sources of revenue for the Learning Center or provide
alternative sources of funding for the Learning Center's students.
STATE AUTHORIZATION AND ACCREDITATION
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
16
<PAGE>
the states in which the Learning Centers currently operate. State laws and
regulations affect the Company's operations and may limit the ability of the
Company to introduce degree programs or to initiate new programs of study, or to
obtain authorization to operate in certain additional states. State regulatory
requirements may overlap or exceed federal requirements.
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 Learning Center
that ISBE had determined that certain activities and procedures of the Company's
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. The
Superintendent's action does not affect the current operations of the Company's
other Illinois Learning Center in Chicago, nor does it affect the status of
currently enrolled students at the Schaumburg Learning Center.
On April 21, 1998, the Company timely submitted its response to the 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 on or before May 6, 1998 the Schaumburg Learning Center
will be able to resume normal marketing and student enrollment activities.
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 ACICS, which is an accrediting
agency recognized by the DOE. Two of the twenty-two Learning Centers, operating
in the United States, 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.
CHANGE OF CONTROL
Upon a change of ownership resulting in a change of control ("change in
control") of the Company, as defined in the HEA and the DOE's regulations, each
Learning Center would lose its eligibility to participate in the Title IV
Programs for an indeterminate period of time while it applies to regain
eligibility, with the likely loss of a portion of its Title IV funding during
the re-approval period. A change in control of the Company could have
significant regulatory consequences at the state level and could affect the
accreditation of the Learning Centers. For a publicly traded corporation like
the Company, DOE regulations specify that a change in control arises from the
same circumstances that would require the Company to file with the Securities
and Exchange Commission a report on Form 8-K disclosing a change in control.
Each state and accrediting agency has its own requirements with respect to a
change of control and the consequences thereof. A change in control of the
Company could, depending on the nature of such change, have a material adverse
effect on the Company.
17
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When the Company acquires an institution that participates in the Title IV
Programs, such as the Learning Centers acquired from BEC, that institution
undergoes a change in control and becomes ineligible to participate in the Title
IV Programs until the DOE determines that the institution meets the standards of
institutional eligibility and may be recertified for such participation under
its new ownership. Further, such recertification following a change in control
will be on a provisional basis.
Upon a change in control of the Company under DOE regulations, the Learning
Centers would immediately become ineligible to participate in Title IV Programs
and with certain limited exceptions respecting Title IV Program funds previously
obligated for the benefit of currently enrolled students, their students would
be unable to obtain Title IV Program funds to pay their cost of education until
such time as the DOE recertifies the Learning Centers to participate in Title IV
Programs. The DOE will not preapprove a change in control and will only
reinstate an institution's eligibility to participate in Title IV Programs on a
provisional basis and only upon approval of an application following the
institution's change in control. Such application, among other things, must
demonstrate that the relevant Learning Center is authorized by the appropriate
states and accredited by the appropriate accrediting agency under its new
ownership. Therefore, before each Learning Center may regain access to Title IV
Program funds following a change in control (a) it must be reaccredited (or
continue to be accredited) by the appropriate accrediting agency and
reauthorized (or continue to be authorized) by the appropriate states and (b)
the change in control must otherwise be approved by the DOE.
The standards and practices of ACICS, the accrediting agency that accredits
all of the Company's Learning Centers, generally provide that, within five
business days after an institution obtains reauthorization (or confirmation of
continued authorization) by the appropriate states following a change in
control, and submits a complete application, ACICS will determine whether to
temporarily reinstate the institution's accreditation, during which period the
institution must apply for permanent reinstatement of its accreditation.
A material adverse effect on the Company's financial positon, results of
operations and cash flows could result if the Company experienced significant
delay in obtaining or failed to obtain the accreditation of any Learning Center,
experienced significant delay in obtaining or failed to obtain authorization
from any state in which the Company has a Learning Center or experienced
significant delay in reestablishing or failed to reestablish the eligibility of
any Learning Center to participate in Title IV Programs. Any change of control
may also delay the ability of the Company to establish new institutions and may
have other adverse regulatory effects.
CANADIAN REGULATION
Students who are residents of the province of Quebec and fulfill certain
other criteria are eligible to receive loans and bursaries ("grants") from the
Quebec Loans and Bursaries Program ("QLBP") established pursuant to an Act
Respecting Financial Assistance for Students. Under the QLBP, student financial
assistance is initially provided in the form of a loan. Delta College is subject
to the Act Respecting Private Education ("ARPE") in Quebec. In accordance with
the 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 Company does not believe that QME's requirements will create significant
obstacles to its plans to acquire additional institutions, or open new branches
in Quebec or that QME's requirements will create significant obstacles to its
plans to add new educational programs at Delta College, in Quebec. In addition,
the 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 regulatory requirements relating to student financial assistance
programs in Quebec are currently in the process of being changed by applicable
governments due to political and budgetary pressures and any such change may
affect the eligibility for student financial assistance of the students
attending Delta
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College which, in turn, could materially adversely affect Delta College's
business, results of operations and financial condition.
ITEM 2. PROPERTIES
All CLC facilities are leased by the Company. The table below sets forth
certain information regarding these facilities as of January 31, 1998.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Alexandria, VA...................................................................................... 57,000
Alexandria, VA(1)................................................................................... 7,300
Anaheim, CA......................................................................................... 22,000
Cherry Hill, NJ..................................................................................... 20,000
Chicago, IL......................................................................................... 22,000
Fairfax, VA(2)...................................................................................... 11,000
Garland, TX......................................................................................... 16,900
Hurst, TX........................................................................................... 16,000
Houston, TX(3)...................................................................................... 28,400
Laurel, MD(3)....................................................................................... 37,900
Los Angeles, CA..................................................................................... 45,000
Madison Heights, MI................................................................................. 20,000
Manassas, VA........................................................................................ 15,000
Marietta, GA........................................................................................ 16,000
Methuen, MA......................................................................................... 2,000
Norristown, PA(2)................................................................................... 3,200
Philadelphia, PA.................................................................................... 32,000
Plymouth Meeting, PA................................................................................ 26,000
San Francisco, CA................................................................................... 22,000
San Jose, CA........................................................................................ 20,000
Schaumburg, IL...................................................................................... 20,000
Somerville, MA...................................................................................... 20,000
Tysons Corner, VA(1)................................................................................ 5,600
Woodhaven, PA....................................................................................... 23,000
------------
Total........................................................................................... 508,300
</TABLE>
- ------------------------
(1) Advantec Institute.
(2) Corporate headquarters/ and support.
(3) Combined Advantec Institute site and Learning Center.
(4) Table excludes facilities associated with the Paramus and Delta College
acquisitions.
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<PAGE>
Learning Center site selection is based upon a number of factors, including
population density, incomes, occupations, education levels, projected demand for
CLC's programs, concentration of technology-oriented employers and applicable
state and accrediting agency requirements. The Company believes its facilities
are suitable, adequate and well-utilized.
ITEM 3. LEGAL PROCEEDINGS
On March 10, 1998, the Attorney General of Illinois 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, Illinois Learning Center. The complaint alleges 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 seeks 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. Concurrent with entering into discussions with the Illinois Attorney
General respecting resolution of this matter, the Company has filed, with the
consent of the Illinois Attorney General, a motion to extend the date to answer
or otherwise plead. As a result of this motion being filed, the Company has been
granted an extension through May 11, 1998 to answer or otherwise plead to the
complaint. The Company is unable to estimate the outcome of this matter or any
potential liability.
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. The Company has not yet been served with the complaint, but has
obtained a copy. The complaint alleges violations of the Securities Exchange Act
of 1934, including allegations that the Company is experiencing "operations
difficulties" and failed to disclose the alleged difficulties. The complaint
also alleges that Company insiders realized profits by trading their shares of
Company stock while in possession of material adverse information. The Company
has moved for a change in venue in this litigation. The Company is unable to
estimate the outcome of this matter or any potential liability.
On or about March 20, 1998, three class action lawsuits were filed against
the Company in the United States District Court for the Northern District of
Illinois, Eastern Division. Two of these lawsuits were filed on behalf of all
purchasers of Company Common Stock from April 30, 1997 through March 10, 1998;
the other lawsuit was filed on behalf of all purchasers of Company Common Stock
from June 6, 1997 through March 13, 1998. On April 16, 1998, a class action
lawsuit was filed in the United States District Court for the Northern District
of Illinois, Eastern Division, on behalf of all purchasers of Company Common
Stock from March 17, 1997 through March 10, 1998. As of April 27, 1998, the
Company had been served with one of the complaints and had obtained copies of
the remaining complaints. The complaints allege violations of the Securities
Exchange Act of 1934, and assert claims similar to those described in the
preceding paragraph. The Company has not yet filed answers in any of these
matters and is unable to estimate the outcome of any of these matters or any
potential liability.
The Company intends to defend itself vigorously in the above proceedings;
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 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.
20
<PAGE>
There can be no assurance that additional legal proceedings will not be
filed or that adverse action will not be initiated against the Company, either
by attorneys general of other states, federal or state regulators, an
accrediting organization, or other parties. Any such legal proceedings or
adverse action could have a severe impact on the Company's business, financial
condition and results of operations.
The Company is involved in litigation in the ordinary course of its
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of fiscal 1998.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the NASDAQ National Market under the
symbol "CLCX." The following table sets forth the high and low sales prices for
the Common Stock reported by NASDAQ for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL YEAR 1997*:
First Quarter............................................................ $ 3.84 $ 2.75
Second Quarter........................................................... 8.42 3.59
Third Quarter............................................................ 11.09 7.34
Fourth Quarter........................................................... 10.34 8.34
FISCAL YEAR 1998*:
First Quarter............................................................ $ 14.38 $ 9.25
Second Quarter........................................................... 24.63 13.50
Third Quarter............................................................ 27.50 19.13
Fourth Quarter........................................................... 36.50 20.56
</TABLE>
- ------------------------
* Restated for stock splits.
On December 8, 1997 the Company's Board of Directors declared a two for one
stock split, in the form of a stock dividend of one share of common stock for
every share owned. Distribution was made on January 8, 1998 to stockholders of
record as of the close of business on December 29, 1997. On March 24, 1997 the
Company's Board of Directors declared a three for two stock split, in the form
of a stock dividend of one share of common stock for every two shares owned.
Distribution was made on April 14, 1997 to stockholders of record as of the
close of business on April 8, 1997. As a result of the foregoing, the prices set
forth in the above table and all other share and per share amounts referenced in
this document have been restated for all prior periods. These over-the-counter
market quotations may reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
At April 22, 1998, there were approximately 54 holders of Common Stock. The
Company estimates that, including shareholders whose shares are held in nominee
accounts by brokers, there are approximately 3,500 total holders of its Common
Stock.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. It is the current
policy of the Company's Board of Directors to retain earnings to finance the
operations and expansion of the Company's business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial and operating data is qualified by
reference to, and should be read in conjunction with, the financial statements
and notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Items 7 and 8 of this Form
10-K. The Statements of Operations for each of the three years in the period
ended January 31, 1998 and the Balance Sheets as of January 31, 1998 and 1997,
and the independent accountant's report thereon are included in
22
<PAGE>
Item 8 of this Form 10-K. The share and per share amounts in the table below
have been restated to reflect the stock splits (Refer to Item 8 "Financial
Statements and Supplementary Data" -- Note 3.)
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................... $ 96,989 $ 64,025 $ 46,081 $ 39,297 $ 34,981
--------- --------- --------- --------- ---------
Costs and expenses:
Costs of instruction and services........................ 54,041 35,475 26,076 22,227 19,406
Selling and promotional.................................. 15,289 11,407 7,884 6,371 6,259
General and administrative............................... 7,657 5,584 4,052 3,727 2,844
Provision for doubtful accounts.......................... 4,794 3,084 2,613 3,313 1,996
Amortization of intangible assets........................ 362 362 363 393 408
--------- --------- --------- --------- ---------
82,143 55,912 40,988 36,031 30,913
--------- --------- --------- --------- ---------
Income from operations..................................... 14,846 8,113 5,093 3,266 4,068
Interest income (expense), net............................. 1,391 721 (96) (948) (1,356)
Gain on sale of investment securities...................... -- 332 -- -- --
--------- --------- --------- --------- ---------
Income before income taxes, discontinued operations,
extraordinary item and cumulative effect of accounting
change................................................... 16,237 9,166 4,997 2,318 2,712
Provision for income taxes................................. 6,657 3,565 2,078 1,131 1,124
--------- --------- --------- --------- ---------
Income from continuing operations before discontinued
operations, extraordinary item and cumulative effect of
accounting change........................................ $ 9,580 $ 5,601 $ 2,919 $ 1,187 $ 1,588
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share -- continuing operations
Basic.................................................... $ 0.60 $ 0.41 (1) (1) (2)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................. $ 0.56 $ 0.37 $ 0.25 $ 0.14 (2)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of shares outstanding --
Basic.................................................... 15,893 13,719 (1) (1) (2)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted.................................................. 17,189 15,018 11,393 8,211 (2)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 24,377 $ 26,950 $ 8,260 $ 4,753 $ 4,388
Total current assets........................................... 78,210 58,805 29,635 29,968 21,210
Total assets................................................... 115,271 75,727 39,808 39,922 36,011
Total current liabilities...................................... 59,349 33,811 21,093 18,460 16,286
Long term liabilities.......................................... 5,167 2,124 1,559 12,342 13,764
Total stockholders' equity..................................... 50,755 39,792 17,156 9,120 5,961
</TABLE>
- ------------------------
(1) Basic earnings per share is not presented for years prior to fiscal 1997 as
such amounts do not present a meaningful comparison to fiscal 1998 and 1997
amounts due to the differing capital structures as a result of the 1997 and
1996 public offerings (Refer to Item 8 "Financial Statements and
Supplementary Data"--Note 4).
(2) Fiscal 1994 earnings per share information is not presented as the
historical capital structure is not considered meaningful.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND AND OVERVIEW
The Company provides information technology education and training to over
12,000 students annually. The Company designs programs and courses to meet
current information technology education needs, offering instruction in rapidly
growing technologies such as client/server, database, networking and
object-oriented programming through its twenty-five locations throughout the
United States and Canada.
On December 23, 1997, the Company acquired Boston Education Corp., ("BEC"),
a privately held provider of information technology education and training. BEC
had 1997 annual revenues of approximately $5.2 million and serves approximately
650 students at its two campuses: a main campus located in Somerville, MA and a
branch in Methuen, MA. The Company's results of operations incorporate BEC
activity from the date of acquisition through January 31, 1998.
On February 17, 1998 the company acquired Markerdowne Corporation d/b/a
Computer Learning Centers Paramus ("CLC Paramus"), a privately-held provider of
information technology education and training based in Paramus, New Jersey. CLC
Paramus had calendar 1997 annual revenues of approximately $6.7 million and
serves approximately 800 students.
On February 20, 1998 the Company acquired Delta College, a Montreal,
Quebec-based, privately-held provider of information technology education and
training. Delta College had annual revenues of approximately $6.7 million for
its fiscal year ended June 30, 1997. Delta College serves approximately 800
students at three locations: Montreal, Laval and Brossard. Neither Paramus or
Delta College are included in the Company's results of operations for fiscal
1998.
All three acquisitions were accounted for as poolings of interests in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations". Current and prior years' financial statements were not restated
to include any of these acquisitions on the basis of immateriality to the
Company.
During fiscal 1998, the Company derived approximately 93% of its revenues
from Learning Centers' course tuition, approximately 4% from the Advantec
Institutes' ("AI") course fees, and the remaining revenues from sales of books
and fees charged directly to students. The Company enrolls students on a monthly
basis and delivers its curricula over an 8- to 16-month period for full-time
students and over a 16-to 32-month period for part-time students. In addition to
its traditional career and associate degree programs, the Company offers its AI
courses in intensive two to six week formats for the continuing education and
training of information technology professionals. The Company's revenues in any
period are directly related to the number of enrolled students (or student
population), the number of new enrollments and the student retention rate.
The majority of the Company's students qualify for financial assistance
under various government-supported student financial aid programs, especially
the Title IV Programs, and the Company is highly dependent on the continued
availability of government-supported student financial aid. Because students in
the Company's AI courses are not eligible to participate in the Title IV
Programs, revenues from these courses are received from companies, government
agencies and individuals that participate or sponsor employees enrolled in these
training programs.
The Company manages the collection risks associated with student accounts
receivable for withdrawn and graduate students by utilizing an in house
centralized credit and collection function staffed with personnel whose primary
responsibility is the collection effort. The collection effort includes
reviewing management reports detailing student accounts receivable balances,
following up on student delinquencies via telephone and letters as well as
employing other activities related to the collection of student accounts
receivable. The Company makes available to qualifying students alternative
financing arrangements ("CLC
24
<PAGE>
financing") which help fund their education. Dependent upon the credit
worthiness 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.
Additionally, Company personnel help students overcome financial obstacles to
completing their educational programs by assisting students in finding part-time
employment when their own resources, CLC financing and Title IV financial aid
are not adequate to meet their financial needs.
Costs of instruction and services consist primarily of costs related to the
delivery and administration of the Company's programs, including faculty
compensation, salaries for administrative personnel who provide services
directly to students, the costs of educational materials sold, facility leases
and related occupancy costs, equipment rental and depreciation and amortization
of educational property and equipment. Selling and promotional costs consist
primarily of advertising, admission representative salaries and benefits and
other costs related to the selling and promotional functions. General and
administrative costs consist primarily of salaries for administrative personnel,
occupancy costs, depreciation and amortization of property and equipment, legal
expenses and other related costs for functions such as executive management,
corporate accounting, human resources, regulatory compliance, product strategy
and curricula development, new business development and other functions that do
not provide direct services to the Company's students. Provision for doubtful
accounts represents the Company's provision for doubtful student accounts
receivable. Amortization of intangibles consists primarily of amortization of
intangible assets related to capitalized costs of original DOE certifications.
This Annual Report on Form 10-K contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe", "expect", "anticipate", and "project", and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. Such forward looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but not be limited to, projections of revenues, income,
or loss, expenses, capital expenditures, plans, the effect of inflation and
government regulation and plans relating to programs of the Company, as well as
assumptions relating to the foregoing. The Company undertakes no obligation to
publicly update or revise any forward looking statements, whether as a result of
new information, future events, or otherwise.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Annual
Report on Form 10-K, including the notes to the financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," describe factors, among others, that could contribute to or cause
such differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements are set forth
in "Business", "Financial Aid and Regulation" and "Certain Factors That May
Affect Future Results" in this Annual Report on Form 10-K for the year ended
January 31, 1998.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's statements
of operations as a percentage of revenues for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Revenues............................................................................ 100.0% 100.0% 100.0%
Costs and expenses:
Costs of instruction and services................................................. 55.7 55.4 56.6
Selling and promotional........................................................... 15.8 17.8 17.1
General and administrative........................................................ 7.9 8.7 8.8
Provision for doubtful accounts................................................... 4.9 4.8 5.7
Amortization of intangible assets................................................. 0.4 0.6 0.8
--------- --------- ---------
84.7 87.3 89.0
--------- --------- ---------
Income from operations.............................................................. 15.3 12.7 11.0
Interest income (expense), net...................................................... 1.4 1.1 (0.2)
Gain on sale of investment securities............................................... -- 0.5 --
--------- --------- ---------
Income from continuing operations before income taxes............................... 16.7% 14.3% 10.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1998 COMPARED WITH FISCAL 1997
Revenues increased 52% to $97.0 million for fiscal 1998 from $64.0 million
for fiscal 1997 primarily due to an increase in enrollments at the Company's
existing Learning Centers, the opening of four new Learning Centers in fiscal
1998 and the growing popularity of the Company's longer programs including
associated degree programs. In addition to the opening of the four new Learning
Centers, the Company acquired BEC on December 23, 1997, which added two Learning
Centers, one in Somerville, MA and the other in Methuen, MA.
The number of students attending Learning Center programs as of the end of
the year increased 56% to 10,112 in fiscal 1998 from 6,485 in fiscal 1997, which
was the result of student enrollment growth of 43%. In fiscal 1998, the ten new
Learning Centers, opened or acquired during the last two fiscal years,
collectively contributed 79% of the total enrollment growth and 81% of the total
student population growth. BEC accounted for approximately 18% of the population
growth, however, did not significantly impact the percentage growth in
enrollments (3%) due to the acquisition occurring in late December 1997. When
evaluating the sources of growth, 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. Revenues from AI increased 30% to $3.9
million in fiscal 1998 from $3.0 million in fiscal 1997 due primarily to an
increase in the number of students.
Accounts receivable, (both long and short-term), increased 76% as compared
to the revenues increase of 52%. The larger percentage increase in accounts
receivable as compared to revenues can be attributed to the following:
When students enroll in 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 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 increases 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
26
<PAGE>
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. The lag
effect is not as evident for established Learning Centers which provide a more
consistent tuition revenue stream. Additionally, Learning Centers in their
second year of operations (those opened in fiscal 1997) contribute significantly
to the lag effect due to the large levels of growth occurring in year two versus
year one of operations. The following summarizes the actual Learning Center
openings and acquisitions for the last three fiscal years which have contributed
to this lag effect.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
SCHOOL OPENINGS/ACQUISITIONS 1998 1997 1996
- ---------------------------------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
First Quarter................................................... -- 1 --
Second Quarter.................................................. 2 -- --
Third Quarter................................................... 1 1 --
Fourth Quarter.................................................. 3 2 2
-- -- --
Total........................................................... 6 4 2
-- -- --
</TABLE>
When removing the tuition revenues and accounts receivable associated with
new Learning Centers opened during the last two fiscal years, the percentage
increase in accounts receivable is less than that of tuition revenues.
Costs of instruction and services increased 52% to $54.0 million in fiscal
1998 from $35.5 million in fiscal 1997 due primarily to the direct costs
necessary to support the increase in student population. These direct costs
consist primarily of compensation and related benefits, and depreciation.
Instruction costs and services as a percentage of revenues increased slightly to
55.7% in fiscal 1998 from 55.4% in fiscal 1996.
Selling and promotional expenses increased 34% to $15.3 million in fiscal
1998 from $11.4 million in fiscal 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 15.8% in fiscal
1998 from 17.8% in fiscal 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 37% to $7.7 million in fiscal
1998 from $5.6 million in fiscal 1997, primarily as a result of increasing the
level of infrastructure needed to support the growth of the business, which
includes credit and treasury administration, information systems, and other
related personnel costs. General and administrative expenses as a percentage of
revenues decreased to 7.9% in fiscal 1998 from 8.7% in fiscal 1997.
Provision for doubtful accounts increased 55% to $4.8 million in fiscal 1998
from $3.1 million in fiscal 1997, primarily due to the increase in revenues of
52% and related accounts receivable balances. Provision for doubtful accounts as
a percentage of revenues increased slightly to 4.9% in fiscal 1998 from 4.8% in
fiscal 1997.
The Company realized net interest income of $1.4 million for fiscal 1998,
compared to net interest income of $721,000 for fiscal 1997, primarily as a
result of the interest generated by larger average invested cash balances from
the 1997 public offering, completed in October 1996.
The income tax rate increased to 41.0% in fiscal 1998 from 38.9% in fiscal
1997 primarily due to the fiscal 1997 utilization of a capital loss carryforward
offsetting the tax effect of the sale of investment securities.
27
<PAGE>
FISCAL 1997 COMPARED WITH FISCAL 1996
Revenues increased 39% to $64.0 million for fiscal 1997 from $46.1 million
for fiscal 1996 primarily due to an increase in enrollments at the Company's
existing Learning Centers, the opening of six new Learning Centers since January
1996, the growing popularity of the Company's longer programs including
associate degree programs, and growth in AI enrollments. Of the six Learning
Centers opened since January 1996, two were operational for the full fiscal year
in 1997 (opened in January 1996), one commenced operations in March 1996, one
commenced operations in October 1996 and two commenced operations during the
fourth quarter of fiscal 1997.
The number of students attending Learning Center programs as of the end of
the year increased 33% to 6,485 in fiscal 1997 from 4,884 in fiscal 1996, which
was the result of student enrollment growth of 33%. In fiscal 1997, the six new
Learning Centers opened during the last two fiscal years collectively
contributed 70% of the total enrollment and student population growth. Revenues
from AI increased 173% to $3.0 million for fiscal 1997 from $1.1 million for
fiscal 1996 due primarily to an increase in the number of students trained
during the period.
Costs of instruction and services increased 36% to $35.5 million in fiscal
1997 from $26.1 million in fiscal 1996 primarily to the direct costs necessary
to support the increase in student population. These direct costs consist
primarily of faculty compensation, related benefits and depreciation.
Instruction costs and services as a percentage of revenue decreased to 55.4% in
fiscal 1997 from 56.6% in fiscal 1996 due to greater revenues being spread over
the fixed costs related to instructional services.
Selling and promotional expenses increased 44% to $11.4 million in fiscal
1997 from $7.9 million in fiscal 1996 due primarily to increased marketing and
advertising necessary to support the growth in student enrollments and the
addition of six new Learning Centers since January 1996. Selling and promotional
salaries and benefits increased by approximately $1.5 million primarily as a
result the six new Learning Centers operating since January 1996. Advertising
expenditures increased by approximately $1.0 million due primarily to the
increased television, radio and direct mail activities associated with the six
new Learning Centers. Selling and promotional expenses as a percentage of
revenues increased to 17.8% in fiscal 1997 from 17.1% in fiscal 1996.
General and administrative expenses increased 37% to $5.6 million from $4.1
million, primarily as a result of increasing the level of infrastructure needed
to support the growth of the business, which includes credit and treasury
administration, information systems, and other related personnel costs. These
expenses were partially offset by a decrease in corporate charges for management
support and treasury management allocated from a former subsidiary that was
divested in May 1995. General and administrative expenses as a percentage of
revenues decreased to 8.7% in fiscal 1997 from 8.8% in fiscal 1996.
Provision for doubtful accounts increased 19% to $3.1 million in fiscal 1997
from $2.6 million in fiscal 1996. On September 26, 1996, the DOE notified the
Chicago Learning Center of their loss of eligibility in the Pell Grant and FFEL
programs. As a result of this loss of Title IV funding, the Company provided
self funded financing options to the existing students that were comparable to
what these students would have received under the traditional FFEL loan program.
As a result of the increased collection risk associated with the increase in
self funding at the Chicago Learning Center, the Company increased its allowance
for doubtful accounts by $258,000 during the fourth quarter of fiscal 1997.
Provision for doubtful accounts as a percentage of revenues decreased to 4.8% in
fiscal 1997 from 5.7% in fiscal 1996. This is primarily the result of improved
financial aid processing and improved credit and collection activities.
The Company realized net interest income of $721,000 in fiscal 1997,
compared to net interest expense of $96,000 in fiscal 1996 primarily as a result
of interest generated by larger invested cash balances and the repayment of debt
from proceeds of the initial public offerings.
The income tax rate declined to 38.9% in fiscal 1997 from 41.6% in fiscal
1996. This was due to the fact that prior to May 31, 1995, state taxable income
included interest income on amounts owed from a
28
<PAGE>
subsidiary, which caused a disproportionately higher state income tax rates.
Also contributing to a lower tax rate in fiscal 1997 versus fiscal 1996 is a
capital loss carryforward offsetting the tax effect of the sale of investment
securities sold during fiscal 1997.
SEASONALITY
New enrollments in Learning Center programs tend to be higher in the third
and fourth fiscal quarters than in the first and second fiscal quarters because
the third and fourth quarters include the times of year traditionally associated
with the beginning of school semesters. The Company believes it is less affected
by this seasonal pattern than many other educational institutions because it
permits students to enroll in and begin Learning Center programs in any month of
the year. In addition, the impact of seasonality in new enrollments on results
of operations has been moderated to some extent by growth in the number of
students attending Learning Center programs, the varying lengths of such
programs, and new Learning Centers opened.
LIQUIDITY AND CAPITAL RESOURCES
During the last three fiscal years, the Company has financed its operating
and capital expenditure requirements principally through cash provided by
operating activities. Cash provided by operating activities for fiscal 1998,
1997 and 1996 was $16.3 million, $10.8 million, and $7.0 million, respectively.
The Company's principal sources of funds at January 31, 1998 were cash and
cash equivalents of approximately $24.4 million and net current accounts
receivable of $48.1 million. Additionally, the Company has a credit agreement
with a bank which provides for an $8.5 million secured revolving credit
facility, expiring on December 22, 1998. The line of credit consists of a
revolving credit note, inclusive of a $2.0 million convertible term loan. The
interest on the facility is based either on the bank's U.S. prime rate (8.5% at
January 31, 1998) or the London Interbank Offer Rate ("LIBOR") which was 5.6% at
January 31, 1998. Interest rates are equal to (i) the U.S. prime rate or LIBOR
plus 1.25% for revolving credit loans and (ii) the U.S. prime rate plus 0.25% or
LIBOR plus 1.5% for the convertible term loans.
Historically, the Company's investment activity has primarily consisted of
capital asset purchases. Capital expenditures, including expenditures for
furniture, computer software and hardware and tenant improvements related to new
Learning Centers, were $19.6 million, $7.5 million, and $2.0 million,
respectively, for fiscal 1998, 1997, and 1996, respectively. To date, cash
generated from operations and cash on hand have been sufficient to fund capital
expenditures. The Company leases substantially all of its facilities under
operating lease agreements. Existing future commitments will be paid from cash
provided by operating activities, cash on hand, and if necessary the existing
credit facility.
The Company continues to expand current facilities, upgrade equipment and
open new Learning Centers. The Company expects fiscal 1999 capital expenditures
to be approximately $20 million. Estimated capital expenditures for a typical
new Learning Center average approximately $1.0 million. The Company anticipates
that its planned capital expenditures can be funded through cash generated from
operations.
A majority of the Company's revenues are derived from tuitions funded by the
Title IV Programs. Disbursement of Title IV Program funds is dictated by federal
regulations. For students enrolled in programs of one academic year or less in
length, disbursements generally are made in two equal increments, one in the
first 30 days following the student's enrollment in a program and the second
when the student reaches the midpoint of the program. For students enrolled in
programs greater than one academic year in length, disbursements also are made
at the beginning and midpoint of the subsequent academic year. Although the
timing of loan disbursements to the Company is subject to a student's directions
to the lender and to existing regulatory requirements regarding such
disbursements, the Company typically receives student loan funds upon their
disbursement by the lender. During fiscal 1998, the Company collected
approximately $87.5 million, of accounts receivable, which was utilized for
various operating activities and capital expenditures.
29
<PAGE>
The Company believes its available cash on hand and cash provided by
operating activities and existing lines of credit under the credit facility will
be sufficient to meet the Company's cash requirements for at least the next 12
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.
HEIGHTENED CASH MONITORING
Refer to Item 1 -- "Business"--"Financial Aid and Regulation" and Item 8,
"Financial Statements and Supplementary Data" -- Note 16.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's historical
operations.
YEAR 2000 COMPLIANCE
The Company has completed its assessment of the potential impact of year
2000 system issues and has determined that the impact of system design costs are
minimal. The financial impact to the Company to ensure year 2000 compliance has
not been, and is not anticipated to be, material to its business, financial
condition or results of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, could cause actual results to differ
materially from those contained in forward looking statements made in this
Annual Report on Form 10-K and presented elsewhere by management from time to
time.
LITIGATION
On March 10, 1998, the Attorney General of Illinois 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, Illinois Learning Center. The complaint alleges 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 seeks 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. The Company has filed a motion to extend the date to answer or
otherwise plead. As a result of this motion being filed, the Company has been
granted an extension through May 11, 1998 to answer or otherwise plead the
complaint. The Company is unable to estimate the outcome of this matter or any
potential liability.
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. The Company has not yet been served with the complaint, but has
obtained a copy. The complaint alleges violations of the Securities Exchange Act
of 1934, including allegations that the Company is experiencing "operations
difficulties" and failed to disclose the alleged difficulties. The complaint
also alleges that Company insiders realized profits by trading their shares of
Company stock while in possession of material adverse information. The Company
has moved for a change in venue in this litigation. The Company is unable to
estimate the outcome of this matter or any potential liability.
30
<PAGE>
On or about March 20, 1998, three additional class action lawsuits were
filed against the Company in the United States District Court for the Northern
District of Illinois, Eastern Division. Two of these lawsuits were filed on
behalf of all purchasers of Company Common Stock from April 30, 1997 through
March 10, 1998; the other lawsuit was filed on behalf of all purchasers of
Company Common Stock from June 6, 1997 through March 13, 1998. On April 16,
1998, a class action lawsuit was filed in the United States District Court for
the Northern District of Illinois, Eastern Division, on behalf of all purchasers
of Company Common Stock from March 17, 1997 through March 10, 1998. As of April
27, 1998, the Company had been served with one of these complaints and had
obtained copies of the remaining complaints. The complaints allege violations of
the Securities Exchange Act of 1934, and assert claims similar to those
described in the preceding paragraph. The Company has not yet filed answers in
any of these matters and is unable to estimate the outcome of any of these
matters or any potential liability.
The Company intends to defend itself vigorously in the above proceedings;
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 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.
There can be no assurance that additional legal proceedings will not be
filed or that adverse action will not be initiated against the Company, either
by attorneys general of other states, federal or state regulators, an
accrediting organization, or other parties. Any such legal proceedings or
adverse action could have a severe impact on the Company's business, financial
condition and results of operations.
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. (Refer to Item 1--"Business"--"Financial Aid and
Regulation.")
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 Higher Education Act of
1965, as amended ("HEA"), and the regulations promulgated thereunder, subject
the Company, the Learning Centers and all other higher education institutions
eligible to participate in the various 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 agency
administering these regulations, the DOE, has not fully developed administrative
interpretations of certain of the statutory and regulatory provisions, it is not
clear how the requirements imposed by statute and 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.
31
<PAGE>
The violation of federal requirements governing participation in the Title
IV Programs or of state or accrediting agency requirements governing the
provision of educational services by the Company or any Learning Center could
result in the restriction or loss by the Company or a Learning Center of its
ability to participate in government funding programs or to offer education and
training programs. Any such loss or restriction would have a material adverse
effect on the Company. Furthermore, current statutes or regulations or statutory
or regulatory standards that become effective in the future may be applied or
interpreted by the government in ways that will delay or change the Company's
expansion plans or otherwise adversely affect the operation of the Learning
Centers and their participation in the Title IV Programs. In addition, all
government-provided student financial aid programs, including the Title IV
Programs, are subject to the effects of federal and state budgetary processes
and the possible elimination or consolidation of the DOE, and there can be no
assurance that government funding for the financial aid programs in which the
Company's students participate will continue to be available or be maintained at
current levels. The loss of funding or a reduction in funding levels for the
Title IV Programs 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, 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 of control of the Company, as
defined in the HEA and the DOE's regulations, each Learning Center would lose
its eligibility to participate in the Title IV Programs for an indeterminate
period of time while it applies to regain eligibility, with the likely loss of a
portion, or all, of its Title IV funding during the reapproval period. 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 arises at the same time that a report on Form 8-K is
required to be filed 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. A change of
control of the Company that exceeds the threshold set by the DOE would have a
material adverse effect on the Company.
COMPETITION
The postsecondary 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 government subsidies, foundation grants, tax-deductible contributions or
other financial resources not available to proprietary institutions.
32
<PAGE>
DEPENDENCE ON NEW PROGRAMS AND LOCATIONS; 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 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 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 integrate
successfully 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 President and Chief
Executive Officer and Chief Financial Officer, is 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.
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
COMPUTER LEARNING CENTERS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Statements of Operations for the Years Ended January 31, 1998 and 1997; Consolidated
Statement of Operations for the Year Ended January 31, 1996.............................................. F-3
Balance Sheets at January 31, 1998 and 1997................................................................ F-4
Statements of Cash Flows for the Years Ended January 31, 1998 and 1997; Consolidated
Statement of Cash Flows for the Year Ended January 31, 1996.............................................. F-5
Notes to Financial Statements.............................................................................. F-6
Financial Statement Schedules for the Years Ended January 31, 1998, 1997 and 1996
Schedule II--Valuation and Qualifying Accounts............................................................. I-6
All other schedules are omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Computer Learning Centers, Inc.
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Computer
Learning Centers, Inc. at January 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
January 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
New York, New York
March 13, 1998, except as to Note 16, which is as of April 27, 1998
F-2
<PAGE>
COMPUTER LEARNING CENTERS, INC.
STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Revenues......................................................................... $ 96,989 $ 64,025 $ 46,081
--------- --------- ---------
Costs and expenses:
Costs of instruction and services.............................................. 54,041 35,475 26,076
Selling and promotional........................................................ 15,289 11,407 7,884
General and administrative..................................................... 7,657 5,584 4,052
Provision for doubtful accounts................................................ 4,794 3,084 2,613
Amortization of intangible assets.............................................. 362 362 363
--------- --------- ---------
82,143 55,912 40,988
--------- --------- ---------
Income from operations........................................................... 14,846 8,113 5,093
Interest income (expense), net................................................... 1,391 721 (96)
Gain on sale of investment securities............................................ -- 332 --
--------- --------- ---------
Income before income taxes and discontinued operations........................... 16,237 9,166 4,997
Provision for income taxes....................................................... 6,657 3,565 2,078
--------- --------- ---------
Net income from continuing operations before discontinued operations............. 9,580 5,601 2,919
--------- --------- ---------
Loss from discontinued operations, net of applicable income taxes
(Note 4)....................................................................... -- -- (1,065)
--------- --------- ---------
Net income....................................................................... $ 9,580 $ 5,601 $ 1,854
--------- --------- ---------
--------- --------- ---------
Earnings per share of common stock (Notes 3 and 5):
Basic........................................................................ $ 0.60 $ 0.41 --
--------- --------- ---------
--------- --------- ---------
Diluted:
Continuing operations.................................................... $ 0.56 $ 0.37 $ 0.25
Discontinued operations.................................................. -- -- (0.09)
--------- --------- ---------
$ 0.56 0.37 $ 0.16
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
COMPUTER LEARNING CENTERS, INC.
BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
<S> <C> <C>
1998 1997
---------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 24,377 $ 26,950
Accounts receivable, net................................................................. 48,114 28,274
Prepaid expenses and other current assets................................................ 5,719 3,581
---------- ---------
Total current assets................................................................. 78,210 58,805
Fixed assets, net.......................................................................... 25,199 9,571
Long-term accounts receivable, net......................................................... 7,330 3,074
Other long-term assets..................................................................... 4,532 4,277
---------- ---------
Total assets......................................................................... $ 115,271 $ 75,727
---------- ---------
---------- ---------
LIABILITES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................................................... $ 1,574 $ 1,779
Accrued employee expenses................................................................ 3,025 2,134
Accrued other expenses................................................................... 6,519 2,412
Deferred revenues........................................................................ 48,231 27,486
---------- ---------
Total current liabilities............................................................ 59,349 33,811
---------- ---------
Long-term deferred revenues................................................................ 3,713 1,342
Other long-term liabilities................................................................ 1,454 782
---------- ---------
Total liabilities.................................................................... 64,516 35,935
---------- ---------
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, 16,239,236 shares issued and
outstanding--1998; 15,647,920 issued and outstanding shares -- 1997 (Note 3)........... 162 156
Additional paid-in capital............................................................... 34,525 32,104
Net unrealized gain on securities available for sale..................................... 160 112
Retained earnings........................................................................ 15,908 7,420
---------- ---------
Total stockholders' equity........................................................... 50,755 39,792
---------- ---------
Commitments and Contingencies (Note 13 and 16)
Total liabilities and stockholders' equity........................................... $ 115,271 $ 75,727
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
COMPUTER LEARNING CENTERS, INC.
STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net income...................................................................... $ 9,580 $ 5,601 $ 1,854
Adjustments to reconcile net income to cash provided by operating activities:
Provision for doubtful accounts............................................... 4,794 3,084 2,613
Depreciation.................................................................. 4,020 2,318 1,367
Amortization of intangible assets............................................. 362 362 363
Deferred tax provision (benefit).............................................. (955) (150) 47
Changes in net assets and liabilities:
Accounts receivable......................................................... (22,405) (11,875) (4,820)
Net assets of discontinued operations....................................... -- -- 1,197
Prepaid expenses and other current assets................................... (962) (1,285) 337
Long-term accounts receivable............................................... (4,888) (2,065) (489)
Other long-term assets...................................................... (203) (213) 283
Trade accounts payable...................................................... (795) 821 796
Accrued employee expenses................................................... 654 801 412
Accrued other expenses...................................................... 5,464 2,168 (562)
Deferred revenues........................................................... 18,617 10,455 3,471
Long-term deferred revenues................................................. 2,371 790 131
Other long-term liabilities................................................. 581 (28) 45
--------- --------- ---------
Cash provided by operating activities..................................... 16,235 10,784 7,045
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures............................................................ (19,548) (7,455) (1,983)
Decrease in restricted cash..................................................... -- -- 700
Product development............................................................. (192) (108) (75)
Cash from acquired company...................................................... 324 -- --
Perkins matching contributions.................................................. (23) -- (82)
--------- --------- ---------
Cash used for investing activities........................................ (19,439) (7,563) (1,440)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.......................................... -- 11,530 14,847
Exercise of stock options....................................................... 811 3,273 183
Proceeds from sales of common stock through employee stock purchase plan........ 121 -- --
Redemption of subscription note receivable...................................... -- 666 --
Borrowing from long-term debt................................................... -- -- 9,694
Repayments of long-term debt.................................................... (301) -- (26,822)
--------- --------- ---------
Cash provided by (used for) financing activities.......................... 631 15,469 (2,098)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (2,573) 18,690 3,507
Cash and cash equivalents, beginning of year...................................... 26,950 8,260 4,753
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 24,377 $ 26,950 $ 8,260
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 1--NATURE OF THE BUSINESS
Computer Learning Centers, Inc. (the "Company" or "CLC"), is a public
company traded on the NASDAQ National Market after completion of an initial
public offering on July 6, 1995 (Note 4). As of January 31, 1998, the Company
had twenty operating Learning Centers, four Advantec Instititutes and was
headquartered in Fairfax, Virginia.
In May 1989, the Company acquired substantially all of the assets of
Blessing/White Inc. ("Blessing/ White"). In fiscal 1990, the Company began
operations in the U.K. with the formation of Comprehensive Learning Concepts
(U.K.) Limited ("UK Ltd."). In connection with its 1996 initial public offering,
the Company spunoff these operations to stockholders (Note 3).
As used herein, the fiscal years ended January 31, 1998, 1997, and 1996 are
referred to as "1998", "1997", and "1996", respectively.
The Company is involved in litigation incident to its business -- (See notes
13 and 16.)
NOTE 2 -- ACQUISITIONS
On December 23, 1997, the Company completed the acquisition of Boston
Education Corp. ("BEC"), a privately held provider of information technology
education and training. 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 200,148 shares of CLC common stock in
exchange for substantially all of the rights, title and interest in the assets
and substantially all of the liabilities of BEC. BEC had calendar 1997 annual
revenues of approximately $5.2 million and serves approximately 650 students at
its two campuses: a main campus located in Somerville, MA and a branch in
Methuen, MA. The Company's results of operations incorporate BEC activity from
the date of acquisition through January 31, 1998. Current and prior years'
financial statements were not restated due to the immateriality of BEC to the
Company. In connection with this acquisition, the Company incurred $400 of
pooling expenses related to certain legal and accounting fees which are
reflected in 1998 results of operations.
On February 17, 1998, the Company acquired Markerdowne Corporation 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, will be accounted for
as a pooling of interests in accordance with APB 16. The acquisition was
completed by issuing 510,287 shares of CLC Common Stock in exchange for
substantially all of the rights, title and interest in the assets and
substantially all of the liabilities of CLC Paramus. CLC Paramus had calendar
1997 annual revenues of approximately $6.7 million and serves approximately 800
students.
On February 20, 1998, the Company acquired Delta College, a Montreal,
Quebec-based, privately-held provider of information technology education and
training. The acquisition, which will be accounted for as a pooling of interests
in accordance with APB 16, 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. Delta College serves approximately 800 students at
three locations: Montreal, Laval and Brossard.
The current and prior years' financial statements were not restated to
include CLC Paramus or Delta College on the basis of the immateriality of these
acquisitions to the Company. As a result of the Markerdowne and Delta
acquisitions, the Company has deferred certain costs related to acquisition work
F-6
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 2 -- ACQUISITIONS (CONTINUED)
performed prior to January 31, 1998. Deferred acquisition costs, included in
prepaid expenses and other current assets on the balance sheet, were $235 at
January 31, 1998. As these acquisitions were completed in the first quarter of
1999, these costs, together with any additional costs incurred subsequent to
January 31, 1998 with respect to these acquisitions, will be charged to
operations in that quarter.
NOTE 3--STOCK SPLITS
On December 8, 1997, the Board of Directors declared a two for one stock
split payable on January 8, 1998 in the form of a 100% stock dividend on the
Company's common stock, to stockholders of record at the close of business on
December 29, 1997. On March 24, 1997 the Board of Directors declared a three for
two stock split, in the form of a 50% stock dividend on the Company's common
stock, payable April 14, 1997 to stockholders of record at the close of business
on April 8, 1997. Share and per share amounts for all prior periods have been
restated to reflect these stock splits.
NOTE 4 -- PUBLIC OFFERINGS
1997 PUBLIC OFFERING
On November 1, 1996, the Company completed a public offering (with an
effective date of October 3, 1996), filing a registration statement on Form S-1
with the Securities and Exchange Commission ("SEC") for the sale of 3,915,000
shares of the Company's common stock at a price of $8.59 per share (share
amounts have been restated to reflect the stock split as discussed in Note 2).
The Company received total net proceeds of approximately $11.5 million from the
sale of 1,500,000 shares. In connection with the offering, the Company also
received approximately $2.4 million from the exercise of options to purchase
703,056 shares of common stock and approximately $666 for 211,944 shares of
common stock issued upon payment of subscription notes receivable of certain
stockholders. The remaining 1,500,000 shares were sold by certain selling
stockholders, and the Company did not receive any proceeds from the sale of
those shares. The total net proceeds of $14.6 million were used for the
expansion of the Company's programs through additional locations as well as for
working capital and general corporate purposes.
1996 INITIAL PUBLIC OFFERING
On July 6, 1995, the Company completed an initial public offering (with an
effective date of May 31, 1995), filing a registration statement on Form S-1
with the SEC for the sale of 6,870,000 shares of its common stock. The net
proceeds of this offering of $14.8 million were used to repay indebtedness, to
repay a portion of subordinated notes payable to stockholders and for working
capital and general corporate purposes.
Certain outstanding preferred shares and warrants were repurchased through
issuance of subordinated notes, aggregating $4.1 million, which were repaid from
the proceeds of this offering ("Repurchase Transactions"). A series of
transactions (collectively, the "Recapitalization") were executed, whereby the
Company distributed all of the outstanding shares of common and preferred stock
of Blessing/White to shareholders of the Company. The results of operations of
Blessing/White and UK Ltd. have been
F-7
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 4 -- PUBLIC OFFERINGS (CONTINUED)
reflected as discontinued operations in the accompanying financial statements
through May 31, 1995. Operating results for these discontinued operations were
as follows:
<TABLE>
<CAPTION>
FOR THE FOUR
MONTHS ENDED
MAY 31, 1995
-------------
<S> <C>
Revenues....................................................................... $ 4,115
-------------
-------------
Loss before income taxes....................................................... (1,568)
Benefit for income taxes....................................................... 503
-------------
Net loss....................................................................... $ (1,065)
-------------
-------------
</TABLE>
The Company effected an approximate .314 for 1 reverse stock split of its
outstanding common stock (the "reverse stock split"), which reduced the number
of shares of common stock as well as the rate at which the preferred stock was
convertible into common stock. Subsequent to the Recapitalization discussed
above, and immediately prior to the completion of the 1996 initial public
offering, preferred stockholders converted their preferred stock into shares of
common stock in accordance with the applicable conversion rates. The 1996
consolidated financial statements reflect these events.
NOTE 5 -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The financial statements include the Company and its former wholly owned
subsidiaries, Blessing/ White, and UK Ltd., which are reflected as discontinued
operations through May 31, 1995 (Note 4). All significant intercompany balances
and transactions have been eliminated.
EARNINGS PER SHARE
Earnings per share are calculated in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 -- "Earnings per Share"
(SFAS No. 128), effective for 1998. SFAS No. 128 requires the Company to report
both basic earnings per share, which is based on the weighted-average number of
common shares outstanding and diluted earnings per share, which is based on the
weighted-average number of common shares outstanding and all potentially
dilutive common shares outstanding. The potentially dilutive securities included
in the 1996 earnings per share calculation also include the Repurchase
Transaction securities and the conversion of convertible preferred stock
described in Note 4.
F-8
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 5 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
All prior years' earnings per share data have been recalculated to reflect the
provisions of SFAS No. 128. The details of the earnings per share calculations
for the years 1998, 1997 and 1996 follow:
<TABLE>
<CAPTION>
PER SHARE
INCOME SHARES AMOUNT
--------- ------------ -----------
<S> <C> <C> <C>
1998
Earnings per share of common stock -- basic.................................... $ 9,580 15,892,943 $ 0.60
Dilutive securities:
Stock options.................................................................. 1,295,921
--------- ------------ -----
Earnings per share of common stock -- diluted.................................. $ 9,580 17,188,864 $ 0.56
--------- ------------ -----
1997
Earnings per share of common stock -- basic.................................... $ 5,601 13,718,912 $ 0.41
Dilutive securities:
Stock options.................................................................. 1,199,706
Subscription note.............................................................. 99,226
--------- ------------ -----
Earnings per share of common stock -- diluted.................................. $ 5,601 15,017,844 $ 0.37
--------- ------------ -----
1996
Earnings per share of common stock -- basic.................................... $ 1,854 4,745,952 $ 0.39
Dilutive securities:
Conversion of preferred stock.................................................. 5,267,092
Stock options.................................................................. 724,502
Repurchase Transaction securities.............................................. 655,878
--------- ------------ -----
Earnings per share of common stock -- diluted.................................. $ 1,854 11,393,424 $ 0.16
--------- ------------ -----
</TABLE>
The basic earnings per share amounts for 1996 have not been presented on the
face of the statement of operations, as such amounts do not present a meaningful
comparison to 1998 and 1997 amounts due to the differing capital structures as
the result of the 1997 and 1996 public offerings, described in Note 4. All
options of the Company's stock had a dilutive effect for the years ended January
31, 1998 and 1997.
REVENUE RECOGNITION
The Company records accounts receivable and related deferred revenues when
students are billed tuition for the programs they are attending. The deferred
revenues are then recognized as tuition revenues on a pro rata basis over the
term of instruction, which varies from concentrated (two to six week) courses to
eight to thirty-two-month programs.
LEARNING CENTER START-UP COSTS
Learning Center start-up costs consist of all direct costs incurred at a new
Learning Center (excluding advertising costs) from the date a lease for a
facility is entered into until the start of the first class. Such capitalized
costs are amortized on a straight-line basis over a one-year period commencing
with the date of
F-9
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 5 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the start of the first class. Net deferred start-up costs included in prepaid
expenses and other current assets in the balance sheets were as follows.
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Start-up costs................................................................ $ 872 $ 510
Accumulated amortization...................................................... (458) (333)
--------- ---------
$ 414 $ 177
--------- ---------
--------- ---------
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, trade accounts payable, accrued other expenses
and deferred revenues approximate fair value because of the immediate or short
term maturity of these financial instruments.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. Total advertising
expense was $6,212, $4,739, and $3,322 for 1998, 1997 and 1996, respectively.
STATEMENT OF CASH FLOWS
For purposes of reporting cash flows, the Company considers investments
having an original maturity of three months or less to be cash equivalents. Cash
paid for interest was $11, none and $315 in 1998, 1997 and 1996, respectively.
Cash paid for income taxes in 1998, 1997 and 1996 aggregated $4,580, $2,429, and
$1,933, respectively.
INVENTORIES
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market. Total inventories, included in prepaid and other current assets in the
balance sheets, were $851 and $576 at January 31, 1998 and 1997, respectively.
FIXED ASSETS
Furniture, equipment and leasehold improvements are recorded at cost.
Furniture and equipment are depreciated using the straight-line method over the
estimated useful lives of the assets for financial reporting purposes (three to
eight years) and accelerated methods over statutory lives for income tax
purposes. Leasehold improvements are amortized using the straight-line method
over the term of the lease for financial reporting purposes and over the
statutory lives for income tax purposes.
INTANGIBLE ASSETS
Identifiable intangible net assets of $2,686 and $3,048 at January 31, 1998
and 1997, included in other long-term assets, consist of Department of Education
("DOE") certifications of Title IV Program
F-10
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 5 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
eligibility. These assets are being amortized through 2007, using a
straight-line method. Accumulated amortization for these assets aggregated
$3,833 and $3,471 at January 31, 1998 and 1997, respectively.
SECURITIES AVAILABLE FOR SALE
In November 1995, the Company's health insurance carrier, pursuant to a
demutualization, issued to the Company 13,649 shares of common stock
representing the Company's pro rata share of the carrier's policy holder surplus
at the demutualization date. In January 1997, the Company sold 9,300 shares of
the common stock and realized a gain of $332. The remaining 4,349 shares of
stock are classified as available for sale, with unrealized gains, net of tax,
excluded from income and reported as a separate component of stockholders'
equity.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the book and tax bases
of assets and liabilities.
Prior to May 31, 1995, discontinued operations were included in the
consolidated tax return of the Company. Under that arrangement, income taxes
were allocated to members of the consolidated group based on amounts they would
pay or receive if they had filed a separate income tax return (the "separate
company basis"). Pursuant to the Recapitalization described in Note 4, the
Company files separate income tax returns and has entered into a Tax Sharing and
Indemnification Agreement with Blessing/White.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates by management that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period, primarily in the areas of provisions for estimated
collections, useful lives of intangible assets, and deferred income taxes.
Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' amounts to conform
with the current year's presentation.
NOTE 6 -- ACCOUNTS RECEIVABLE
Student accounts receivables 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 Title IV
program funds. Third party student receivable balances are those expected to be
paid by employer companies or various 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 credit
F-11
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 6 -- ACCOUNTS RECEIVABLE (CONTINUED)
worthiness 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 accounts 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 than quarterly for the
purposes 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 charges-off accounts receivable
balances deemed to be uncollectible usually after they are delinquent 120 days.
All charge offs are recorded as reductions in the allowance for doubtful
accounts, with any recoveries of previously written off accounts receivable
recorded as increases to the allowance for doubtful accounts.
As of January 31, 1998 and 1997, net accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
JANUARY 31, 1998
---------------------------------
<S> <C> <C> <C>
CURRENT LONG TERM TOTAL
--------- ----------- ---------
Accounts receivable......................................... $ 61,582 $ 10,464 $ 72,046
Student withdrawal allowance................................ (11,086) (1,603) (12,689)
Allowance for doubtful accounts............................. (2,382) (1,531) (3,913)
--------- ----------- ---------
$ 48,114 $ 7,330 $ 55,444
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31, 1997
---------------------------------
<S> <C> <C> <C>
CURRENT LONG TERM TOTAL
--------- ----------- ---------
Accounts receivable......................................... $ 36,519 $ 4,438 $ 40,957
Student withdrawal allowance................................ (6,511) (848) (7,359)
Allowance for doubtful accounts............................. (1,734) (516) (2,250)
--------- ----------- ---------
$ 28,274 $ 3,074 $ 31,348
--------- ----------- ---------
--------- ----------- ---------
</TABLE>
NOTE 7--FINANCIAL AID PROGRAMS
The Company is subject to extensive regulation as a participant in various
federal and state government supported financial aid programs. These regulations
require, among other things, that the Company and its Learning Centers comply
with certain financial responsibility and administrative capability
requirements. Failure to comply with these requirements could result in
restriction or loss by the Company or its Learning Centers of their ability to
participate in federal or other financial aid programs or to provide educational
and training services. Such restrictions could have a severe impact on the
Company's business,
F-12
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 7--FINANCIAL AID PROGRAMS (CONTINUED)
financial condition and results of operations. For 1998, approximately 73% of
the Company's revenues were derived from tuitions that are funded by various
federal student financial aid programs.
In September 1996, the DOE notified the Company that the Chicago Learning
Center lost its eligibility to participate in the Federal Family Education Loan
("FFEL") programs for one year due to three consecutive federal fiscal years (FY
1991-1993) of cohort default rates above 25%. The Company reapplied for
participation in the FFEL program in accordance with DOE guidance and received
notification from the DOE on October 10, 1997 that the Chicago Learning Center
regained eligibility to participate. The Chicago Learning Center is now eligible
for all federal student financial aid programs under Title IV of the Higher
Education Act of 1965.
The Philadelphia Learning Center's receipt of its FY 1994 cohort default
rate resulted in three consecutive years of default rates that exceeded the 25%
threshold. The Company appealed the FY 1994 cohort default rate with the DOE. On
November 6, 1997, the Company received notification from the DOE that the
Philadelphia Learning Center's official FY 1995 cohort default rate was 17.9%.
As the FY 1994 appeal was not settled prior to receipt of the FY 1995 official
rate, the DOE considered the FY 1995 cohort default rate in applying the federal
law regarding an institution's eligibility to participate in the FFEL programs.
As such, the Philadelphia Learning Center retained its eligibility to
participate in the FFEL programs. On November 10, 1997 the Company withdrew the
FY 1994 cohort default rate appeal.
Under the DOE's regulations, an FFEL cohort default rate equal to or
exceeding 25% in any one of the three most recent federal fiscal years can be a
basis for the DOE to place that institution on provisional certification for up
to four years for lack of administrative capability. Provisional certification
generally allows an institution to continue to participate in the Title IV
Programs subject to conditions imposed by the DOE and, in the event of any
material violation of such conditions, subjects the institution to a loss of
eligibility. The Philadelphia and Chicago Learning Centers were granted
provisional certification through July and December 2000, respectively.
NOTE 8--FIXED ASSETS
Fixed assets consisted of the following:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Furniture and equipment................................................. $ 25,958 $ 15,002
Leasehold improvements.................................................. 9,968 2,974
--------- ---------
35,926 17,976
Less: Accumulated depreciation and amortization......................... (10,727) (8,405)
--------- ---------
$ 25,199 $ 9,571
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 9--CREDIT FACILITY
The Company has a credit agreement with a bank which provides for an $8.5
million secured revolving credit facility, expiring on December 22, 1998. At
January 31, 1998 and 1997, there was no outstanding balance. The line of credit
consists of a revolving credit note, inclusive of a $2.0 million convertible
term loan. The interest on the facility is based either on the bank's United
States ("U.S.") prime rate (8.5% at January 31, 1998) or the London Interbank
Offer Rate ("LIBOR") which was 5.6% at January 31, 1998. Interest rates are
equal to (i) the U.S. prime rate or LIBOR plus 1.25% for revolving credit loans
and (ii) the U.S. prime rate plus 0.25% or LIBOR plus 1.50% for convertible term
loans. All interest payments are payable quarterly on the outstanding balance.
The Company pays a commitment fee of 0.25% based on the unused portion of the
credit facility. The Company has granted the bank a security interest in
accounts receivable. The agreement requires maintenance of certain financial
ratios (current, leverage, and fixed charge ratios) and contains other
restrictive covenants including limitations on purchases and sales of assets. At
January 31, 1998, the Company was in compliance with all financial ratio
requirements and all covenants.
In December 1997, the Company repaid a $301 term loan associated with the
BEC acquisition. The Company had letters of credit in the aggregate for $432 and
$373 outstanding at January 31, 1998 and 1997, respectively, primarily with an
insurance company for surety bonds required by various states in which the
Company operates and with a landlord securing future rental payments of a
facility.
NOTE 10--INCOME TAXES
The components of the provisions for income taxes are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Current:
Federal.................................................................... $ 6,140 $ 2,813 $ 1,433
State...................................................................... 1,472 902 598
Deferred..................................................................... (955) (150) 47
----------- ----------- -----------
Provision for income taxes................................................... $ 6,657 $ 3,565 $ 2,078
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Deferred tax assets (liabilities) arise due to the recognition of income and
expense items for tax purposes in periods which differ from those used for
financial statement purposes. At January 31, 1998 and 1997, the net deferred tax
asset was comprised of the following:
F-14
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 10--INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Allowance for doubtful accounts................................................................ $ 1,525 $ 817
Deferred rent accrual.......................................................................... 632 355
Vacation pay accrual........................................................................... 203 141
Employee benefits.............................................................................. 105 107
Lease terminations............................................................................. 111 103
Other accruals................................................................................. 17 34
--------- ---------
Total deferred tax assets.................................................................... 2,593 1,557
--------- ---------
Depreciation and amortization.................................................................. (116) --
Deferred start-up costs........................................................................ (139) (73)
Other deferred tax liabilities................................................................. (85) (186)
--------- ---------
Total deferred tax liabilities............................................................... (340) (259)
--------- ---------
Net deferred tax assets...................................................................... $ 2,253 $ 1,298
--------- ---------
--------- ---------
</TABLE>
Management believes, based on the Company's history of earnings, that future
income from operations will more likely than not be sufficient to fully
recognize this net deferred tax asset. The components of the net deferred tax
asset include a current and long-term portion, which are included in prepaid
expenses and other current assets and other long-term assets in the balance
sheets, respectively.
Differences between effective income tax rates and the statutory U.S.
federal income tax rates are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Statutory U.S. federal income tax rate...................................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................................................. 6.4 6.8 7.8
Permanent differences and other............................................................. (0.4) (2.9) (1.2)
--- --- ---
Effective income tax rate................................................................... 41.0% 38.9% 41.6%
--- --- ---
--- --- ---
</TABLE>
For the year ended January 31, 1996 (through May 31, 1995), state taxable
income includes interest income on amounts owed from Blessing/White which caused
a disproportionately higher state income tax rate.
F-15
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 11--STOCKHOLDERS' EQUITY
An analysis of the changes in stockholder's equity for the years ended
January 31, 1998, 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
COMMON
PREFERRED COMMON TREASURY SUBSCRIPTION PAID-IN STOCK
STOCK STOCK STOCK NOTES CAPITAL WARRANTS
----------- ----------- ----------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1995................ $ 19,018 $ 3 $ (585) $ (1,169) $ 78 $ 24
Retirement of treasury stock............... (585) -- 585 -- -- --
Repurchase transactions.................... (3,125) -- -- -- -- (24)
Recapitalization........................... (6,582) -- -- 503 (8,045) --
Conversion of preferred stock to common.... (8,726) 51 -- -- 8,675 --
1996 initial public offering (Note 4)...... -- 69 -- -- 14,778 --
Exercise of stock options.................. -- 6 -- -- 177 --
1996 net income............................ -- -- -- -- -- --
----------- ----- ----------- ------------- --------- -----------
BALANCE AT JANUARY 31, 1996................ -- 129 -- (666) 15,663 --
----------- ----- ----------- ------------- --------- -----------
1997 public offering (Note 4).............. -- 21 -- 666 13,911 --
Exercise of stock options.................. -- 6 -- -- 865 --
Tax benefit of non-qualified option
exercises................................ -- -- -- -- 1,665 --
1997 net income............................ -- -- -- -- -- --
----------- ----- ----------- ------------- --------- -----------
BALANCE AT JANUARY 31, 1997................ -- 156 -- -- 32,104 --
----------- ----- ----------- ------------- --------- -----------
Exercise of stock options.................. -- 4 -- -- 807 --
Tax benefit of non-qualified option
exercises................................ -- -- -- -- 1,365 --
BEC acquisition (Note 2)................... -- 2 -- -- 128 --
1998 net income............................ -- -- -- -- -- --
Employee stock purchase plan............... -- -- -- -- 121 --
----------- ----- ----------- ------------- --------- -----------
BALANCE AT JANUARY 31, 1998................ $ -- $ 162 $ -- $ -- $ 34,525 $ --
----------- ----- ----------- ------------- --------- -----------
<CAPTION>
(ACCUMULATED
DEFICIT)
RETAINED
EARNINGS
-------------
<S> <C>
BALANCE AT FEBRUARY 1, 1995................ $ (8,249)
Retirement of treasury stock............... --
Repurchase transactions.................... (986)
Recapitalization........................... 9,200
Conversion of preferred stock to common.... --
1996 initial public offering (Note 4)...... --
Exercise of stock options.................. --
1996 net income............................ 1,854
-------------
BALANCE AT JANUARY 31, 1996................ 1,819
-------------
1997 public offering (Note 4).............. --
Exercise of stock options.................. --
Tax benefit of non-qualified option
exercises................................ --
1997 net income............................ 5,601
-------------
BALANCE AT JANUARY 31, 1997................ 7,420
-------------
Exercise of stock options.................. --
Tax benefit of non-qualified option
exercises................................ --
BEC acquisition (Note 2)................... (1,092)
1998 net income............................ 9,580
Employee stock purchase plan............... --
-------------
BALANCE AT JANUARY 31, 1998................ $ 15,908
-------------
</TABLE>
NOTE 12 -- SAVINGS AND EMPLOYEE STOCK PURCHASE PLANS
The Company maintains a 401(k) plan covering substantially all employees.
Under the terms of the plan, the Company will match 25% of employee
contributions up to a maximum of 6% of annual employee compensation. Company
contributions under the plan aggregated $99, $76 and $52 for 1998, 1997, and
1996, respectively.
On March 13, 1997, the Board of Directors ("Board") adopted, and on July 10,
1997, the Company's stockholders approved the 1997 Employee Stock Purchase Plan
("ESPP"). With certain limited exceptions, all full time employees, including
executive officers, employed by the Company for at least one year, are eligible
to participate in the ESPP. The Company maintains payroll deduction accounts for
all participating employees and an employee may authorize a payroll deduction in
any whole percentage from 1% to 10% of the employee's eligible compensation, not
to exceed $25. Under the terms of the ESPP, the Company's Common Stock may be
acquired for an amount equal to 85% of the fair market value per share of Common
stock on either the first day or the last day of the offering period, whichever
is lower. The first offering period commenced on August 1, 1997 and terminated
on January 31, 1998. Thereafter, the offering period will commence on February 1
and terminate on January 31, unless otherwise determined by the Board. A total
of 400,000 shares are available for purchase under the plan and 5,392 shares of
Common Stock were acquired by eligible employees during the first offering
period.
F-16
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 13--COMMITMENTS AND CONTINGENCIES
LITIGATION
On March 10, 1998, the Attorney General of Illinois 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, Illinois Learning Center. The complaint alleges 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 seeks 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. The Company has filed a motion to extend the date to answer or
otherwise plead. As a result of this motion being filed, the Company has been
granted an extension through May 11, 1998 to answer or otherwise plead the
complaint. The Company is unable to estimate the outcome of this matter or any
potential liability.
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. The Company has not yet been served with the complaint, but has
obtained a copy. The complaint alleges violations of the Securities Exchange Act
of 1934, including allegations that the Company is experiencing "operations
difficulties" and failed to disclose the alleged difficulties. The complaint
also alleges that Company insiders realized profits by trading their shares of
Company stock while in possession of material adverse information. The Company
has moved for a change in venue in this litigation. 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 proceedings;
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 legal and other
defense costs as a result of such proceedings. These proceedings could involve
the substantial diversion of 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,
results of operations and cash flows.
In addition to the legal proceedings described above, the Company may from
time to time be involved in routine litigation incident to its business.
LEASE COMMITMENTS
The Company leases substantially all of its facilities under operating lease
agreements. A majority of the operating leases contain renewal options that can
be exercised after the initial lease term. Renewal options are generally for
periods of one to five years. All operating leases will expire over the next ten
years, and management expects that leases will be renewed or replaced by other
leases in the normal
F-17
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 13--COMMITMENTS AND CONTINGENCIES (CONTINUED)
course of business. There are no material restrictions imposed by the lease
agreements. The Company has not entered into any significant guarantees related
to the leases. The Company is required to make additional payments under certain
operating lease terms for taxes, insurance and other operating expenses incurred
during the operating lease period.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
January 31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................................................ 6,984
2000................................................................ 6,390
2001................................................................ 5,416
2002................................................................ 4,875
2003................................................................ 4,277
Thereafter.......................................................... 12,562
---------
40,504
---------
---------
</TABLE>
Rent expense under these lease agreements aggregated $6,299, $5,176, and
$3,689 for 1998, 1997, and 1996, respectively.
EMPLOYEE AGREEMENTS
On February 1, 1997, the Company entered into an employment agreement with
the President and Chief Executive Officer of the Company, pursuant to which he
is entitled to 24 months of salary and benefits and a guaranteed bonus which
would be payable with respect to the year in which any breach of such agreement,
as specified. In addition, if he were terminated as the result of a change of
control as defined in the agreement, he will receive an amount equal to three
times the greater of the average annual total compensation paid to him over the
Company's last three fiscal years or the total compensation paid during the
Company's most recent fiscal year ended.
On January 15, 1998, the Company entered into a severance agreement with the
Chief Financial Officer of the Company, pursuant to which he is entitled to a
lump sum of 12 months of salary for termination without cause or resignation for
good reason. In addition, if he were terminated as a result of a change in
control as defined in the agreement, he will receive a lump sum amount equal to
one and one half times his base salary and one and one half times his prior
fiscal year bonus or current year target bonus, whichever is larger.
NOTE 14--STOCK INCENTIVE PLANS
The Company has a Long-Term Incentive Plan that provides for award of
incentive and nonqualified common stock options and common stock appreciation
rights to certain directors, officers and key employees. The Company has
provided that no further grants may be made under the plan. As of January 31,
1998, options to purchase 139,456 shares of common stock were outstanding under
this plan.
F-18
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 14--STOCK INCENTIVE PLANS (CONTINUED)
In addition, the 1995 Stock Incentive Plan provides a variety of awards,
including stock options, stock appreciation rights and restricted and
unrestricted stock grants to the Company's employees, officers, consultants and
advisors. Stock options may be granted either in the form of incentive stock
options or non-qualified stock options. The option exercise price of incentive
stock options may not be less than the fair market value of the common stock on
the date of grant. The Company has reserved 1,460,460 shares of common stock for
grant under the plan. As of January 31, 1998, options to purchase 1,176,050
shares of common stock were outstanding under this plan, and 220,210 options
were available for grant.
The 1995 Non-Employee Directors Stock Option Plan, provides for the grant to
each of the current non-employee directors of an option exercisable for shares
of common stock. All options granted under the plan will have an exercise price
equal to the fair market value of the common stock on the date of grant. The
Company has reserved 210,534 shares for issuance under this plan. As of January
31, 1998, options to purchase 148,060 shares of common stock were outstanding
under this plan, and 48,434 options were available for grant.
Incentive and nonqualified options are exercisable at a price not less than
100% and 50%, respectively, of the fair market value of the common stock at the
date of grant, as determined by the administration committee. Stock appreciation
rights provide for payments equal to the base amount of the right, as determined
by the administration committee. No stock appreciation rights are outstanding.
Options may be granted in tandem with stock appreciation rights; however,
holders of such tandem awards are subject to restrictions on the matter of
exercise as defined in the plan. Generally, stock options and rights vest
ratably over five years. All options and rights must be exercised within ten
years from date of grant.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No., 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). Accordingly, no compensation cost has been
recognized for the stock option plans. Had compensation cost for the Company's
three stock option plans been determined based on the fair value at the grant
date for awards in 1998, 1997, and 1996, consistent with the provisions of SFAS
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated in the table below.
F-19
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 14--STOCK INCENTIVE PLANS (CONTINUED)
The effects of applying SFAS 123 in this disclosure are not indicative of
future amounts.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
-------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ----------- -----------
Net income as reported--1998 and 1997; income from continuing
operations--1996 as reported............................................... $ 9,580 $ 5,601 $ 2,919
Net income -- pro forma...................................................... 7,879 4,585 2,820
Earnings per share -- as reported:
Basic.................................................................... $ 0.60 $ 0.41 $ 0.62
Diluted.................................................................. 0.56 0.37 0.25
Earnings per share -- pro forma:
Basic.................................................................... $ 0.50 $ 0.33 $ 0.59
Diluted.................................................................. 0.46 0.31 0.25
</TABLE>
The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
JANUARY 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Expected life (years)....................................................................... 5 5 5
Interest rate............................................................................... 5.6% 6.7% 6.7%
Volatility.................................................................................. 43.3% 42.5% 14.1%
</TABLE>
The calculated weighted average fair values of stock options granted during
1998, 1997 and 1996, using the Black-Scholes model, were $7.61, $3.53 and $0.81
per share, respectively.
<TABLE>
<CAPTION>
WEIGHTED
INCENTIVE AVERAGE
STOCK NON QUALIFIED EXERCISE
OPTIONS STOCK OPTIONS PRICES
---------- ------------- -----------
<S> <C> <C> <C>
Outstanding at February 1, 1995............................................ 1,855,371 353,244 $ 2.00
---------- ------------- -----
Options granted............................................................ 273,660 -- 2.67
Options exercised.......................................................... (575,616) -- 0.32
Options cancelled.......................................................... (13,221) -- 1.83
---------- ------------- -----
Outstanding at January 31, 1996............................................ 1,540,194 353,244 2.61
---------- ------------- -----
Options granted............................................................ 968,648 -- 7.45
Options exercised.......................................................... (829,680) (329,694) 2.82
---------- ------------- -----
Outstanding at January 31, 1997............................................ 1,679,162 23,550 5.22
---------- ------------- -----
Options granted............................................................ 160,050 -- 16.43
Options exercised.......................................................... (399,196) -- 2.03
---------- ------------- -----
Outstanding at January 31, 1998............................................ 1,440,016 23,550 $ 7.31
---------- ------------- -----
</TABLE>
F-20
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 14--STOCK INCENTIVE PLANS (CONTINUED)
The weighted average exercise prices for the nonqualified stock options
outstanding, included above, as of January 31, 1998 and 1997 was $4.84.
Incentive stock options and nonqualified stock options exercisable were 535,615
and 23,550 at January 31, 1998 and 377,280 and 23,550 at January 31, 1997 and
998,199 and 353,244 at January 31, 1996, respectively.
The following table summarizes information about options outstanding at
January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ------------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISABLE PRICE
- ------------------ ----------- --------------- --------------- ----------- -----------------
<C> <C> <C> <S> <C> <C> <C>
$ 1.83 to $9.00 ................... 1,263,016 8.1 years $ 6.09 551,065 $ 5.70
$ 9.01 to $16.00 ................... 123,250 9.0 years 10.47 8,100 9.34
$ 16.01 to $22.25 ................... 77,300 9.5 years 22.25 -- --
----------- --------------- ----- ----------- -----
1,463,566 8.2 years $ 7.31 559,165 $ 5.75
----------- --------------- ----- ----------- -----
----------- --------------- ----- ----------- -----
</TABLE>
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR 1998
THREE MONTHS ENDED
----------------------------------------------
<S> <C> <C> <C> <C>
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1997 1998
--------- --------- ----------- -----------
Revenues................................................................ $ 20,830 $ 22,138 $ 25,682 $ 28,339
Costs and expenses...................................................... 17,309 18,917 21,740 24,177
Income from operations.................................................. 3,521 3,221 3,942 4,162
Interest income, net.................................................... 346 367 341 337
Net income.............................................................. $ 2,243 $ 2,078 $ 2,595 $ 2,664
Earnings per share:
Basic............................................................... $ 0.14 $ 0.13 $ 0.16 $ 0.17
Diluted............................................................. 0.14 0.12 0.15 0.15
</TABLE>
F-21
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 15--QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR 1997
THREE MONTHS ENDED
----------------------------------------------
<S> <C> <C> <C> <C>
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1996 1996 1996 1997
--------- --------- ----------- -----------
Revenues................................................................ $ 14,006 $ 14,977 $ 16,888 $ 18,154
Costs and expenses...................................................... 12,047 12,938 14,674 16,253
Income from operations.................................................. 1,959 2,039 2,214 1,901
Interest income, net.................................................... 104 110 183 324
Gain on sale of investment securities................................... -- -- -- 332
Net income.............................................................. $ 1,207 $ 1,257 $ 1,402 $ 1,735
Earnings per share:
Basic............................................................... $ 0.10 $ 0.10 $ 0.10 $ 0.11
Diluted............................................................. 0.09 0.08 0.09 0.11
</TABLE>
NOTE 16--SUBSEQUENT EVENTS
LITIGATION
On or about March 20, 1998, three class action lawsuits were filed against
the Company in the United States District Court for the Northern District of
Illinois, Eastern Division. Two of these lawsuits were filed on behalf of all
purchasers of Company Common Stock from April 30, 1997 through March 10, 1998;
the other lawsuit was filed on behalf of all purchasers of Company Common Stock
from June 6, 1997 through March 13, 1998. On April 16, 1998, a class action
lawsuit was filed in the United States District Court for the Northern District
of Illinois, Eastern Division, on behalf of all purchasers of Company Common
Stock from March 17, 1997 through March 10, 1998. As of April 27, 1998, the
Company had been served with one of the complaints and had obtained copies of
the remaining complaints. The complaints allege violations of the Securities
Exchange Act of 1934, and assert claims similar to those described in the second
paragraph of Note 13. The Company has not yet filed answers in any of these
matters and is unable to estimate the outcome of any of these matters or any
potential liability.
The Company intends to defend itself vigorously in the above proceedings;
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 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.
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
F-22
<PAGE>
COMPUTER LEARNING CENTERS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, UNLESS OTHERWISE STATED)
NOTE 16--SUBSEQUENT EVENTS (CONTINUED)
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 should not have any effect on the
availability or timing of financial assistance to the Company's students, nor
should it have a material affect on the Company's cash flow or operating
results.
ILLINOIS STATE AUTHORIZATION
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 Learning Center
that ISBE had determined that certain activities and procedures of the Company's
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. The
Superintendent's action does not affect the current operations of the Company's
other Illinois Learning Center in Chicago, nor does it affect the status of
currently enrolled students at the Schaumburg Learning Center.
On April 21, 1998, the Company timely submitted its response to the ISBE.
The Company believes that it will be able to satisfy the ISBE that the
Schaumburg Learning Center is operating in substantial compliance with the
Schools Act and that on or before May 6, 1998 the Schaumburg Learning Center
will be able to resume normal marketing and student enrollment activities.
BEC LETTER OF CREDIT
In connection with the acquisition of BEC described in Note 2, the DOE has
requested that the Company, and the Company has agreed to, post a letter of
credit in the amount of $2.8 million as a condition of BEC's recertification for
the Title IV Programs.
F-23
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information regarding directors of the Company will be set forth in the
Company's definitive Proxy Statement for its 1998 Annual Meeting of the
Stockholders which will be filed pursuant to Regulation 14A within 120 days
after the end of the Company's last fiscal year, and is incorporated herein by
reference. The following sets forth information as of January 31, 1998
concerning the Company's executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Reid R. Bechtle.................... 45 President, Chief Executive Officer and Director
Charles L. Cosgrove................ 43 Vice President and Chief Financial Officer
Susan L. Luster.................... 46 Vice President and Chief Operating Officer
Harry H. Gaines.................... 60 Chairman of the Board of Directors
</TABLE>
Mr. Bechtle joined the Company in 1991 as President of what was then its
Computer Learning Center division and has been President, Chief Executive
Officer and a director of the Company since October 1994. From 1982 to 1991, he
served as President of Multi-List, Inc., a software services subsidiary of
PRC/Litton, Inc. ("PRC").
Mr. Cosgrove joined the Company in 1992 as Vice President and Chief
Financial Officer of what was then its Computer Learning Center division and has
been Vice President and Chief Financial Officer of the Company since October
1994. From March 1990 to 1992, he served as Vice President, Controller of the
government operations division of PRC.
Ms. Luster joined the Company in November 1995 as Vice President and Chief
Operating Officer. From April 1994 to November 1995, she was a partner of Tower
Technologies, Inc., an information technology consulting company. From January
1992 to April 1994, she was Senior Vice President of Infodata Systems, Inc., a
document management software company, and from May 1986 to January 1992, she
served as Senior Vice President of Operations with AGS Information Services, a
systems development company.
Mr. Gaines has been Chairman of the Board of Directors since October 1994
and has served as a director since 1987. From 1987 to October 1994 and from 1988
to October 1994, he served as President and Chief Executive Officer of the
Company and of Mohr Development Incorporated, respectively. From 1989 through
September 1995, Mr. Gaines served as President of Blessing/White.
ITEM 11. EXECUTIVE COMPENSATION
This information required by this Item 11 concerning remuneration of the
Company's officers and directors and information concerning material
transactions involving such officers and Directors is incorporated herein by
reference to the company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
I-1
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 1998 Annual
Meeting of Stockholders which will be filed pursuant to Regulation 14A within
120 days after the end of the Company's last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
EMPLOYMENT AGREEMENTS
On February 1, 1997, the Company entered into an employment agreement with
the President and Chief Executive Officer of the Company, Reid Bechtle. The
Agreement has a term of one year but shall be automatically renewed for
successive one-year periods unless the Company notifies Mr. Bechtle of non-
renewal at least 90 days prior to the end of the initial term or any renewal
term. The agreement provides for an annual salary of $265,000, which may be
increased from time to time by the Compensation Committee of the Company's Board
of Directors, a guaranteed annual bonus equal to 25% of Mr. Bechtle's salary and
an additional annual bonus payable based on achievement by the Company of
certain revenue and income targets.
In the event Mr. Bechtle's employment is terminated other than for cause, as
defined in the agreement, or due to his voluntary resignation, he is entitled to
receive an amount equal to two times his then effective base salary and
guaranteed bonus.
In addition, if Mr. Bechtle's employment is terminated as the result of a
change of control as defined in the agreement, he is entitled to receive an
amount equal to three (3) times the greater of (i) the average annual total
compensation paid to him over the Company's last three fiscal years or (ii)
total compensation paid during the Company's most recent fiscal year ended.
On January 15, 1998, the Company entered into a severance agreement with the
Chief Financial Officer of the Company, Charles Cosgrove. The agreement will
expire upon the termination of Mr. Cosgrove's employment with the Company for
any reason whatsoever. The agreement provides for an annual salary of not less
than $165,000, which may be increased from time to time by the Compensation
Committee of the Company's Board of Directors. In addition, the agreement
specifies that Mr. Cosgrove shall be eligible to receive an annual bonus payable
under the Company's bonus plan in accordance with the bonus criteria established
by the Company's Board of Directors.
In the event Mr. Cosgrove's employment is terminated without cause or he
resigns for good reason as defined the agreement, he is entitled to receive a
lump sum payment in an amount equal to one (1) times his base salary in effect
as of the date of termination.
In addition, if Mr. Cosgrove's employment is terminated as a result of a
change in control as defined in the agreement, he will receive a lump sum amount
equal to one and one half (1.5) times his base salary plus one and one half
(1.5) times his prior fiscal year bonus or current year target bonus, whichever
is larger.
TAX SHARING AGREEMENT
The Company and Blessing/White are parties to a tax sharing and
indemnification agreement providing for, among other matters, the payment of tax
liabilities and entitlement to tax refunds, the allocation of responsibility and
the providing of cooperation in the filing of tax returns, the indemnification
of Blessing/White by the Company from certain tax and other liabilities related
to the operation of the Company prior to the 1996 initial public offering and
the indemnification of the Company by Blessing/
I-2
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)
White from certain tax and other liabilities related to the operation of
Blessing/White prior to the 1996 initial public offering.
OTHER RELATED PARTY TRANSACTIONS
The Company has adopted a policy that all transactions between the Company
and its officers, directors and other affiliates must be approved by a majority
of the members of the Company's Board of Directors and by a majority of the
disinterested members of the Company's Board of Directors and on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
In addition, this policy requires that any loans by the Company to its officers,
directors or other affiliates be for bona fide business purposes only.
I-3
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
A. Financial Statements, see index in Item 8 on page F-1
(1) Report of Independent Accountants
(2) Financial Statements
(a) Statements of Operations for the years ended January 31, 1998 and
1997; Consolidated Statement of Operations for the year ended January
31, 1996;
(b) Balance Sheets as of January 31, 1998 and 1997;
(c) Statements of Cash Flows for the years ended January 31, 1998 and
1997; Consolidated Statement of Cash Flows for the year ended January
31, 1996;
(d) Notes to Financial Statements
B. Financial Statement Schedule, see index in Item 8 on page F-1
C. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT SEQUENTIALLY NUMBERED PAGE
- ----------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
2.1 Asset Purchase Agreement dated November 7, 1997, by Incorporated by reference to Exhibit 2 of the
and among the Company, BEC, CTG, David F. Carney Registrant's Form S-3 Registration Statement filed
and Sandra E. Carney January 22, 1998 (No. 333-44729)
2.2 Asset Purchase Agreement dated December 31, 1997 by Incorporated by reference to Exhibit 99.1 of the
and among the Company, Markerdowne Corporation, Company's Current Report on Form 8-K filed March
Graeme Dorras, Randy Proto and Chris Coutts 10, 1998 (the "Form 8-K")
2.3 Amended and Restated Share Purchase Agreement dated Incorporated by reference to Exhibit 99.2 of the
February 20, 1998 by and among Computer Learning Form 8-K
Centers, Inc., Computer Learning Centers of Quebec,
Inc., Delta College, Inc., Roger Matte, Marie
Josee-Matte, Dominique Matte, Johanne Matte,
Suzanne Matte and Dolmen (1994) Inc.
3.1 Second Amended and Restated Certificate of Incorporated by reference to Exhibit 3.1 of the
Incorporation, as amended Registrant's report on Form 10-Q for the quarter
ended July 31, 1997 filed September 9, 1997
3.2 Second Amended and Restated Certificate of Incorporated by reference to Exhibit 3.3 of the
Incorporation of the Registrant Registrant's Report on Form 10-Q filed July 14,
1995 (the "1995 Form 10-Q")
3.3 Amended and Restated Bylaws of the Registrant Incorporated by reference to Exhibit 3.4 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 Registrant's Incorporated by reference to Exhibit 4.1 of Form
Common Stock S-1
10.1 Severance Agreement, dated January 15, 1998, by and Incorporated by reference to Exhibit 10 of the
between Charles L. Cosgrove and the Registrant Registrant's S-3 Registration Statement filed
January 22, 1998
10.2* Long-Term Incentive Plan, as amended Incorporated by reference to Exhibit 10.1 of the
Form S-1
10.3* 1995 Stock Incentive Plan, as amended by the Board Incorporated by reference to Exhibit 10.1 of the
of Directors on March 23, 1996. Registrant's Report on Form 10-Q filed June 13,
1996
10.4* 1995 Non-Employee Directors Stock Option Plan Incorporated by reference to Exhibit 10.3 of the
Form S-1
</TABLE>
I-4
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT SEQUENTIALLY NUMBERED PAGE
- ----------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
10.5 Second Amended and Restated Shareholders' Agreement Incorporated by reference to Exhibit 10.1 of the
1995 Form 10-Q
10.6 Assignment Agreement, dated as of February 27, Incorporated by reference to Exhibit 10.6 of the
1995, by and among Blessing/White Inc., Harry H. Form S-1
Gaines and the Registrant.
10.7 Voting Agreement dated May 5, 1995 by and among Incorporated by reference to Exhibit 10.16 of the
General Atlantic Corporation, General Atlantic Form S-1
Partners II, L.P. and GAP-CLC Partners, L.P.
10.8 Stock Repurchase Agreement, dated May 5, 1995, by Incorporated by reference to Exhibit 10.17 of the
and between Bankers Trust (Delaware) and the Form S-1
Registrant.
10.9 Stock Repurchase Agreement, dated May 5, 1995 by Incorporated by reference to Exhibit 10.18 of the
and between BancBoston Capital, Inc. and the Form S-1
Registrant.
10.10 Stock Repurchase Agreement, dated May 5, 1995 by Incorporated by reference to Exhibit 10.19 of the
and between GAP-CLC Partners, L.P. and the Form S-1
Registrant.
10.11 Tax Sharing and Indemnification Agreement by and Incorporated by reference to Exhibit 10.26 of the
between the Registrant and Blessing/White, Inc. Form 1996 10-K filed April 30, 1996
10.12 Employment Agreement, dated June 6, 1996, by and Incorporated by reference to Exhibit 10.2 of the
between Harry H.Gaines and the Registrant. Registrants Report on Form 10-Q filed September 4,
1996
10.13 Employment Agreement, dated February 1, 1997, by Incorporated by reference to Exhibit 10.33 of the
and between Reid Bechtle and the Registrant. Registrant's Form 10-K filed April 30, 1997
10.14 Credit Agreement, dated December 23, 1996 by and Incorporated by reference to Exhibit 10.34 of the
between CoreStates Bank, N.A. and the Registrant. Registrant's Form 10-K filed April 30, 1997
11.1 Computation of earnings per share. Filed herewith
21.1 List of subsidiaries. Incorporated by reference to Exhibit 21.1 of the
Form S-1
23.1 Consent of Price Waterhouse LLP. Filed herewith
23.2 Consent of Price Waterhouse LLP. Filed herewith
27 Financial Data Schedule Filed herewith
99.1 Computer Learning Centers, Inc. Employee Stock Incorporated by reference to Exhibit 99.1 of the
Purchase Plan dated July 10, 1998 Registrant's Form S-8 Registration Statement filed
December 31, 1997 (No. 333-43633)
</TABLE>
- ------------------------
* This exhibit is a compensatory plan or arrangement in which executive
officers or directors of the Registrant participate.
D. Reports on Form 8-K
<TABLE>
<CAPTION>
REPORT DATE EVENT REPORTED
- ------------------------------------- --------------------------------------------------------------------------
<S> <C>
January 6, 1998 The Company announced that it had completed the acquisition of Boston
Education Corporation. The Company also announced that it had signed a
definitive agreement to acquire Markerdowne Corporation.
</TABLE>
I-5
<PAGE>
SCHEDULE II
COMPUTER LEARNING CENTERS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND NET BALANCE AT END
YEAR EXPENSES WRITE-OFFS OF YEAR
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
January 31, 1996
Allowance for doubtful accounts....................... 1,737 2,613 (2,843) 1,507
January 31, 1997
Allowance for doubtful accounts....................... 1,507 3,084 (2,341) 2,250
January 31, 1998
Allowance for doubtful accounts....................... 2,250 4,794 (3,131) 3,913
</TABLE>
The Company's allowance for doubtful accounts at January 31, 1998 and 1997
includes amounts applicable to current accounts receivable ($2,382 and $1,734,
respectively) and long-term accounts receivable ($1,531 and $516, respectively).
I-6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
COMPUTER LEARNING CENTERS, INC.
By /s/ REID R. BECHTLE
-----------------------------------------
Reid R. Bechtle
Dated: May 1, 1998 PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
/s/ REID R. BECHTLE Officer and Director
- ------------------------------ (Principal Executive May 1, 1998
Reid R. Bechtle Officer)
Vice President and Chief
/s/ CHARLES L. COSGROVE Financial Officer
- ------------------------------ (Principal Financial May 1, 1998
Charles L. Cosgrove Officer)
/s/ MARK M. NASSER Controller (Principal
- ------------------------------ Accounting Officer) May 1, 1998
Mark M. Nasser
/s/ HARRY H. GAINES Director
- ------------------------------ May 1, 1998
Harry H. Gaines
/s/ RALPH W. CLARK Director
- ------------------------------ May 1, 1998
Ralph W. Clark
/s/ IRA D. COHEN Director
- ------------------------------ May 1, 1998
Ira D. Cohen
/s/ JOHN L. CORSE Director
- ------------------------------ May 1, 1998
John L. Corse
/s/ STEPHEN P. REYNOLDS Director
- ------------------------------ May 1, 1998
Stephen P. Reynolds
S-1
<PAGE>
EXHIBIT 11.1
Computation of Earnings Per Share
January 31, 1998, 1997, and 1996
(dollar amounts in thousands, expect per share amounts)
See Notes 3 and 5 to Financial Statements
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- --------------
<S> <C> <C> <C>
Income from continuing operations ........................... $ 9,580 $ 5,601 $ 2,919
Loss from discontinued operations ........................... -- -- (1,065)
---------- ---------- ---------
Net income .................................................. $ 9,580 $ 5,601 $ 1,854
---------- ---------- ---------
---------- ---------- ---------
Weighted average number of common shares
outstanding - Basic ....................................... 15,892,943 13,718,912 4,745,952
Dilutive securities:
Preferred shares converted to common stock ................ -- -- 5,267,092
Employee stock options .................................... 1,197,052 998,199 697,146
Non employee stock options ................................ 98,869 201,507 27,356
Subscription note receivable .............................. -- 99,226 --
Repurchase Transaction securities ......................... -- -- 655,878
Weighted average number of common shares
outstanding - Diluted ..................................... 17,188,864 15,017,844 11,393,424
---------- ---------- ---------
---------- ---------- ---------
Earnings per share:
Basic .................................................... $ 0.60 $ 0.41 (1)
---------- ---------- ---------
---------- ---------- ---------
Diluted:
Continuing operations .................................. $ 0.56 $ 0.37 $ 0.25
Discontinued operations ................................ -- -- (0.09)
---------- ---------- ---------
Net income ............................................. $ 0.56 $ 0.37 $ 0.16
---------- ---------- ---------
---------- ---------- ---------
</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.
(1) Basic earnings per share is not presented for years prior to fiscal 1997
as such amounts do not present a meaningful comparison to fiscal 1998
and 1997 amounts due to the differing capital structures as a result of
the 1997 and 1996 public offerings (refer to Item 8 "Financial
Statements and Supplementary Data" -- Note 4).
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-17009 and 333-43633) of Computer Learning
Centers, Inc. of our report dated March 13, 1998, except as to Note 16,
which is as of April 27, 1998, appearing on page F-2 of this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
May 1, 1998
<PAGE>
EXHIBIT 23.2
Consent Of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-44729
and 333-48467) of Computer Learning Centers, Inc. of our report dated March
13, 1998, except as to Note 16, which is as of April 27, 1998, appearing on
page F-2 of this Form 10-K.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
New York, New York
May 1, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Statement of Operations and the Balance Sheet and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 24,377
<SECURITIES> 229
<RECEIVABLES> 72,046
<ALLOWANCES> (16,602)
<INVENTORY> 851
<CURRENT-ASSETS> 78,210
<PP&E> 35,926
<DEPRECIATION> (10,727)
<TOTAL-ASSETS> 115,271
<CURRENT-LIABILITIES> 59,349
<BONDS> 0
0
0
<COMMON> 162
<OTHER-SE> 50,593
<TOTAL-LIABILITY-AND-EQUITY> 115,271
<SALES> 0
<TOTAL-REVENUES> 96,989
<CGS> 0
<TOTAL-COSTS> 82,143
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,794
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,237
<INCOME-TAX> 6,657
<INCOME-CONTINUING> 9,580
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,580
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.56
</TABLE>
