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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---- OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________.
COMMISSION FILE NUMBER: 0-26040
---------------
COMPUTER LEARNING CENTERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 36-3501869
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11350 RANDOM HILLS ROAD, SUITE 240
FAIRFAX, VIRGINIA 22030
(Address of principal executive offices) (Zip Code)
</TABLE>
(703) 359-9333
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AT SEPTEMBER 7, 1999
Common Stock, $.01 par value 18,507,103
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1
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COMPUTER LEARNING CENTERS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations........................................ 3
Consolidated Balance Sheets.................................................. 4
Consolidated Statements of Cash Flows........................................ 5
Notes to Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks............ 23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 24
Item 2. Changes in Securities.................................................. 25
Item 3. Defaults Upon Senior Securities........................................ 25
Item 4. Submission of Matters to a Vote of Security Holders.................... 26
Item 5. Other Information...................................................... 26
Item 6. Exhibits and Reports on Form 8-K....................................... 26
SIGNATURES..................................................................... 26
</TABLE>
2
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PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
Revenues $32,845 $35,273 $68,827 $71,329
------- ------- ------- -------
<S> <C> <C> <C> <C>
Costs and expenses:
Costs of instruction and services 23,708 23,433 49,186 43,844
Selling and promotional 5,220 5,309 10,757 10,470
General and administrative 3,656 3,221 8,601 6,554
Provision for doubtful accounts 2,617 1,919 5,168 4,015
Amortization of intangible assets 140 143 281 275
--------- --------- ------- -------
35,341 34,025 73,993 65,158
--------- --------- ------- -------
(Loss) income from operations (2,496) 1,248 (5,166) 6,171
Interest (expense) income, net (66) 135 (75) 419
Litigation settlement expense - - - (210)
Gain on sale of investment securities - - - 279
---------- --------- -------- -------
(Loss) income before income taxes (2,562) 1,383 (5,241) 6,659
Provision for (benefit from) income taxes (1,065) 521 (2,176) 2,654
---------- --------- --------- -------
Net (loss) income $ (1,497) $ 862 $ (3,065) $ 4,005
========== ========= ========= =======
(Loss) earnings per share of common stock:
Basic $ (0.08) $ 0.05 $ (0.17) $ 0.23
=========== ========= ========== =======
Diluted $ (0.08) $ 0.05 $ (0.17) $ 0.22
=========== ========= ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31, JULY 31,
1999 1999 1998
--------------- --------------- ---------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 3,538 $ 7,691 $ 7,922
Accounts receivable, net......................................... 45,238 56,697 55,144
Deferred tax asset............................................... 4,671 4,671 1,536
Prepaid expenses and other current assets........................ 8,104 8,913 6,943
------------ ----------- ------------
Total current assets........................................ 61,551 77,972 71,545
------------ ----------- ------------
Fixed assets, net..................................................... 37,893 37,604 35,715
Long-term accounts receivable, net.................................... 8,276 10,660 9,239
Other long-term assets................................................ 4,420 4,500 4,771
------------ ----------- ------------
Total assets................................................ $ 112,140 $ 130,736 $ 121,270
============ =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................... $ 3,364 $ 6,503 $ 2,915
Accrued employee expenses........................................ 2,121 1,775 1,730
Accrued other expenses........................................... 5,501 8,341 4,747
Deferred revenues................................................ 40,470 50,932 51,418
------------ ----------- ------------
Total current liabilities................................... 51,456 67,551 60,810
------------ ----------- ------------
Long-term debt........................................................ 4,875 3,000 -
Long-term deferred revenues........................................... 1,492 3,073 4,198
Other long-term liabilities........................................... 2,850 2,576 2,369
------------ ----------- ------------
Total liabilities........................................... 60,673 76,200 67,377
------------ ----------- ------------
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; 18,507,103, 17,493,251
and 17,380,025 shares issued and
outstanding, respectively.................................... 185 175 174
Additional paid-in capital....................................... 40,672 40,682 35,401
Accumulated other comprehensive loss............................. (52) (48) (2)
Retained earnings................................................ 10,662 13,727 18,320
------------ ----------- ------------
Total stockholders' equity.................................. 51,467 54,536 53,893
------------ ----------- ------------
Total liabilities and stockholders' equity.................. $ 112,140 $ 130,736 $ 121,270
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH
PERIOD ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income.................................................... $ (3,065) $ 4,005
Adjustments to reconcile net income to cash
from operating activities:
Provision for doubtful accounts................................. 5,168 4,015
Depreciation.................................................... 4,731 3,318
Amortization of intangible assets............................... 281 275
Changes in net assets and liabilities:
Accounts receivable............................................. 7,097 (8,527)
Prepaid expenses and other current assets....................... 809 (2,892)
Long-term accounts receivable................................... 1,578 (2,251)
Other long-term assets.......................................... (205) (369)
Trade accounts payable.......................................... (3,139) 552
Accrued employee expenses....................................... 346 (1,388)
Accrued other expenses.......................................... (2,840) (2,770)
Deferred revenues............................................... (10,462) (561)
Long-term deferred revenues..................................... (1,581) 485
Other long-term liabilities..................................... 274 1,296
--------- --------
Cash used for operating activities......................... (1,008) (4,812)
--------- --------
Cash flows from investing activities:
Capital expenditures................................................. (5,020) (12,275)
Cash from acquired companies......................................... - 932
--------- --------
Cash used for investing activities......................... (5,020) (11,343)
--------- --------
Cash flows from financing activities:
Repayments of long-term debt......................................... - (518)
Borrowing from long-term debt........................................ 1,875 -
Exercise of stock options............................................ - 218
--------- --------
Cash provided by (used for) financing activities........... 1,875 (300)
--------- --------
Net decrease in cash and cash equivalents................................. (4,153) (16,455)
--------- --------
Cash and cash equivalents, beginning of period............................ 7,691 24,377
--------- --------
Cash and cash equivalents, end of period.................................. $ 3,538 $ 7,922
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. - NATURE OF THE BUSINESS, BASIS OF PRESENTATION AND GEOGRAPHIC INFORMATION:
Nature of the Business
Computer Learning Centers, Inc. (the "Company" or "CLC") is a public
company traded on the NASDAQ National Market. As of July 31, 1999, the Company
operated twenty-eight Learning Centers in the U.S. and Canada and is
headquartered in Fairfax, Virginia.
Basis of Presentation
The interim consolidated financial statements of Computer Learning Centers,
Inc. (the "Company" or "CLC") as of and for the three and six months ended July
31, 1999 and 1998 have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission ("SEC") with respect to
Form 10-Q and reflect all normal recurring adjustments that are, in the opinion
of management, necessary for a fair statement of results for the interim periods
presented. Pursuant to such rules and regulations, certain notes in the audited
financial statements for fiscal year 1999 included in the Company's Annual
Report on the SEC's Form 10-K ("1999 Annual Report") have been omitted.
As used herein, the three-month periods ended July 31, 1999 and 1998 are
referred to as "second quarter 1999" and "second quarter 1998," respectively.
These consolidated financial statements should be read in conjunction with
the 1999 Annual Report. The Company's consolidated balance sheet as of January
31, 1999 was derived from the audited financial statements. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to prior period amounts to conform
with the current period presentation.
Geographic information
The following table sets forth financial information for the Company's U.S.
and Canadian operations.
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIODS
----------------------------
ENDED JULY 31, 1999 1998
-------------- ------------------------------------- -----------------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 31,166 $1,679 $ 32,845 $ 33,119 $ 2,154 $ 35,273
(Loss) income before income
taxes (2,631) 69 (2,562) 805 578 1,383
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE SIX-MONTH
---------------------------
PERIODS ENDED JULY 31, 1999 1998
--------------------- ----------------------------------- ------------------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 65,073 $ 3,754 $ 68,827 $ 67,375 $ 3,954 $ 71,329
(Loss) income before income
taxes (5,864) 623 (5,241) 5,434 1,225 6,659
Long-lived assets, net 36,951 942 37,893 34,565 1,150 35,715
</TABLE>
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. - ACCOUNTS RECEIVABLE:
Student accounts receivable are initially established for the balance of
course tuition (however, only for the current academic year of multi-academic
year programs) at the time a student enrolls in the Learning Center and consist
of financial aid, third-party and self-pay receivable balances. Financial aid
receivables are student receivable balances expected to be paid through federal
student financial assistance funds administered pursuant to Title IV of the
Higher Education Act of 1965, as amended ("Title IV"). Third-party student
receivable balances are those expected to be paid by employer companies or
various non-Title IV federal and state agencies. Self-pay student receivables
consist of those amounts to be paid by the student. The Company makes available
to qualifying students, alternative financing arrangements ("CLC financing")
which help fund their education. Dependent upon the creditworthiness of the
individual, CLC financing may be offered to assist students with meeting their
financial obligations related to attending CLC. The Company requires students
receiving CLC financing to make regular monthly payments. Depending on the level
of financing extended to students, payment plans offered generally range from
six months to three years. All amounts due to the Company in periods beyond one
year are classified as long-term receivables.
When a student withdraws, tuition paid in excess of earned tuition revenues
is refunded based on the applicable refund policy and tuition revenues earned in
excess of tuition paid remains as an account receivable. Based on comparison to
historical levels, the Company provides for estimated student withdrawals, as
reductions to accounts receivable and related deferred revenue balances, thus
stating these amounts at estimated net realizable value.
Accounts receivable balances are reviewed no less frequently than quarterly
for the purpose of determining appropriate levels of allowance for doubtful
accounts. The Company establishes the allowance for doubtful accounts using an
objective model, which applies various expected loss percentages to aging
categories based on historical bad debt experience. The Company charges off
accounts receivable balances deemed to be uncollectible (usually those that are
delinquent for more than 120 days). All charge offs are recorded as reductions
in the allowance for doubtful accounts, and any recoveries of previously written
off accounts receivable are recorded as increases to the allowance for doubtful
accounts.
As of July 31, 1999 and 1998, net accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
JULY 31, 1999
---------------------------------------------
CURRENT LONG TERM TOTAL
------------- --------- -------------
<S> <C> <C> <C>
Accounts receivable..................................... $ 63,141 $ 11,951 $ 75,092
Student withdrawal allowance............................ (10,059) (1,751) (11,810)
Allowance for doubtful accounts......................... (7,844) (1,924) (9,768)
----------- --------- ----------
$ 45,238 $ 8,276 $ 53,514
---------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
JULY 31, 1998
-----------------------------------------------
CURRENT LONG TERM TOTAL
----------- --------- -------------
<S> <C> <C> <C>
Accounts receivable..................................... $ 71,923 $ 12,647 $ 84,570
Student withdrawal allowance............................ (12,179) (1,843) (14,022)
Allowance for doubtful accounts......................... (4,600) (1,565) (6,165)
--------- --------- ----------
$ 55,144 $ 9,239 $ 64,383
======== ======== =========
</TABLE>
7
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
3. - LONG-TERM DEBT:
The Company has an available credit facility of $20.0 million with a bank,
of which approximately $9.1 million is utilized as of July 31, 1999. This credit
facility consists of a revolving line of credit, with a convertible term loan
component. Any outstanding amounts borrowed under the revolving line of credit
are payable upon its termination in October 2000. The credit agreement requires
maintenance of certain financial ratios and contains other restrictive covenants
including limitations on purchases and sales of assets. As of April 30 and July
31, 1999, the Company failed to meet one of the financial ratio requirements.
The Company has obtained an amendment to this facility and a waiver for this
financial ratio requirement from its lender. The Company is in compliance with
all other covenants as of and for the second quarter 1999. In accordance with
the terms of the agreement, the term loan component of the facility has been
suspended and other restrictions have been imposed, including prohibiting
acquisitions by the Company until the Company achieves compliance with the
financial ratio requirement.
4. - EARNINGS PER SHARE:
The following table sets forth the basic and diluted earnings per share
calculations for the three and six months ended July 31, 1999 and 1998:
<TABLE>
<CAPTION>
NET (LOSS) PER SHARE
INCOME SHARES AMOUNT
------------ ------------ ------------
<S> <C> <C> <C>
THREE-MONTH PERIOD ENDED JULY 31, 1999
Earnings per share of common stock -- basic........................ $(1,497) 17,726,030 $(0.08)
Dilutive securities-
Stock options................................................. - - -
-------- ---------- -------
Earnings per share of common stock -- diluted...................... $(1,497) 17,726,030 $(0.08)
======== ========== =======
THREE-MONTH PERIOD ENDED JULY 31, 1998
Earnings per share of common stock -- basic........................ $862 17,316,398 $0.05
Dilutive securities-
Stock options................................................. - 1,017,590 -
---- ---------- -----
Earnings per share of common stock -- diluted...................... $862 18,333,988 $0.05
==== ========== =====
SIX-MONTH PERIOD ENDED JULY 31, 1999
Earnings per share of common stock -- basic........................ $(3,065) 17,609,640 $(0.17)
Dilutive securities-
Stock options................................................. - - -
-------- ---------- -------
Earnings per share of common stock -- diluted...................... $(3,065) 17,609,640 $(0.17)
======== ========== =======
SIX-MONTH PERIOD ENDED JULY 31, 1998
Earnings per share of common stock -- basic........................ $ 4,005 17,609,640 $ 0.23
Dilutive securities-
Stock options................................................. - 1,008,953 -
--------- ---------- ------
Earnings per share of common stock -- diluted...................... $ 4,005 18,609,640 $ 0.22
========= ========== ======
</TABLE>
8
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company had 1,826,331 options outstanding as of July 31, 1999 however,
these options are not included in the calculation of the number of dilutive
securities outstanding as their impact was antidilutive due to the net loss for
the three and six months ended July 31, 1999. There are 1,013,152 shares that
were issued with respect to settlement of shareholder litigation that are
included in the second quarter 1999 calculation since the litigation settlement
to which they relate received final judicial approval on July 9, 1999 (see Note
5). All options of the Company had a dilutive effect for the three and six
months ended July 31, 1998.
5. - LITIGATION:
Active Litigation
On May 5, 1998, a class action lawsuit was filed against the Company in the
Superior Court of New Jersey in Bergen County, New Jersey, on behalf of all
students who attended a Learning Center in New Jersey within six years of May 5,
1998. The complaint alleges, among other things, that the Company, at its
Learning Centers located in the State of New Jersey failed to provide certain
educational services and resources, misrepresented certain information
respecting services, resources, occupational opportunities and student outcomes
and violated certain provisions of the New Jersey Consumer Fraud Act. The
Company is unable to estimate the outcome of the matter or any potential
liability.
Between June 1, 1998 and May 31, 1999, the Company was named as defendant
in seven other lawsuits in California, Texas, Virginia, Michigan and New Jersey
by individual students or groups of students who formerly attended one of its
Learning Centers. The complaints allege, among other things, that the Company,
at the affected Learning Centers failed to provide plaintiffs with certain
educational services and resources and misrepresented certain information
respecting services, resources, student outcomes and violated certain
provisions of the applicable state consumer laws. In the second quarter of
1999, two of these seven cases were settled resulting in payments to the former
students of immaterial amounts. The Company is unable to estimate the outcome
of the other five matters or any potential liability.
On July 9, 1999, a class action lawsuit was filed against the Company in
the Court of Common Pleas in Philadelphia County, Pennsylvania, on behalf of all
students who attended the Learning Center located on Market Street in
Philadelphia within six years of July 9, 1999 who have not obtained employment
in a computer-related job through the Company's placement services. On August 2,
1999, the case was removed to the United States District Court for the Eastern
District of Pennsylvania. The complaint alleges, among other things, that this
Learning Center failed to provide certain educational services and resources,
misrepresented certain information respecting services, resources, occupational
opportunities and student outcomes, and violated certain provisions of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law. The Company is
unable to estimate the outcome of the matter or any potential liability.
In addition to the lawsuits discussed above, the Company is a defendant in
a number of civil lawsuits involving current and former employees, which the
Company considers incidental to its business and unlikely to have a material
effect on the Company's future operations. However, there can be no assurance
that these matters will not have a material adverse effect on the results of
operations of the Company in a future period, depending in part on the results
for such period.
9
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company intends to defend itself vigorously in the lawsuits referred to
above; 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 has incurred and expects to continue
to incur significant legal and other defense costs as a result of such
proceedings. These proceedings could involve substantial diversion of the time
of some members of management, and an adverse determination in, or settlement
of, such litigation could involve the payment of significant amounts, or could
include terms in addition to such payments, which could have a severe impact on
the Company's business, financial condition and results of operations.
Settled Litigation
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 July 31, 1997 through March 10,
1998. Over the following two months, eight additional similar cases were filed
in United States District Courts: two in the Central District of California;
five in the Northern District of Illinois; and one in the Eastern District of
Virginia. The complaints alleged violations of the Securities Exchange Act of
1934, including allegations that the Company was experiencing "operations
difficulties" and failed to disclose the alleged difficulties. The complaints
also alleged that Company insiders realized profits by trading their shares of
Company stock while in possession of material adverse information. All of the
complaints were filed on behalf of classes of shareholders of Company Common
Stock beginning as early as March 11, 1997 and ending as late as April 7, 1998.
All of these shareholder lawsuits were consolidated and transferred to the
United States District Court for the Eastern District of Virginia. The Company
entered into a settlement agreement with the plaintiffs in February 1999,
whereby the Company settled these allegations and agreed to compensation to
members of the plaintiffs' class. The terms of the settlement, which received
final judicial approval on July 9, 1999 and has been approved by the plaintiffs,
provided for the payment of $3.0 million in cash ($2.35 million was covered by
the Company's insurance policy) and the issuance of 550,000 shares of CLC Common
Stock, subject to certain price protection features, which resulted in an
additional 463,152 shares of CLC Common Stock being issued to guarantee a total
settlement of $7.5 million. The Company's $650 cash portion of the settlement
agreement was paid in April 1999, and the remaining $2.35 million cash
obligation was paid in June 1999. In addition, litigation settlement expense for
the six months ended July 31, 1998 consists of $210 of legal expenses
specifically related to this litigation.
10
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
6. - REGULATORY MATTERS:
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, financial condition and results of operations.
U. S. Department of Education ("Department of Education" or "Department")
Under the standards of financial responsibility of the Department of
Education, if an institution's annual financial aid compliance audit or a review
by another regulatory agency finds that the institution made refunds late (as
defined by the Department) to 5% or more of its students in either of the two
most recent fiscal years, the institution is required to post a letter of credit
in favor of the Department in an amount equal to 25% of the total Title IV
Program refunds paid by the institution in its prior fiscal year. During fiscal
year 1999, the Company posted a letter of credit of $1.5 million with respect to
all U.S. Learning Centers except for the Somerville and Methuen, MA Learning
Centers for which a separate letter of credit had been required to meet the
Department's financial responsibility requirements, and the Paramus, NJ Learning
Center for which no letter of credit is required. After review of the Company's
fiscal year 1999 financial responsibility measures, the Department removed the
letter of credit related to the Somerville and Methuen Learning Centers. Based
on the results of the Company's compliance audit for the last fiscal year the
Company's letter of credit requirement for late refunds increased from $1.5
million to $2.2 million for all of the Company's U.S. Learning Centers,
excluding the Paramus, NJ Learning Center.
The Department conducted a program review of the Company's administration
of the Title IV Programs at its Alexandria and Manassas, VA Learning Centers for
the two-year period ended June 30, 1998. The Department issued a preliminary
report on this review in September 1998. This report cited certain findings of
alleged noncompliance with Department regulations. The Company has responded to
each of the findings raised in this report and negotiations aimed at its
resolution are continuing. The findings raised in this report do not affect the
continued eligibility of any of the Company's Learning Centers to participate in
the Title IV Programs or the manner in which such funds are disbursed.
The Department reviewed the results of the independent audit on
administration of the Company's Title IV Programs for the year ended January
31, 1998 and issued a preliminary audit determination report in December 1998.
The Department's report alleged that the Company failed to make certain student
refunds at Learning Centers operating during fiscal year 1998 within the
timeframes established by the Department. The Department required the Company
to perform more expansive reviews of student account files ("file reviews") at
five of these Learning Centers, which were determined by the Department to have
incidents of non-compliance in excess of rates acceptable to the Department.
The Department has not issued a final determination letter on this review.
11
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In January 1999, the Department of Education initiated a program review of
the administration of the Title IV Programs by the Company's Laurel, MD Learning
Center for the period July 1, 1997 through the present. In August 1999, the
Department conveyed its preliminary findings resulting from the program review.
The Department has not yet issued any written findings or reports on this
program review.
In July 1999, the Company submitted the results of its independent audit on
administration of its Title IV Programs for the year ended January 31, 1999 to
the Department. The independent audit identified certain findings of
non-compliance with respect to the Company's administration of Title IV
Programs. The Company has not received any communication from the Department
with respect to this compliance audit.
State Authorization and Accreditation
The Maryland Higher Education Commission ("MHEC") and Texas Workforce
Commission ("TWC") reviewed programs at the Company's Laurel, Maryland and
Houston, Texas Learning Centers, respectively. In October 1998, the MHEC issued
its report citing certain findings of regulatory noncompliance at the Laurel
Learning Center. The TWC's reports, also issued in October 1998, contained
findings relating to their investigation of student complaints at the Houston
Learning Center. In both these matters, the Company agreed to make refunds to
certain former students who attended the affected Learning Centers. In April
1999, the Company entered into a settlement agreement with the MHEC. Under the
terms of the settlement, the Company agreed to pay a $60 fine, disburse all
refunds proposed by MHEC, and assured the MHEC that the Company would continue
to implement policies and procedures imposed by the MHEC. The Company has made
the required refunds to former students of the Houston Learning Center and taken
additional corrective measures as directed by the TWC. During the six months
ended July 31, 1999, the Company recorded expenses of $738 representing the
amount of MHEC and TWC related student refunds and fees required to complete
these reviews. Although the TWC has communicated to the Company that its actions
are sufficient to correct the findings noted in the Reports, the TWC has not
issued a formal resolution letter.
On May 10, 1999, the Illinois State Board of Education ("ISBE") issued a
report regarding ISBE's March 1999 site visit to the Schaumburg Learning Center.
In that report, the ISBE stated that the site visit indicated that the
Schaumburg Learning Center is in compliance with the Private Business and
Vocational Schools Act. On that basis, the ISBE issued a conditional Certificate
of Approval to the Learning Center covering the year ended June 30, 1999. The
ISBE subsequently advised the Schaumburg Learning Center that it would conduct
another site visit in September 1999 to determine if the Learning Center has
complied with the conditions on the Certificate of Approval. If the ISBE review
is satisfactory and the renewal application is approved, the ISBE has stated
that it will issue an unconditional Certificate of Approval for the year ending
June 30, 2000. During the interim, the Learning Center is operating under
continuing ISBE authorization.
12
<PAGE> 13
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Heightened Cash Monitoring
On April 6, 1998, the Department of Education notified the Company that,
based upon the Department's monitoring of litigation involving the Company and
certain student complaints lodged against the Company, it placed all Learning
Centers on a "heightened cash monitoring status." This status allows all
Learning Centers to continue to receive federal student financial assistance
funds so long as the funds requested are drawn after they have been credited to
student accounts and CLC subsequently provides evidence of such credit and other
supporting information to Department. The Department does not consider
"heightened cash monitoring status" to represent either an adverse or punitive
action. This action by Department 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.
7. - COMPREHENSIVE (LOSS) INCOME:
Total comprehensive (loss) income is summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31, SIX MONTHS ENDED JULY 31,
------------------------------- -----------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income..................................... $(1,497) $862 $(3,065) $ 4,005
Unrealized gain, net of realized gain, on
investment securities..................... - - - (160)
Foreign currency translation adjustment............... 4 10 (4) (2)
-------- ---- -------- -------
Total comprehensive (loss) income..................... $(1,493) $872 $(3,069) $ 3,843
======== ==== ======== =======
</TABLE>
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause our actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results" and Part II, Item 1 -- "Legal
Proceedings" contained herein.
This management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read in conjunction with Part I, Item 1
- -"Business - Financial Aid and Regulation" contained in our Annual Report on
Form 10-K ("1999 Annual Report") as filed with the U.S. Securities and Exchange
Commission ("SEC") for the year ended January 31, 1999, for discussion of, among
other matters:
- The nature and extent of our participation in federal student aid
programs authorized under Title IV of the Higher Education Act of
1965, as amended ("Title IV Programs");
- The U.S. Department of Education's ("Department of Education" or
"Department") review and regulation of Title IV Programs and review of
our Learning Centers, including:
-student loan default rates,
-heightened cash monitoring of our Learning Centers by the
Department,
-financial responsibility measures,
-the effect of a change in control, and
-percentage of applicable revenue that may be derived from
Title IV Programs;
- State authorization, regulation and accreditation of our Learning
Centers, including pending actions with state agencies and other
actions and settlements occurring in prior periods;
- Canadian regulations affecting certain of our Learning Centers;
and
- U.S. federal income tax relief to qualifying students.
This MD&A should also be read in conjunction with the same titled section
contained in our 1999 Annual Report for a discussion of, among other matters:
- A business overview and description of acquisitions
occurring through February 1998;
- Components of income statement classification;
- Cyclical pattern of enrollments; and
- Collection risk management associated with our student
financing plans.
RESULTS OF OPERATIONS
The following table sets forth consolidated statement of operations data of
the Company expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH FOR THE SIX-MONTH
PERIOD ENDED JULY 31, PERIOD ENDED JULY 31,
------------------------------ ----------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues............................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of instruction and services................. 72.2 66.4 71.5 61.5
Selling and promotional........................... 15.9 15.1 15.6 14.7
General and administrative........................ 11.1 9.1 12.5 9.2
Provision for doubtful accounts................... 8.0 5.4 7.5 5.6
Amortization of intangible assets................. 0.4 0.4 0.4 0.4
--------- ---------- ------- --------
107.6 96.4 107.5 91.4
--------- ---------- ------- --------
(Loss) income from operations.......................... (7.6) 3.6 (7.5) 8.6
Interest (expense) income, net......................... (0.2) 0.4 (0.1) 0.6
Litigation settlement expense.......................... - - - (0.3)
Gain on sale of investment securities.................. - - - 0.4
--------- ---------- ------- --------
(Loss) income before income taxes...................... (7.8) 4.0 (7.6) 9.3
(Benefit from) provision for income taxes.............. (3.2) 1.5 (3.2) 3.7
---------- ---------- -------- --------
Net (loss) income...................................... (4.6)% 2.5% (4.4)% 5.6%
========= ========== ======= ========
</TABLE>
14
<PAGE> 15
THREE MONTHS ENDED JULY 31, 1999 ("SECOND QUARTER OF 1999") COMPARED WITH THE
THREE MONTHS ENDED JULY 31, 1998 ("SECOND QUARTER OF 1998").
Revenues decreased 7% to $32.8 million in the second quarter of 1999 from
$35.3 in the second quarter of 1998. The number of students attending Learning
Center programs at the end of the quarter decreased 15% to 9,475 in the second
quarter of 1999 from 11,153 in the second quarter of 1998. The decrease in
revenue was not as large as the decrease in student population, since the
decline in the number of students attending our programs was offset by the
impact of the increasing popularity of our higher tuition programs.
When evaluating the enrollment growth, we view all Learning Centers opened
or acquired during the last two fiscal years (current and preceding) as "new" in
order to account for the start-up period inherent in new Learning Center
openings. Learning Centers opened for more than two fiscal years are "same
centers." The following table shows a comparison of student enrollments in new
centers and same centers:
<TABLE>
<CAPTION>
Second Quarter Increase/
1999 1998 (Decrease) %
---- ---- ---------- ---
<S> <C> <C> <C> <C>
New centers............................................ 422 531 (109) (21)%
Same centers........................................... 2,236 2,907 (671) (23)%
----- ----- ----- ----
Total ................................................. 2,658 3,438 (780) (23)%
===== ===== ===== ====
</TABLE>
The following summarizes Learning Center openings and acquisitions for the
current and last two fiscal years.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
LEARNING CENTER OPENINGS/ACQUISITIONS 2000 1999 1998
------------------------------------------------- -------- -------- ------
<S> <C> <C> <C>
First Quarter.................................... - 5 -
Second Quarter................................... 1 1 2
-
Third Quarter.................................... - 1
Fourth Quarter................................... 1 3
- -
Total.................................. 1 7 6
= = =
</TABLE>
Costs of instruction and services increased 1% to $23.7 million in the
second quarter of 1999 from $23.4 million in the second quarter of 1998. These
direct costs consist primarily of faculty and staff compensation and related
benefits, and facility costs (including rent and depreciation). Instruction
costs and services as a percentage of revenues increased to 72.2% in the second
quarter of 1999 from 66.4% in the second quarter of 1998. This increase in cost
of instruction and services as a percentage of revenue is primarily attributable
to lower enrollments during the second quarter of 1999 at several of our more
established U.S. Learning Centers and Canadian schools. Lower enrollments at our
more established Learning Centers and Canadian schools resulted in a higher
ratio of cost of instruction due to decreased revenues without a corresponding
decrease in fixed costs. The decline in same center enrollments has been
greatest in terms of number of students at our Learning Centers in the
Washington, DC suburbs, in California, and in Texas which had declines in
enrollments of 33%, 36% and 39%, respectively, for the second quarter of 1999
compared to the same period of 1998. We attribute the decreases in enrollments
to negative publicity generated by various regulatory actions, optimizing of
class sizes and a reduced lead conversion rate at these centers. We attribute
the decrease in enrollments at our Canadian schools to the impact of changes in
the student financial aid program in the province of Quebec, Canada.
Selling and promotional expenses decreased 2% to $5.2 million in the second
quarter of 1999 from $5.3 million in the second quarter of 1998. Selling and
promotional expenses as a percentage of revenues increased to 15.9% in the
second quarter of 1999 from 15.1% in the second quarter of 1998.
General and administrative expenses increased 16% to $3.7 million in the
second quarter of 1999 from $3.2 million in the second quarter of 1998,
primarily as a result of increased costs of staff and
15
<PAGE> 16
office facilities. We also incurred an additional $200,000 of costs related to
the development of our new proprietary administrative software system. General
and administrative expenses as a percentage of revenues increased to 11.1% in
the second quarter of 1999 from 9.1% in the second quarter of 1998.
Provision for doubtful accounts increased 37% to $2.6 million in the second
quarter of 1999 from $1.9 million in the second quarter of 1998, attributable to
the increase in CLC-financed student accounts receivable balances. Provision for
doubtful accounts as a percentage of revenues increased to 8.0% in the second
quarter of 1999 from 5.4% in the second quarter of 1998. We attribute this
increase to a shift in student enrollments to higher priced tuition programs,
which typically have higher amounts of self-pay accounts receivable after
application of available federal financial aid. The self-pay receivables have
historically had lower collection rates than loans from traditional third-party
lenders.
Amortization of intangible assets equaled $140,000 in the second quarter of
1999 versus $143,000 in the second quarter of 1998.
We realized net interest expense of $66,000 in the second quarter 1999,
compared to net interest income of $135,000 in the second quarter 1998. This
variance can be attributed to a decrease in interest generated from lower
average invested cash balances as well as interest expense on borrowings
outstanding during the quarter.
SIX MONTHS ENDED JULY 31, 1999 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1998
Revenues decreased approximately 4% to $68.8 million for the six months
ended July 31, 1999 from $71.3 million for the comparable period of the prior
year primarily due to a decrease in enrollments at our same centers and
partially offset by the growing popularity of our higher tuition programs. The
average monthly student population for the six months ended July 31, 1999 versus
1998 fell approximately 11%. The number of students attending Learning Center
programs as of July 31, 1999 decreased 15% to 9,475 from 11,153 from the
comparable period of the prior year. The following table shows a comparison of
student enrollments in new centers and same centers:
<TABLE>
<CAPTION>
Six months ended July 31, Increase/
1999 1998 (Decrease) %
---- ---- ---------- ---
<S> <C> <C> <C> <C>
New centers...................................... 1,139 752 387 51%
Same centers..................................... 4,491 6,126 (1,635) (27)%
----- ----- ------- ----
Total ........................................... 5,630 6,878 (1,248) (18)%
===== ===== ======= ====
</TABLE>
Costs of instruction and services increased 12% to $49.2 million for the
six months ended July 31, 1999 from $43.8 million for the comparable period of
the prior year. These direct costs consist primarily of faculty and staff
compensation and related benefits, and facility costs (including rent and
depreciation). Instruction costs and services as a percentage of revenues
increased to 71.5% for the six months ended July 31, 1999 from 61.5% for the
comparable period of the prior year. This increase in cost of instruction and
services as a percentage of revenue is primarily attributable to lower
enrollments during the six months ended July 31, 1999 at several of our more
established Learning Centers and our Canadian schools, and increased costs in
anticipation of growth that was not achieved at expected levels. Lower
enrollments at our more established U.S. Learning Centers and Canadian schools
resulted in a higher ratio of cost of instruction due to decreased revenues
without a corresponding decrease in fixed costs. The decline in same center
enrollments has been greatest in terms of number of students at our Learning
Centers in the Washington, DC suburbs, in California, and in Texas which have
had average population declines of 35%, 31% and 22%, respectively, for the six
months ended July 31, 1999 compared to the same period of 1998. We attribute the
decreases in enrollments to negative publicity generated by various regulatory
actions, optimizing of class sizes and a reduced lead conversion rate at these
centers. We attribute the decrease in enrollments at our Canadian schools to the
impact of changes in the student financial aid program in the province of
Quebec, Canada.
16
<PAGE> 17
Selling and promotional expenses increased 3% to $10.8 million for the six
months ended July 31, 1999 from $10.5 million for the comparable period of the
prior year. Selling and promotional expenses as a percentage of revenues
increased to 15.6% for the six months ended July 31, 1999 from 14.7% for the
comparable period of the prior year. This increase is primarily due to our
advertising and admissions expenses remaining at the same levels of the prior
year while revenue has declined.
General and administrative expenses increased 30% to $8.6 million for the
six months ended July 31, 1999 from $6.6 million for the comparable period of
the prior year primarily as a result of the addition of $738 of increased
regulatory expense to provide for additional obligations associated with
resolution of reviews conducted by the Texas Workforce Commission ("TWC") and
Maryland Higher Education Commission ("MHEC"). Also contributing to this
increase is approximately $400,000 of costs related to developing a new
proprietary administrative software system, $230,000 provided for settlement of
lawsuits brought by former students and employees of certain Learning Centers
and an increase in personnel to support the growth of the business. General and
administrative expenses as a percentage of revenues increased to 12.5% for the
six months ended July 31, 1999 from 9.2% for the comparable period of the prior
year.
Provision for doubtful accounts increased 30% to $5.2 million for the six
months ended July 31, 1998 from $4.0 million for the comparable period of the
prior year primarily due to a shift in accounts receivable to a greater
percentage of the balance representing loans financed by the Company. Provision
for doubtful accounts as a percentage of revenues increased to 7.5% for the six
months ended July 31, 1999 from 5.6% for the comparable period of the prior
year. We attribute this increase to a shift in student enrollments to higher
priced tuition programs, which typically have higher amounts of self-pay
accounts receivable after application of available federal financial aid. The
self-pay receivables have historically had lower collection rates than loans
from traditional third-party lenders.
Amortization of intangibles equaled $281,000 for the six months ended July
31, 1999 versus $275,000 for the comparable period of the prior year.
The Company realized net interest expense of $75,000 for the six months
ended July 31, 1999 versus net interest income of $419,000 for the comparable
period of the prior year primarily due to a decrease in interest generated from
smaller average invested cash balances, as well as interest expense on
borrowings outstanding during the six months ended July 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased by $4.2 million for the six month
period ending July 31, 1999. Cash generated from operations for the first six
months of 1999 compared to the first six months of 1998 increased by
approximately $3.8 million primarily due to an increase in net assets offset by
a decrease in net income adjusted for non-cash charges.
Our principal sources of funds at July 31, 1999 were cash and cash
equivalents of approximately $3.5 million and net current accounts receivable of
$45.2 million. Additionally, we have a credit agreement with a bank that
provides for a $20.0 million secured revolving credit facility, expiring in
October 2000. The interest on the facility is based either on the bank's U.S.
prime rate or the London Interbank Offer Rate ("LIBOR") which were 8.0% and
5.1%, respectively at July 31, 1999. Interest rates are equal to the U.S. prime
rate or LIBOR plus 1.25% for revolving credit loans. We have borrowings
outstanding of approximately $4.9 million on our line of credit as of July 31,
1999. In addition, we have pledged portions of our line of credit totaling $4.2
million to the Department of Education, to our insurance carrier and to our
lessors on behalf of certain Learning Centers. As of July 31, 1999, we have
$10.9 million available under the line of credit agreement.
17
<PAGE> 18
The credit agreement requires maintenance of certain financial ratios and
contains other restrictive covenants including limitations on purchases and
sales of assets. As of April 30 and July 31, 1999, we failed to meet one of the
financial ratio requirements. The Company has obtained an amendment to this
facility and a waiver for this financial ratio requirement from our lender. We
are in compliance with all other covenants as of and for the second quarter
1999. In accordance with the terms of the agreement, the term loan component of
the facility has been suspended and other restrictions have been imposed,
including prohibiting acquisitions by the Company until the Company achieves
compliance with the financial ratio requirement.
We continuously review our cash flow, and seek strategies to provide
favorable returns on our capital. The Board of Directors authorized a program to
repurchase up to 1,000,000 shares of our Common Stock over a two-year period
ending August 31, 2000. As of August 31, 1999, we had not purchased any stock
under this program. We issued 1,013,152 shares of the Company's Common Stock in
settlement of the shareholder lawsuit, which received final judicial approval in
July 1999.
We have undertaken the development of a new proprietary administrative
software system, which we believe will serve to mitigate deficiencies in our
record-keeping systems identified by previous regulatory reviews. We expect to
expend in excess of $3.0 million to develop and implement this system, which
we anticipate will be completed by April 30, 2000. To date we have expended
approximately $1.0 million to develop and implement this system.
We believe our available cash on hand, cash from operating activities and
existing lines of credit will be sufficient to meet our cash requirements for at
least the next twelve months. Thereafter, we will continue to evaluate all
sources of capital available to us, including bank financing and additional
equity or debt offerings, to satisfy ongoing working capital and capital
expenditure requirements.
REGULATORY MATTERS - CURRENT DEVELOPMENTS
We are subject to extensive federal and state regulation and review of
operations at our U.S. Learning Centers. There are several regulatory reviews
ongoing at certain Learning Centers which are more fully described in Part I,
Item 1 - "Business - Financial Aid and Regulation" section in our 1999 Annual
Report. Current developments regarding these regulatory matters are discussed
below.
U.S. Department of Education ("Department of Education" or "Department")
We have submitted written responses with respect to all of the findings of
noncompliance asserted in the Department of Education's program review report on
our Alexandria, VA and Manassas, VA Learning Centers for the period July 1, 1996
through June 30, 1998. The Department has not yet issued a final determination
letter with respect to this program review. We expect the Department to issue a
final determination letter after reviewing our responses to its program review
report, the last of which was submitted in June 1999.
The Department reviewed the results of our independent audit on
administration of our Title IV Programs for the year ended January 31, 1998 and
issued a preliminary audit determination report in December 1998. The
Department's report alleged that we failed to make certain student refunds at
our Learning Centers operating during fiscal year 1998 within the timeframe
established by the Department. The Department required us to perform more
expansive reviews of student account files ("file reviews") at five of these
Learning Centers, which were deemed to have findings of non-compliance in excess
of rates acceptable to the Department. We expect the Department will issue a
final determination letter after reviewing the results of these file reviews
that we submitted to the Department in March 1999.
18
<PAGE> 19
In January 1999, the Department of Education initiated a program review of
the administration of the Title IV Programs by our Laurel, MD Learning Center
for the period July 1, 1997 through the present. In August 1999, the Department
conveyed to us its preliminary findings resulting from the program review. The
Department has not yet issued any written findings or reports on this program
review.
In July 1999, we submitted the results of our independent audit on
administration of our Title IV Programs for the year ended January 31, 1999 to
the Department. The independent audit identified certain findings of
non-compliance with respect to our administration of the Title IV Programs. The
independent audit on the administration of our Title IV Programs for the year
ended January 31, 1999 identified eight schools having late refund frequency
rates in excess of 5% for the students sampled in the audit. In April and May
of 1999, we introduced new procedures in all of our Learning Centers to ensure
that student refunds are processed on a timely basis. Our submission to the
Department incorporated a supplemental report prepared by the same independent
auditors, which found that in the eight Learning Centers referred to above, that
there were no late refunds for approximately a 45 day period beginning in May
1999. The Company has not received any communication from the Department with
respect to this compliance audit.
State Authorization and Accreditation
On May 10, 1999, the Illinois State Board of Education ("ISBE") issued a
report regarding ISBE's March 1999 site visit to the Schaumburg Learning Center.
In that report, the ISBE stated that the site visit indicated that our
Schaumburg Learning Center was in compliance with the Private Business and
Vocational Schools Act. On that basis, the ISBE issued a conditional Certificate
of Approval to us covering the year ended June 30, 1999. The ISBE subsequently
advised the Schaumburg Learning Center that it would conduct another site visit
in September 1999 to determine if the Learning Center has complied with the
conditions on the Certificate of Approval. If the ISBE review is satisfactory
and the renewal application is approved, the ISBE has stated that it will issue
an unconditional Certificate of Approval for the year ending June 30, 2000.
During the interim, the Learning Center is operating under continuing ISBE
authorization.
In April 1999, we executed a settlement agreement with the Maryland Higher
Education Commission ("MHEC") to settle a Notice of Deficiencies issued by MHEC
to our Laurel Learning Center in October 1998. In conjunction with this
settlement agreement, we paid a $60,000 fine and assured the MHEC that the
Laurel Learning Center would continue to implement certain policies and
procedures. Under certain circumstances, we may need to make refunds
to students currently enrolled at the Learning Center; however, we expect no
further impact from this matter on the results of our operations in future
periods.
In October 1998, the Texas Workforce Commission ("TWC") issued three
separate Complaint Investigation Reports (the "Reports") respecting complaints
submitted to the TWC by seven former students of the Houston Learning Center.
During the first quarter 1999, we made refunds to former students as mandated by
the TWC after issuing their Reports. Since that time we have taken additional
corrective measures and paid additional student refunds to former students of
our Houston Learning Center, in an effort to resolve the findings noted in the
Reports. Although the TWC has communicated to us that our actions are sufficient
to correct the findings noted in the Reports, the TWC has not issued a formal
resolution letter, and we do not expect to receive one. We believe the matters
have been resolved and will not proceed to formal administrative or judicial
proceedings.
Accreditation by an accrediting agency recognized by the Department of
Education is required in order for an institution (as defined by the Department
as a main campus and any branch campuses) to become and remain eligible to
participate in the Title IV Programs. In addition, most states require
institutions operating within their borders to become and continue to be
accredited as a condition of continuing state authorization. All of our
U.S.-based Learning Centers are accredited by ACICS, which
19
<PAGE> 20
is an accrediting agency recognized by the Department of Education. Three of our
institutions operating in the United States are due for renewal of accreditation
during fiscal 2000. Two of these institutions received accreditation renewals in
the second quarter of 1999. We have submitted the remaining renewal application
and will provide additional information as requested in order to complete the
renewal process for the third institution.
The loss of accreditation or 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 and would have a material adverse effect on
our results of operations and financial condition.
Guaranty Agency Reviews
In the ordinary course of our business, certain of the U.S. Learning
Centers are subject to periodic review by the guaranty agencies which guarantee
Federal Family Education Loan Program loans disbursed to students at those
Learning Centers. We believe all open reviews by these guaranty agencies will be
concluded with no material effect to the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, including without limitation those set
forth below under the caption Part II, Item 1 - "Legal Proceedings," could cause
actual results to differ materially from those contained in forward looking
statements made in this Report on Form 10-Q and presented elsewhere by us from
time to time.
Potential Adverse Effects of Regulation
We are dependent on the authorization of the applicable agency or agencies
of each state within which a Learning Center is located to allow us 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. We are subject to extensive and varying
regulation in each of the states in which the Learning Centers currently
operate.
In the event that we fail to maintain or renew any required regulatory
approvals, accreditations' or authorizations of any of the Learning Centers it
would have a material adverse effect on our results of operations and financial
condition.
Potential Adverse 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 16% of the outstanding shares
of our Common Stock. Consequently, the General Atlantic Entities, and GAC in
particular, will continue to have significant influence over our policies and
affairs. Upon a change of ownership resulting in a change of control of the
Company, as defined in the Department of Education's regulations, each of our
Learning Centers would be required to apply to the Department to reestablish its
eligibility to participate in the Title IV Programs. If such application were
incomplete or untimely or the Department's review indicated material
deficiencies, the affected Learning Center could lose access to Title IV Program
funding for an indeterminate period of time, leading to the loss of a portion,
or all, of its Title IV funding during the reapproval period. A change of
control also could affect the state authorization and accreditation of our
Learning Centers. If we experience a change of control under Department of
Education, state or accreditation standards and any of our Learning Centers lose
authority to operate or access to Title IV Program funding for an extended
period, it would have a material adverse effect on our results of operations and
financial condition.
20
<PAGE> 21
Competition
The post-secondary adult education and training market is highly
fragmented, with no single institution or company holding a dominant market
share. We compete for students with vocational and technical training schools,
degree-granting colleges and universities, continuing education programs and
commercial training programs. Certain public and private colleges may offer
programs similar to those of the Learning Centers at a lower tuition cost due in
part to substantial government subsidies, foundation grants, tax-deductible
contributions or other financial resources not available to proprietary
institutions.
Risks Associated with Changes in Technology and Growth
The market for our programs and services is characterized by rapidly
changing requirements and characteristics, and our 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 we are
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 our Learning Centers fail to gain or
maintain widespread commercial acceptance, our business may be materially and
adversely affected.
Our ability to meet our future operating and financial goals will depend
upon our ability to successfully implement our growth strategy which will
include the introduction of new locations, as well as the potential acquisition
of assets and programs complementary to our operations. Our success in this area
will depend on our ability to successfully integrate such new locations, assets
and businesses. There can be no assurance that we will be able to implement or
manage expansion effectively.
Dependence upon Key Employees
Our success depends to a significant extent upon the continued service of
our executive officers and other key personnel. The loss of the services of any
of our executive officers or other key employees could have a material adverse
effect on the Company. Our future success will depend in part upon our
continuing ability to attract and retain highly qualified personnel. There can
be no assurance that we 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 our 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.
21
<PAGE> 22
YEAR 2000 COMPLIANCE
The Year 2000 computer issue (commonly referred to as "Y2K") exists because
many computer systems and applications currently use two-digit date fields to
designate a year. When the century date change occurs, date-sensitive systems
will recognize the year 2000 as 1900, or not at all. This inability to recognize
or properly treat the year 2000 may cause systems to process critical
information incorrectly.
State of Readiness
We have completed an initial assessment of potential exposure of our own
IT-Systems. We have identified certain software for which we engaged third-party
consultants to complete remediation as well as routine upgrades to the system,
which were completed in April 1999. In addition, we replaced our payroll and
human resources systems in order to be Y2K ready as well as provide significant
improvements over the current systems. The payroll and human resource IT-System
was successfully completed in July 1999. Most of our computer hardware was
acquired during the last few years and we determined that these newer systems
do not possess a Y2K problem. We have computer hardware at certain Learning
Centers that is not Y2K compliant, and we plan to replace or repair these
systems prior to December 1999. Most of this noncompliant computer hardware
equipment is scheduled for replacement in the ordinary course of business and
is not part of a Y2K remediation effort. We have formalized a plan relating to
testing our IT-Systems and expect to conclude this testing prior to October
1999, however we have no plans to conduct formal testing on Learning Center non
IT-Systems readiness. Although we do not anticipate we will be significantly
affected by Y2K problems in our own IT-Systems, we may be adversely affected by
Y2K problems of our vendors, banking and governmental relationships, as well as
with our leased facilities. We completed the assessment phase of evaluating the
readiness of our significant suppliers, business partners, banks, and
government agencies to determine the extent to which we may be vulnerable in
the event that those parties fail to properly remediate their own Y2K issues.
Our operations and liquidity largely depend upon the federal student
funding provided by Title IV Programs for our students. Processing of
applications for this funding is handled by the Department of Education's
computer systems. The U.S. General Accounting Office reported in September 1998
that the Department of Education's limited progress in making contingency plans,
should its IT systems fail, may not identify conditions that could cause
disruptions in the administration of, and disbursement of funds under, the Title
IV Programs. On April 1, 1999, the Department of Education reported that the
Department's data systems are Y2K compliant, although the Department had not
tested the entire Title IV Programs delivery system which could reveal problems
that did not show up in tests of the individual systems. Any prolonged
interruption would have a material adverse impact on the education industry and,
accordingly, upon our business, results of operations, liquidity and financial
condition.
Costs to address the Company's Year 2000 issues
We estimate that we have expended approximately $200,000 in direct costs
through July 31, 1999 to identify and remediate the Company's Y2K issues. We
estimate that we will expend an additional $100,000 during fiscal year 2000.
These amounts do not include:
- the salaries of our employees involved in the remediation
process;
- the cost of the enhancement and replacements to our IT-Systems,
occurring in the normal course of operations; and
- the cost of replacing or acquiring any Non IT-Systems in the
normal course of operations.
There can be no assurance that the cost estimates associated with our Y2K
issues will prove to be accurate or that those actual costs will not have a
material adverse effect on our results of operations and financial condition.
22
<PAGE> 23
Risks Associated with Y2K Issues
Remediation and contingency planning associated with Y2K problems may
increasingly cause us to divert management and employees time and attention. We
are unable to estimate these potential internal indirect costs expended on Y2K
efforts; however, it is not expected to have a material adverse effect on our
financial condition, results of operations or cash flows. We do not have a plan
to utilize any independent verification or validation process to assure the
reliability of our risk or cost estimates associated with Y2K efforts.
We have contemplated several possible worst case scenarios that could arise
from Y2K problems. At this time, there is insufficient information to assess the
likelihood of any of these scenarios. However, the most reasonably likely worst
case scenario for the Y2K issue would be that the third parties with whom the
Company has relationships would cease or not successfully complete their Y2K
remediation efforts. If this were to occur, we would encounter disruptions to
our business that could have a severe impact on our results of operations, such
as:
- We could experience significant delays in receipt of federal,
state or third-party student financial aid in payment of students'
education costs of attending our Learning Centers due to IT-System
failures at the Department of Education, any of our lending
institutions or our electronic payment processing agent.
Contingency Plan
We continue to revise and enhance our contingency plan to prepare for the
possibility that we may experience Y2K problems in our own IT-Systems or Non
IT-Systems. If Y2K problems occur with Non IT-Systems, we expect to be able to
isolate such systems so that they do not affect other systems, and adjust the
clocks on such Non IT-Systems that are not date sensitive. We do not intend to
create a formal contingency plan for IT-Systems and Non IT-Systems that are not
controlled by us, including third party systems of the Department of Education,
our accrediting agency, third-party student loan institutions, or financial
institutions on which we rely. We believe that with the exception of the
Department of Education, there are alternative service providers with which we
can contract in order to recover from any temporary service interruptions due
to Y2K problems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
We have minimal exposure to market risks as it relates to the effects of
changes in interest rates and foreign currency exchange rates. We do not hold or
issue derivative financial instruments.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Active Litigation
On May 5, 1998, a class action lawsuit was filed against the Company in the
Superior Court of New Jersey in Bergen County, New Jersey, on behalf of all
students who attended a Learning Center in New Jersey within six years of May 5,
1998. The complaint alleges, among other things, that our Learning Centers in
New Jersey failed to provide certain educational services and resources,
misrepresented certain information respecting services, resources, occupational
opportunities and student outcomes and violated certain provisions of the New
Jersey Consumer Fraud Act. We are unable to estimate the outcome of the matter
or any potential liability.
Between June 1, 1998 and May 31, 1999, the Company was named as defendant
in seven other lawsuits in California, Texas, Virginia, Michigan and New Jersey
by individual students or groups of students who formerly attended one of our
Learning Centers. The complaints allege, among other things, that our affected
Learning Centers failed to provide plaintiffs with certain educational services
and resources and misrepresented certain information respecting services,
resources, student outcomes and violated certain provisions of the applicable
state consumer laws. During the second quarter of 1999, two of these seven
cases were settled resulting in payments to the former students of immaterial
amounts. We are unable to estimate the outcome of the other five matters or any
potential liability.
On July 9, 1999, a class action lawsuit was filed against the Company in
the Court of Common Pleas in Philadelphia County, Pennsylvania, on behalf of all
students who attended the Learning Center located on Market Street in
Philadelphia within six years of July 9, 1999 who have not obtained employment
in a computer-related job through the Company's placement services. On August 2,
1999, the case was removed to the United States District Court for the Eastern
District of Pennsylvania. The complaint alleges, among other things, that this
Learning Center failed to provide certain educational services and resources,
misrepresented certain information respecting services, resources, occupational
opportunities and student outcomes, and violated certain provisions of the
Pennsylvania Unfair Trade Practices and Consumer Protection Law. We are unable
to estimate the outcome of the matter or any potential liability.
In addition to the lawsuits discussed above, the Company is a defendant in
a number of civil lawsuits involving current and former employees, which we
consider incidental to our business and unlikely to have a material effect on
our future operations. However, there can be no assurance that these matters
will not have a material adverse effect on our results of operations in a future
period, depending in part on the results for such period.
We intend to defend the Company vigorously in the lawsuits referred to
above; however, there can be no assurance that we will be successful in
defending the Company in any of these proceedings. Even if we prevail on the
merits in such litigation, we expect to incur significant legal and other
defense costs as a result of such proceedings. These proceedings could involve
substantial diversion of the time of some members of management, and an adverse
determination in, or settlement of, such litigation could involve the payment of
significant amounts, or could include terms in addition to such payments, which
could have a severe impact on our 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 federal or state regulators, or other parties. Any such legal proceedings or
adverse action could have a severe impact on our business, financial condition
and results of operations.
24
<PAGE> 25
Settled Litigation
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 our Common Stock from July 31, 1997 through March
10, 1998. Over the following two months, eight additional similar cases were
filed in United States District Courts: two in the Central District of
California; five in the Northern District of Illinois; and one in the Eastern
District of Virginia. The complaints alleged violations of the Securities
Exchange Act of 1934, including allegations that the Company was experiencing
"operations difficulties" and failed to disclose the alleged difficulties. The
complaints also alleged that Company insiders realized profits by trading their
shares of Company stock while in possession of material adverse information. All
of the complaints were filed on behalf of classes of shareholders of Company
Common Stock beginning as early as March 11, 1997 and ending as late as April 7,
1998. All of these shareholder lawsuits were consolidated and transferred to the
United States District Court for the Eastern District of Virginia. The Company
entered into a settlement agreement with the plaintiffs in February 1999,
whereby the Company settled these allegations and agreed to compensation to
members of the plaintiffs' class. The terms of the settlement, which received
final judicial approval on July 9, 1999 and has been approved by the plaintiffs,
provided for the payment of $3.0 million in cash ($2.35 million was covered by
the Company's insurance policy) and the issuance of 550,000 shares of CLC Common
Stock, subject to certain price protection features, which resulted in an
additional 463,152 shares of CLC Common Stock being issued to guarantee a total
settlement of $7.5 million. The Company's $650,000 cash portion of the
settlement agreement was paid in April 1999, and the remaining $2.35 million
cash obligation was paid in June 1999.
On April 16, 1999, the United States District Court for the Eastern
District of Virginia modified a confidentiality order that had been entered in
the case. The modification permitted the Company's counsel to share with the
United States Securities and Exchange Commission material that we had obtained
in discovery from certain third parties who had been trading in our common
stock. We sought the modification of the confidentiality order because we
believe that the material in question might evidence violations of federal
securities laws by those third parties.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
25
<PAGE> 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 1999 Annual Meeting of Stockholders was held on July 27,
1999. Represented, in person or by proxy were 16,450,258 shares, or
approximately 94% of the total shares outstanding. The following actions were
taken:
1. Election of two Class I Directors to serve until the 2002 Annual
Meeting of Stockholders. The nominees, Reid R. Bechtle and Harry H.
Gaines were elected by the following vote:
Nominees For Against Non-Vote
-------- ---- ------- --------
Mr. Bechtle 16,309,196 143,962 0
Mr. Gaines 16,309,196 143,962 0
2. Ratification of the selection by the Board of Directors of
PricewaterhouseCoopers, LLP as independent accountants for the current
fiscal year.
For Against Non-Vote
--- ------- --------
16,392,107 41,128 19,923
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
A list of exhibits required to be filed as part of this report is set forth
in the Index to exhibits, which immediately precedes such exhibits and is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: September 13, 1999
COMPUTER LEARNING CENTERS, INC.
By: /s/ CHARLES L. COSGROVE
------------------------
Charles L. Cosgrove
Vice President and Chief Financial Officer
(Principal Financial Officer)
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO. IN THIS FILING
- ---------- ----------- -----------------------
<S> <C> <C>
3.1 Second Amended and Restated Certificate Incorporated by reference to Exhibit 3.1
of Incorporation of the Registrant, as of the Registrant's report on Form 10-Q
amended for the quarter ended July 31, 1997 filed
September 9, 1997
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.4
Registrant of the Registrant's Form S-1 Registration
Statement as amended, filed March 29,
1995 (No. 33-90716)(the "Form S-1")
4.1 Form of Certificate for Shares of the Incorporated by reference to Exhibit 4.1
Registrant's Common Stock of the Form S-1
10.1 First Amendment of Credit Agreement, dated Incorporated by reference to Exhibit 10.1
October 31, 1998 by and between of the Registrant's report on Form 10-Q
First Union National Bank and the for the quarter ended April 30, 1999 filed
Registrant June 14, 1999
10.2 Second Amendment of Credit Agreement, dated Incorporated by reference to Exhibit 10.2
June 10, 1999 by and between First of the Registrant's report on Form 10-Q
Union National Bank and the Registrant for the quarter ended April 30, 1999 filed
June 14, 1999
10.5 Severance Agreement, dated July 20, 1999, Filed herewith.
by and between Christine Strachota and
the Registrant.
27 Financial Data Schedule Filed herewith.
</TABLE>
27
<PAGE> 1
EXHIBIT 10.5
SEVERANCE AGREEMENT
THIS SEVERANCE AGREEMENT (this "Agreement") made as of the 20th day of
July, 1999 by and between COMPUTER LEARNING CENTERS, INC., a Delaware
corporation (the "Company"), and CHRISTINE STRACHOTA (the "Executive").
The Executive is presently employed by the Company as its Vice President.
The Board of Directors of the Company (the "Board") desires to set forth
the nature and amount of compensation and other benefits to be provided to the
Executive and any of the rights of the Executive in the event of her termination
of employment with the Company. The Executive is willing to commit herself to
continue to serve the Company, on the terms and conditions herein provided.
In order to effect the foregoing, the Company and the Executive wish to
enter into this Agreement under the terms and conditions set forth below.
Accordingly, in consideration of the promises and the respective covenants and
agreements of the parties herein contained, and intending to be legally bound
hereby, the parties hereto agree as follows:
1. Employment. The Company hereby agrees to continue to employ the
Executive, and the Executive hereby agrees to continue to serve the Company, on
the terms and conditions set forth herein.
2. Term. The term of Executive's employment under Section 1 will terminate
upon the termination of Executive's employment with the Company for any reason
whatsoever. No such termination shall affect any of the Company's other
obligations under this Agreement arising at or after such termination of
employment.
3. Position and Duties. The Executive shall serve as Vice President of the
Company and shall have such responsibilities and authority as may normally be
exercised by a person in such position at a company.
4. Place of Performance. The Executive shall be based at the current
principal executive offices of the Company in Northern Virginia, or in the
Company's headquarters, provided that such headquarters is not more than
thirty-five (35) miles from the location of the Company's principal executive
offices on the date hereof.
5. Compensation and Related Matters.
(a) Base Salary. During the Executive's employment with the Company,
the Company shall pay to the Executive a salary at a rate of not less than One
Hundred Fifty Thousand Dollars ($150,000) per annum in equal installments as
nearly as practicable on the normal payroll periods for employees of the Company
generally (the "Base Salary"). The Base Salary may be increased from time to
time and, if so increased, shall not thereafter be decreased during the term of
this Agreement.
<PAGE> 2
(b) Bonus. The Executive shall be eligible to receive an annual bonus
(the "Annual Bonus") payable under the Company's bonus plan in accordance with
the bonus criteria established by the Board or the Chief Executive Officer for
the Executive on an annual basis.
(c) Expenses. During the term of the Executive's employment hereunder,
the Executive shall be entitled to receive prompt reimbursement for all
reasonable expenses incurred by the Executive in performing services hereunder,
including all expenses of travel and living expenses while away from home on
business or at the request of and in the service of the Company, provided that
such expenses are incurred and accounted for in accordance with the policies and
procedures established by the Company.
(d) Benefits. During the term of the Executive's employment hereunder,
the Company shall maintain in full force and effect, and the Executive shall be
entitled to continue to participate in, all of its employee benefit plans and
arrangements in effect on the date hereof in which the Executive participates or
receives benefits, or plans or arrangements providing the Executive with at
least equivalent benefits thereunder. The Company shall not make any changes in
such plans and arrangements which would adversely affect the Executive's rights
or benefits thereunder, unless such change occurs pursuant to a program
applicable to all officers of the Company and does not result in a
proportionately greater reduction in the rights of or benefits to the Executive
as compared with any other officers of the Company. The Executive shall be
entitled to participate in or receive benefits under any employee benefit plan
or arrangement made available by the Company in the future to its officers and
key management employees, subject to and on a basis consistent with the terms,
conditions and overall administration of such plans and arrangements. Nothing
paid to the Executive under any plan or arrangement presently in effect or made
available in the future shall be deemed to be in lieu of any amounts payable to
the Executive pursuant to this Section 5.
6. Termination and Definitions.
(a) Cause. This Agreement shall immediately be terminated and neither
party shall have any future obligation hereunder, except for the Company's
obligations in Section 7 hereof, and except for the Executive's obligations in
Section 8 hereof, if the Executive's employment is terminated for Cause.
(b) Termination by the Executive. The Executive may terminate her
employment hereunder for Good Reason.
(c) Notice of Termination. Any termination of the Executive's
employment by the Company or by the Executive shall be communicated by written
Notice of Termination to the other party hereto.
(d) Definitions.
(i) For purposes of this Agreement, termination "for Cause" shall
arise where termination results from theft or dishonesty in the conduct of the
Company's business, or intoxication while on duty, or conviction of a felony, in
each case having a material adverse effect on the business of the Company.
-2-
<PAGE> 3
(ii) For purposes of this Agreement, "Good Reason" shall mean (A)
a Change in Control of the Company (as defined below), (B) a decrease in the
total amount of the Executive's Base Salary below its level in effect on the
date hereof, (C) a reduction in the importance of the Executive's job
responsibilities without the Executive's consent or (D) a geographical
relocation of the Executive without his consent.
(iii) For purposes of this Agreement, a "Change in Control" of
the Company shall be deemed to have occurred if (A) any person (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"), is or becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the Company
representing twenty-five percent (25%) of more of the combined voting power of
the Company's then outstanding securities, (B) during any period of two (2)
consecutive years during the term of this Agreement, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in advance by
directors representing at least two-thirds of the directors then in office who
were directors at the beginning of the period, (C) the shareholders of the
Company approve a merger or consolidation involving the Company resulting in a
change of ownership of a majority of the outstanding shares of capital stock of
the Company, or (D) the shareholders of the Company approve a plan of
liquidation or dissolution of the Company or the sale or disposition by the
Company of all or substantially all of the Company's assets.
(iv) For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated.
7. Compensation upon Termination.
(a) Termination for Cause or Resignation Without Good Reason. If (i)
the Executive's employment shall be terminated for Cause, or (ii) the Executive
voluntarily resigns from the employ of the Company and Good Reason shall not
have occurred, then the Company shall pay the Executive her Base Salary through
the date of delivery to her of a Notice of Termination at the rate then in
effect at the time and date the Notice of Termination is delivered, and the
Company shall have no further obligations to the Executive under this Agreement.
(b) Termination Without Cause or Resignation for Good Reason. If the
Company shall terminate the Executive's employment other than pursuant to
Section 6(a) hereof (it being understood that a purported termination pursuant
to Section 6(a) hereof, which is disputed and finally determined not to have
been pursuant to Section 6(a) shall be a termination by the Executive pursuant
to Section 6(b)) or if the Executive terminates her employment for Good Reason,
then:
-3-
<PAGE> 4
(i) the Company shall pay to the Executive her Base Salary
through the date of termination at the rate in effect at the time Notice of
Termination is delivered; and
(ii) in lieu of any further salary or bonus payments to the
Executive for periods subsequent to the date of termination, the Company shall
pay on the date of termination, as severance pay to the Executive, a lump sum
payment in an amount equal to one hundred percent (100%) of the Executive's Base
Salary in effect as of the date of termination.
(c) Termination Upon a Change in Control. If there is a Change in
Control of the Company or there has been a public announcement of a Change in
Control of the Company (provided, however, that consummation of the Change in
Control of the Company shall be a condition precedent to the effectiveness of
this provision) and at any time thereafter the employment of the Executive under
this Agreement is terminated other than pursuant to Section 6(a) hereof by the
Company or a successor entity or is terminated with Good Reason by the
Executive, then:
(i) the Company shall pay to the Executive her Base Salary
through the date of termination at the rate in effect at the time Notice of
Termination is given; and
(ii) in lieu of any further salary or bonus payments to the
Executive for periods subsequent to the date of termination, the Company shall
pay on the date of termination as severance pay to the Executive, a lump sum
payment in an amount equal to one hundred fifty percent (150%) of the
Executive's Base Salary in effect as of the date of termination.
(d) Continuation of Benefit Plans. Upon any termination of the
Executive's employment, other than pursuant to Section 6(a) hereof or by the
Executive without Good Reason, the Company shall maintain in full force and
effect for the continued benefit of the Executive for twelve (12) months, or
eighteen (18) months if there has previously occurred a Change in Control of the
Company, all employee benefit plans and programs in which the Executive was
entitled to participate.
(e) Participation in Benefit Plans after Termination of Employment.
The Executive shall be entitled to continue to participate in any benefit plan
or program of the Company for twelve (12) months after the expiration of the
period provided for in Section 7(d), provided, that the Executive pays the
direct cost of any such benefit plan or program.
8. Covenants Not to Compete or Hire Employees. It is recognized and
understood by the parties hereto that the Executive, through the Executive's
association with the Company as an employee, shall acquire a considerable amount
of knowledge and goodwill with respect to the business of the Company, which
knowledge and goodwill are extremely valuable to the Company and which would be
extremely detrimental to the Company if used by the Executive to compete with
the Company. It is, therefore, understood and agreed by the parties hereto that,
because of the nature of the business of the Company, it is necessary to afford
fair protection to the Company from such competition by the Executive.
Consequently, as a material inducement to the Company to enter into this
Agreement, the Executive covenants and agrees that for the period commencing
with the date hereof and ending one (1) year after the
-4-
<PAGE> 5
Executive's termination of employment with the Company, the Executive shall not
engage, directly, indirectly or in concert with any other person or entity, in
the information technology training industry in the geographical area of the
contiguous forty-eight (48) states of the United States. The Executive further
covenants and agrees that for the period commencing on the date of the
Executive's termination of employment for any reason whatsoever and ending one
(1) year after the Executive's termination of employment with the Company, the
Executive shall not, directly or indirectly, hire or engage or attempt to hire
or engage any individual who shall have been an employee of the Company at any
time during the one (1)-year period prior to the date of the Executive's
termination of employment with the Company, whether for or on behalf of the
Executive or for any entity in which the Executive shall have a direct or
indirect interest (or any subsidiary or affiliate of any such entity), whether
as a proprietor, partner, co-venturer, financier, investor or stockholder,
director, officer, employer, employee, servant, agent, representative or
otherwise.
9. Successors; Binding Agreement.
(a) Successors. The Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid which
executes and delivers the agreement provided for in this Section 9 or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) Binding Agreement. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
10. Notice. For the purposes of this Agreement, notices, demands and all
other communications provided for in the Agreement shall be in writing and shall
be deemed to have been duly given when delivered or (unless otherwise specified)
mailed by United States registered mail, return receipt requested, postage
prepaid, addressed, if to the Executive, to her address as it appears in the
records of the Company, or if to the Company, as follows:
Computer Learning Centers, Inc.
11350 Random Hills Road
Suite 240
Fairfax, Virginia 22030
-5-
<PAGE> 6
or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
11. Prior Agreement. All prior agreements between the Company and the
Executive with respect to the employment of the Executive are hereby superseded
and terminated effective as of the date hereof and shall be without further
force or effect.
12. Miscellaneous. No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing signed by the Executive and duly authorized officer of the Company. No
waiver by either party hereto at any time of any breach by the other hereto of,
or compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar provisions
or conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Virginia.
13. Validity. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
14. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three arbitrators, in Washington, D.C., in accordance with the
rules of the American Arbitration Association then in effect. The expense of
such arbitration shall be borne by the Company.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date and year first above written.
COMPUTER LEARNING CENTERS, INC.
Date: July 20, 1999 By:/s/ REID BECHTLE
-------------------------------------
Reid Bechtle, Chief Executive Officer
EXECUTIVE:
/s/ CHRISTINE STRACHOTA
Date: July 20, 1999 -----------------------------------------
Christine Strachota
-7-
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF OPERATIONS AND THE CONSOLIDATED BALANCE SHEET AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JUL-31-1999
<CASH> 3,538
<SECURITIES> 0
<RECEIVABLES> 75,092
<ALLOWANCES> (21,578)
<INVENTORY> 1,021
<CURRENT-ASSETS> 61,551
<PP&E> 62,450
<DEPRECIATION> (24,557)
<TOTAL-ASSETS> 112,140
<CURRENT-LIABILITIES> 51,456
<BONDS> 0
0
0
<COMMON> 185
<OTHER-SE> 51,282
<TOTAL-LIABILITY-AND-EQUITY> 112,140
<SALES> 0
<TOTAL-REVENUES> 68,827
<CGS> 0
<TOTAL-COSTS> 73,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> (5,241)
<INCOME-TAX> (2,176)
<INCOME-CONTINUING> (3,065)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,065)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
