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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 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)
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)
(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 DECEMBER 10, 1999
Common Stock, $.01 par value 18,511,603
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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 NINE-MONTH
PERIODS ENDED PERIODS ENDED
OCTOBER 31, OCTOBER 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 32,955 $37,076 $101,782 $108,405
-------- ------- -------- --------
Costs and expenses:
Costs of instruction and services 24,590 24,707 73,776 68,551
Selling and promotional 5,251 5,515 16,008 15,985
General and administrative 4,042 3,419 12,643 9,973
Provision for doubtful accounts 1,536 2,540 6,704 6,555
Amortization of intangible assets 141 141 422 416
-------- ------- -------- --------
35,560 36,322 109,553 101,480
-------- ------- -------- --------
(Loss) income from operations (2,605) 754 (7,771) 6,925
Interest (expense) income, net (74) 36 (149) 455
Shareholder litigation settlement expense - - - (210)
Gain on sale of investment securities - - - 279
-------- ------- -------- --------
(Loss) income before income taxes (2,679) 790 (7,920) 7,449
(Benefit from) provision for income taxes (1,146) 317 (3,322) 2,971
-------- ------- -------- --------
Net (loss) income $( 1,533) $ 473 $ (4,598) $ 4,478
======== ======= ======== ========
(Loss) earnings per share of common stock:
Basic $ (0.08) $ 0.03 $ (0.26) $ 0.26
======== ======= ======== ========
Diluted $ (0.08) $ 0.03 $ (0.26) $ 0.25
======== ======= ======== ========
</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>
OCTOBER 31, JANUARY 31, OCTOBER 31,
1999 1999 1998
--------------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 3,414 $ 7,691 $ 7,620
Accounts receivable, net.......................... 48,771 56,697 60,390
Deferred tax asset................................ 4,671 4,671 1,536
Prepaid expenses and other current assets......... 8,584 8,913 6,822
---------- ---------- ---------
Total current assets......................... 65,440 77,972 76,368
---------- ---------- ---------
Fixed assets, net...................................... 37,137 37,604 36,347
Long-term accounts receivable, net..................... 10,321 10,660 8,468
Other long-term assets................................. 4,162 4,500 4,640
---------- ---------- ---------
Total assets................................. $ 117,060 $ 130,736 $ 125,823
========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable............................ $ 2,850 $ 6,503 $ 2,665
Accrued employee expenses......................... 2,415 1,775 1,674
Accrued other expenses............................ 5,871 8,341 5,761
Current portion of long-term debt................. 6,625 - -
Deferred revenues................................. 45,046 50,932 55,786
---------- ---------- ---------
Total current liabilities.................... 62,807 67,551 65,886
---------- ---------- ---------
Long-term debt......................................... - 3,000 -
Long-term deferred revenues............................ 1,395 3,073 2,880
Other long-term liabilities............................ 2,908 2,576 2,423
---------- ---------- ---------
Total liabilities............................ 67,110 76,200 71,189
---------- ---------- ---------
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; 18,511,603, 17,493,251
and 17,380,025 shares issued and
outstanding, respectively..................... 185 175 174
Additional paid-in capital........................ 40,690 40,682 35,657
Accumulated other comprehensive (loss) income..... (54) (48) 12
Retained earnings................................. 9,129 13,727 18,791
---------- ---------- ---------
Total stockholders' equity................... 49,950 54,536 54,634
---------- ---------- ---------
Total liabilities and stockholders' equity... $ 117,060 $ 130,736 $ 125,823
========== ========== =========
</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 NINE-MONTH
PERIOD ENDED
OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income............................................ $ (4,598) $ 4,478
Adjustments to reconcile net income to cash
from operating activities:
Provision for doubtful accounts......................... 6,704 6,555
Depreciation............................................ 7,037 4,802
Amortization of intangible assets....................... 422 416
Changes in net assets and liabilities:
Accounts receivable..................................... 1,975 (16,003)
Prepaid expenses and other current assets............... 329 (2,771)
Long-term accounts receivable........................... (413) (1,790)
Other long-term assets.................................. (90) (379)
Trade accounts payable.................................. (3,653) 302
Accrued employee expenses............................... 640 (1,444)
Accrued other expenses.................................. (2,470) (1,756)
Deferred revenues....................................... (5,886) 3,807
Long-term deferred revenues............................. (1,678) (833)
Other long-term liabilities............................. 331 1,350
-------- --------
Cash used for operating activities................. (1,350) (3,266)
-------- --------
Cash flows from investing activities:
Capital expenditures......................................... (6,573) (14,391)
Cash from acquired companies................................. - 932
-------- --------
Cash used for investing activities................. (6,573) (13,459)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt................................. (500) (518)
Borrowing from long-term debt................................ 4,125 -
Exercise of stock options.................................... 21 486
-------- --------
Cash provided by (used for) financing activities... 3,646 (32)
-------- --------
Net decrease in cash and cash equivalents......................... (4,277) (16,757)
-------- --------
Cash and cash equivalents, beginning of period.................... 7,691 24,377
-------- --------
Cash and cash equivalents, end of period.......................... $ 3,414 $ 7,620
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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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 October 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. as of and for the three and nine months ended October 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
consolidated 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 October 31, 1999 and 1998 are
referred to as "third quarter 1999" and "third 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 OCTOBER 31, 1999 1998
- --------------------------------------------- ---- ----
--------------------------------------------------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 31,289 $ 1,666 $ 32,955 $ 35,308 $ 1,768 $ 37,076
(Loss) income before income taxes (3,023) 344 (2,679) 615 175 790
<CAPTION>
AS OF AND FOR THE NINE-MONTH PERIODS ENDED OCTOBER 31, 1999 1998
- ------------------------------------------------------ ---- ----
-------------------------------------------------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
---- -------- ----- ---- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 96,362 $ 5,420 $ 101,782 $ 102,683 $ 5,722 $ 108,405
(Loss) income before income taxes (8,887) 967 (7,920) 6,049 1,400 7,449
Long-lived assets, net 36,075 1,062 $ 37,137 35,246 1,101 36,347
</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, lending
institutions 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 nine 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 October 31, 1999 and 1998, net accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------------------------
CURRENT LONG TERM TOTAL
------- --------- -----
<S> <C> <C> <C>
Accounts receivable..................................... $ 67,133 $ 14,429 $ 81,562
Student withdrawal allowance............................ (10,596) (2,267) (12,863)
Allowance for doubtful accounts......................... (7,766) (1,841) (9,607)
-------- -------- --------
$ 48,771 $ 10,321 $ 56,092
======== ======== ========
<CAPTION>
OCTOBER 31, 1998
---------------------------------------------
CURRENT LONG TERM TOTAL
------- --------- -----
<S> <C> <C> <C>
Accounts receivable..................................... $ 78,517 $ 12,639 $ 91,156
Student withdrawal allowance............................ (12,816) (2,172) (14,988)
Allowance for doubtful accounts......................... (5,311) (1,999) (7,310)
-------- -------- --------
$ 60,390 $ 8,468 $ 68,858
======== ======== ========
</TABLE>
During the third quarter of 1999, the Company adjusted the provision for
doubtful accounts as a result of improving collection rates on CLC financed
students, which is one of the factors used in estimating the allowance for
doubtful accounts.
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 $10.7 million is utilized as of October 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. As a result, all debt
on October 31, 1999 is classified as current. The credit agreement requires
maintenance of certain financial ratios and contains other restrictive covenants
including limitations on purchases and sales of assets. As of October 31, 1999,
the Company failed to meet one of the financial ratio requirements. The Company
has obtained a commitment to an amendment of this facility including a waiver of
this financial ratio requirement from its lender. The Company is in compliance
with all other covenants as of and for the third quarter 1999. In accordance
with the terms of the commitment, the term loan component of the facility will
be eliminated and other restrictions will be imposed, including the prohibition
of acquisitions and stock repurchases by the Company. In addition, the
available credit of the facility will be reduced to $12.0 million immediately
and further reduced to $11.0 million on February 1, 2000 and to $10.0 million
on May 1, 2000. Under the terms of the commitment, the termination date of the
facility will be extended to February 28, 2001, and the interest rate
associated with the facility will change to the U.S. Prime rate plus 1%. The
commitment requires that a formal amendment is executed by December 24, 1999,
else the commitment expires and the original terms of the facility, as
previously amended, remain in effect. Until the proposed amendment is executed,
the Company remains in default and has no additional borrowing capacity under
the current credit facility.
4. -EARNINGS PER SHARE:
The following table sets forth the basic and diluted earnings per share
calculations for the three and nine months ended October 31, 1999 and 1998:
<TABLE>
<CAPTION>
NET (LOSS) PER SHARE
INCOME SHARES AMOUNT
------ ------ ------
<S> <C> <C> <C>
THREE-MONTH PERIOD ENDED OCTOBER 31, 1999
Earnings per share of common stock -- basic............. $(1,533) 18,511,603 $(0.08)
Dilutive securities-
Stock options...................................... - - -
-------- ---------- -------
Earnings per share of common stock -- diluted........... $(1,533) 18,511,603 $(0.08)
======== ========== =======
THREE-MONTH PERIOD ENDED OCTOBER 31, 1998
Earnings per share of common stock -- basic............. $473 17,331,159 $0.03
Dilutive securities-
Stock options...................................... - 322,615 -
---- ---------- -------
Earnings per share of common stock -- diluted........... $473 17,653,774 $0.03
==== ========== =====
NINE-MONTH PERIOD ENDED OCTOBER 31, 1999
Earnings per share of common stock -- basic............. $(4,598) 17,910,295 $ (0.26)
Dilutive securities-
Stock options...................................... - - -
------- ---------- --------
Earnings per share of common stock -- diluted........... $(4,598) 17,910,295 $ (0.26)
======= ========== =======
NINE-MONTH PERIOD ENDED OCTOBER 31, 1998
Earnings per share of common stock -- basic............. $ 4,478 17,268,569 $ 0.26
Dilutive securities-
Stock options...................................... - 832,312 -
--------- ---------- ------
Earnings per share of common stock -- diluted........... $ 4,478 18,100,881 $ 0.25
========= ========== ======
</TABLE>
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 options to purchase 1,826,331 shares of its Common Stock
outstanding as of October 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 nine months ended
October 31, 1999. The Company was required to issue 1,013,152 shares of Common
Stock with respect to the settlement of shareholder litigation that are included
in the earnings per share calculations since July 9, 1999, the date on which the
litigation settlement received final judicial approval (see Note 5).
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. 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. On November 19, 1999, the court certified
a class consisting of all persons who, during the six years immediately
preceding the commencement of this action, had enrolled in a course or courses
of study, education or training provided by the Company at its New Jersey
locations for which they incurred tuition expenses. On December 6, 1999, the
Company filed a motion with the Appellate Division of the Superior Court of New
Jersey to appeal the November 19, 1999 decision to certify a class. The Company
is unable to estimate the outcome of the matter or any potential liability.
Between June 1, 1998 and October 31, 1999, the Company was named as
defendant in eight 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. In two of these lawsuits, various officers and
directors of the Company have also been named as defendants. 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 cases were settled resulting in
payments to the former students of immaterial amounts. In the third quarter of
1999, one case in Virginia was also settled. Settlement expenses are combined
with legal fees and included within general and administrative expenses in
these consolidated financial statements. 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. On October 12, 1999, the United States District Court
for the Eastern District of Pennsylvania remanded the case to the Court of
Common Please in Philadelphia County, 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
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)
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.
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 October 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 have 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 nine months ended October 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 regulations 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 fiscal year 1999, the
Company's letter of credit requirement for late refunds increased from $1.5
million to approximately $2.2 million for all of the Company's U.S. Learning
Centers, excluding the Paramus 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 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
continue. The findings raised in this report do not currently affect the
continued eligibility of any of the Company's Learning Centers to participate in
the Title IV Programs or the manner in which Title IV Program funds are
disbursed. However, the Department has informed the Company in writing that its
Norcross, GA and Las Vegas, NV schools Title IV Program eligibility have been
linked to the resolution of issues in the Alexandria and Manassas, VA program
review. In response, and in order to simplify issues before the Department, the
Company has withdrawn its applications for approval to grant Title IV Program
Funding at the Learning Centers in Norcross and Las Vegas. The Company can
resubmit these applications at any time.
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 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. By letter dated
September 28, 1999, the Department of Education issued its final audit
determination letter ("FADL")
11
<PAGE> 12
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
related to this matter. In the FADL, the Department assessed repayment
liabilities of immaterial amounts. In addition, the Department deferred
resolution of any matters related to the Alexandria, VA and Laurel, MD Learning
Centers to the open program reviews conducted by the Department related to those
locations. Although the deferred issues remain open as part of Alexandria, VA
and Laurel, MD Learning Center program reviews, the Department's review of the
fiscal year 1998 compliance audit is considered closed.
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 verbally 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 the Title IV
Programs. The Company has not received any written 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, MD and Houston, TX
Learning Centers, respectively. In October 1998, MHEC issued its report citing
certain findings of regulatory noncompliance at the Laurel Learning Center. The
TWC reports ("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 MHEC. Under the terms of the
settlement, the Company agreed to pay a $60 fine and disburse all refunds
proposed by MHEC and assured MHEC that the Company would continue to implement
policies and procedures imposed by MHEC. The Company has made refunds to former
students of the Houston Learning Center and taken additional corrective
measures as directed by the TWC. During the nine months ended October 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, IL 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 conducted another site visit in September 1999 to determine if
the Learning Center had complied with the conditions on the Certificate of
Approval. On the basis of that review, ISBE issued an unconditional Certificate
of Approval for the year ending June 30, 2000. This matter is considered closed.
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
In April 1998, the Department of Education placed all Learning Centers on
"heightened cash monitoring status." This status allows all Learning Centers to
continue to receive Title IV Program funds so long as the funds requested are
drawn after they have been credited to student accounts and CLC subsequently
provides evidence of such credit and other supporting information to the
Department. The Department does not consider "heightened cash monitoring
status" to represent either an adverse or punitive action. This action by the
Department does not have any effect on the availability or timing of financial
assistance to the Company's students, nor has it had a material effect 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 NINE MONTHS ENDED
------------------ -----------------
OCTOBER 31, OCTOBER 31,
----------- -----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) income................................... $(1,533) $473 $(4,598) $4,478
Unrealized gain, net of realized gain, on
investment securities................... - - - (160)
Foreign currency translation adjustment............. (2) 14 (6) 12
-------- ---- -------- ------
Total comprehensive (loss) income................... $(1,535) $487 $(4,604) $4,330
======== ==== ======== ======
</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 NINE-MONTH
PERIOD ENDED OCTOBER 31, PERIOD ENDED OCTOBER 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.......... 74.6 66.6 72.5 63.2
Selling and promotional.................... 15.9 14.9 15.7 14.7
General and administrative................. 12.3 9.2 12.4 9.2
Provision for doubtful accounts............ 4.7 6.9 6.6 6.0
Amortization of intangible assets.......... 0.4 0.4 0.4 0.4
------------ ------------ ------------ ----------
107.9 98.0 107.6 93.5
------------ ------------ ------------ ----------
(Loss) income from operations................... (7.9) 2.0 (7.6) 6.5
Interest (expense) income, net.................. (0.2) 0.1 (0.1) 0.4
Shareholder litigation settlement expense....... - - - (0.2)
Gain on sale of investment securities........... - - - 0.3
------------ ------------ ------------ ----------
(Loss) income before income taxes............... (8.1) 2.1 (7.7) 7.0
(Benefit from) provision for income taxes....... (3.5) 0.8 (3.3) 2.9
------------ ------------ ------------ ----------
Net (loss) income............................... (4.6)% 1.3% (4.4)% 4.1%
============ ============ ============ ==========
</TABLE>
14
<PAGE> 15
THREE MONTHS ENDED OCTOBER 31, 1999 ("THIRD QUARTER OF 1999") COMPARED WITH THE
THREE MONTHS ENDED OCTOBER 31, 1998 ("THIRD QUARTER OF 1998").
Revenues decreased 11% to $33.0 million in the third quarter of 1999 from
$37.1 in the third quarter of 1998. The number of students attending Learning
Center programs at the end of the quarter decreased 14% to 10,023 in the third
quarter of 1999 from 11,629 in the third quarter of 1998.
When evaluating 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>
Third quarter Increase/
1999 1998 (Decrease) %
---- ---- ---------- -
<S> <C> <C> <C> <C>
New centers................................ 848 888 (40) (4%)
Same centers............................... 3,002 3,529 (527) (15%)
----- ----- ----- -----
Total ..................................... 3,850 4,417 (567) (13%)
===== ===== ===== =====
</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 of $24.6 million for the third quarter
of 1999 approximated that of the third 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 74.6% inthe third quarter of
1999 from 66.6% in the third quarter of 1998. This increase in cost of
instruction and services as a percentage of revenue is primarily attributable
to lower enrollments during fiscal 2000 at several of our more established U.S.
Learning Centers. Lower enrollments at our more established Learning Centers
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 Houston, TX, in Illinois, in Los Angeles, CA and in the Washington,
DC area which had declines in enrollments of 52%, 35%, 32% and 31%,
respectively, for the third quarter of 1999 compared to the same period of
1998. We attribute the decreases in enrollments to negative publicity generated
by various regulatory actions and a reduced lead conversion rate at these
centers.
Selling and promotional expenses decreased 4% to $5.3 million in the third
quarter of 1999 from $5.5 million in the third quarter of 1998. Selling and
promotional expenses as a percentage of revenues increased to 15.9% in the
third quarter of 1999 from 14.9% in the third quarter of 1998 due to decreased
revenues.
General and administrative expenses increased 18% to $4.0 million in the
third quarter of 1999 from $3.4 million in the third quarter of 1998, primarily
as a result of an increase of approximately $700,000 related to legal fees and
other legal expenses (see Part II - Item I "Legal Proceedings", contained
herein.) During the third quarter of 1998, we provided $548,000 for regulatory
obligations
15
<PAGE> 16
where as no amount was provided for in the third quarter of 1999. This decrease
in regulatory expense was offset by increased costs of staff resulting from
additional senior management and support personnel, including those in
regulatory compliance, information technology support and collection
departments. General and administrative expenses as a percentage of revenues
increased to 12.3% in the third quarter of 1999 from 9.2% in the third quarter
of 1998.
Provision for doubtful accounts decreased 40% to $1.5 million in the third
quarter of 1999 from $2.5 million in the third quarter of 1998. Provision for
doubtful accounts as a percentage of revenues decreased to 4.7% in the third
quarter of 1999 from 6.9% in the third quarter of 1998. This decrease is
attributable primarily to a reduction in the provision as a result of an
improving collection rate on CLC financed students, which is one of the factors
used in estimating our allowance for doubtful accounts.
Amortization of intangible assets equaled $141,000 in the third quarter of
1998 and 1999.
We realized net interest expense of $74,000 in the third quarter of 1999,
compared to net interest income of $36,000 in the third quarter of 1998. This is
attributable to a decrease in interest generated from lower average invested
cash balances as well as interest expense on borrowings outstanding during the
quarter.
NINE MONTHS ENDED OCTOBER 31, 1999 COMPARED WITH THE NINE MONTHS ENDED OCTOBER
31, 1998
Revenues decreased approximately 6% to $101.8 million for the nine months
ended October 31, 1999 from $108.4 million for the comparable period of the
prior year primarily due to a decrease in enrollments at our same centers and
partially offset by a shift in enrollment mix to favor our higher tuition
programs. The number of students attending Learning Center programs as of
October 31, 1999 decreased 14% to 10,023 from 11,629 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>
Nine months ended
October 31, Increase/
1999 1998 (Decrease) %
---- ---- ---------- -
<S> <C> <C> <C> <C>
New centers............. 1,987 1,640 347 21%
Same centers............ 7,493 9,655 (2,162) (22%)
----- ----- ------- -----
Total .................. 9,480 11,295 (1,815) (16%)
===== ====== ======= =====
</TABLE>
Costs of instruction and services increased 8% to $73.8 million for the
nine months ended October 31, 1999 from $68.6 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 72.5% for the nine months ended October 31, 1999 from 63.2% for
the comparable period of the prior year. This increase in cost of instruction
and services as a percentage of revenue is primarily attributable to lower
enrollments during the nine months ended October 31, 1999 at several of our
more established Learning Centers, and increased costs in anticipation of
growth that was not achieved at expected levels. Lower enrollments at our more
established U.S. Learning Centers resulted in a higher ratio of cost of
instruction due to decreased revenues without a corresponding decrease in fixed
costs. Same center enrollments have declined 22% in the nine months ended
October 31, 1999 versus the comparable period in the prior year. The decline in
same center enrollments has been greatest in terms of number of students at our
Learning Centers in the Washington, DC area, in Texas, and in California which
have had enrollment declines of 40%, 35% and 29%, respectively, for the nine
months ended October 31, 1999 compared to the same period of 1998. We attribute
the decreases in enrollments to negative publicity generated by various
regulatory actions and a reduced lead conversion rate at these centers.
16
<PAGE> 17
Selling and promotional expenses were $16.0 million for the nine months
ended October 31, 1998 and 1999. Selling and promotional expenses as a
percentage of revenues increased to 15.7% for the nine months ended October 31,
1999 from 14.7% for the comparable period of the prior year due to the
previously described revenue decline.
General and administrative expenses increased 26% to $12.6 million for the
nine months ended October 31, 1999 from $10.0 million for the comparable period
of the prior year primarily as a result of an increase in personnel to support
the growth of the business. Also contributing to this increase is approximately
$600,000 of costs related to developing a new proprietary administrative
software system, and approximately $516,000 of increased legal fees and other
legal expenses incurred in defense of lawsuits brought by former students
and employees of certain Learning Centers and other regulatory matters. General
and administrative expenses as a percentage of revenues increased to 12.4% for
the nine months ended October 31, 1999 from 9.2% for the comparable period of
the prior year.
Provision for doubtful accounts increased 2% to $6.7 million for the nine
months ended October 31, 1999 from $6.6 million for the comparable period of the
prior year. Provision for doubtful accounts as a percentage of revenues
increased to 6.6% for the nine months ended October 31, 1999 from 6.0% for the
comparable period of the prior year.
Amortization of intangibles equaled $422,000 for the nine months ended
October 31, 1999 versus $416,000 for the comparable period of the prior year.
The Company realized net interest expense of $149,000 for the nine months
ended October 31, 1999 versus net interest income of $455,000 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 nine months ended October 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased by $4.3 million for the nine month
period ended October 31, 1999. Cash used for operations for the first nine
months of 1999 compared to the first nine months of 1998 decreased by
approximately $1.9 million primarily due to the increased collection of student
receivables offsetting the decline in income as adjusted for non-cash charges.
Our principal sources of funds at October 31, 1999 were cash and cash
equivalents of approximately $3.4 million and net current accounts receivable of
$48.8 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. As a result, all debt on October 31, 1999 is classified as
current. 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 8.25% and 5.3%,
respectively at October 31, 1999. Interest rates are equal to the U.S. prime
rate or LIBOR plus 1.25%, at the Company's option, for revolving credit loans.
We have borrowings outstanding of approximately $6.7 million on our line of
credit as of October 31, 1999. In addition, we have pledged portions of our line
of credit totaling $4.0 million to the Department of Education, to our insurance
carrier and to our lessors on behalf of certain Learning Centers. As of October
31, 1999, we had $9.3 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 October 31, 1999, the Company failed to meet one of the
financial ratio requirements. We have obtained a commitment to an amendment of
this facility including a waiver of this financial ratio requirement from our
lender. We are in compliance with all other covenants as of and for the third
quarter 1999. In accordance with the terms of the commitment, the term loan
component of the facility will be eliminated and other restrictions will be
imposed, including the prohibition of acquisitions and stock repurchases by the
Company. In addition, the available credit of the facility will be reduced to
$12.0 million immediately and further reduced to $11.0 million on February 1,
2000 and to $10.0 million on May 1, 2000. Under the terms of the commitment,
the termination date of the facility will be extended to February 28, 2001, and
the interest rate associated with the facility will change to the U.S. Prime
rate plus 1%. The commitment requires that a formal amendment is executed by
December 24, 1999, else the commitment expires and the original terms of the
facility, as previously amended, remain in effect. Until the proposed amendment
is executed, the Company remains in default and has no additional borrowing
capacity under the current credit facility.
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 December 15, 1999, we had not purchased any stock
under this program. Under the terms of the commitment of amendment to our
credit facility we will be restricted from making any future purchases of our
Common Stock. We were required to issue 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 million to develop and implement this system, which we
anticipate will be completed by April 30, 2000. To date we have expended
approximately $1.5 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 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. The Department has informed us in
writing that our Norcross, GA and Las Vegas, NV Learning Centers Title IV
Program eligibility have been linked to the resolution of issues in the
Alexandria and Manassas, VA program review. In response, and in order to
simplify issues before the Department, we have withdrawn our applications for
approval to grant Title IV Program funding at the Learning Centers in Norcross
and Las Vegas. We can resubmit these applications at any time.
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 timeframes
established by the Department. The Department required us to perform more
expansive reviews of student account files at five of these Learning Centers,
which were deemed to have findings of non-compliance in excess of rates
acceptable to the Department. By letter dated September 28, 1999, the Department
of Education issued its final audit determination letter ("FADL") related to
this matter. In the FADL, the Department assessed repayment liabilities of
immaterial amounts. In addition, the Department deferred resolution of any
matters related to the Alexandria, VA and Laurel, MD Learning Centers to the
open program reviews conducted by the Department related to those locations.
Although the deferred issues remain open as part of Alexandria, VA and Laurel,
MD Learning Center program reviews, the Department's review of the fiscal year
1998 compliance audit is considered closed.
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
verbally 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 audit identified certain findings of non-compliance with
respect to our administration of the Title IV Programs. The audit 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, there were no late refunds for
approximately a 45-day period beginning in May 1999. The Company has not
received any significant communication from the Department with respect to this
compliance audit.
On December 10, 1999, we received a subpoena from the Office of Inspector
General of the Department of Education for the production of various documents
and materials related to the compensation of our admissions representatives and
the calculation of our student loan cohort default rates. The Office of
Inspector General has also recently served subpoenas on the accounting firm that
audits our financial statements and the accounting firm that performs our Title
IV Programs compliance audits, for copies of certain of their audits, workpapers
and other materials prepared in the course of their work on our behalf. In
discussion with the responsible attorney at the U.S. Department of Justice on
December 17, 1999 regarding the subpoena issued to us on December 10, 1999, our
attorney determined that the subpoena was issued with respect to a qui tam
lawsuit filed against us in Federal District Court in Texas alleging that our
compensation of certain employees was not in compliance with provisions of Title
IV of the Higher Education Act of 1965, as amended. We are currently in the
process of assembling the information requested by the Department in this
matter.
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, IL 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
conducted another site visit in September 1999 to determine if the Learning
Center had complied with the conditions on the Certificate of Approval. On the
basis of that review, ISBE issued an unconditional Certificate of Approval for
the year ending June 30, 2000. The matter is now considered closed.
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, MD Learning Center in October 1998. In conjunction with this
settlement agreement, we paid a $60,000 fine, made certain refunds and assured
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, TX Learning
Center. During the first quarter of fiscal 2000, 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.
19
<PAGE> 20
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 the Accrediting Council for
Independent Colleges and Schools, which 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 third quarter of fiscal
2000. 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 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 enroll students or award
credentials and to participate in the Title IV Programs and would have a
material adverse effect on our results of operations and financial condition.
The loss of accreditation by an existing Learning Center or the failure of a
newly acquired Learning Center to obtain accreditation 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 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, 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 Program 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
may recognize the year 2000 as 1900, or not at all. This inability to recognize
or properly treat the year 2000 may cause systems to process critical
information incorrectly. The following is a "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Disclosure Act.
State of Readiness
We have assessed and continue to assess the state of Y2K readiness of our
internal information technology ("IT") systems, those of vendors on which we
place significant reliance and our non-information technology systems. Our Y2K
plan contains five phases: phase one is the inventorying and discovery of all
elements that impact the Company's ability to conduct business in a normal
manner; phase two is the analysis and assessment of critical information
technology for Y2K compliance; phase three is the construction of remedies
and solutions to the Y2K issues identified in discovery; phase four is the
implementation and testing of solutions, including necessary repair work,
modifications, and replacements to system software and hardware; and phase five
is the development of a contingency plan identifying alternative resolutions to
unanticipated issues that may arise relative to the Company's operations.
We substantially completed phase four during the third quarter of fiscal
2000. We formally began phase five of our Y2K plan at the start of the second
quarter of fiscal 2000. We will continue to assess Y2K risk, our Y2K plan and
contingency efforts as Y2K approaches. Our Y2K plan relates primarily to the
Company's own IT-Systems. 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 had made limited progress in making
contingency plans, should its IT systems fail, and thus the Department's plans
may not identify remedies to 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 $275,000 in direct costs
through December 13, 1999 to identify and remediate the Company's Y2K issues. We
estimate that we will expend an additional $25,000 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.
22
<PAGE> 23
There can be no assurance that the actual Y2K related costs will not differ
materially from our current expectations or that our contingency plan, if
needed, will sufficiently mitigate Y2K related problems. Specific factors that
might cause such material differences include, but are not limited to, our
success in identifying additional systems and programs that are not Y2K ready,
the nature and amount of programming required to upgrade or replace each of the
affected programs, the availability, rate and magnitude of related labor and
consulting costs; the success of our business partners and vendors in addressing
the Y2K issue and the ability to formulate and successfully implement
contingency plans, if required, and similar uncertainties.
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. 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. On November 19, 1999, the Court certified a class consisting of all
persons who, during the six years immediately preceding the commencement of this
action had enrolled in a course or courses of study, education or training
provided by the Company at its New Jersey locations for which they incurred
tuition expenses. On December 6, 1999, the Company filed a motion with the
Appellate Division of the Superior Court of New Jersey to appeal the November
19, 1999 decision to certify a class. We are unable to estimate the outcome of
the matter or any potential liability.
Between June 1, 1998 and October 31, 1999, the Company was named as
defendant in eight 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. In two of these lawsuits, various officers and
directors of the Company have also been named as defendants. 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 fiscal 2000, two of these cases were settled resulting in
payments to the former students of immaterial amounts. In the third quarter of
fiscal 2000, one case in Virginia was also settled. Settlement expenses are
combined with legal fees and included within general and administrative
expenses in the consolidated financial statements. 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. On October 12, 1999, the United States District Court
for the Eastern District of Pennsylvania remanded the case to the Court of
Common Pleas in Philadelphia County, 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.
The Company intends to defend itself 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
24
<PAGE> 25
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.
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 October 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 have 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.
None.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
A list of exhibits required to be filed as part of this report is set forth
in the Index to exhibits, which immediately precedes such exhibits and is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Report Date Event Reported
----------- --------------
<S> <C>
November 4, 1999 The Company announced it had retained an investment bank to
explore the opportunities to maximize shareholder value,
including the possible sale of the Company.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: December 17, 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 October 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 of
October 31, 1998 by and between First the Registrant's report on Form 10-Q for the
Union National Bank and the Registrant quarter ended April 30, 1999 filed June 14,
1999
10.2 Second Amendment of Credit Agreement, dated Incorporated by reference to Exhibit 10.2 of
June 10, 1999 by and between First Union the Registrant's report on Form 10-Q for the
National Bank and the Registrant quarter ended April 30, 1999 filed June 14,
1999
10.5 Severance Agreement, dated July 20, 1999 by and Incorporated by reference to Exhibit 10.2
between Christine Strachota and the Registrant of the Registrant's report on Form 10-Q
for the quarter ended July 31, 1999 filed
September 13, 1999
27 Financial Data Schedule Filed herewith.
</TABLE>
27
<TABLE> <S> <C>
<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>
<CIK> 0000943206
<NAME> N/A
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 3,414
<SECURITIES> 0
<RECEIVABLES> 81,562
<ALLOWANCES> (22,470)
<INVENTORY> 1,054
<CURRENT-ASSETS> 65,440
<PP&E> 50,349
<DEPRECIATION> (23,212)
<TOTAL-ASSETS> 117,060
<CURRENT-LIABILITIES> 62,807
<BONDS> 0
0
0
<COMMON> 185
<OTHER-SE> 49,765
<TOTAL-LIABILITY-AND-EQUITY> 117,060
<SALES> 0
<TOTAL-REVENUES> 101,782
<CGS> 0
<TOTAL-COSTS> 109,553
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 149
<INCOME-PRETAX> (7,920)
<INCOME-TAX> (3,322)
<INCOME-CONTINUING> (4,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,598)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
