<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2000
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.)
10021 BALLS FORD ROAD,
SUITE 200,
MANASSAS, VIRGINIA 20109
(Address of principal executive offices) (Zip Code)
</TABLE>
(703) 367-7000
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AS OF SEPTEMBER 7, 2000
<S> <C>
Common Stock, $.01 par value 18,617,646
</TABLE>
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<PAGE> 2
COMPUTER LEARNING CENTERS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations..................... 3
Consolidated Balance Sheets............................... 4
Consolidated Statements of Cash Flows..................... 5
Notes to Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
Item 3. Quantitative and Qualitative Disclosures about
Market Risks.............................................. 26
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................... 27
Item 2. Changes in Securities............................... 28
Item 3. Defaults Upon Senior Securities..................... 28
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 28
Item 5. Other Information................................... 28
Item 6. Exhibits and Reports on Form 8-K.................... 28
SIGNATURES.................................................. 29
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE-MONTH SIX-MONTH
PERIOD ENDED PERIOD ENDED
JULY 31, JULY 31,
------------------ ------------------
1999 1999
RESTATED RESTATED
2000 (NOTE 2) 2000 (NOTE 2)
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues................................................ $31,709 $33,087 $66,054 $69,376
------- ------- ------- -------
Costs and expenses:
Costs of instruction and services..................... 24,377 23,724 50,567 49,224
Selling and promotional............................... 4,809 5,220 10,172 10,757
General and administrative............................ 4,088 3,656 8,960 8,601
Provision for doubtful accounts....................... 1,915 2,617 3,782 5,168
Amortization of intangible assets..................... 140 140 281 281
------- ------- ------- -------
35,329 35,357 73,762 74,031
------- ------- ------- -------
Loss from operations.................................... (3,620) (2,270) (7,708) (4,655)
Interest expense, net................................... (229) (66) (348) (75)
------- ------- ------- -------
Loss before income taxes................................ (3,849) (2,336) (8,056) (4,730)
Benefit from income taxes............................... (1,600) (973) (3,350) (1,967)
------- ------- ------- -------
Net loss.............................................. $(2,249) $(1,363) $(4,706) $(2,763)
======= ======= ======= =======
Loss per share of common stock:
Basic and diluted..................................... $ (0.12) $ (0.08) $ (0.25) $ (0.16)
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 4
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 31, JANUARY 31,
2000 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,490 $ 7,819
Accounts receivable, net.................................. 45,206 51,074
Income taxes receivable................................... 315 6,083
Deferred tax asset........................................ 6,903 5,541
Prepaid expenses and other current assets................. 3,020 3,440
-------- --------
Total current assets.............................. 58,934 73,957
-------- --------
Fixed assets, net........................................... 30,675 34,558
Long-term accounts receivable, net.......................... 10,183 10,439
Long-term deferred tax asset................................ 5,817 2,021
Other long-term assets...................................... 3,199 3,333
-------- --------
Total assets...................................... $108,808 $124,308
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 5,972 $ 3,520
Accrued employee expenses................................. 4,688 3,091
Accrued other expenses.................................... 6,666 6,498
Current portion of long-term debt......................... 3,174 8,455
Deferred revenues......................................... 41,868 50,833
-------- --------
Total current liabilities......................... 62,368 72,397
Long-term deferred revenues................................. 2,497 1,191
Long-term debt, net of the current portion.................. 0 2,500
Other long-term liabilities................................. 3,496 3,061
-------- --------
Total liabilities................................. 68,361 79,149
-------- --------
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; 18,617,646 and 18,610,818 issued and
outstanding............................................ 186 186
Additional paid-in capital................................ 41,120 41,120
Accumulated other comprehensive loss...................... (65) (59)
(Accumulated deficit)/Retained earnings................... (794) 3,912
-------- --------
Total stockholders' equity........................ 40,447 45,159
-------- --------
Total liabilities and stockholders' equity........ $108,808 $124,308
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX-MONTH
PERIOD ENDED
JULY 31,
-------------------
1999
RESTATED
2000 (NOTE 2)
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (4,706) $ (2,763)
Adjustments to reconcile net loss to cash from operating
activities:
Provision for doubtful accounts........................ 3,782 5,168
Deferred tax benefit................................... (3,425) --
Depreciation........................................... 4,827 4,731
Amortization of intangible assets...................... 281 281
Changes in net assets and liabilities:
Accounts receivable.................................... 2,781 7,090
Income taxes receivable................................ 4,035 --
Prepaid expenses and other current assets.............. 420 1,057
Long-term accounts receivable.......................... (439) 1,578
Other long-term assets................................. (153) (205)
Trade accounts payable................................. 2,452 (3,139)
Accrued employee expenses.............................. 1,597 346
Accrued other expenses................................. 168 (2,840)
Deferred revenues...................................... (8,965) (11,012)
Long-term deferred revenues............................ 1,306 (1,581)
Other long-term liabilities............................ 435 274
-------- --------
Cash provided by (used for) operating activities..... 4,396 (1,008)
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (944) (5,020)
-------- --------
Cash used for investing activities................... (944) (4,856)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt.............................. (24,680) --
Borrowing from long-term debt............................. 16,899 1,875
-------- --------
Cash (used for) provided by financing activities..... (7,781) 1,875
-------- --------
Net decrease in cash and cash equivalents................... (4,329) (4,153)
-------- --------
Cash and cash equivalents, beginning of period.............. 7,819 7,691
-------- --------
Cash and cash equivalents, end of period.................... $ 3,490 $ 3,538
======== ========
</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, 2000, the Company
operated twenty-eight Learning Centers in the U.S. and Canada and is
headquartered in Manassas, Virginia.
Basis of Presentation
The interim consolidated financial statements of Computer Learning Centers,
Inc. as of and for the three and six months ended July 31, 2000 and 1999 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 2000 included in the Company's Annual Report on the
SEC's Form 10-K ("2000 Annual Report") have been omitted.
These consolidated financial statements should be read in conjunction with
the 2000 Annual Report on Form 10-K. The Company's consolidated balance sheet as
of January 31, 2000 was derived from the audited financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
As used herein, the three-month periods ended July 31, 2000 and 1999 are
referred to as "second quarter 2000" and "second quarter 1999," respectively.
Geographic information
The following table sets forth financial information for the Company's U.S.
and Canadian operations.
<TABLE>
<CAPTION>
1999-RESTATED
2000 (NOTE 2)
AS OF AND FOR THE THREE-MONTH ---------------------------- ---------------------------------
PERIODS ENDED JULY 31, U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
----------------------------- ------- -------- ------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $30,271 $1,438 $31,709 $31,409 $1,678 $33,087
(Loss) income before income
taxes............................ (3,892) 43 (3,849) (2,405) 69 (2,336)
</TABLE>
<TABLE>
<CAPTION>
1999-RESTATED
2000 (NOTE 2)
AS OF AND FOR THE SIX-MONTH ---------------------------- ---------------------------------
PERIODS ENDED JULY 31, U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
--------------------------- ------- -------- ------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues........................... $62,758 $3,296 $66,054 $65,622 $3,754 $69,376
(Loss) income before income
taxes............................ (8,250) 194 (8,056) (5,353) 623 (4,730)
Long-lived assets, net............. 29,804 871 30,675 36,951 942 37,893
</TABLE>
2. RESTATEMENT OF FINANCIAL STATEMENTS
In the fourth quarter of fiscal 2000, management reviewed its policies with
respect to revenue recognition relative to other companies within the industry.
This review was predicated upon a heightened awareness of revenue recognition
policies. As previously disclosed, the Company recognized revenues on a pro rata
basis over the term of instruction, which varies based on the length of the
program. The Company recognized revenue using a half-month convention by
recognizing one-half month of tuition revenue during the starting
6
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COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
and graduating months of a student's program of study, without consideration of
the number of days scheduled for class during such start month. For all of the
interim months, a full month of revenue was recognized.
CLC commences new classes every month and the start dates of these classes
are typically near the end of the month. For example, the Company determined
that on average, students were, and continue to be, in attendance for one-sixth
of a month in the start month, and five-sixths of a month in the graduating
month. The half-month convention was applied primarily for administrative ease.
As a result of the Company's review, the method of recognizing revenue has
changed to an instructional day basis, thereby matching the recognition of
revenue to the instructional term for all students.
In addition, the Company had historically expensed all direct student
acquisition costs as incurred. These costs primarily related to recruiting
representatives' salaries, employee benefits and other direct costs. As such,
the half-month revenue convention served to mitigate the impact of this
immediate expensing. Current accounting guidelines, notably the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," issued in December 1999, now require the deferral of
"incremental direct" acquisition costs over the contract period with the
expensing of all other acquisition costs. As a significant portion of student
acquisition costs defined above do not qualify as "incremental direct" costs,
these costs would not be eligible for deferral.
Accordingly, the Company has also modified its policy in order to defer
incremental direct acquisition costs, which consist primarily of certain third
party fees paid on behalf of the students, net of nominal enrollment fees
collected from the students at the beginning of their programs.
The effect of these adjustments on prior fiscal years financial statements
are discussed in the Company's Annual Report on Form 10-K for the year ended
January 31, 2000 in Note 2 of the Notes to Consolidated Financial Statements.
Accordingly, the financial statements and financial information contained
herein for the second quarter and six-month period of 1999 have been restated.
The statement of operations has been restated as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JULY 31, 1999 JULY 31, 1999
------------------- -------------------
REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................ $32,845 $33,087 $68,827 $69,376
Costs and expenses.............................. 35,341 35,357 73,993 74,031
Loss from operations............................ (2,496) (2,270) (5,166) (4,655)
Net loss........................................ (1,497) (1,363) (3,065) (2,763)
Loss per share:
Basic and Diluted............................. $ (0.08) $ (0.08) $ (0.17) $ (0.16)
</TABLE>
3. REGULATORY MATTERS:
The Company is subject to extensive regulation as a participant in various
federal and state government supported student 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.
7
<PAGE> 8
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
U.S. Department of Education -- Regulation and Review
Under the Department of Education's regulations, a cohort default rate on
loans under the Federal Family Education Loan ("FFEL") or Federal Direct Loan
("FDL") programs equal to or exceeding 25% in any one of the three most recent
federal fiscal years or a default rate on Perkins loans of more than 15% in a
year can be a basis for the Department to place that institution on provisional
certification for up to four years for lack of administrative capability. As of
August 31, 2000, four of the Company's Learning Centers are provisionally
certified for participation in the Title IV Programs due either to cohort
default rates or the change of control following the Company's acquisition of
these Learning Centers. The provisional certification of two of these four
Learning Centers extends through dates ranging from July 2001 to September 2001,
at which time the Company expects to apply for recertification of these Learning
Centers. The provisional certification of the two other Learning Centers has
expired but remains in effect while the Department reviews the Learning Centers'
pending applications for recertification. The Company's Perkins loan default
rate, which applies to 21 of its Learning Centers, for the most recent fiscal
year exceeds 15%, which may lead to the provisional certification of other
Learning Centers.
Under the standards of financial responsibility of the Department of
Education, if an institution's annual financial aid compliance audit or a review
by a regulatory agency finds that the institution made refunds late (as defined
by the Department) to 5% or more of its withdrawn 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
2001, the Company has posted letters of credit of approximately $1.8 million for
all of the Company's U.S. Learning Centers, excluding the Paramus Learning
Center, for which no letter of credit was required.
In May 1998, the Department of Education initiated a program review of the
administration of the Title IV Programs by the Company's Alexandria, VA and
Manassas, VA Learning Centers for the period July 1, 1996 through June 30, 1998.
In September 1998, the Department issued a preliminary report containing a
number of findings alleging non-compliance with certain Title IV Program
requirements. CLC has performed file reviews at these schools and provided
additional materials requested by the Department. In order to conclude this
program review, the Department has requested CLC to perform an additional file
review of returns of federal funds during the review period for the Alexandria
campus. Also as part of this program review, the Department has requested that
the Company perform specified file reviews for its San Jose, Philadelphia and
Houston Learning Centers. These reviews are now in process. The Company does not
believe that the resolution of these reviews will have a material impact on the
Company's business, financial condition and results of operations
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 June 30, 1999. The Department issued
a preliminary report in February 2000, which contained a number of findings
alleging non-compliance with certain Title IV Program requirements similar to
those found in the Alexandria and Manassas program review discussed above. The
Company has submitted responses to the Department concerning all of the
findings, and is presently in the process of performing the file reviews as
agreed to with the Department. The Company does not believe that the resolution
of this review will have a material impact on the Company's business, financial
condition and results of operations.
In July 1999 and August 2000, the Company submitted to the Department the
results of the independent audits on the Company's administration of the Title
IV Programs by all of the Learning Centers for the fiscal years ended January
31, 1999 and January 31, 2000, respectively. Each of these audits identified
certain findings of non-compliance with respect to the Company's administration
of the Title IV Programs. The Company has received acknowledgement that the
Department has received the audits. They
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)
are subject to quality control reviews and the Company will receive subsequent
letters indicating actions to resolve findings. does not believe that the
resolution of either of these matters will have a material impact on the
Company's business, financial condition and results of operations.
On December 10, 1999, the Company 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 its admissions
representatives and the calculation of its student loan cohort default rates.
The Office of Inspector General also served subpoenas on the accounting firm
that had audited the Company's financial statements and the accounting firm that
had performed the Company's Title IV Program compliance audits, for copies of
certain of their audits, work papers and other materials prepared in the course
of their work on the Company's behalf. In discussion with the responsible
attorney at the U.S. Department of Justice in December 1999 regarding the
December subpoena, the Company's attorney determined that the subpoena was
issued with respect to a qui tam lawsuit filed against the Company in Federal
District Court in Texas alleging that the Company's compensation of certain
employees was not in compliance with provisions of Title IV of the Higher
Education Act. The Company has submitted all the documents requested by the
Department of Education in the December subpoena. On or about July 24, 2000, the
Company received a second subpoena from the Office of Inspector General seeking
certain additional information. Some of the requested documents have been
submitted and the remaining requested documents are in the process of being
gathered. The Company's management believes that the compensation plans are in
compliance with the Higher Education Act.
Financial Responsibility
The Higher Education Act and the Department of Education regulations
require institutions participating in the Title IV Programs to demonstrate that
they have sufficient resources to properly administer Title IV funds on behalf
of their students and provide appropriate educational services to their
students. The regulations allow the Department to evaluate an institution based
on its own financial condition or that of the consolidated corporation.
Historically, the Department has evaluated the financial condition of the
Learning Centers on a consolidated basis.
The Department evaluates an institution's financial responsibility based on
three ratios: an equity ratio, a primary reserve ratio and a net income ratio;
1. the equity ratio measures an institution's capital resources, ability
to borrow and financial viability;
2. the primary reserve ratio measures an institution's ability to support
current operations from expendable resources; and
3. the net income ratio measures the ability of an institution to operate
at a profit.
The ratios are calculated each year based on an institution's annual
audited financial statements. The results of each ratio are assigned a strength
factor and then combined under a weighted formula to arrive at a composite score
for the institution ranging from minus one to three, the latter being the
highest possible score. An institution that achieves a composite score of at
least 1.5 is considered to be financially responsible without the need for
further oversight. If an institution achieves a composite score of more than 1.0
but less than 1.5, it may continue to participate in the Title IV Programs;
however this may require additional reporting and monitoring procedures as
determined by the Department, including the receipt of its Title IV Program
funds on the "cash monitoring" basis. Such reporting and monitoring procedures
also would require the institution to report significant financial or regulatory
events such as any violation of a loan agreement. Three of the Company's
twenty-three U.S. Learning Centers that are eligible to participate in the Title
IV Programs currently operate under "heightened cash monitoring." If an
institution's composite score is less than 1.0 an
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)
institution may establish its financial responsibility by posting an irrevocable
letter of credit in favor of the Secretary of Education in an amount equal to
not less than 10 percent of the Title IV Program funds received by the
institution during its most recent fiscal year, as well as accepting additional
reporting and monitoring procedures, including either the "cash monitoring" or
"reimbursement" methods of disbursing its Title IV Program funds, and accepting
provisional certification. In addition, regardless of its financial condition,
an institution may establish its financial responsibility by posting an
irrevocable letter of credit in favor of the Secretary of Education in an amount
equal to not less than one-half the Title IV Program funds received by the
institution during its most recent fiscal year.
Based on its audited financial statements for fiscal 2000, we have
calculated a composite score of 1.3 for CLC. On this basis, the Department could
return some or all of the Learning Centers to heightened cash monitoring status.
Although we believe the Department's emphasis is on CLC as a whole, the
Department has the right to apply the financial responsibility measures on an
individual institution basis. Based on the audited financial statements for
fiscal 2000 the Company has determined that two of the Company's main campuses
have a composite score below 1.0 and the remaining seven main campuses have
composite scores that exceed 1.5.
Heightened Cash Monitoring
The Department has discretion to alter the way it provides Title IV Program
funds to participating institutions. It may transfer an institution from the
"advance" system of funding, under which an institution receives funding from
the Department in advance based on anticipated need, to the "reimbursement"
system of payment, under which an institution must disburse funds to students
and document their eligibility for Title IV Program funds before receiving funds
from the Department. The Department may also impose a requirement known as
"heightened cash monitoring," of which there are multiple levels, which requires
additional reporting to and review by the Department of all Title IV funds
requests.
On April 6, 1998, the Company was notified by the Department of Education
that, based upon the Department's monitoring of litigation involving the Company
and certain student complaints lodged against the Company, it had placed all
Learning Centers on "heightened cash monitoring status 1" ("HCM1"). 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 the Department. The Department does
not consider HCM1 to represent either an adverse or punitive action. This action
by the Department did not have an effect on the availability or timing of
financial assistance to the Company's students, nor did it have a material
effect on the Company's cash flow or operating results.
On March 8, 2000, the Department notified the Company that it was placing
all of the Company's Learning Centers on "heightened cash monitoring status 2"
("HCM2"). HCM2 does not affect the ability of Learning Centers to obligate Title
IV Program funds or the theoretical ability of their students to receive all
applicable forms of federal student aid. However, under HCM2, Learning Centers
are required to document to the Department on a sample basis, each student's
eligibility for Title IV Program funding before being reimbursed by the
Department for funds which they must advance to their eligible students. HCM2
procedures require the effected Learning Centers to submit extensive
documentation proving student eligibility. Those documents are then reviewed by
the Department. The Department's review process customarily requires a minimum
of thirty days. The initial delay in the timing of Title IV cash flow under HCM2
has exceeded 170 days. Management expects that HCM2 will eventually delay the
timing of Title IV cash flow for any effected campus by approximately 75 days.
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)
The Department stated that the March 8, 2000 action was based on
information obtained during its Alexandria, Manassas and Laurel program reviews,
which indicated that the Company had failed to make refunds for some students
and had failed to make refunds on a timely basis for other students. The Company
vigorously disputed the Department's basis for this action and explained the
significant adverse financial effects such action would have. On March 14, 2000,
the Company reached an agreement with the Department resulting in a modification
of the terms of its March 8 action. The key terms of the agreement are that only
the Company's Alexandria, VA and Laurel, MD Learning Centers would be placed on
HCM2, that the remaining Learning Centers would continue on HCM1 but with
additional reporting and documentation requirements, and that the Company must
engage an independent accountant to attest to the compliance with Title IV
requirements respecting the timely payment of refunds and returns of funds by
all of the Company's U.S. Learning Centers receiving Title IV funds (the
"Special Attestation").
The Special Attestation required by the Department as part of the March 14,
2000 agreement covered the payment of refunds and other returns of federal funds
for the seven-month period ended January 31, 2000. The results of the Special
Attestation were submitted to the Department on June 1, 2000. The Special
Attestation showed that for the period covered there was a Company-wide
exception rate of only 2 percent. Based on its review of the Special
Attestation, on July 20, 2000, the Department, returned all but three of the
Company's Learning Centers to the advance system of payment for Title IV funds.
The Department left the Philadelphia Learning Center on HCM1 status, and left
the Alexandria, VA and Laurel, MD Learning Centers on HCM2 status with reduced
reporting requirements.
State Authorization and Accreditation
The Company is dependent on the authorization of the applicable agency or
agencies of each state within which a Learning Center is located to allow it to
operate and to grant degrees or diplomas to students. State authorization is
also required in order for an institution to become and remain eligible to
participate in the Title IV Programs. The Company is subject to extensive and
varying regulation in each of the states in which the Learning Centers operate.
State laws and regulations affect the Company's operations and may limit the
ability of the Company to introduce degree programs or to initiate new programs
of study, or to obtain authorization to operate in certain additional states.
State regulatory requirements may overlap or exceed federal requirements. The
Company has no significant state regulatory actions open that management expects
to result in adverse action or material fines and assessments. 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 effected
Learning Center ineligible to participate in the Title IV Programs, could affect
its accreditation and would have a material adverse effect on the Company.
The Company is required to submit to its accreditation agency annual
placement and retention rates for each Learning Center. The Company was notified
in May 2000 that based on its most recent submission, that was for the
twelve-month period ended June 30, 1999, eight of its Learning Centers did not
achieve the minimum requirement for placement rates and one of these eight
Learning Centers did not achieve the minimum retention rate requirement.
Consequently, these eight Learning Centers have been assigned reporting
requirements by the Company's accreditation agency.
The Company is required to submit to its accreditation agency annual
financial statements for each main campus and the reporting units included
within each main campus. The Company was notified in September 2000 that based
on its most recent submission, for the twelve-month period ended January 31,
2000, two of its nine main campuses did not achieve the minimum profitability
requirement. Consequently, these two main campuses have been assigned reporting
requirements by the Company's accreditation agency.
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)
4. ACCOUNTS RECEIVABLE:
Student accounts receivables 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. An academic
year is determined based on the length of the student's educational program and
compliance with regulatory guidelines. Accounts receivables consist of financial
aid, third-party and self-pay receivable balances. Financial aid receivables are
student receivable balances expected to be paid through Title IV program funds.
Third party student receivable balances are those to be paid by employer
companies or various non-Title IV federal, state and non-governmental agencies.
Self-pay student receivables consist of those amounts to be paid by the student.
The Company makes available to qualifying students alternative financing
arrangements ("CLC financing"), which help fund their education. Dependent upon
the credit worthiness of the individual, CLC financing may be offered to assist
students with meeting their financial obligations related to attending CLC. The
Company requires students receiving CLC financing to make regular monthly
payments. Depending on the level of financing extended to students, payment
plans offered generally range from six months to three years. All amounts due to
the Company in periods beyond one year are classified as long-term receivables.
When a student withdraws, tuition paid in excess of earned tuition revenues
is refunded based on the applicable refund policy. Conversely, tuition revenues
earned in excess of tuition paid remains as an accounts receivable. Based on
comparison to historical levels, the Company provides for estimated student
withdrawals, as reductions to accounts receivable and related deferred revenue
balances, thus presenting these amounts at estimated net realizable value.
Accounts receivable balances are reviewed no less than quarterly for the
purposes of determining appropriate levels of the 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 typically
charges-off accounts receivable balances deemed to be uncollectible usually
after they are delinquent 120 days. All charge offs are recorded as reductions
in the allowance for doubtful accounts, with any recoveries of previously
written off accounts receivables recorded as increases to the allowance for
doubtful accounts.
As of July 31, 2000, net accounts receivable consisted of the following:
<TABLE>
<CAPTION>
JULY 31, 2000
-----------------------------
CURRENT LONG TERM TOTAL
------- --------- -------
<S> <C> <C> <C>
Accounts receivable..................................... $61,638 $13,518 $75,156
Student withdrawal allowance............................ (8,268) (1,702) (9,970)
Allowance for doubtful accounts......................... (8,164) (1,633) (9,797)
------- ------- -------
Accounts receivable, net................................ $45,206 $10,183 $55,389
======= ======= =======
</TABLE>
5. LONG-TERM DEBT:
As disclosed in the Annual Report on Form 10-K (Note 9), the Company has a
stand-alone revolving credit facility with a maximum borrowing capacity of $9.2
million as well as a separate facility for letters of credit of $3.3 million.
The interest rate on outstanding balances is equal to the bank's U.S. prime rate
plus two percent with an additional interest fee of up to three percent based on
the amount of outstanding borrowings.
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)
The prime rate of the Company's bank was 9.5% as of July 31, 2000. Both credit
facilities expire on May 31, 2001. The declining amounts of available credit
over the term of each facility is structured as follows:
<TABLE>
<CAPTION>
LETTER OF CREDIT
CREDIT FACILITY* FACILITY TOTAL
---------------- ---------------- -------
<S> <C> <C> <C>
May 15 -- July 31, 2000................. $9,200 $3,300 $12,500
August 1 -- September 30, 2000.......... 3,700 2,575 6,275
October 1 -- October 31, 2000........... 3,000 2,575 5,575
November 1, 2000 -- May 31, 2001........ 2,500 2,575 5,075
</TABLE>
---------------
* The facility provides for required prepayments based on tax refunds and other
collateral which when received by the bank would reduce the available credit
to the $2,500 level prior to November 1, 2000.
The Company had extended approximately $2.1 million of letters of credit at
July 31, 2000. Beginning on August 1, 2000 and for nine months hereafter, the
Company is required to deposit $250 into a restricted cash account, until the
balance is equal to 110% of the outstanding letters of credit, or the facility
is terminated. The credit agreement requires maintenance of certain financial
ratios and other restrictive covenants including limitations on purchases and
sales of assets. As of July 31, 2000, the Company was in compliance with all
ratios and covenants. In July 2000 the Company received a Federal tax refund of
approximately $4.0 million which reduced the revolving credit facility to $5.2
million. On August 1, 2000, the revolving credit facility was reduced to $3.7
million and in August 2000 the Company received a state tax refund equal to $169
further reducing the revolving credit facility to approximately $3.5 million. On
August 31, 2000 the Company completed the sale of its Canadian Learning Centers
("Delta College"). Upon completion of the sale, the bank received $391,000
further reducing the credit facility to approximately $3.1 million.
6. LOSS PER SHARE:
The following table sets forth the basic and diluted loss per share
calculations for the three and six months ended July 31, 2000 and 1999:
<TABLE>
<CAPTION>
NET (LOSS) PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ---------
<S> <C> <C> <C>
THREE-MONTH PERIOD ENDED JULY 31, 2000
Loss per share of common stock -- basic and diluted......... $(2,249) 18,617,646 $(0.12)
======= ========== ======
THREE-MONTH PERIOD ENDED JULY 31, 1999
Loss per share of common stock -- basic and diluted......... $(1,363) 17,726,030 $(0.08)
======= ========== ======
</TABLE>
<TABLE>
<CAPTION>
NET (LOSS) PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ---------
<S> <C> <C> <C>
SIX-MONTH PERIOD ENDED JULY 31, 2000
Loss per share of common stock -- basic and diluted......... $(4,706) 18,617,646 $(0.25)
======= ========== ======
SIX-MONTH PERIOD ENDED JULY 31, 1999
Loss per share of common stock -- basic and diluted......... $(2,763) 17,609,640 $(0.16)
======= ========== ======
</TABLE>
7. 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
13
<PAGE> 14
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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. On January 19, 2000, that motion was denied. The Company is unable to
estimate the outcome of the matter 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. 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.
Between June 1, 1998 and October 31, 1999, the Company was named as
defendant in four other lawsuits in Texas and New Jersey by individual students
or groups of students who formerly attended one of its Learning Centers. The
June 1, 1998 lawsuit has been settled. In two of the remaining lawsuits, various
present or former officers, directors and employees of the Company were also
named as defendants. In May of 2000, the officers and directors were dismissed
as defendants in these two lawsuits; however, those decisions have been
appealed. 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, and student outcomes and violated certain provisions of the
applicable state consumer laws. The Company is unable to estimate the outcome of
these matters 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 and other
third parties, 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 severe impact 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 have involved and could continue to involve
substantial diversion of the time of some members of management. An adverse
determination in, or settlement of, such litigation could involve payment of
significant amounts, or could include terms in addition to such payments, or
could lead to other adverse consequences, including the suspension or
termination of the Company's licenses to operate within the respective state,
which would have a severe impact on the Company's business, financial condition
and results of operations.
14
<PAGE> 15
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. COMPREHENSIVE LOSS:
Total comprehensive loss is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH FOR THE SIX-MONTH
PERIOD ENDED JULY 31, PERIOD ENDED JULY 31,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss................................... $(2,249) $(1,363) $(4,706) $(2,763)
Foreign currency translation adjustment.... (0) 4 (6) (4)
------- ------- ------- -------
Total comprehensive loss......... $(2,249) $(1,359) $(4,712) $(2,767)
======= ======= ======= =======
</TABLE>
9. SIGNIFICANT EVENTS:
Due to recurring operating losses and declining student enrollment trends,
the Company announced its intent to close its San Jose, CA Learning Center. This
Learning Center had 62 students as of July 31, 2000 and had $1.9 million and
$3.5 million in revenues in fiscal 2000 and fiscal 1999, respectively. During
the quarter ended April 30, 2000, the Company recorded expenses of approximately
$141 related to anticipated closing costs of this Learning Center, which is
included in costs of instruction and services. This Learning Center is scheduled
to teach existing students through July 31, 2001.
During the first quarter of 2000, the Company executed a termination
agreement of an operating lease for facilities in Denver, Colorado. The Company
recorded lease cancellation related charges of $254 in the first quarter period,
which is included in cost of instruction and services.
The Company has various employment agreements with certain senior
executives. The employment agreements entitle executives to one to two years of
salary and benefits, which would be payable with respect to the year in which
any breach of such agreements occurred, including termination without cause.
During the first quarter of 2000, the Company recorded $170 of severance
expenses in this regard. This amount is included in general and administrative
expenses.
10. SUBSEQUENT EVENTS
On August 31, 2000, the Company completed the sale of its Canadian Learning
Centers ("Delta College") to CDI Education Corporation, Canada's largest public
information technology education and training company, for approximately $1.4
million. Proceeds will be used to reduce the Company's outstanding line of
credit and for general working capital purposes.
15
<PAGE> 16
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 the Company's 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 ("2000 Annual Report"), as filed with the U.S.
Securities and Exchange Commission ("SEC") for the year ended January 31, 2000,
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,
-reauthorization of the Higher Education Act,
-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 2000 Annual Report for a discussion of, among other matters:
- A business overview;
- Components of income statement classification;
- Cyclical pattern of enrollments; and
- Collection risk management associated with our student financing plans.
16
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth certain 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 1999
2000 (RESTATED) 2000 (RESTATED)
----- ---------- ----- ----------
<S> <C> <C> <C> <C>
Revenues........................................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of instruction and services............. 76.9 71.7 76.6 71.0
Selling and promotional....................... 15.2 15.8 15.4 15.5
General and administrative.................... 12.9 11.0 13.6 12.4
Provision for doubtful accounts............... 6.0 7.9 5.7 7.4
Amortization of intangible assets............. 0.4 0.4 0.4 0.4
----- ----- ----- -----
111.4 106.8 111.7 106.7
----- ----- ----- -----
Loss from operations............................ (11.4) (6.8) (11.7) (6.7)
Interest expense, net........................... (0.7) (0.2) (0.5) (0.1)
----- ----- ----- -----
Loss before income taxes........................ (12.1) (7.0) (12.2) (6.8)
Benefit from income taxes....................... (5.0) (2.9) (5.1) (2.8)
----- ----- ----- -----
Net loss........................................ (7.1) (4.1) (7.1) (4.0)
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JULY 31, 2000 ("SECOND QUARTER OF 2000") COMPARED WITH THE
THREE MONTHS ENDED JULY 31, 1999 ("SECOND QUARTER OF 1999").
Revenues decreased 4% to $31.7 million in the second quarter of 2000 from
$33.1 in the second quarter of 1999. The average number of students attending
Learning Center programs decreased 3% in the second quarter of 2000 versus the
second quarter of 1999. The number of students attending Learning Center
programs at the end of the quarter decreased 2% to 9,325 at July 31, 2000 from
9,475 at July 31, 1999.
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." In fiscal 2001, a comparison of new centers to same centers is not
meaningful as only the Norcross, Georgia school is considered a new center.
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 2001 2000 1999
------------------------------------- ------ ------ ------
<S> <C> <C> <C>
First Quarter............................................... -- -- 5
Second Quarter.............................................. -- 1 1
Third Quarter............................................... -- --
Fourth Quarter.............................................. -- 1
-- -- --
Total.................................................. -- 1 7
== == ==
</TABLE>
Costs of instruction and services increased to $24.4 million for the second
quarter of 2000 versus $23.7 million in the second quarter of 1999. 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 77% in the second quarter of
2000 from 72% in the second quarter of 1999. The increase in costs of
instruction and services relative to the 4% decrease in revenue is primarily
attributable to the fixed nature of these costs.
17
<PAGE> 18
Selling and promotional expenses were $4.8 million in the second quarter of
2000 versus $5.2 million in the second quarter of 1999. Selling and promotional
expenses as a percentage of revenues was approximately 15% in the second quarter
of 2000 and 16% in the second quarter of 1999.
General and administrative expenses increased to $4.1 million in the second
quarter of 2000 from $3.7 million in the second quarter of 1999 and as a
percentage of revenues was 13% in the second quarter of 2000 versus 11% in the
second quarter of 1999. During the second quarter of 2000 increased costs are
primarily the result of increased professional fees associated with the Special
Attestation and file reviews required by the Department of Education.
Provision for doubtful accounts decreased 27% to $1.9 million in the second
quarter of 2000 from $2.6 million in the second quarter of 1999. Provision for
doubtful accounts as a percentage of revenues decreased to 6.0% in the second
quarter of 2000 from 8% in the second quarter of 1999. This decrease is
attributable to an improving collection rate on CLC financed student loans,
which is one of the factors used in estimating our allowance for doubtful
accounts.
We incurred net interest expense of $229,000 and $66,000 in the second
quarter of 2000 and 1999, respectively. This is attributable to increased
amounts of borrowings outstanding during the second quarter of 2000 versus
second quarter of 1999.
SIX MONTHS ENDED JULY 31, 2000 COMPARED WITH THE SIX MONTHS ENDED JULY 31, 1999
Revenues decreased 5% to $66.1 million for the six months of 2000 from
$69.4 for the six months of 1999. The average number of students attending
Learning Center programs decreased 5% for the six months of 2000 versus for the
six months of 1999. The number of students attending Learning Center programs at
July 31, 2000 decreased 2% to 9,325 from 9,475 at July 31, 1999.
Costs of instruction and services increased 3% to $50.6 million for the six
months of 2000 from $49.2 million for the six months of 1999. 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 77% for the six months of 2000 from 71%
for the six months of 1999. The increase in costs of instruction and services
relative to the 5% decrease in revenue is primarily attributable to the fixed
nature of these costs and annual increases in compensation and other expenses.
Also impacting the increase was $254,000 of expenses related to lease
cancellation charges of a facility in Denver, Colorado and expenses of $141,000
related to the closure of our San Jose, California Learning Center.
Selling and promotional expenses decreased 6% to $10.2 million for the six
months of 2000 from $10.8 million for the six months of 1999. Selling and
promotional expenses as a percentage of revenues was 15% for the six months of
2000 and 16% for the six months of 1999.
General and administrative expenses increased to $8.8 million for the six
months of 2000 from $8.6 million for the six months of 1999 and as a percentage
of revenues was 13% for the six months of 2000 and 12% for the six months of
1999. This increase is primarily related to increased professional fees
primarily associated with the Special Attestation and file reviews required by
the Department of Education.
Provision for doubtful accounts decreased 27% to $3.8 million for the six
months of 2000 from $5.2 million for the six months of 1999. Provision for
doubtful accounts as a percentage of revenues decreased to 6% for the six months
of 2000 from 7% for the six months of 1999. This decrease is attributable to an
improving collection rate on CLC financed student loans, which is one of the
factors used in estimating our allowance for doubtful accounts.
We incurred net interest expense of $348,000 and $75,000 for the six months
of 2000 and 1999, respectively. This is attributable to increased amounts of
borrowings outstanding during the first six months of 2000.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased by $4.3 million for the six months
ended July 31, 2000. Cash from operations for the first six months of 2000
compared to the first six months of 1999 increased by approximately $5.4 million
primarily due to the Company receiving in July 2000 a federal tax refund equal
to $4.035 million and an increased use of trade credit.
Our principal sources of funds at July 31, 2000 were cash and cash
equivalents of approximately $3.5 million and net current accounts receivable of
$45.1 million. Additionally, we have a credit agreement with a bank that
provided for a $9.2 million revolving credit facility, with scheduled reductions
through November 1, 2000 when the maximum borrowing capacity will be $2.5
million. We have pledged our expected income tax refunds of $4.4 million for
immediate prepayment on this facility. In July 2000, we received the federal
portion of the income tax refund equal to approximately $4.0 million. We have
granted the bank a security interest in substantially all of our assets. The
interest on the facility is based on the bank's U.S. prime rate plus two percent
with a facility charge of up to three percent dependent on the outstanding
borrowings. The bank's prime rate was 9.5% at July 31, 2000. We had borrowings
outstanding of approximately $3.2 million on our line of credit as of July 31,
2000.
On August 1, 2000, the revolving credit facility was reduced to $3.7
million and in August 2000 the Company received a state tax refund equal to
$169,000 further reducing the revolving credit facility to approximately $3.5
million. At August 31, 2000, state tax refunds equal to approximately $150,000
are still pending. On August 31, 2000, the Company completed the sale of its
Canadian Learning Centers ("Delta College"). Upon completion of the sale, the
bank received $391,000 further reducing the credit facility to approximately
$3.1 million. Due to Canadian tax implications associated with the sale of Delta
College, approximately $715,000 has not yet been received by CLC. We believe
that we will receive these funds during the next 30 to 60 days. The purchaser
will pay the remaining $270,000 over a two-year period. This credit facility is
scheduled to be reduced further to $3.0 million effective October 1, 2000.
Our credit agreement provides for a separate letter of credit facility. As
of July 31, 2000, the Company had outstanding letters of credit of approximately
$2.1 million primarily to the Department of Education. Our letter of credit
facility provides for $3.3 million as the maximum limit for outstanding letters
of credit through July 31, 2000; thereafter, the limit is reduced to $2.6
million.
The credit agreement, as amended, requires maintenance of certain financial
ratios and contains other restrictive covenants including limitations on
purchases and sales of assets. As of July 31, 2000, we were in compliance with
all of these ratios and covenants.
We are also required to maintain a financial responsibility score and
satisfy other measures to maintain compliance with regulatory standards on an
annual basis. As of January 31, 2000, we fell below certain minimum measures for
certain institutions, and based on the score for CLC as a whole, some or all of
our Learning Centers could be returned to heightened cash monitoring status by
the Department. Further if our financial condition continues to deteriorate, we
may no longer be able to meet minimum regulatory standards which could lead the
Department to require that we post an additional letter of credit on behalf of
some or all of our Learning Centers. We may also be subject to additional
financial oversight and actions by State regulatory agencies or our
accreditation agency as a result of failing certain of these minimum financial
measures.
As previously disclosed, we began operating under HCM2 procedures at two of
our Learning Centers as of March 14, 2000. These procedures have delayed the
receipt of Title IV Program funding for approximately 170 days. While
implementing these procedures with the Department, we have experienced a delay
in Title IV Program funding for two of our other Learning Centers, since they
are a part of the same institution or campus group. We estimate that this delay
has required us to use additional working capital to fund operations during the
delay period of approximately $4.0 million.
CLC leases all of its facilities under operating lease agreements. We
continue to expand current facilities and upgrade equipment, as necessary;
however, we do not expect to open any new Learning Centers during
19
<PAGE> 20
fiscal 2001. We anticipate fiscal 2001 capital expenditures will be
approximately $2.6 million, which we expect to fund with cash from our
operations.
On April 17, 2000, we made a decision to close our San Jose, CA Learning
Center. This school had 62 students as of July 31, 2000 and accounted for
approximately $1.9 million and $3.5 million of our revenue in fiscal 2000 and
1999, respectively. We decided to close this Learning Center due to our market
evaluation which indicated that this school could not return to profitable
operations. This Learning Center is scheduled to teach existing students through
July 31, 2001. We recorded a charge of $141,000 in the first quarter of 2000
related to estimated closing costs of this facility.
We continuously review our cash flow, and seek strategies to provide
favorable returns on our capital. Our 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, 2000, we had not purchased any stock
under this program and the terms of our credit facility restricted us from
making any purchases of our Common Stock.
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 approximately $3.0 million to develop and implement this system, which we
anticipate will be completed in the early months of 2001. To date, we have
expended approximately $2.1 million to develop and implement this system.
We have experienced a decline in our working capital over the last several
quarterly periods. During this time, we have utilized an increasing amount of
our available line of credit with our principal bank. However, when considering
our existing student population and projected enrollments during fiscal 2001, we
expect our available cash on hand and cash from operating activities will be
sufficient to meet our cash requirements for at least the next twelve months
(see "Certain Factors That May Affect Future Results -- Financial Condition,"
contained herein). During this time, we will continue to evaluate all sources of
capital available to us, including bank financing or additional equity or debt
offerings, to satisfy ongoing working capital and capital expenditure
requirements. However, effective September 5, 2000 the line of credit was
reduced to $3.1 million and is scheduled to be reduced to $3.0 million effective
October 1, 2000 and further reduced to $2.5 million effective November 1, 2000.
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 fiscal 2000
Annual Report. Current developments regarding these regulatory matters are
discussed below.
U.S. Department of Education -- Regulation and Review
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 a
restriction or loss by the Company or its Learning Centers of their ability to
participate in federal or other student financial aid programs or to provide
educational and training services. Such restrictions or loss could have a
material impact on the Company's business, financial condition and results of
operations. For fiscal 2000, approximately 64% of the Company's revenues were
derived from tuitions that are funded by various federal student financial aid
programs.
Under the Department of Education's regulations, an FFEL or FDL cohort
default rate equal to or exceeding 25% in any one of the three most recent
federal fiscal years or a default rate on Perkins loans of more than 15% in a
year can be a basis for the Department to place that institution on provisional
certification for up to four years for lack of administrative capability. As of
August 31, 2000, four of the Company's Learning Centers are provisionally
certified for participation in the Title IV Programs due either to cohort
default rates or the change of control following the Company's acquisition of
these Learning Centers. The
20
<PAGE> 21
provisional certifications of two of these Learning Centers extends through June
2001 and September 2001, at which time the Company expects to apply for
recertification of these Learning Centers. The provisional certification of the
two other Learning Centers has expired but remains in effect while the
Department reviews the Learning Centers' pending applications for
recertification. The Company's Perkins loan default rate, which applies to 21 of
its Learning Centers, for the most recent fiscal year exceeds 15%, which may
lead to the provisional certification of other Learning Centers.
Under the standards of financial responsibility of the Department of
Education, if an institution's annual financial aid compliance audit or a review
by a regulatory agency finds that the institution made refunds late (as defined
by the Department) to 5% or more of its withdrawn 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
2001, the Company has posted letters of credit of approximately $1.8 million for
all of the Company's U.S. Learning Centers, excluding the Paramus Learning
Center, for which no letter of credit was required.
In May 1998, the Department of Education initiated a program review of the
administration of the Title IV Programs by the Company's Alexandria, VA and
Manassas, VA Learning Centers for the period July 1, 1996 through June 30, 1998.
In September 1998, the Department issued a preliminary report containing a
number of findings alleging non-compliance with certain Title IV Program
requirements. CLC has performed file reviews at these schools and provided
additional materials requested by the Department. In order to conclude this
program review, the Department has requested CLC to perform an additional file
review of returns of federal funds during the review period for the Alexandria
Learning Center. Also as part of this program review the Department has
requested that the Company perform specified file reviews for its San Jose,
Philadelphia and Houston Learning Centers. The reviews are now in process. The
Company does not believe that the resolution of these reviews will have a
material impact on the Company's business, financial condition and results of
operations.
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 June 30, 1999. The Department issued
a preliminary report in February 2000, which contained a number of findings
alleging non-compliance with certain Title IV Program requirements similar to
those found in the Alexandria and Manassas program review discussed above. The
Company has submitted responses to the Department concerning all of the
findings, and is presently in the process of performing the file reviews as
agreed to with the Department. The Company does not believe that the resolution
of this review will have a material impact on the Company's business, financial
condition and results of operations.
In July 1999 and August 2000, the Company submitted to the Department the
results of the independent audits on the administration of the Title IV Programs
by all of the Learning Centers for the fiscal years ended January 31, 1999 and
January 31, 2000, respectively. Each of these audits identified certain findings
of non-compliance with respect to the Company's administration of the Title IV
Programs. The Company has received acknowledgement that the Department has
received the audits. They are subject to quality control reviews and the Company
will receive subsequent letters indicating actions to resolve findings. The
Company does not believe that the resolution of either of these matters will
have a material impact on the Company's business, financial condition and
results of operations.
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 also served subpoenas on the accounting firm that had audited
our financial statements and the accounting firm that had performed our Title IV
Program compliance audits, for copies of certain of their audits, work papers
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 in
December 1999 regarding the December subpoena, 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
21
<PAGE> 22
compliance with provisions of Title IV of the Higher Education Act. We have
submitted all the documents requested by the Department of Education in the
December subpoena. On or about July 24, 2000 we received a second subpoena from
the Office of Inspector General seeking certain additional information. We have
submitted some of the requested documents and we are in the process of gathering
the remaining requested documents. We believe that our compensation plans are in
compliance with the Higher Education Act.
Financial Responsibility
The Higher Education Act and the Department of Education regulations
require institutions participating in the Title IV Programs to demonstrate that
they have sufficient resources to properly administer Title IV funds on behalf
of their students and provide appropriate educational services to their
students. The regulations allow the Department to evaluate an institution based
on its own financial condition or that of the consolidated corporation.
Historically, the Department has evaluated the financial condition of the
Learning Centers on a consolidated basis.
The Department evaluates an institution's financial responsibility based on
three ratios: an equity ratio, a primary reserve ratio and a net income ratio;
1. the equity ratio measures an institution's capital resources, ability
to borrow and financial viability;
2. the primary reserve ratio measures an institution's ability to support
current operations from expendable resources; and
3. the net income ratio measures the ability of an institution to operate
at a profit.
The ratios are calculated each year based on an institution's annual
audited financial statements. The results of each ratio are assigned a strength
factor and then combined under a weighted formula to arrive at a composite score
for the institution ranging from minus one to three, the latter being the
highest possible score. An institution that achieves a composite score of at
least 1.5 is considered to be financially responsible without the need for
further oversight. If an institution achieves a composite score of more than 1.0
but less than 1.5, it may continue to participate in the Title IV Programs under
additional reporting and monitoring procedures as determined by the Department,
including the receipt of its Title IV Program funds on the "cash monitoring"
basis. Such reporting and monitoring procedures also would require the
institution to report significant financial or regulatory events such as any
violation of a loan agreement. Three of our twenty-three U.S. Learning Centers
that are eligible to participate in the Title IV Programs currently operate
under "heightened cash monitoring." If an institution's composite score is less
than 1.0 an institution may establish its financial responsibility by posting an
irrevocable letter of credit in favor of the Secretary of Education in an amount
equal to not less than 10 percent of the Title IV Program funds received by the
institution during its most recent fiscal year, as well as accepting additional
reporting and monitoring procedures, including either the "cash monitoring" or
"reimbursement" methods of disbursing its Title IV Program funds, and accepting
provisional certification. In addition, regardless of its financial condition,
an institution may establish its financial responsibility by posting an
irrevocable letter of credit in favor of the Secretary of Education in an amount
equal to not less than one-half the Title IV Program funds received by the
institution during its most recent fiscal year.
Based on its audited financial statements for fiscal 2000, we have
calculated a composite score of 1.3 for CLC. Although we believe the
Department's emphasis is on CLC as a whole, the Department has the right to
apply the financial responsibility measures on an individual institution basis.
Based on our audited financial statements for fiscal 2000 we have determined
that two of our institutions have a composite score below 1.0 and the remaining
seven institutions have composite scores that exceed 1.5. Based on the score of
CLC as a whole, the Department could return all of the Learning Centers to
heightened cash monitoring.
Heightened Cash Monitoring
The Department has discretion to alter the way it provides Title IV Program
funds to participating institutions. It may transfer an institution from the
"advance" system of funding, under which an institution receives funding from
the Department in advance based on anticipated need, to the "reimbursement"
system of payment, under which an institution must disburse funds to students
and document their eligibility for
22
<PAGE> 23
Title IV Program funds before receiving funds from the Department. The
Department may also impose a requirement known as "heightened cash monitoring,"
of which there are multiple levels, which requires additional reporting to and
review by the Department of all Title IV funds requests.
On April 6, 1998, the Company was notified by the Department of Education
that, based upon the Department's monitoring of litigation involving the Company
and certain student complaints lodged against the Company, it had placed all
Learning Centers on heightened cash monitoring status 1 ("HCM1"). 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 the Department. The Department does
not consider HCM1 to represent either an adverse or punitive action. This action
by the Department did not have an effect on the availability or timing of
financial assistance to the Company's students, nor did it have a material
effect on the Company's cash flow or operating results.
On March 8, 2000, the Department notified the Company that it was placing
all of the Company's Learning Centers on heightened cash monitoring status 2
("HCM2"). HCM2 does not affect the ability of Learning Centers to obligate Title
IV Program funds or the theoretical ability of their students to receive all
applicable forms of federal student aid. However, under HCM2, Learning Centers
are required to document to the Department on a sample basis, each student's
eligibility for Title IV Program funding before being reimbursed by the
Department for funds which they must advance to their eligible students. HCM2
procedures require the effected Learning Centers to submit extensive
documentation proving student eligibility. The documents are then reviewed by
the Department. The Department's review process customarily requires a minimum
of thirty days. The initial delay in the timing of Title IV cash flow for the
effected learning centers under HCM2 has exceeded 170 days. Management expects
that HCM2 will eventually delay the timing of Title IV cash flow for any
affected campus by approximately 75 days.
The Department stated that this March 8, 2000 action was based on
information obtained during its Alexandria, Manassas and Laurel program reviews,
which indicated that the Company had failed to make refunds for some students
and had failed to make refunds on a timely basis for other students. The Company
vigorously disputed the Department's basis for this action and explained the
significant adverse financial effects such action would have. On March 14, 2000,
the Company reached an agreement with the Department resulting in a modification
of the terms of its March 8 action. The key terms of the agreement were that
only the Company's Alexandria, VA and Laurel, MD Learning Centers would be
placed on HCM2, that the remaining Learning Centers would continue on HCM1 but
with additional reporting and documentation requirements, and that the Company
must engage an independent accountant to attest to the compliance with Title IV
requirements respecting the timely payment of refunds and returns of funds by
all of the Company's U.S. Learning Centers receiving Title IV funds (the
"Special Attestation").
The Special Attestation required by the Department as part of the March 14,
2000 agreement covered the payment of refunds and other returns of federal funds
for the seven-month period ended January 31, 2000. The results of the Special
Attestation were submitted to the Department on June 1, 2000. The Special
Attestation showed that for the period covered there was a Company-wide
exception rate of only 2 percent. Based on its review of the Special
Attestation, on July 20, 2000, the Department returned all but 3 of the
Company's Learning Centers to the advance system of payment for Title IV program
funds. The Department left the Philadelphia Learning Center on HCM1 status, and
left the Alexandria, VA and Laurel, MD Learning Centers on HCM2 status with
reduced reporting requirements.
State Authorization and Accreditation
In addition to federal oversight, we are subject to state level regulation
as well as accreditation agency guidelines. The Company is dependent on the
authorization of the applicable agency or agencies of each state within which a
Learning Center is located to allow it to operate and to grant degrees or
diplomas to students. State authorization is also required in order for an
institution to become and remain eligible to participate in the Title IV
Programs. The Company is subject to extensive and varying regulation in each of
the states in which the Learning Centers operate. State laws and regulations
affect the Company's operations and may limit
23
<PAGE> 24
the ability of the Company to introduce degree programs or to initiate new
programs of study, or to obtain authorization to operate in certain additional
states. State regulatory requirements may overlap or exceed federal
requirements. The Company has no significant state regulatory actions open that
management expects to result in adverse action or material fines and
assessments. 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 effected Learning Center ineligible to
participate in the Title IV Programs, could affect its accreditation and would
have a material adverse effect on the Company.
We are required to submit to our accreditation agency annual placement and
retention rates for each Learning Center, as well as financial information for
each main campus together with its reporting units. We were notified in May 2000
that based on our most recent submission, that was for the twelve-month period
ended June 30, 1999, eight of our Learning Centers did not achieve the minimum
requirement for placement rates and one of these eight Learning Centers did not
achieve the minimum retention rate requirement. Consequently, these eight
Learning Centers have been assigned reporting requirements by our accreditation
agency. Also two Learning Centers did not meet financial requirements for the
fiscal year ended January 31, 2000, and consequently have been assigned
additional financial reporting requirements.
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.
Financial Condition
We have experienced a decline in our working capital and available cash
balances over the last several quarterly periods. During this time, we have
utilized an increasing amount of our available line of credit with our principal
bank and as of September 5, 2000, there were $3.1 million of borrowings
available under our line of credit. In addition, we have utilized significant
financial resources to improve and expand existing Learning Centers. These uses
of capital combined with the operating losses we have experienced have resulted
in a deterioration of our financial condition as evidenced by our declining
financial ratios. We have had to seek modification of our credit facility
covenants and obtain waivers of these covenants when we have failed to meet the
lender's minimum requirements. We have not had to request waivers for this
quarter. We are also required to maintain a certain financial responsibility
score and satisfy other measures to maintain compliance with regulatory
standards. As of January 31, 2000, certain institutions, as defined by the
Department, fell below the minimum financial responsibility score and, based on
the score for CLC as a whole, all of the Learning Centers could be returned to
heightened cash monitoring status by the Department. In order for us to meet our
long-term plan of expanding in new and existing markets, we may need additional
capital resources either from a financial institution or the capital markets. If
we are unable to obtain capital from these or other sources, we may not meet
these long-term plans. In addition, if our financial condition continues to
deteriorate, we may not meet minimum financial responsibility standards, which
could lead the Department to place additional Learning Centers on either HCM1 or
HCM2 or require that we post an additional letter of credit on behalf of some or
all of our Learning Centers. We may also be subject to additional financial
oversight and actions by State regulatory agencies or our accreditation agency
as a result of failing certain of these minimum financial measures.
24
<PAGE> 25
Litigation
CLC has been named as defendant in numerous lawsuits filed by former
students and employees and other parties. We intend to defend CLC vigorously in
these lawsuits; however, there can be no assurance that we will be successful in
defending CLC in any of these proceedings. Even if we prevail on the merits in
such litigation, we expect 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 our business, financial condition and results of
operations. Refer to Part II, Item 1 -- "Legal Proceedings" herein.
There can be no assurance that additional legal proceedings will not be
filed or that adverse actions will not be initiated against CLC, either by
federal or state regulators or other parties. Any such legal proceedings or
adverse action could have a severe impact on CLC's business, financial condition
and results of operations.
Change in Title IV Program Funding Administrative Agent
We utilize a third-party agent to perform maintenance of the required
regulatory requirements associated with transfers of Title IV Program funds to
our bank accounts. This responsibility will be transferred to a new third-party
administrative agent in October and November 2000. We expect this transfer of
responsibility to occur without significant impact on our business. However,
should we experience impediments related to this transition, it may result in
delays in the timing of our cash receipts, which could result in material
adverse effects on our business, results of operations, and financial condition.
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.
25
<PAGE> 26
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.
Reid R. Bechtle resigned from the Board of Directors in August 2000. The
Company is grateful for his service and wishes him well in his future endeavors.
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.
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.
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<PAGE> 27
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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. On January
19, 2000, that motion was denied. The Company is unable to estimate the outcome
of the matter 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. 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.
Between June 1, 1998 and October 31, 1999, the Company was named as
defendant in four other lawsuits in Texas and New Jersey by individual students
or groups of students who formerly attended one of its Learning Centers. The
June 1, 1998 lawsuit has been settled. In two of the remaining lawsuits, various
present or former officers, directors and employees of the Company were also
named as defendants. In May of 2000, the officers and directors were dismissed
as defendants in these two lawsuits; however, those decisions have been
appealed. 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, and student outcomes and violated certain provisions of the
applicable state consumer laws. The Company is unable to estimate the outcome of
these matters 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 and other
third parties, 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 severe impact 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 have involved and could continue to involve
substantial diversion of the time of some members of management. An adverse
determination in, or settlement of, such litigation could involve payment of
significant amounts, or could include terms in addition to such payments, or
could lead to other adverse consequences, including the suspension or
termination of the Company's licenses to operate within the respective state,
which would have a severe impact on the Company's business, financial condition
and results of operations.
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<PAGE> 28
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 2000 Annual Meeting of Stockholders was held on August 1,
2000. Represented, in person or by proxy were 16,753,966 shares, or
approximately 95% of the total shares outstanding. The following actions were
taken:
1. Election of one Class I Director to serve until the 2003 Annual Meeting
of Stockholders. The nominee Stephen P. Reynolds was elected by the
following vote.
<TABLE>
<S> <C> <C>
For Against Non-Vote
16,606,744 147,222 0
</TABLE>
2. The approval of the Company's 2000 Stock Incentive Plan.
<TABLE>
<S> <C> <C>
For Against Non-Vote
6,366,811 476,300 44,309
</TABLE>
3. Ratification of the selection by the Board of Directors of
PricewaterhouseCoopers LLP as independent accountants for the current
fiscal year.
<TABLE>
<S> <C> <C>
For Against Non-Vote
16,648,509 86,168 19,289
</TABLE>
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.
28
<PAGE> 29
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, 2000
COMPUTER LEARNING CENTERS, INC.
By: /s/ MARK M. NASSER
------------------------------------
MARK M. NASSER
Vice President and Chief Financial
Officer
(Principal Financial Officer)
29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO. IN THIS FILING
------- ----------- -----------------------
<C> <S> <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 Second Amended and Restated Credit Incorporated by reference to Exhibit
Agreement, dated May 15, 2000 by and 10.23 of the Registrant's report on Form
between First Union National Bank and the 10-K for the year ended January 31, 2000
Registrant filed May 15, 2000
10.2 Second Amended and Restated Pledge and Incorporated by reference to Exhibit
Security Agreement, dated May 15, 2000 by 10.25 of the Registrant's report on Form
and between First Union National Bank and 10-K for the year ended January 31, 2000
the Registrant filed May 15, 2000
10.3 Third Amended and Restated Revolving Incorporated by reference to Exhibit
Credit Note, dated May 15, 2000 by and 10.28 of the Registrant's report on Form
between First Union National Bank and the 10-K for the year ended January 31, 2000
Registrant filed May 15, 2000
10.4 2000 Stock Incentive Plan Filed herewith
27 Financial Data Schedule Filed herewith.
</TABLE>
30
