<PAGE> 1
DEC 19, 2000 4:15 PM
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
<TABLE>
<CAPTION>
<S> <C>
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---- OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 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 __________.
</TABLE>
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 (Zip Code)
offices)
</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 DECEMBER 18, 2000
<S> <C>
Common Stock, $.01 par value 18,617,646
</TABLE>
================================================================================
1
<PAGE> 2
COMPUTER LEARNING CENTERS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I -- FINANCIAL INFORMATION --------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations..................... 3
Consolidated Balance Sheets............................... 4
Consolidated Statements of Cash Flows..................... 5
Notes to Consolidated Financial Statements................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risks........................................ 31
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................... 30
Item 2. Changes in Securities............................... 31
Item 3. Defaults Upon Senior Securities..................... 31
Item 4. Submission of Matters to a Vote of Security Holders. 31
Item 5. Other Information................................... 31
Item 6. Exhibits and Reports on Form 8-K.................... 31
SIGNATURES.................................................. 32
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMPUTER LEARNING CENTERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE FOR THE
THREE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
-------------- -------------
1999 1999
RESTATED RESTATED
2000 (NOTE 2) 2000 (NOTE 2)
------- -------- ------ ----------
<S> <C> <C> <C> <C>
Revenues $32,010 $32,817 $ 98,064 $102,193
------- ------- ------- ----------
Costs and expenses:
Costs of instruction and services 23,683 24,534 74,252 73,758
Selling and promotional 5,120 5,251 15,292 16,008
General and administrative 3,725 4,042 12,684 12,643
Provision for doubtful accounts 2,458 1,536 6,240 6,704
Amortization of intangible assets 141 141 421 422
----- ------ --- ----------
35,127 35,504 108,889 109,535
-------- ------- ------- ----------
Loss from operations (3,117) (2,687) (10,825) (7,342)
Interest expense, net (43) (74) (391) (149)
Gain on sale of Delta College 721 ---- 721 ----
-------- ----- ------ ---------
Loss before income taxes (2,439) (2,761) (10,495) (7,491)
Benefit from income taxes (1,140) (1,180) ( 4,490) (3,147)
------- ------- ------- ---------
Net loss $(1,299) $(1,581) $ (6,005) $ (4,344)
====== ======= ======= ========
Loss per share of common stock:
Basic and diluted $ (0.07) $ (0.09) $ (0.32) $ (0.24)
======= ======= ======= ========
</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>
OCTOBER 31, JANUARY 31,
2000 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 2,373 $ 7,819
Restricted cash...................... 754 ---
Accounts receivable, net............. 44,281 51,074
Income taxes receivable.............. 84 6,083
Deferred tax asset................... 5,411 5,541
Prepaid expenses and other current
assets............................. 3,055 3,440
-------- -------
Total current assets............ 55,958 73,957
-------- -------
Fixed assets, net......................... 29,001 34,558
Long-term accounts receivable, net........ 8,836 10,439
Long-term deferred tax asset.............. 8,450 2,021
Other long-term assets.................... 3,327 3,333
-------- -------
Total assets.................... $105,572 $124,308
========= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Trade accounts payable............... $ 4,487 $ 3,520
Accrued employee expenses............ 3,045 3,091
Accrued other expenses............... 5,963 6,498
Current portion of long-term debt.... ---- 8,455
Deferred revenues.................... 47,685 50,833
------- ------
Total current liabilities....... 61,180 72,397
Long-term deferred revenues............... 1,360 1,191
Long-term debt, net of the current
portion................................. ---- 2,500
Other long-term liabilities............... 3,819 3,061
------- ------
Total liabilities............... 66,359 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. ---- (59)
(Accumulated deficit) Retained (2,093) 3,912
earnings............................ ------- ------
Total stockholders' equity...... 39,213 45,159
------- ------
Total liabilities and
stockholders' equity.......... $105,572 $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 NINE-MONTH
PERIOD ENDED
OCTOBER 31,
-----------------------
1999
RESTATED
2000 (NOTE 2)
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (6,005) $ (4,344)
Adjustments to reconcile net loss to cash from
operating activities:
Provision for doubtful accounts......... 6,240 6,704
Deferred tax benefit.................... (4,566) ----
Depreciation............................ 7,399 7,037
Amortization of intangible assets....... 421 422
Gain on sale of Delta College........... (721) ----
Changes in net assets and liabilities:
Accounts receivable..................... (2,557) 1,975
Income taxes receivable................. 4,266 ---
Prepaid expenses and other current assets (357) 486
Long-term accounts receivable........... 1,331 (413)
Other long-term assets.................. (481) (90)
Trade accounts payable.................. (1,232) (3,653)
Accrued employee expenses............... 149 640
Accrued other expenses.................. (378) (2,470)
Deferred revenues....................... 218 (6,297)
Long-term deferred revenues............. 217 (1,678)
Other long-term liabilities............. 741 331
------- --------
Cash provided by (used for) operating
activities.......................... 7,149 (1,350)
------- ---------
Cash flows from investing activities:
Capital expenditures......................... (2,689) (6,573)
Proceeds from sale of Delta College 1,049 ----
------- -------
Cash used for investing activities. (1,640) (6,573)
------- -------
Cash flows from financing activities:
Repayments of long-term debt................. (33,618) (500)
Borrowing from long-term debt................ 22,663 4,125
Exercise of stock options.................... ---- 21
-------- --------
Cash (used for) provided by financing
activities.......................... (10,955) 3,646
--------- --------
Net decrease in cash and cash equivalents......... (5,446) (4,277)
--------- --------
Cash and cash equivalents, beginning of period.... 7,819 7,691
--------- --------
Cash and cash equivalents, end of period.......... $ 2,373 $ 3,414
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR
AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. -- NATURE OF THE BUSINESS, BASIS OF PRESENTATION AND GEOGRAPHIC INFORMATION:
Nature of the Business
Computer Learning Centers, Inc. (the "Company" or "CLC") is a public
company traded on the NASDAQ National Market. As of October 31, 2000, the
Company operated twenty-five Learning Centers in the U.S. 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 nine months ended October 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 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 October 31, 2000 and 1999
are referred to as "third quarter 2000" and "third quarter 1999," respectively.
Geographic information
On August 31, 2000, the Company completed the sale of its Canadian
Learning Centers ("Delta College") to CDI Education Corporation. As a result of
this transaction the Company recognized a gain of $721, the receipt of cash
proceeds equal of $1,049 and notes receivable of $297. The following table sets
forth financial information for the Company's U.S. and Canadian operations.
(Delta college is presented through August 31, 2000.)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH 1999- RESTATED
PERIODS ENDED OCTOBER 31, 2000 (NOTE 2)
--------------------------- ----------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
----- -------- ----- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $31,566 $ 444 $32,010 $ 31,151 $ 1,666 $ 32,817
(Loss) income before income
taxes (2,403) (36) (2,439) (3,105) 344 (2,761)
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE-MONTH 1999- RESTATED
PERIODS ENDED OCTOBER 31, 2000 (NOTE 2)
--------------------------- ----------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
----- -------- ----- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues $94,324 $ 3,740 $98,064 $ 96,773 $5,420 $102,193
(Loss) income before income
taxes (10,653) 158 (10,495) (8,458) 967 (7,491)
Long-lived assets, net 29,001 ---- 29,001 36,075 1,062 37,137
</TABLE>
6
<PAGE> 7
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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
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 was 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 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 third quarter and nine-month period of 1999 have been
restated. The statement of operations has been restated as follows:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
OCTOBER 31, 1999 OCTOBER 31, 1999
REPORTED RESTATED REPORTED RESTATED
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues.......................... $ 32,955 $ 32,817 $ 101,782 $102,193
Costs and expenses................ 35,560 35,504 109,553 109,535
Loss from operations.............. (2,605) (2,687) (7,771) (7,342)
Net loss.......................... (1,533) (1,581) (4,598) (4,344)
Loss per share:
Basic and Diluted.............. $(0.08) $(0.09) $(0.26) $(0.24)
</TABLE>
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)
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.
U.S. Department of Education -- Regulation and Review
Under Department of Education ("Department") 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 December 12, 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 July 2001
and September 2001, prior to 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 for the most recent
year, which applies to 20 of its Learning Centers, exceeds 15%, which may lead
to the provisional certification of other Learning Centers.
Under the standards of financial responsibility of the Department, 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 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 file reviews for San Jose and
Houston were submitted to the Department on October 24, 2000 and November 6,
2000, respectively. The remaining reviews are still in process. The Company does
not believe that the resolution of this program review will have a material
impact on the Company's business, financial condition and results of operations
8
<PAGE> 9
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
In January 1999, the Department 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 program 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 by the
Department. The Company expects to receive subsequent letters indicating actions
to resolve the identified findings in addition to any corrective actions that
the Company has initiated based on its review of the reported 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.
In December 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 audits of the Company. 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. In July
2000, the Company received a second subpoena from the Office of Inspector
General seeking certain additional information and materials. The Company has
responded to both subpoenas. The Company's management believes that the
compensation plans are in compliance with the Higher Education Act.
In December 2000, the Department issued a Final Program Review
Determination ("FPRD") which asserts that CLC violated a provision of law
governing the Federal student aid programs by compensating its admissions
representatives based on their success in securing student enrollments. As a
result of this finding, the Department asserts that CLC should be required to
return a total of $187 million in funds received by CLC and its students since
July 1, 1994 under the Title IV Federal student aid programs. The FPRD states
that it is based on an "off-site program review," and the Company believes that
the FPRD arose from the Department's participation in the investigation
associated with the legal proceeding CLC announced in December 1999. Prior to
receipt of the FPRD, CLC had never been informed that ED was conducting a
program review on
9
<PAGE> 10
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
this subject, nor did the pending school-level Department of Education program
reviews, which are discussed above, have any findings on this issue. Under the
applicable provisions of the Higher Education Act of 1965, as amended, CLC has
45 days from receipt of the FPRD to file an appeal, which initiates an
administrative adjudication before a Department of Education Administrative
Judge and, at the request of either the government or CLC, review of the
decision of the Administrative Judge by the Secretary of Education. The
Secretary's decision is subject to judicial review in federal District Court.
Under applicable law, collection of the asserted liability is stayed, except in
certain exceptional circumstances, pending the outcome of the administrative
appeal process so long as the appeal has been filed within the 45-day period.
During the administrative appeal period, CLC and its students also remain fully
eligible to continue to participate in the Title IV Programs. On December 13,
2000, representatives of CLC met with senior Department of Education and
Department of Justice officials to seek a resolution of this matter. If a
resolution is not reached before the expiration of the 45-day period, CLC plans
to timely appeal the FPRD to challenge the legal and factual bases of the
asserted liability. Should CLC's appeal be denied, based on existing cash on
hand and existing lines of credit under its credit facility, CLC would be unable
to meet the liabilities imposed by the Department of Education. If CLC is unable
to pay the liabilities, the Department may offset Title IV funds due the
Learning Centers, thereby severely impairing or terminating the Company's
ability to continue operations. The Company believes that its compensation
policies and practices are consistent with the applicable legal standard. In
addition, the Company has been advised that receipt of the FPRD constituted an
event of default of the Company's credit facility with its bank. However, the
bank has agreed that it will defer from taking any action in regard to this
violation until the earlier of January 19, 2001 or the execution of a
settlement agreement resolving the FPRD to the bank's satisfaction. Subject to
the reaching of a settlement deemed to be satisfactory to the bank, the bank
will extend the term of the credit facility to February 28, 2002.
Financial Responsibility
The Higher Education Act and the Department 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 annually 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 seeks to measure an institution's capital resources,
ability to borrow and financial viability;
2. the primary reserve ratio seeks to measure an institution's ability to
support current operations from expendable resources; and
3. the net income ratio seeks to measure 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 positive 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 from 1.0 to less
than 1.5, it may continue to participate in the Title IV Programs; however
additional reporting and monitoring procedures as determined by the
10
<PAGE> 11
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Department may be required including the receipt of its Title IV Program
funds on the "cash monitoring" or "reimbursement" basis. Such reporting and
monitoring procedures also would require the institution to report to the
department significant financial or regulatory events such as any violation of a
loan agreement. Three of the Company's 23 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, the 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 certificaton. 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 the year ended January
31, 2000, the Company has 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. Although we believe the Department evaluates CLC on
a consolidated basis, the Department may apply the financial responsibility
measures on the basis of an individual institution consisting of a main campus
and its additional locations. Using the same audited financial statements for
fiscal 2000, the Company has determined that two of its institutions have a
composite score below 1.0 and the remaining seven institutions have composite
scores that exceed 1.5. The Department is currently reviewing the calculation of
CLC's composite score for fiscal 2000. In that review, the Department has asked
CLC for more information regarding certain terms in its credit agreement and
evidence that the borrowings were utilized to purchase fixed assets used by the
Learning Centers. The Company has provided the Department with such information,
including documentation demonstrating that CLC used a substantial majority of
the debt incurred under its credit agreement primarily to purchase capital
assets in fiscal 2000. If the Department does not accept such information, it
may adjust CLC's composite score and, if such adjusted score is less than 1.0,
it may require that CLC post a letter of credit. The Department has not advised
CLC of the conclusion of the review or any action based on such review.
Heightened Cash Monitoring
The Department has discretion to alter the way it provides Title IV
Program funds to students through participating institutions. It may transfer an
institution from the "advance" system of funding, under which an institution
receives student funds 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 the students' 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 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
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)
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 the Learning Center must advance to their
eligible students. HCM2 procedures require the affected 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 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 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 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 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.
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)
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 affected
Learning Center ineligible to participate in the Title IV Programs, could affect
its accreditation and would have a material adverse effect on the Company.
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, covering 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. Subsequent to filing the second quarter Form
10-Q, the Company was notified that a ninth Learning Center did not achieve the
minimum retention rate requirement. This campus also has been assigned reporting
requirements.
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. Subsequent to filing the
second quarter Form 10-Q, the Company was notified that a third main campus did
not achieve the minimum profitability requirement. This campus also has been
assigned reporting requirements.
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)
.
4. -- ACCOUNTS RECEIVABLE:
Student accounts receivable are initially established for the balance of
course tuition (however, only for the student's current academic year of
multi-academic year programs) at the time a student enrolls in the Learning
Center. A student's academic year is determined based on the length of the
student's educational program and compliance with regulatory guidelines.
Accounts receivable consist of financial aid, third-party and self-pay
receivable balances. Financial aid receivables are student receivable balances
the student has authorized to be paid through Title IV funds. Third-party
student receivable balances are those to be paid directly 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.
Beginning July 2000, the Company initiated a program with SCM Financial
Corporation ("Sallie Mae") that provides for comprehensive alternative financing
programs. This relationship enables loan origination and servicing to become
standardized across CLC while continuing to provide students tuition financing
options. As of October 31, 2000, this program has provided the Company $4.1
million in cash receipts that would have otherwise been financed by CLC with
payment terms ranging from six months to three years. Due to the nature of this
financing, Sallie Mae funds the majority of the principal balance immediately
while retaining a balance of the principal to be utilized as a right of offset
should the student default on their loan. The amount withheld is 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 remain 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
purpose 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 receivable recorded as increases to the allowance for
doubtful accounts.
As of October 31, 2000, net accounts receivable consisted of the
following:
<TABLE>
<CAPTION>
October 31, 2000
--------------------------------
Current Long term Total
---------- ----------- --------
<S> <C> <C> <C>
Accounts receivable............... $60,348 $12,913 $73,261
Student withdrawal allowance...... (9,341) (1,888) (11,229)
Allowance for doubtful accounts... (6,726) (2,189) (8,915)
------- ------- -------
Accounts receivable, net.......... $44,281 $ 8,836 $53,117
======= ======= =======
</TABLE>
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)
5. -- LONG-TERM DEBT:
On December 15, 2000 the Company obtained an amendment to its credit
facility from it bank which extended the term of the line of credit through
February 2002. The facility also included a revision of the existing financial
covenants to reflect the performance of the Company through October 31, 2000, as
well as future projections. The revolving credit facility has a reduction in the
maximum borrowing capacity from $2.5 million to $2.0 million through March 31,
2001. Effective April 1, 2001 through February 28, 2002, the maximum borrowing
capacity will be $1.5 million. The facility for standby letters of credit was
reduced to the current level of letters outstanding, or $2.1 million. The
Company has the option to extend the letters of credit through September 5,
2002. Both facilities require cash deposits to a restricted cash account, as
defined in the amendment, through such time that the balances are equal to 110%
of the borrowing capacity and the amount of letters of credit outstanding. As of
December 15, 2000, the total amount of restricted cash deposited for this
purpose was approximately $2.3 million (as of October 31, 2000 this amount was
$754). The cash deposited for the line of credit may be borrowed against the
line to the extent of the maximum borrowing capacity.
On December 11, the Company received a Final Program Review
Determination ("FPRD") that asserts that CLC violated a provision of law
governing the Federal student aid programs by compensating its admissions
representatives based on their success in securing student enrollments.
Receiving the FPRD did constitute an event of default of the Company's credit
facility with its bank. However, the bank has agreed that it will defer from
taking any action in regard to this violation until the earlier of January 19,
2001 or the execution of a settlement agreement resolving the FPRD to the bank's
satisfaction. Provided that a settlement is reached prior to January 19, 2001
and it is to the bank's satisfaction, the bank has agreed to extend the term of
the credit facility to February 2002. Should a settlement to the bank's
satisfaction addressing the FPRD not be attainable by January 19, 2001, the bank
could declare an event of default, which could then terminate the credit
facility effective December 15.
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 two percent
based on when borrowings may be outstanding. The prime rate of the Company's
bank was 9.5% as of October 31, 2000.
The Company had extended approximately $2.1 million of letters of credit
at October 31, 2000, of which $1.8 million relates to those held for Department
of Education purposes.
6. --LOSS PER SHARE:
The following table sets forth the basic and diluted loss per share
calculations for the three and nine months ended October 31, 2000 and 1999:
<TABLE>
<CAPTION>
NET (LOSS) PER SHARE
INCOME SHARES AMOUNT
------------ -------- ---------
<S> <C> <C> <C>
THREE-MONTH PERIOD ENDED
OCTOBER 31, 2000 $(1,299) 18,617,646 $(0.07)
======== ========== ==========
OCTOBER 31, 1999 $(1,581) 18,511,603 $(0.09)
======== ========== ==========
NINE-MONTH PERIOD ENDED
OCTOBER 31, 2000 $(6,005) 18,617,646 $(0.32)
======== ========== =========
OCTOBER 31, 1999 $(4,344) 17,910,295 $(0.24)
======== ========== =======
</TABLE>
15
<PAGE> 16
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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 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 four 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. On November 30, 2000 oral argument
was heard on the Company's motion to deny this class action. 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. For one of these cases argument was heard in the appellate court on
November 9, 2000. 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 three civil lawsuits involving a former employee and two other third
parties, all of 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
16
<PAGE> 17
COMPUTER LEARNING CENTERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, UNLESS OTHERWISE STATED, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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.
8. -- 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. 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. The
Learning Center had 33 students as of October 31, 2000 and had $1.9 million and
$3.5 million in revenues in fiscal 2000 and fiscal 1999, respectively.
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 during the quarter ended
April 30, 2000, 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 quarter ended April 30, 2000, the Company recorded $170 of severance
expenses in this regard. This amount is included in general and administrative
expenses.
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" below and 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 and in 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 "2000
Annual Report" for discussion of, among other matters:
- The nature and extent of our participation in the 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:
17
<PAGE> 18
- 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;
- 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.
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 FOR THE
THREE-MONTH NINE-MONTH
PERIOD ENDED PERIOD ENDED
OCTOBER 31, OCTOBER 31,
------------------------------------
2000 1999 2000 1999
(RESTATED) (RESTATED)
---------- ----------
<S> <C> <C> <C> <C>
Revenues................................ 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Costs of instruction and services.. 74.0 74.8 75.7 72.2
Selling and promotional............ 16.0 16.0 15.6 15.7
General and administrative......... 11.6 12.3 12.9 12.4
Provision for doubtful accounts.... 7.7 4.7 6.4 6.6
Amortization of intangible assets.. 0.4 0.4 0.4 0.4
----- ----- ----- ----
109.7 108.2 111.0 107.2
----- ----- ----- -----
Loss from operations.................... (9.7) (8.2) (11.0) (7.2)
Interest expense, net................... (0.1) (0.2) ( 0.4) (0.1)
Gain on sale of Delta College........... 2.2 --- 0.7 ---
------ ------ ------- ----
Loss before income taxes................ (7.6) (8.4) (10.7) (7.3)
Benefit from income taxes............... (3.6) (3.6) (4.6) (3.1)
------ ------ ------ -----
Net loss................................ (4.0)% (4.8)% (6.1)% (4.3)%
====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED OCTOBER 31, 2000 ("THIRD QUARTER OF 2000") COMPARED WITH THE
THREE MONTHS ENDED OCTOBER 31, 1999 ("THIRD QUARTER OF 1999").
Revenues decreased 2% to $32.0 million in the third quarter of 2000 from
$32.8 in the third quarter of 1999. The average number of students attending
Learning Center programs decreased 3% in the third quarter of 2000 versus the
third quarter of 1999. The number of students attending Learning Center programs
at the end of the quarter decreased 5% to 9,499 at October 31, 2000 from 10,023
at October 31, 1999, which included the Canadian operations.
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.
19
<PAGE> 19
<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 decreased to $23.7 million for the
third quarter of 2000 from $24.5 million in the third 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 decreased to 74% in the third
quarter of 2000 from 75% in the third quarter of 1999. The decrease in costs of
instruction and services relative to the percentage decrease in revenue is
primarily attributable to better efficiencies being realized from cost controls.
Selling and promotional expenses were $5.1 million in the third quarter
of 2000 versus $5.3 million in the third quarter of 1999. Selling and
promotional expenses as a percentage of revenues was approximately 16% in both
the third quarter of 2000 and 1999.
General and administrative expenses decreased to $3.7 million in the
third quarter of 2000 from $4.0 million in the third quarter of 1999 and as a
percentage of revenues was 12% in the third quarter of 2000 versus 12% in the
third quarter of 1999. During the third quarter of 2000 decreased costs are
primarily the result of lower salaries and software development expenses as
compared to prior year third quarter.
Provision for doubtful accounts increased 67% to $2.5 million in the
third quarter of 2000 from $1.5 million in the third quarter of 1999. This
increase primarily relates to the Sallie Mae alternative-financing program
implemented during the third quarter of 2000. Due to the nature of this
alternative-financing arrangement and the credit risk associated with this type
of funding, the Company has recorded an allowance for doubtful accounts for
student receivable balances financed through this instrument. Provision for
doubtful accounts as a percentage of revenues increased to 8% in the third
quarter of 2000 from 5% in the third quarter of 1999.
We incurred net interest expense of $43,000 and $74,000 in the third
quarter of 2000 and 1999, respectively. This is attributable to decreased
amounts of borrowings outstanding during the third quarter of 2000 versus third
quarter of 1999.
We realized a gain of $721,000 on the sale of Delta College during the
third quarter of 2000. The proceeds of $1.4 million were and will be used to
reduce the line of credit and for working capital purposes.
NINE MONTHS ENDED OCTOBER 31, 2000 COMPARED WITH THE NINE MONTHS ENDED OCTOBER
31, 1999
Revenues decreased 4% to $98.1 million for the nine months of 2000 from
$102.2 for the nine months of 1999. The average number of students attending
Learning Center programs decreased 5% for the nine months of 2000 versus the
nine months of 1999. The number of students attending Learning Center programs
at October 31, 2000 decreased 5% to 9,499 from 10,023 at October 31, 1999.
However, the 9,499 compares to a U.S. population of 9,198 as of October 31,
1999.
Costs of instruction and services increased slightly to $74.3 million
for the nine months of 2000 from $73.8 million for the nine 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 76% for
the nine months of 2000 from 72% for the nine months of 1999. The percentage
increase in costs of instruction and services relative to the percentage
decrease in revenue for the nine-month period 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
19
<PAGE> 20
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 4% to $15.3 million for the
nine months of 2000 from $16.0 million for the nine months of 1999. Selling and
promotional expenses as a percentage of revenues was 16% for both the nine
months of 2000 and 1999.
General and administrative expenses increased to $12.7 million for the
nine months of 2000 from $12.6 million for the nine months of 1999 and as a
percentage of revenues was 13% for the nine months of 2000 and 12% for the nine
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 7% to $6.2 million for the
nine months of 2000 from $6.7 million for the nine months of 1999. Provision for
doubtful accounts as a percentage of revenues was essentially the same for the
nine months of 2000 compared to the nine months of 1999.
We incurred net interest expense of $391,000 and $149,000 for the nine
months of 2000 and 1999, respectively. This is attributable to increased amounts
of borrowings outstanding in the first three quarters of 2000 versus 1999.
We realized a gain of $721,000 on the sale of Delta College during the
third quarter of 2000. The proceeds of $1.4 million are being and will be used
to reduce the line of credit and for working capital purposes.
LIQUIDITY AND CAPITAL RESOURCES
Excluding restricted cash of $754,000 our cash and cash equivalents
decreased by $5.4 million for the nine months ended October 31, 2000. Cash from
operations for the first nine months of 2000 compared to the first nine months
of 1999 increased by approximately $8.5 million primarily due to the Company
receiving federal and state tax refunds equal to $4.3 million. More timely
collection of accounts receivable through participation in the Sallie Mae
programs and an increased use of trade credit.
Our principal sources of funds at October 31, 2000 were cash and cash
equivalents of approximately $2.4 million and net current accounts receivable of
$44.2 million. Additionally, we have a credit agreement with a bank that
provided for a $2.0 million revolving credit facility, with scheduled
reductions through April, 2001 when the maximum borrowing capacity will be$1.5
million.
On December 11, the Company received a Final Program Review
Determination ("FPRD") that asserts that CLC violated a provision of law
governing the Federal student aid programs by compensating its admissions
representatives based on their success in securing student enrollments.
Receiving the FPRD constituted an event of default of the Company's credit
facility with its bank. However, the bank has agreed that it will defer from
taking any action in regard to this violation until the earlier of January 19,
2001 or the execution of a settlement agreement resolving the FPRD to the bank's
satisfaction. Provided that a settlement is reached prior to January 19, 2001
and it is to the bank's satisfaction, the bank has agreed to extend the term of
the credit facility to February 2002. Should a settlement to the bank's
satisfaction addressing the FPRD not be attainable by January 19, 2001, the bank
could declare an event of default, which could then terminate the credit
facility effective December 15.
On December 15, 2000 the Company obtained an amendment to its credit
facility from its bank that extended the term of the line of credit through
February 2002. The facility also included a revision of the then existing
financial covenants to reflect the performance of the Company through October
31, 2000. The revolving credit facility has a reduction in the maximum borrowing
capacity from $2.5 million to $2.0 million through March 31, 2001. Effective
April 1, 2001 through February 28, 2002, the maximum borrowing capacity will be
$1.5 million.
20
<PAGE> 21
The facility for standby letters of credit was reduced to the Company's
current level of letters outstanding, or $2.1 million. The Company has the
option to extend the letters of credit through September 5, 2002. Both credit
facilities require cash deposits to a restricted cash account through such times
that the balances are equal to 110% of the borrowing capacity and amount of
letters of credit outstanding.
As of December 18, 2000, the total amount of restricted cash deposited
for this purpose was approximately $2.3 million (as of October 31, 2000, this
amount was $754). We have granted the bank a security interest in substantially
all of our assets. The interest rate on the facility is based on the bank's U.S.
prime rate plus two percent with a facility charge of one percent from December
2000 through August 2001 and two percent from September 2001 through February
2002. As of October 31, 2000, the bank's prime rate was 9.5% and we had no
borrowings outstanding.
The credit agreement, as amended, requires maintenance of certain
financial ratios and contains other restrictive covenants including limitations
on purchases and sale of assets. As mentioned above, the amendment included a
revision to previously established financial covenants to reflect the
performance of the Company through October 31, 2000.
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 In addition, the Department is reviewing the calculation of our
composite score for fiscal 2000, with particular attention as to how the
long-term debt incurred under our credit agreement should be counted in that
calculation. 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 initially delayed
the receipt of Title IV Program funding at these two Learning Lenters for
approximately 170 days. While implementing these procedures with the Department,
we experienced an initial 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 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 fiscal 2001.
We anticipate fiscal 2001 capital expenditures will be approximately $3.4
million, which we expect to fund with cash from our operations.
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 first quarter of 2001. To date, we have
expended approximately $2.4 million to develop and implement this system.
21
<PAGE> 22
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 the
remainder of fiscal 2001 and fiscal 2002, 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.
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 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
December 12, 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 Learning
Centers extends through June 2001 and September 2001, prior to 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 for
the most recent year, which applies to 20 of its Learning Centers, 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
22
<PAGE> 23
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 file reviews for San Jose and Houston were submitted to the
Department on October 24, 2000 and November 6, 2000, respectively. The remaining
reviews are still in process. The Company does not believe that the resolution
of this program review 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 program 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 by the
Department and the Company expects to receive subsequent letters indicating
actions to resolve the identified findings in addition to any corrective actions
that the Company has initiated based on its review of the reported 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.
In December 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 the Company's admissions
representatives and the calculation of the Company's 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 audits of 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. In July, 2000, the Company received a second subpoena from
the Office of Inspector General seeking certain additional information and
materials. The Company has responded to both subpoenas. The Company believes
that its compensation plans are in compliance with the Higher Education Act .
In December 2000, the Department issued a Final Program Review
Determination ("FPRD") which asserts that CLC violated a provision of law
governing the Federal student aid programs by compensating its admissions
representatives based on their success in securing student enrollments. As a
result of this finding, the Department asserts that CLC should be required to
return a total of $187 million in funds received by CLC and its students since
July 1, 1994 under the Title IV Federal student aid programs. The FPRD states
that it is based on an "off-site program review," and the Company believes that
the FPRD arose from the Department's participation in the investigation
associated with the legal proceeding CLC announced in December 1999. Prior to
receipt of the FPRD, CLC had never been informed that ED was conducting a
program review on this subject, nor did the pending school-level Department of
Education program reviews, which are discussed above, have any findings on this
issue. Under the applicable provisions of the Higher Education Act of 1965, as
amended, CLC has 45 days from receipt of the FPRD to file an
23
<PAGE> 24
appeal, which initiates an administrative adjudication before a Department of
Education Administrative Judge and, at the request of either the government or
CLC, review of the decision of the Administrative Judge by the Secretary of
Education. The Secretary's decision is subject to judicial review in federal
District Court. Under applicable law, collection of the asserted liability is
stayed, except in certain exceptional circumstances, pending the outcome of the
administrative appeal process so long as the appeal has been filed within the
45-day period. During the administrative appeal period, CLC and its students
also remain fully eligible to continue to participate in the Title IV Programs.
On December 13, 2000, representatives of CLC met with senior Department of
Education and Department of Justice officials to seek a resolution of this
matter. If a resolution is not reached before the expiration of the 45-day
period, CLC plans to timely appeal the FPRD to challenge the legal and factual
bases of the asserted liability. Should CLC's appeal be denied, based on
existing cash on hand and existing lines of credit under its credit facility,
CLC would be unable to meet the liabilities imposed by the Department of
Education. If CLC is unable to pay the liabilities, the Department may offset
Title IV funds due the Learning Centers, thereby severely impairing or
terminating the Company's ability to continue operations. The Company believes
that its compensation policies and practices are consistent with the applicable
legal standard. In addition, the Company has been advised that receipt of the
FPRD constituted an event of default of the Company's credit facility with its
bank. However, the bank has agreed that it will defer from taking any action in
regard to this violation until the earlier of January 19, 2001 or the execution
of a settlement agreement resolving the FPRD to the bank's satisfaction. Subject
to the reaching of a settlement deemed to be satisfactory to the bank prior to
January 19, 2001, the bank will extend the term of the credit facility to
February 28, 2002.
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 annually 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 seeks to measure an institution's capital
resources, ability to borrow and financial viability;
2. the primary reserve ratio seeks to measure an institution's
ability to support current operations from expendable resources;
and
3. the net income ratio seeks to measure 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 positive 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 from 1.0 to
less than 1.5 it may continue to participate in the Title IV Programs; however
additional reporting and monitoring procedures as determined by the Department
may be required, including the receipt of its Title IV Program funds on the
"cash monitoring" or "reimbursement" basis. Such reporting and monitoring
procedures also would require the institution to report to the Department
significant financial or regulatory events such as any violation of a loan
agreement. Three of our 23 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, the
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 certificaton. In addition, regardless of its
24
<PAGE> 25
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 financial statements for the year ended January 31, 2000,
the Company has 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. Although CLC believes the Department evaluates CLC on a
consolidated basis, the Department may apply the financial responsibility
measures on the basis of an individual institution consisting of a main campus
and its additional locations. Using the same audited financial statements for
fiscal 2000, the Company has determined that two of its institutions have a
composite score below 1.0 and the remaining seven institutions have composite
scores that exceed 1.5. The Department is currently reviewing the calculation
of CLC's composite score for fiscal 2000. In that review, the Department has
asked CLC for more information regarding certain terms in its credit agreement
and evidence that the borrowings were utilized to purchase fixed assets used by
the Learning Centers. The Company has provided the Department with such
information, including documentation demonstrating that CLC used a substantial
majority of the debt incurred under its credit agreement primarily to purchase
capital assets in fiscal 2000. If the Department does not accept such
information, it may adjust CLC's composite score and, if such adjusted score is
less than 1.0, it may require that CLC post a letter of credit. The Department
has not advised CLC of the conclusion of the review or any action based on such
review.
Heightened Cash Monitoring
The Department has discretion to alter the way it provides Title IV
Program funds to students through participating institutions. It may transfer an
institution from the "advance" system of funding, under which an institution
receives student funds 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 the student's 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 the Learning Centers must advance to their
eligible students. HCM2 procedures require the affected 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 affected Learning Centers under HCM2 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.
25
<PAGE> 26
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 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, the Company is 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 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, covering 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. Subsequent to filing the second quarter Form
10-Q, the Company was notified that a ninth Learning Center did not achieve the
minimum retention rate requirement. This campus also has been assigned reporting
requirements.
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 financial
reporting requirements. Subsequent to filing the second quarter Form 10-Q, the
Company was notified that
26
<PAGE> 27
a third main campus did not achieve the minimum profitability requirement. This
campus also has been assigned financial reporting requirements.
Guaranty Agency Reviews
In the ordinary course of the Company's 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. The Company believes 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 December 18, 2000, there was approximately $1.0 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 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 or
reimbursement 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,
HCM2 or reimbursement, 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 minimum financial measures.
As discussed above under "Liquidity and Capital Resources" and
"Regulatory Matters in Current Developments", we have advised that receipt of
the FPRD constitutes a default under our bank credit facility. In the event the
the FPRD is not resolved to the lender's satisfaction prior to January 19, 2001,
the bank may exercise it rights to our assets under its security agreement which
could force us to cease operations.
Possible Delisting from NASDAQ
Our stock is currently listed on the Nasdaq National Market. On December
20, 2000, we received notification that the Company's stock has failed to
maintain a minimum bid price of $1.00 over the last 30 consecutive trading days
as required by Marketplace Rule 4450(a)(5)(the "Rule"). As a result of receiving
this notification, the Company has 90 calendar days, or until March 20, 2001 to
regain compliance with this Rule. If at anytime before March 20, 2001, the bid
price of the Company's common stock is at least $1.00 for a minimum of 10
consecutive trading days, Nasdaq will determine if the Company complies with the
Rule. If the Company is unable to demonstrate compliance with the Rule on or
before March 20, 2001, Nasdaq will provide the Company written notification that
they have determined to delist our common stock. Upon receiving the written
notification delisting the Company's stock, the Company can request a hearing to
review Nasdaq's delisting determination. If the Company were not successful in
reversing Nasdaq's delisting determination, Nasdaq would then proceed with
delisting the Company's common stock from the Nasdaq National Market. If we
fail to maintain our Nasdaq listing, the market value of our common stock may
decline further, trading in our stock is likely to be materially adversely
affected and we are likely to encounter difficulties in obtaining financing.
27
<PAGE> 28
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 was transferred to a new third-party
administrative agent through November 2000. This transfer of responsibility
occurred 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
As discussed above under "Regulatory Matters" in Note 3 to the
Consolidated Financial Statements and under Regulatory Matters- Current
Developments and in Item 1 "Business - Financial Aid and Regulation contained in
our 2000 Annual Report, we are subject to extensive regulation. In addition 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 comply with applicable federal or state
requirements, or 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. In
particular any adverse determination by the Department of Education or other
government authorities in connection with the FPRD could severely impair or
terminate the Company's ability to continue operations.
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
28
<PAGE> 29
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.
Competition
The post-secondary adult education and training market is highly
fragmented, with no single institution or company holding a dominant market
share. We compete for students with vocational and technical training schools,
degree-granting colleges and universities, continuing education programs and
commercial training programs. Certain public and private colleges may offer
programs similar to those of the Learning Centers at a lower tuition cost due in
part to substantial government subsidies, foundation grants, tax-deductible
contributions or other financial resources not available to proprietary
institutions
Risks Associated with Changes in Technology and Growth
The market for our programs and services is characterized by rapidly
changing requirements and characteristics, and our ability to develop and offer
new programs and services and to open new locations is subject to extensive
state and federal regulation and accrediting agency requirements. If we are
unable, for financial, regulatory or other reasons, to develop and offer new
programs and services in a timely manner in response to changes in the industry,
or if programs and services offered by our Learning Centers fail to gain or
maintain widespread commercial acceptance, our business may be materially and
adversely affected.
Our ability to meet our future operating and financial goals will depend
upon our ability to successfully implement our growth strategy which will
include the introduction of new locations, as well as the potential acquisition
of assets and programs complementary to our operations. Our success in this area
will depend on our ability to successfully integrate such new locations, assets
and businesses. There can be no assurance that we will be able to implement or
manage expansion effectively.
Dependence upon Key Employees
Our success depends to a significant extent upon the continued service
of our executive officers and other key personnel. The loss of the services of
any of our executive officers or other key employees could have a material
adverse effect on the Company. Our future success will depend in part upon our
continuing ability to attract and retain highly qualified personnel. There can
be no assurance that we will be successful in attracting and retaining such
personnel.
General
Because of these and other factors, past financial performance should
not be considered an indicator of future performance. Investors should not use
historical trends to anticipate future results and should be aware that the
trading price of our Common Stock may be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, general
conditions in the education and training industry, changes in earnings estimates
and recommendations by analysts or other events.
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.
29
<PAGE> 30
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 four 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. On November 30, 2000 oral argument
was heard on the Company's motion to deny this class action. 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. For one of these cases oral argument was heard in the appellate court
on November 9, 2000. 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 three civil lawsuits involving a former employee and two other third
parties, all of which 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.
30
<PAGE> 31
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.
None
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
A list of exhibits required to be filed as part of this report is set forth
in the Index to exhibits, which immediately precedes such exhibits and is
incorporated herein by reference.
(b) REPORTS ON FORM 8-K
None.
31
<PAGE> 32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: December 20, 2000
COMPUTER LEARNING CENTERS, INC.
By: /s/ MARK M. NASSER
------------------
MARK M. NASSER
Vice President and Chief Financial Officer
(Principal Financial Officer)
32
<PAGE> 33
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO. IN THIS FILING
-------- ----------- -----------------------
<S> <C> <C>
3.1 Second Amended and Restated Incorporated by reference
Certificate of Incorporation to Exhibit 3.1
of the Registrant, as of the Registrant's report
amended on Form 10-Q
for the quarter ended
October 31, 1997 filed
September 9, 1997
3.2 Amended and Restated Bylaws Incorporated by reference
of the Registrant to Exhibit 3.4 of the
Registrant's Form S-1
Registration Statement as
amended, filed March 29, 1995
(No. 33-90716) (the "Form
S-1")
4.1 Form of Certificate for Incorporated by reference
Shares of the to Exhibit 4.1 of the Form
Registrant's Common Stock S-1
10.1 Third Amended and Restated Filed herewith
Credit Agreement, dated
December 15, 2000 by and
between First Union National
Bank and the Registrant
10.2 Third Amended and Restated Filed herewith
Pledge and Security Agreement
dated December 15, 2000 by
and between First Union
National Bank and the
Registrant
10.3 Fourth Amended and Restated Filed herewith
Revolving Credit Note dated
December 15, 2000 by and
between First Union
National Bank and the
Registrant
27 Financial Data Schedule Filed herewith.
</TABLE>
33
