<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
<TABLE>
<CAPTION>
(MARK ONE)
<S> <C>
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
---- OF THE SECURITIES ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 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 offices) (Zip Code)
</TABLE>
(703) 359-9333
(Registrant's telephone number, including area code)
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JUNE 12, 2000
<S> <C>
Common Stock, $.01 par value 18,610,818
</TABLE>
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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........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................. 15
Item 3. Quantitative and Qualitative Disclosures about Market Risks................................ 23
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 24
Item 2. Changes in Securities...................................................................... 25
Item 3. Defaults Upon Senior Securities............................................................ 25
Item 4. Submission of Matters to a Vote of Security Holders........................................ 25
Item 5. Other Information.......................................................................... 25
Item 6. Exhibits and Reports on Form 8-K........................................................... 25
SIGNATURES.......................................................................................... 25
</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
THREE-MONTH
PERIOD ENDED
APRIL 30,
-----------
1999
RESTATED
2000 (NOTE 2)
------------- ------------
<S> <C> <C>
Revenues $ 34,345 $ 36,289
------------- ------------
Costs and expenses:
Costs of instruction and services 26,190 25,500
Selling and promotional 5,363 5,537
General and administrative 4,872 4,945
Provision for doubtful accounts 1,867 2,551
Amortization of intangible assets 141 141
----------- ------------
38,433 38,674
----------- ------------
Loss from operations (4,088) (2,385)
Interest expense, net (119) (19)
----------- ------------
Loss before income taxes (4,207) (2,394)
Benefit from income taxes 1,750 994
----------- ------------
Net loss $ (2,457) $(1,400)
=========== ============
Loss per share of common stock:
Basic and diluted $ (0.13) $ (0.08)
============ ============
</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)
<TABLE>
<CAPTION>
APRIL 30, JANUARY 31,
2000 2000
--------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................ $ 3,495 $ 7,819
Accounts receivable, net......................................... 48,855 51,074
Income taxes receivable.......................................... 5,987 6,083
Deferred tax asset............................................... 7,345 5,541
Prepaid expenses and other current assets........................ 3,347 3,440
------------- -------------
Total current assets........................................ 69,029 73,957
------------- -------------
Fixed assets, net..................................................... 32,488 34,558
Long-term accounts receivable, net.................................... 8,854 10,439
Other long-term assets................................................ 5,296 5,354
------------- -------------
Total assets................................................ $ 115,667 $ 124,308
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable........................................... $ 5,900 $ 3,520
Accrued employee expenses........................................ 5,478 3,091
Accrued other expenses........................................... 6,718 6,498
Current portion of long-term debt ............................... 3,034 8,455
Deferred revenues................................................ 44,355 50,833
------------- -------------
Total current liabilities................................... 65,485 72,397
Long-term deferred revenues........................................... 1,728 1,191
Long-term debt, net of the current portion............................ 2,500 2,500
Other long-term liabilities........................................... 3,258 3,061
------------- -------------
Total liabilities........................................... 72,971 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; 18,610,818 issued and.....................
outstanding.................................................. 186 186
Additional paid-in capital....................................... 41,120 41,120
Accumulated other comprehensive loss............................. (65) (59)
Retained earnings................................................ 1,455 3,912
------------- -------------
Total stockholders' equity.................................. 42,696 45,159
------------- -------------
Total liabilities and stockholders' equity.................. $ 115,667 $ 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)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
PERIOD ENDED
APRIL 30,
---------------------------------
1999
RESTATED
2000 (NOTE 2)
---- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (2,457) $ (1,400)
Adjustments to reconcile net loss to cash from operating
activities:
Provision for doubtful accounts.......................................... 1,867 2,551
Deferred tax benefit..................................................... 1,804 ---
Depreciation............................................................. 2,321 2,274
Amortization of intangible assets........................................ 141 141
Changes in net assets and liabilities:
Accounts receivable...................................................... 669 546
Income taxes receivable.................................................. 96 (158)
Prepaid expenses and other current assets................................ 93 427
Long-term accounts receivable............................................ 1,268 2,618
Other long-term assets................................................... (89) 1,326
Trade accounts payable................................................... 2,380 (2,375)
Accrued employee expenses................................................ 2,387 402
Accrued other expenses................................................... 220 (2,029)
Deferred revenues........................................................ (6,478) (6,653)
Long-term deferred revenues.............................................. 537 (468)
Other long-term liabilities.............................................. 197 258
------------- -------------
Cash provided by (used for) operating activities.................... 1,348 (2,540)
------------- -------------
Cash flows from investing activities:
Capital expenditures.......................................................... (251) (2,354)
-------------- -------------
Cash used for investing activities.................................. (251) (2,354)
-------------- -------------
Cash flows from financing activities:
Repayments of long-term debt.................................................. (6,795) ---
Borrowing from long-term debt................................................. 1,374 1,375
-------------- -------------
Cash (used for) provided by financing activities.................... (5,421) 1,375
------------- -------------
Net decrease in cash and cash equivalents.......................................... (4,324) (3,519)
------------- -------------
Cash and cash equivalents, beginning of period..................................... 7,819 7,691
------------- -------------
Cash and cash equivalents, end of period........................................... $ 3,495 $ 4,172
============= =============
</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 April 30, 2000, the Company
operated twenty-eight Learning Centers in the U.S. and Canada and is
headquartered in Manassas, Virginia.
Basis of Presentation
The interim consolidated financial statements of Computer Learning Centers,
Inc. as of and for the three months ended April 30, 2000 and 1999 have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") with respect to Form 10-Q and reflect all normal
recurring adjustments that are, in the opinion of management, necessary for a
fair statement of results for the interim periods presented. Pursuant to such
rules and regulations, certain notes in the audited consolidated financial
statements for fiscal year 2000 included in the Company's Annual Report on the
SEC's Form 10-K ("2000 Annual Report") have been omitted.
These consolidated financial statements should be read in conjunction with
the 2000 Annual Report on Form 10-K. The Company's consolidated balance sheet as
of January 31, 2000 was derived from the audited financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
As used herein, the three-month periods ended April 30, 2000 and 1999 are
referred to as "first quarter 2000" and "first quarter 1999," respectively.
Geographic information
The following table sets forth financial information for the Company's U.S.
and Canadian operations.
<TABLE>
<CAPTION>
2000 1999 RESTATED
AS OF AND FOR THE FIRST QUARTER (NOTE 2)
-------------------------------- --------------------------------------------- ----------------------------------------------
U.S. CANADIAN TOTAL U.S. CANADIAN TOTAL
---- -------- -------- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 32,487 $ 1,858 $ 34,345 $ 34,213 $ 2,076 $ 36,289
(Loss) income before income taxes (4,348) 141 (4,207) (2,948) 554 (2,394)
Long-lived assets, net 31,552 936 32,488 36,655 1,029 37,684
</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 has
changed to an instructional day basis, thereby matching the recognition of
revenue to the instructional term for all students.
In addition, the Company had historically expensed all direct student
acquisition costs as incurred. These costs primarily related to recruiting
representatives' salaries, employee benefits and other direct costs. As such,
the half-month revenue convention served to mitigate the impact of this
immediate expensing. Current accounting guidelines, notably the Securities and
Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements," issued in December 1999, now require the deferral of
"incremental direct" acquisition costs over the contract period with the
expensing of all other acquisition costs. As a significant portion of student
acquisition costs defined above do not qualify as "incremental direct" costs,
these costs would not be eligible for deferral.
Accordingly, the Company has also modified its policy in order to defer
incremental direct acquisition costs, which consist primarily of certain third
party fees paid on behalf of the students, net of nominal enrollment fees
collected from the students at the beginning of their programs.
The effect of these adjustments on prior fiscal years financial statements
are discussed in the Company's Annual Report on Form 10-K for the year ended
January 31, 2000 in Note 2 of the Notes to Consolidated Financial Statements.
Accordingly, the financial statements and financial information contained
herein for the first quarter of 1999 have been restated. The statement of
operations has been restated as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED APRIL 30, 1999 REPORTED RESTATED
---------- ----------
<S> <C> <C>
Revenues................................................ $ 35,982 $ 36,289
Costs and expenses...................................... 38,652 38,674
Loss from operations.................................... (2,670) (2,385)
Net loss................................................ (1,568) (1,400)
Loss per share:
Basic and Diluted.................................... $ (0.09) $ (0.08)
</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 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 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
April 30, 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 due to a change of control following the Company's acquisition
of these campuses. The provisional certifications on these four centers extend
through July 2000 to September 2001. The Company expects to apply for
recertification as the provisional certifications expire. The Company's Perkins
loan default rate, which applies to 21 of its Learning Centers, for the most
recent fiscal year exceeds 15%, which may lead to additional provisional
certifications of CLC's 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 another regulatory agency finds that the institution made refunds late (as
defined by the Department) to 5% or more of its students in either of the two
most recent fiscal years, the institution is required to post a letter of credit
in favor of the Department in an amount equal to 25% of the total Title IV
Program refunds paid by the institution in its prior fiscal year. During fiscal
2000, the Department required a letter of credit of approximately $2.2 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
review, the Department has requested CLC to perform an additional file review of
returns of federal funds during the review period. The Department has expanded
its review of that issue to include the Company's San Jose, Philadelphia and
Houston Learning Centers. The Company does not believe that the resolution of
these reviews will have a severe 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
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)
a number of findings alleging non-compliance with certain Title IV Program
requirements similar to those found in the Alexandria and Manassas program
reviews discussed above. The Company has submitted responses to the Department
in March and April 2000 concerning all of the findings. The Company does not
believe that the resolution of this review will have a severe impact on the
Company's business, financial condition and results of operations.
In July 1999, the Company submitted the results of its independent audit on
its administration of Title IV Programs for the year ended January 31, 1999 to
the Department. The audit identified certain findings of non-compliance with
respect to the Company's administration of the Title IV Programs. The Company
has not received any written communication from the Department with respect to
this compliance audit. The Company does not believe that the resolution of this
matter will have a severe impact on the Company's business, financial condition
and results of operations.
Heightened Cash Monitoring
The Department also has discretion to alter the way it provides Title IV
Program funds to participating institutions. It may transfer an institution from
the "advance" system of funding, under which an institution receives funding
from the Department in advance based on anticipated need, to the "reimbursement"
system of payment, under which an institution must disburse funds to students
and document their eligibility for Title IV Program funds before receiving funds
from the Department. The Department may also impose a requirement known as
"heightened cash monitoring," of which there are multiple levels, which requires
additional reporting to and review by the Department of all Title IV funds
requests.
On April 6, 1998, the Company was notified by the Department of Education
that, based upon the Department's monitoring of litigation involving the Company
and certain student complaints lodged against the Company, it had placed all
Learning Centers on a 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 has not had an effect on the availability or timing of
financial assistance to the Company's students, nor has it had a material effect
on the Company's cash flow or operating results.
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 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 each student's eligibility for Title IV Program
funding before being reimbursed by the Department for funds which they must
advance to their eligible students. HCM2 procedures require the affected
Learning Centers to submit extensive documentation proving student eligibility.
Those documents are then reviewed by the Department, a process that customarily
requires a minimum of thirty days. Management expects that HCM2 will delay the
timing of Title IV cash flow for approximately 75 days.
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)
The Department stated that this action was based on information obtained
during its Alexandria, Manassas and Laurel program reviews, which indicated that
the Company had failed to make refunds for some students and had failed to make
refunds on a timely basis for other students. The Company vigorously disputed
the Department's basis for this action and explained the significant adverse
financial effects such action would have. On March 14, 2000, the Company reached
an agreement with the Department resulting in a modification of the terms of its
March 8 action. The key terms of the agreement are that only the Company's
Alexandria, VA and Laurel, MD Learning Centers would be placed on HCM2, that the
remaining Learning Centers would continue on HCM1 with the condition that the
Company submit additional reports and documentation in conjunction with their
future Title IV funds requests, and that the Company must engage an independent
accountant to attest to the compliance with Title IV regulation of refunds and
returns of funds at all of the Company's U.S. Learning Centers receiving Title
IV funds (the "Special Attestation"). Management expects HCM2 will have a
significant impact on the timing of cash flows at these Learning Centers and has
estimated the cash flow impact of the 75 day delay at approximately $3 million.
The Special Attestation required by the Department as part of the March 14,
2000 agreement related to a review of 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
Company's management believes that should the Special Attestation substantiate
compliance with Title IV requirements acceptable to the Department and with
CLC's continued compliance with Title IV Program requirements, the Department
may remove HCM1 and HCM2 requirements at some or all of the Learning Centers.
However, should the Special Attestation be interpreted as demonstrating
noncompliance with Title IV Program requirements in excess of rates tolerable by
the Department, the Department may take additional actions against CLC,
including the possibility of placing additional Learning Centers on HCM2. Any
further adverse actions initiated by the Department, including a change in
status from HCM1 to HCM2 for any of the Learning Centers could have a severe
impact on the Company's business, financial condition and results of operations.
State Authorization and Accreditation
In addition to Federal oversight, the Company is subject to state level
regulation as well as accreditation agency guidelines. During 1999, the Maryland
Higher Education Commission ("MHEC") and Texas Workforce Commission ("TWC")
reviewed programs at the Company's Laurel, Maryland, and Houston, Texas Learning
Centers, respectively. In October 1998, the MHEC and TWC both issued reports
citing several findings of regulatory noncompliance. During the first quarter
1999, the Company recorded expenses of $738 representing estimated costs
associated with resolving the findings included in these regulatory matters,
which were included in general and administrative expenses. These matters are
now considered closed. The Company has no significant state regulatory actions
open that management expects to result in adverse action or material fines and
assessments.
The Company is required to submit to its accreditation agency annual
placement and retention rates for each Learning Center. The Company was
notified in May 2000 that based on its most recent submission, that was for the
twelve-month period ended June 30, 1999, eight of its Learning Centers did not
achieve the minimum requirement for placement rates and one of these eight
Learning Centers did not achieve the minimum retention rate requirement.
Consequently, these eight Learning Centers have been assigned reporting
requirements by the Company's accreditation agency.
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)
4. - ACCOUNTS RECEIVABLE:
Student accounts receivables are initially established for the balance of
course tuition (however, only for the current academic year of multi-academic
year programs) at the time a student enrolls in the Learning Center. An academic
year is determined based on the length of the student program and consideration
of regulatory guidelines. Accounts receivables consist of financial aid,
third-party and self-pay receivable balances. Financial aid receivables are
student receivable balances expected to be paid through Title IV program funds.
Third party student receivable balances are those to be paid by employer
companies or various non-Title IV federal, state and non-governmental agencies.
Self-pay student receivables consist of those amounts to be paid by the student.
The Company makes available to qualifying students alternative financing
arrangements ("CLC financing"), which help fund their education. Dependent upon
the credit worthiness of the individual, CLC financing may be offered to assist
students with meeting their financial obligations related to attending CLC. The
Company requires students receiving CLC financing to make regular monthly
payments. Depending on the level of financing extended to students, payment
plans offered generally range from six months to three years. All amounts due to
the Company in periods beyond one year are classified as long-term receivables.
When a student withdraws, tuition paid in excess of earned tuition revenues
is refunded based on the applicable refund policy. Conversely, tuition revenues
earned in excess of tuition paid remains as an accounts receivable. Based on
comparison to historical levels, the Company provides for estimated student
withdrawals, as reductions to accounts receivable and related deferred revenue
balances, thus presenting these amounts at estimated net realizable value.
Accounts receivable balances are reviewed no less than quarterly for the
purposes of determining appropriate levels of the allowance for doubtful
accounts. The Company establishes the allowance for doubtful accounts using an
objective model, which applies various expected loss percentages to aging
categories based on historical bad debt experience. The Company typically
charges-off accounts receivable balances deemed to be uncollectible usually
after they are delinquent 120 days. All charge offs are recorded as reductions
in the allowance for doubtful accounts, with any recoveries of previously
written off accounts receivables recorded as increases to the allowance for
doubtful accounts.
As of April 30, 2000, net accounts receivable consisted of the following:
<TABLE>
<CAPTION>
April 30, 2000
-------------------------------------------------
Current Long term Total
-------- --------- ---------
<S> <C> <C> <C>
Accounts receivable..................................... $ 66,848 $ 12,255 $ 79,103
Student withdrawal allowance............................ (9,461) (1,679) (11,140)
Allowance for doubtful accounts......................... (8,532) (1,722) (10,254)
-------- --------- ---------
$ 48,855 $ 8,854 $ 57,709
======== ========= =========
</TABLE>
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)
5. - LONG-TERM DEBT:
As disclosed in the Annual Report on Form 10-K (Note 9), the Company has a
stand-alone revolving credit facility with a maximum borrowing capacity of $9.2
million as well as a separate facility for letters of credit of $3.3 million.
The interest rate on outstanding balances is equal to the bank's U.S. prime rate
plus two percent with an additional interest fee of up to three percent based on
the amount of outstanding borrowings. The prime rate of the Company's bank was
8.5% as of April 30, 2000. Both the credit facilities expire on May 31, 2001.
The declining amounts of available credit over the term of each facility is
structured as follows:
<TABLE>
<CAPTION>
LETTER OF CREDIT
CREDIT FACILITY* FACILITY TOTAL
---------------- ------------------ ------------
<S> <C> <C> <C>
May 15 -- July 31, 2000 $ 9,200 $ 3,300 $ 12,500
August 1 -- September 30, 2000 3,700 2,575 6,275
October 1 -- October 31, 2000 3,000 2,575 5,575
November 1, 2000 -- May 31, 2001 2,500 2,575 5,075
</TABLE>
* The facility provides for required prepayments based on tax refunds and other
collateral which when received by the bank would reduce the available credit
to the $2,500 level prior to November 1, 2000.
The Company had extended approximately $3.3 million of letters of credit at
April 30, 2000. Beginning on August 1, 2000 and every month thereafter, the
Company is required to deposit $250 into a restricted cash account, until the
balance is equal to 110% of the outstanding letters of credit, or the facility
is terminated. The credit agreement requires maintenance of certain financial
ratios and other restrictive covenants including limitations on purchases and
sales of assets. As of April 30, 2000, the Company was in compliance with all
covenants.
6. -LOSS PER SHARE:
The following table sets forth the basic and diluted loss per share
calculations for the three months ended April 30, 2000 and 1999:
<TABLE>
<CAPTION>
NET (LOSS) PER SHARE
INCOME SHARES AMOUNT
---------- ---------- ---------
<S> <C> <C> <C>
THREE-MONTH PERIOD ENDED APRIL 30, 2000
Loss per share of common stock -- basic and diluted $(2,457) 18,610,818 $(0.13)
======== ========== =======
THREE-MONTH PERIOD ENDED APRIL 30, 1999
Loss per share of common stock -- basic and diluted $(1,400) 17,493,251 $(0.08)
======== ========== =======
</TABLE>
7. - LITIGATION:
On May 5, 1998, a class action lawsuit was filed against the Company in the
Superior Court of New Jersey in Bergen County, New Jersey. The complaint
alleges, among other things, that the Company, at its 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
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)
incurred tuition expenses. On December 6, 1999, the Company filed a motion with
the Appellate Division of the Superior Court of New Jersey to appeal the
November 19, 1999 decision to certify a class. On January 19, 2000, that motion
was denied. The Company is unable to estimate the outcome of the matter or any
potential liability.
On July 9, 1999, a class action lawsuit was filed against the Company in
the Court of Common Pleas in Philadelphia County, Pennsylvania, on behalf of all
students who attended the Learning Center located on Market Street in
Philadelphia within six years of July 9, 1999, who have not obtained employment
in a computer-related job through the Company's placement services. The
complaint alleges, among other things, that this Learning Center failed to
provide certain educational services and resources, misrepresented certain
information respecting services, resources, occupational opportunities and
student outcomes, and violated certain provisions of the Pennsylvania Unfair
Trade Practices and Consumer Protection Law. The Company is unable to estimate
the outcome of the matter or any potential liability.
Between June 1, 1998 and October 31, 1999, the Company was named as
defendant in three other lawsuits in Texas and New Jersey by individual students
or groups of students who formerly attended one of its Learning Centers. In two
of these 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, that
decision has been appealed. The complaints allege, among other things, that the
Company, at the affected Learning Centers, failed to provide plaintiffs with
certain educational services and resources and misrepresented certain
information respecting services, resources, and student outcomes and violated
certain provisions of the applicable state consumer laws. The Company is unable
to estimate the outcome of these matters or any potential liability.
In addition to the lawsuits discussed above, the Company is a defendant in
a number of civil lawsuits involving current and former employees and other
third parties, which the Company considers incidental to its business and
unlikely to have a material effect on the Company's future operations. However,
there can be no assurance that these matters will not have a severe impact on
the results of operations of the Company in a future period, depending in part
on the results for such period.
The Company intends to defend itself vigorously in the lawsuits referred to
above; however, there can be no assurance that the Company will be successful in
defending itself in any of these proceedings. Even if the Company prevails on
the merits in such litigation, the Company has incurred and expects to continue
to incur significant legal and other defense costs as a result of such
proceedings. These proceedings have involved and could continue to involve
substantial diversion of the time of some members of management. An adverse
determination in, or settlement of, such litigation could involve the 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.
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)
8. - COMPREHENSIVE LOSS:
Total comprehensive loss is summarized as follows:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH PERIOD
ENDED APRIL 30,
2000 1999
---- ----
<S> <C> <C>
Net loss ............................................................ $(2,457) $(1,400)
Foreign currency translation adjustment.............................. (6) (2)
------- -------
Total comprehensive loss............................................. $(2,463) $(1,402)
======== ========
</TABLE>
9. - SIGNIFICANT EVENTS:
Due to recurring operating losses and declining student enrollment trends,
the Company announced its intent to close its San Jose, CA Learning Center. This
Learning Center had 100 students at April 30, 2000 and had $1.9 million and $3.5
million in revenues in fiscal 2000 and fiscal 1999, respectively. During the
quarter ended April 30, 2000, the Company recorded expenses of approximately
$141 related to anticipated closing costs of this Learning Center, which is
included in costs of instruction and services. This Learning Center is
scheduled to teach existing students through July 31, 2001.
During the first quarter of 2000, the Company executed a termination
agreement of an operating lease for facilities in Denver, Colorado. The Company
recorded lease cancellation related charges of $254 in this period, which is
included in cost of instruction and services.
The Company has various employment agreements with certain senior
executives. The employment agreements entitle executives to one to two years of
salary and benefits, which would be payable with respect to the year in which
any breach of such agreements occurred, including termination without cause.
During the first quarter of 2000, the Company recorded $170 of severance
expenses in this regard. This amount is included in general and administrative
expenses.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report on Form 10-Q contains forward-looking statements. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. There are a
number of important factors that could cause our actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results" and Part II, Item 1 -- "Legal
Proceedings" contained herein.
This management's discussion and analysis of financial condition and
results of operations ("MD&A") should be read in conjunction with Part I, Item 1
-"Business - Financial Aid and Regulation" contained in our Annual Report on
Form 10-K ("2000 Annual Report"), as filed with the U.S. Securities and Exchange
Commission ("SEC") for the year ended January 31, 2000, for discussion of, among
other matters:
- The nature and extent of our participation in federal student aid
programs authorized under Title IV of the Higher Education Act of
1965, as amended ("Title IV Programs");
- The U.S. Department of Education's ("Department of Education" or
"Department") review and regulation of Title IV Programs and review
of our Learning Centers, including:
-student loan default rates,
-heightened cash monitoring of our Learning Centers by
the Department,
-financial responsibility measures,
-reauthorization of the Higher Education Act,
-the effect of a change in control, and
-percentage of applicable revenue that may be derived
from Title IV Programs;
- State authorization, regulation and accreditation of our Learning
Centers, including pending actions with state agencies and other
actions and settlements occurring in prior periods;
- Canadian regulations affecting certain of our Learning Centers; and
- U.S. federal income tax relief to qualifying students.
This MD&A should also be read in conjunction with the same titled section
contained in our 2000 Annual Report for a discussion of, among other matters:
- A business overview;
- Components of income statement classification;
- Cyclical pattern of enrollments; and
- Collection risk management associated with our student financing
plans.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data of the Company expressed as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE THREE-MONTH
PERIOD ENDED APRIL 30,
-----------------------------
2000 1999
(restated)
------------- -----------
<S> <C> <C>
Revenues.......................................................... 100.0% 100.0%
Costs and expenses:
Costs of instruction and services............................ 76.3 70.3
Selling and promotional...................................... 15.6 15.3
General and administrative................................... 14.2 13.6
Provision for doubtful accounts.............................. 5.4 7.0
Amortization of intangible assets............................ 0.4 0.4
----------- -----------
111.9 106.6
----------- -----------
Loss from operations.............................................. (11.9) (6.6)
Interest expense, net............................................. (0.3) -
----------- -----------
Loss before income taxes.......................................... (12.2) (6.6)
Benefit from income taxes......................................... (5.1) (2.7)
----------- -----------
Net loss.......................................................... (7.2)% (3.9)%
=========== ===========
</TABLE>
15
<PAGE> 16
THREE MONTHS ENDED APRIL 30, 2000 ("FIRST QUARTER OF 2000") COMPARED WITH THE
THREE MONTHS ENDED APRIL 30, 1999 ("FIRST QUARTER OF 1999").
Revenues decreased 5% to $34.3 million in the first quarter of 2000 from
$36.3 in the first quarter of 1999. The average number of students attending
Learning Center programs decreased 7% in the first quarter of 2000 versus the
first quarter of 1999. The number of students attending Learning Center programs
at the end of the quarter decreased 5% to 9,755 at April 30, 2000 from 10,254 at
April 30, 1999.
When evaluating enrollment growth, we view all Learning Centers opened or
acquired during the last two fiscal years (current and preceding) as "new" in
order to account for the start-up period inherent in new Learning Center
openings. Learning Centers opened for more than two fiscal years are "same
centers." In fiscal 2001, a comparison of new centers to same centers is not
meaningful as only the Norcross, Georgia school is considered a new center.
The following summarizes Learning Center openings and acquisitions for the
current and last two fiscal years.
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
LEARNING CENTER OPENINGS/ACQUISITIONS 2001 2000 1999
------------------------------------------------- ------ -------- ------
<S> <C> <C> <C>
First Quarter.................................... - - 5
-
Second quarter................................... 1 1
Third Quarter.................................... - -
Fourth Quarter................................... - 1
- -
Total.................................. - 1 7
= = =
</TABLE>
Costs of instruction and services increased 3% to $26.2 million for the
first quarter of 2000 from $25.5 million in the first quarter of 1999. These
direct costs consist primarily of faculty and staff compensation and related
benefits, and facility costs (including rent and depreciation). Instruction
costs and services as a percentage of revenues increased to 76% in the first
quarter of 2000 from 70% in the first quarter of 1999. The slight increase in
costs of instruction and services relative to the 5% decrease in revenue is
primarily attributable to the fixed nature of these costs and annual increases
in compensation and other expenses. Also impacting the increase was $254,000 of
expenses related to lease cancellation charges of a facility in Denver, Colorado
and $141,000 related to the closure of our San Jose, California Learning Center.
Selling and promotional expenses decreased 2% to $5.4 million in the first
quarter of 2000 from $5.5 million in the first quarter of 1999. Selling and
promotional expenses as a percentage of revenues was approximately 15% in the
first quarter of 2000 and 1999.
General and administrative expenses of $4.9 million in the first quarter of
2000 was slightly lower than those of the first quarter of 1999 and as a
percentage of revenues was 14% in the first quarter of 2000 and 1999. During the
first quarter of 1999, we provided $872,000 for regulatory obligations where as
no amount was provided for in the first quarter of 2000. This decrease in
regulatory expense was offset by increased costs of staff resulting from
additional support personnel, including those in regulatory compliance,
information technology support and collection departments as well as a result of
increased professional fees primarily associated with the Special Attestation
required by the Department of Education.
16
<PAGE> 17
Provision for doubtful accounts decreased 27% to $1.9 million in the first
quarter of 2000 from $2.6 million in the first quarter of 1999. Provision for
doubtful accounts as a percentage of revenues decreased to 5% in the first
quarter of 2000 from 7% in the first quarter of 1999. This decrease is
attributable to an improving collection rate on CLC financed students, which is
one of the factors used in estimating our allowance for doubtful accounts.
We incurred net interest expense of $119,000 and $9,000 in the first
quarter of 2000 and 1999, respectively. This is attributable to a decrease in
interest generated from lower average invested cash balances as well as interest
expense on increased amounts of borrowings outstanding during the first quarter
of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents decreased by $4.3 million for the three month
period ended April 30, 2000. Cash from operations for the first quarter of 2001
compared to the first quarter of 2000 increased by approximately $3.9 million
primarily due to an increased use of trade credit, which offset the decline in
net loss adjusted for non-cash charges.
Our principal sources of funds at April 30, 2000 were cash and cash
equivalents of approximately $3.5 million and net current accounts receivable of
$48.9 million. Additionally, we have a credit agreement with a bank that
provided for a $9.2 million revolving credit facility, with scheduled reductions
through November 1, 2000 when the maximum borrowing capacity will be $2.5
million. We have pledged our expected income tax refunds of $6.1 million for
immediate prepayment on this facility. We have granted the bank a security
interest in substantially all of our assets. The interest on the facility is
based on the bank's U.S. prime rate plus two percent with a facility charge of
up to three percent dependent on the outstanding borrowings. The bank's prime
rate was 8.5% at April 30, 2000. We had borrowings outstanding of approximately
$5.5 million on our line of credit as of April 30, 2000 leaving approximately
$3.7 million available for borrowing under the facility.
In addition, the Company had outstanding letters of credit of
approximately $3.3 million primarily to the Department of Education, and an
insurance company, for surety bonds required by various states. Our credit
agreement provides for a separate letter of credit facility. Our credit facility
provides for $3.3 million as the maximum limit for outstanding letters of credit
through July 31, 2000; thereafter, the limit is reduced to $2.6 million.
The credit agreement, as amended, requires maintenance of certain financial
ratios and contains other restrictive covenants including limitations on
purchases and sales of assets. As of April 30, 2000, we were in compliance with
all of these covenants. We are also required to maintain a financial
responsibility score and satisfy other measures to maintain compliance with
regulatory standards on an annual basis. As of January 31, 2000, we fell below
certain minimum measures for certain institutions and for CLC as a whole. If
our financial condition continues to deteriorate, we may no longer be able to
meet minimum regulatory standards which could lead the Department to place
additional Learning Centers on HCM2 or require that we post an additional letter
of credit on behalf of some or all of our Learning Centers. We may also be
subject to additional financial oversight and actions by State regulatory
agencies or our accreditating 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 delay the receipt of
Title IV Program funding for approximately 75 days. While implementing these
procedures with the Department, we have experienced a delay in Title IV Program
funding for two of our other Learning Centers, since they are a part of the same
institution or campus group. We estimate that this delay has required us to use
additional working capital to fund operations during the delay period of
approximately $3 million.
17
<PAGE> 18
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 $2.6
million, which we expect to fund with cash from our operations.
On April 17, 2000, we made a decision to close our San Jose, CA Learning
Center. This school had 114 students as of March 31, 2000 and accounted for
approximately $1.9 million and $3.5 million of our revenue in fiscal 2000 and
1999, respectively. We decided to close this Learning Center due to our market
evaluation which indicated that this school could not return to profitable
operations. This Learning Center is scheduled to teach existing students
through July 31, 2001. We recorded a charge of $141,000 in the first quarter of
2000 related to estimated closing costs of this facility.
We continuously review our cash flow, and seek strategies to provide
favorable returns on our capital. Our Board of Directors authorized a program to
repurchase up to 1,000,000 shares of our Common Stock over a two-year period
ending August 31, 2000. As of June 13, 2000, we had not purchased any stock
under this program and the terms of our credit facility restrict us from making
any future purchases of our Common Stock.
We have undertaken the development of a new proprietary administrative
software system, which we believe will serve to mitigate deficiencies in our
record-keeping systems identified by previous regulatory reviews. We expect to
expend approximately $3 million to develop and implement this system, which we
anticipate will be completed by January 31, 2001. To date, we have expended
approximately $1.9 million to develop and implement this system.
We have experienced a decline in our working capital over the last several
quarterly periods. During this time, we have utilized an increasing amount of
our available line of credit with our principal bank and as of April 30, 2000
there remained approximately $3.7 million of additional borrowings available
under the line. However, when considering our existing student population and
projected enrollments during fiscal 2001, we expect our available cash on hand
and cash from operating activities will be sufficient to meet our cash
requirements for at least the next twelve months (see "Certain Factors That May
Affect Future Results -- Financial Condition," contained herein). During this
time, we will continue to evaluate all sources of capital available to us,
including bank financing or additional equity or debt offerings, to satisfy
ongoing working capital and capital expenditure requirements.
REGULATORY MATTERS - CURRENT DEVELOPMENTS
We are subject to extensive federal and state regulation and review of
operations at our U.S. Learning Centers. There are regulatory reviews ongoing at
certain Learning Centers which are more fully described in Part I, Item 1 -
"Business - Financial Aid and Regulation" section in our fiscal 2000 Annual
Report. Current developments regarding these regulatory matters are discussed
below.
U.S. Department of Education -- Regulation and Review
The Company is subject to extensive regulation as a participant in various
federal and state government supported financial aid programs. These regulations
require, among other things, that the Company and its Learning Centers comply
with certain financial responsibility and administrative capability
requirements. Failure to comply with these requirements could result in
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. For 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, a cohort default rate in
the Federal Family
18
<PAGE> 19
Education Loan ("FFEL") program or William D. Ford Direct Loan ("FDL") program
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 April 30,
2000, four of the Company's Learning Centers are provisionally certified for
participation in the FFEL program, due either to cohort default rates or due to
a change of control following the Company's acquisition of these campuses. The
provisional certifications on these four centers extend through July 2000 to
September 2001. The Company expects to apply for recertification as the
provisional certifications expire.
Under the standards of financial responsibility of the Department of
Education, if an institution's annual financial aid compliance audit or a review
by another regulatory agency finds that the institution made refunds late (as
defined by the Department) in 5% or more of cases 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 2000,
the Company was required to post a letter of credit of approximately $2.2
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
review, the Department has requested CLC to perform an additional file review of
returns of federal funds during the review period. The Department has expanded
its review of that issue to include the Company's San Jose, Philadelphia and
Houston Learning Centers. The Company does not believe that the resolution of
these reviews will have a severe 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 reviews discussed above. The
Company submitted responses to the Department in March and April 2000 concerning
all of the findings. The Company does not believe that the resolution of this
review will have a severe impact on the Company's business, financial condition
and results of operations.
In July 1999, the Company submitted the results of its independent audit on
its administration of Title IV Programs for the year ended January 31, 1999 to
the Department. The audit identified certain findings of non-compliance with
respect to the Company's administration of the Title IV Programs. The Company
has not received any written communication from the Department with respect to
this compliance audit. The Company does not believe that the resolution of this
matter will have a severe impact on the Company's business, financial condition
and results of operations.
Heightened Cash Monitoring
The Department also has discretion to alter the way it provides Title IV
Program funds to participating institutions. It may transfer an institution from
the "advance" system of funding, under which an institution receives funding
from the Department in advance based on anticipated need, to the "reimbursement"
system of payment, under which an institution must disburse funds to students
and document their eligibility for Title IV Program funds before receiving funds
from the Department. The Department may also impose a requirement known as
"heightened cash monitoring," of which there are multiple levels, which requires
additional reporting to and review by the Department of all Title IV funds
requests.
19
<PAGE> 20
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 a 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 has not had an effect on the availability or timing of
financial assistance to the Company's students, nor has it had a material effect
on the Company's cash flow or operating results. This requirement has led to
delays (estimated by us as generally two to three days) in the timing of our
cash receipts, but has not impaired our business operations.
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 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 each student's eligibility for Title IV Program
funding before being reimbursed by the Department for funds which they must
advance to their eligible students. HCM2 procedures require the affected
Learning Centers to submit extensive documentation proving student eligibility.
Those documents are then reviewed by the Department, a process that customarily
requires a minimum of thirty days. Management expects that HCM2 will delay the
timing of Title IV cash flow for approximately 75 days.
The Department stated that this action was based on information obtained
during its Alexandria, Manassas and Laurel program reviews, which indicated that
the Company had failed to make refunds for some students and had failed to make
refunds on a timely basis for other students. The Company vigorously disputed
the Department's basis for this action and explained the significant adverse
financial effects such action would have. On March 14, 2000, the Company reached
an agreement with the Department resulting in a modification of the terms of its
March 8 action. The key terms of the agreement are that only the Company's
Alexandria, VA and Laurel, MD Learning Centers would be placed on HCM2, that the
remaining Learning Centers would continue on HCM1 with the condition that the
Company submit additional reports and documentation in conjunction with their
future Title IV funds requests, and that the Company must engage an independent
accountant to attest to the compliance with Title IV regulation of refunds and
returns of funds at all of the Company's U.S. Learning Centers receiving Title
IV funds (the "Special Attestation"). Management expects HCM2 will have a
significant impact on the timing of cash flows at these Learning Centers and has
estimated the cash flow impact of the 75 day delay at approximately $3 million.
The Special Attestation required by the Department as part of the March 14,
2000 agreement related to a review of 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 Company's management believes that should the Special Attestation
substantiate compliance with Title IV requirements acceptable to the Department
and with CLC's continued compliance with Title IV Program requirements, the
Department may remove HCM1 and HCM2 requirements at some or all of the Learning
Centers. However, should the Special Attestation be interpreted as demonstrating
noncompliance with Title IV Program requirements in excess of rates tolerable by
the Department, the Department may take additional actions against CLC,
including the possibility of placing additional Learning Centers on HCM2. Any
further adverse actions initiated by the Department, including a change in
status from HCM1 to HCM2 for any of the Learning Centers could have a severe
impact on the Company's business, financial condition and results of operations.
20
<PAGE> 21
State Authorization and Accreditation
In addition to federal oversight, we are subject to state level regulation
as well as accreditation agency guidelines. We are required to submit to our
accreditation agency annual placement and retention rates for each Learning
Center. We were notified in May 2000 that based on our most recent submission,
that was for the twelve-month period ended June 30, 1999, eight of our Learning
Centers did not achieve the minimum requirement for placement rates and one of
these eight Learning Centers did not achieve the minimum retention rate
requirement. Consequently, these eight Learning Centers have been assigned
reporting requirements by our accreditation agency.
The Company has no significant state regulatory actions open that
management expects will result in adverse action or material fines and
assessments.
Guaranty Agency Reviews
In the ordinary course of our business, certain of the U.S. Learning
Centers are subject to periodic review by the guaranty agencies which guarantee
Federal Family Education Loan Program loans disbursed to students at those
Learning Centers. We believe all open reviews by these guaranty agencies will be
concluded with no material effect to the Company.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following factors, among others, including without limitation those set
forth below under the caption Part II, Item 1 - "Legal Proceedings," could cause
actual results to differ materially from those contained in forward looking
statements made in this Report on Form 10-Q and presented elsewhere by us from
time to time.
Financial Condition
We have experienced a decline in our working capital and available cash
balances over the last several quarterly periods. During this time, we have
utilized an increasing amount of our available line of credit with our principal
bank and as of April 30, 2000, there was $3.7 million of borrowings available
under the line. 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 has 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, for certain institutions, as defined by the Department, and
for CLC as a whole, we fell below the financial responsibility score and other
minimum measures. 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 HCM2 or require that we post an additional letter
of credit on behalf of some or all of our Learning Centers. We may also be
subject to additional financial oversight and actions by State regulatory
agencies or our accreditating agency as a result of failing certain of these
minimum financial measures.
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
21
<PAGE> 22
assurance that we will be successful in defending CLC in any of these
proceedings. Even if we prevail on the merits in such litigation, we expect to
continue to incur significant legal and other defense costs as a result of such
proceedings. These proceedings could involve substantial diversion of the time
of some members of management, and an adverse determination in, or settlement
of, such litigation could involve the payment of significant amounts, or could
include terms in addition to such payments, which could have a severe impact on
our business, financial condition and results of operations. Refer to Part II,
Item 1 -- "Legal Proceedings" herein.
There can be no assurance that additional legal proceedings will not be
filed or that adverse actions will not be initiated against CLC, either by
federal or state regulators or other parties. Any such legal proceedings or
adverse action could have a severe impact on CLC's business, financial condition
and results of operations.
Change in Title IV Program Funding Administrative Agent
We utilize a third-party agent to perform maintenance of the required
regulatory requirements associated with transfers of Title IV Program funds to
our bank accounts. This responsibility will be transferred to a new third-party
administrative agent in November 2000. We expect this transfer of responsibility
to occur without significant impact on our business. However, should we
experience impediments related to this transition, it may result in delays in
the timing of our cash receipts, which could result in material adverse effects
on our business, results of operations, and financial condition.
Potential Adverse Effects of Regulation
We are dependent on the authorization of the applicable agency or agencies
of each state within which a Learning Center is located to allow us to operate
and to grant degrees or diplomas to students. State authorization is also
required in order for an institution to become and remain eligible to
participate in the Title IV Programs. We are subject to extensive and varying
regulation in each of the states in which the Learning Centers operate.
In the event that we fail to maintain or renew any required regulatory
approvals, accreditations or authorizations of any of the Learning Centers it
would have a material adverse effect on our results of operations and financial
condition.
Potential Adverse Effects of Change of Control
General Atlantic Corporation ("GAC"), General Atlantic Partners II, L.P.
("GAP") and GAP-CLC Partners, L.P. ("GAP-CLC") (collectively, the "General
Atlantic Entities") beneficially own approximately 16% of the outstanding shares
of our Common Stock. Consequently, the General Atlantic Entities, and GAC in
particular, will continue to have significant influence over our policies and
affairs. Upon a change of ownership resulting in a change of control of the
Company, as defined in the Department of Education's regulations, each of our
Learning Centers would be required to apply to the Department to reestablish its
eligibility to participate in the Title IV Programs. If such application were
incomplete, untimely or the Department's review indicated material deficiencies,
the affected Learning Center could lose access to Title IV Program funding for
an indeterminate period of time, leading to the loss of a portion, or all, of
its Title IV Program funding during the reapproval period. A change of control
also could affect the state authorization and accreditation of our Learning
Centers. If we experience a change of control under Department of Education,
state or accreditation standards and any of our Learning Centers lose authority
to operate or access to Title IV Program funding for an extended period, it
would have a material adverse effect on our results of operations and financial
condition.
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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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On May 5, 1998, a class action lawsuit was filed against the Company in the
Superior Court of New Jersey in Bergen County, New Jersey. The complaint
alleges, among other things, that the Company, at its Learning Centers located
in the State of New Jersey failed to provide certain educational services and
resources, misrepresented certain information respecting services, resources,
occupational opportunities and student outcomes and violated certain provisions
of the New Jersey Consumer Fraud Act. On November 19, 1999, the court certified
a class consisting of all persons who, during the six years immediately
preceding the commencement of this action, had enrolled in a course or courses
of study, education or training provided by the Company at its New Jersey
locations for which they incurred tuition expenses. On December 6, 1999, the
Company filed a motion with the Appellate Division of the Superior Court of New
Jersey to appeal the November 19, 1999 decision to certify a class. On January
19, 2000, that motion was denied. The Company is unable to estimate the outcome
of the matter or any potential liability.
On July 9, 1999, a class action lawsuit was filed against the Company in
the Court of Common Pleas in Philadelphia County, Pennsylvania, on behalf of all
students who attended the Learning Center located on Market Street in
Philadelphia within six years of July 9, 1999, who have not obtained employment
in a computer-related job through the Company's placement services. The
complaint alleges, among other things, that this Learning Center failed to
provide certain educational services and resources, misrepresented certain
information respecting services, resources, occupational opportunities and
student outcomes, and violated certain provisions of the Pennsylvania Unfair
Trade Practices and Consumer Protection Law. The Company is unable to estimate
the outcome of the matter or any potential liability.
Between June 1, 1998 and October 31, 1999, the Company was named as
defendant in three other lawsuits in Texas and New Jersey by individual students
or groups of students who formerly attended one of its Learning Centers. In two
of these 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, that
decision has been appealed. The complaints allege, among other things, that the
Company, at the affected Learning Centers, failed to provide plaintiffs with
certain educational services and resources and misrepresented certain
information respecting services, resources, student outcomes and violated
certain provisions of the applicable state consumer laws. The Company is unable
to estimate the outcome of these matters or any potential liability.
In addition to the lawsuits discussed above, the Company is a defendant in
a number of civil lawsuits involving current and former employees and other
third parties, which the Company considers incidental to its business and
unlikely to have a material effect on the Company's future operations. However,
there can be no assurance that these matters will not have a severe impact on
the results of operations of the Company in a future period, depending in part
on the results for such period.
The Company intends to defend itself vigorously in the lawsuits referred to
above; however, there can be no assurance that the Company will be successful in
defending itself in any of these proceedings. Even if the Company prevails on
the merits in such litigation, the Company has incurred and expects to continue
to incur significant legal and other defense costs as a result of such
proceedings. These proceedings could involve substantial diversion of the time
of some members of management. 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, or could lead to other adverse
consequences, including the suspension or termination of the Company's licenses
to operate within the respective state, which would have a severe impact on the
Company's business, financial condition and results of operations.
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<PAGE> 25
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.
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: June 14, 2000
COMPUTER LEARNING CENTERS, INC.
By: /s/ MARK M. NASSER
-------------------
MARK M. NASSER
Vice President and Chief Financial Officer
(Principal Financial Officer)
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<PAGE> 26
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NO. IN THIS FILING
------- ----------- -----------------------
<S> <C> <C>
3.1 Second Amended and Restated Certificate Incorporated by reference to Exhibit 3.1
of Incorporation of the Registrant, as of the Registrant's report on Form 10-Q
amended for the quarter ended October 31, 1997 filed
September 9, 1997
3.2 Amended and Restated Bylaws of the Incorporated by reference to Exhibit 3.4
Registrant of the Registrant's Form S-1 Registration
Statement as amended, filed March 29,
1995 (No. 33-90716)(the "Form S-1")
4.1 Form of Certificate for Shares of the Incorporated by reference to Exhibit 4.1
Registrant's Common Stock of the Form S-1
10.1 Second Amended and Restated Credit Agreement, Incorporated by reference to Exhibit 10.23 of
dated May 15, 2000 by and between First Union the Registrant's report on Form 10-K for the
National Bank and the Registrant year ended January 31, 2000 filed May 15, 2000
10.2 Second Amended and Restated Pledge and Incorporated by reference to Exhibit 10.25 of
Security Agreement, dated May 15, 2000 by and Registrant's report on Form 10-K for the
between the First Union National Bank and the year ended January 31, 2000 filed May 15, 2000
Registrant
10.3 Third Amended and Restated Revolving Credit Incorporated by reference to Exhibit 10.28 of
Note, dated May 15, 2000 by and between First the Registrant's report on Form 10-K for the
Union National Bank and the Registrant year ended January 31, 2000 filed May 15, 2000
27 Financial Data Schedule Filed herewith.
</TABLE>
26
