10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 30, 2001 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to . Commission File Number: 0-23245 Career Education Corporation (Exact name of registrant as specified in its charter) Delaware 36-3932190 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2895 Greenspoint Parkway, Suite 600, Hoffman Estates, IL 60195 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (847) 781-3600 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 (square root) No As of November 12, 2001, 44,176,793 shares of the registrant's Common Stock, par value $.01, were outstanding. CAREER EDUCATION CORPORATION QUARTER ENDED SEPTEMBER 30, 2001 INDEX PART I--FINANCIAL INFORMATION
Page ---- Item 1. Financial Statements Condensed Unaudited Consolidated Balance Sheets as of September 30, 2001 and 2000, and December 31, 2000..................................................................... 3 Condensed Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000.................................................. 4 Condensed Unaudited Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2001 and 2000.................................................. 5 Notes to Condensed Unaudited Consolidated Financial Statements.............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 16 PART II--OTHER INFORMATION Item 4. Submissions of Matters to a Vote of Security Holders....................................... 17 Item 6. Exhibits and Reports on Form 8-K........................................................... 17 SIGNATURES.............................................................................................. 18
2 Item 1. Financial Statements CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)
September 30, September 30, December 31, 2001 2000 2000 ------------- ------------- ------------ ASSETS CURRENT ASSETS: Cash............................................................. $ 9,188 $ 40,447 $ 33,742 Student receivables, net......................................... 55,770 28,201 29,800 Other receivables................................................ 4,926 3,131 3,851 Inventories...................................................... 4,784 1,922 2,874 Prepaid expenses and other current assets........................ 18,132 12,507 13,116 Deferred income tax assets....................................... 4,952 2,890 2,847 -------- -------- -------- Total current assets......................................... 97,752 89,098 86,230 -------- -------- -------- PROPERTY AND EQUIPMENT, net......................................... 127,943 80,804 90,836 INTANGIBLE ASSETS, net.............................................. 158,973 92,059 93,634 DEFERRED INCOME TAX ASSETS.......................................... 2,526 -- -- OTHER ASSETS........................................................ 5,850 3,943 9,999 -------- -------- -------- TOTAL ASSETS........................................................ $393,044 $265,904 $280,699 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt............................. $ 7,175 $ 4,454 $ 4,494 Accounts payable................................................. 13,727 13,368 7,608 Accrued expenses and other current liabilities................... 18,088 11,224 20,877 Accrued restructuring and severance.............................. 3,329 274 325 Deferred tuition revenue......................................... 36,536 24,482 23,610 -------- -------- -------- Total current liabilities........................................ 78,855 53,802 56,914 -------- -------- -------- DEFERRED RENT OBLIGATIONS........................................... 3,088 1,836 1,988 LONG-TERM DEBT, net of current maturities........................... 33,293 15,616 14,626 DEFERRED INCOME TAX LIABILITIES..................................... -- 6,250 6,185 OTHER LONG-TERM LIABILITIES......................................... 2,363 237 93 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT: Preferred stock, $.01 par value; 1,000,000 shares authorized; no shares issued and outstanding at September 30, 2001 and 2000 and December 31, 2000.......................................... -- -- -- Common stock, $.01 par value; 150,000,000 shares authorized; 44,039,866, 40,583,120, and 40,647,478 shares issued and outstanding at September 30, 2001 and 2000, and December 31, 2000, respectively......................................... 440 406 406 Additional paid-in capital....................................... 234,466 178,115 178,930 Accumulated other comprehensive loss............................. (777) (719) (698) Retained earnings................................................ 41,316 10,361 22,255 -------- -------- -------- Total stockholders' investment............................... 275,445 188,163 200,893 -------- -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT........................................................ $393,044 $265,904 $280,699 ======== ======== ========
3 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------- ------------------ 2001 2000 2001 2000 -------- ------- -------- -------- REVENUE: Tuition and registration fees, net............................... $119,306 $74,007 $338,335 $205,566 Other, net....................................................... 13,697 8,254 35,681 20,591 -------- ------- -------- -------- Total net revenue............................................ 133,003 82,261 374,016 226,157 -------- ------- -------- -------- OPERATING EXPENSES: Educational services and facilities.............................. 55,677 34,003 156,478 92,852 General and administrative....................................... 54,996 35,246 160,212 99,886 Depreciation and amortization.................................... 7,756 5,278 22,590 14,964 -------- ------- -------- -------- Total operating expenses..................................... 118,429 74,527 339,280 207,702 -------- ------- -------- -------- Income from operations....................................... 14,574 7,734 34,736 18,455 Interest income.................................................. 167 370 563 915 Interest expense................................................. (577) (262) (1,677) (1,103) Share of affiliate earnings...................................... 59 -- 1,034 -- -------- ------- -------- -------- Income before provision for income taxes and cumulative effect of change in accounting principle....................... 14,223 7,842 34,656 18,267 PROVISION FOR INCOME TAXES.......................................... 6,401 3,451 15,595 7,977 -------- ------- -------- -------- Income before cumulative effect of change in accounting principle...................................................... 7,822 4,391 19,061 10,290 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of taxes of $587................................... -- -- -- (778) -------- ------- -------- -------- NET INCOME.......................................................... $ 7,822 $ 4,391 $ 19,061 $ 9,512 ======== ======= ======== ======== NET INCOME PER SHARE: Basic Income before cumulative effect of change in accounting principle.................................................. $ 0.18 $ 0.11 $ 0.44 $ 0.28 Cumulative effect of change in accounting principle, net of taxes................................................... -- -- -- (0.02) -------- ------- -------- -------- Net Income................................................ $ 0.18 $ 0.11 $ 0.44 $ 0.26 ======== ======= ======== ======== Diluted Income before cumulative effect of change in accounting principle.................................................. $ 0.17 $ 0.10 $ 0.42 $ 0.27 Cumulative effect of change in accounting principle, net of taxes................................................... -- -- -- (0.02) -------- ------- -------- -------- Net Income................................................ $ 0.17 $ 0.10 $ 0.42 $ 0.25 ======== ======= ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic............................................................ 43,895 40,534 43,577 36,286 ======== ======= ======== ======== Diluted.......................................................... 46,000 42,277 45,427 37,546 ======== ======= ======== ========
4 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------- ------------------ 2001 2000 2001 2000 ------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................ $ 7,822 $ 4,391 $ 19,061 $ 9,512 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................. 7,756 5,278 22,590 14,964 Compensation expense related to stock options................. 13 13 39 39 Loss on sale of property and equipment........................ 3 2 10 22 Deferred income taxes......................................... 1,295 87 2,403 5,539 Changes in operating assets and liabilities, net of acquisitions................................................ (110) 224 (27,960) (20,212) ------- -------- -------- -------- Net cash provided by operating activities.................. 16,779 9,995 16,143 9,864 ------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash................................ (99) (2,683) (1,431) (26,151) Acquisition costs and financing transaction costs................. (116) (181) (1,441) (1,577) Purchase of property and equipment, net........................... (9,485) (6,343) (37,605) (15,479) ------- -------- -------- -------- Net cash used in investing activities...................... (9,700) (9,207) (40,477) (43,207) ------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock.......................................... 2,082 446 5,751 67,453 Equity issuance costs............................................. -- -- -- (4,225) Payments of amounts due and notes payable to former owners of acquired businesses, capital lease obligations and other long-term debt.................................................. (2,092) 671 (21,784) (3,526) Net borrowings (payments) on revolving loans under Credit Agreement....................................................... 2,000 (28,500) 16,000 (30,500) ------- -------- -------- -------- Net cash provided by (used in) financing activities........ 1,990 (27,383) (33) 29,202 ------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH.............................. (154) (60) (187) (157) ------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH...................................... 8,915 (26,655) (24,554) (4,298) CASH, beginning of period............................................ 273 67,102 33,742 44,745 ------- -------- -------- -------- CASH, end of period.................................................. $ 9,188 $ 40,447 $ 9,188 $ 40,447 ======= ======== ======== ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations for purchase of equipment............... $ 767 $ 1,763 $ 2,367 $ 4,341 Shares of common stock for license fee............................ -- 1,000 -- 1,000 Shares of common stock issued to EduTrek shareholders............. $ -- $ -- $ 40,623 $ -- ======= ======== ======== ========
5 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1--Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2001. The condensed consolidated balance sheet at December 31, 2000 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For additional information, refer to the consolidated financial statements and footnotes for the year ended December 31, 2000 that are included in our annual report on Form 10-K. Note 2--Business Acquisitions On January 2, 2001, we completed our acquisition of EduTrek International, Inc., a Georgia corporation and operator of American InterContinental University. EduTrek's shareholders received an aggregate of approximately 2.4 million shares of our common stock (0.1802 shares of our common stock for each share of EduTrek stock) and approximately $2.5 million in cash ($0.1877 per EduTrek share). The acquisition was accounted for as a purchase and the purchase price exceeded the fair market value of identifiable assets acquired and liabilities assumed, resulting in goodwill of approximately $66.8 million. Additionally, at November 30, 2000, one of EduTrek's lenders, assigned its $5.0 million promissory note to us, in exchange for $5.0 million plus accrued interest. This note is included in other assets in the accompanying consolidated balance sheet as of December 31, 2000. As part of the acquisition, we acquired a minority interest in the American InterContinental University in Dubai, United Arab Emirates. The entity is accounted for using the equity method. On August 1, 2001, we acquired certain assets and assumed certain liabilities of Le Chef College of Hospitality Careers, Inc., doing business as Texas Culinary Academy. The acquisition was accounted for as a purchase and the purchase price, subject to adjustment, exceeded the fair value of identifiable assets acquired and liabilities assumed, resulting in intangible assets of $1.1 million. 6 Note 3--Pro Forma Results of Operations The following unaudited pro forma results of operations (in thousands, except per share amounts) for the nine months ended September 30, 2000 compared to actual 2001 results for the same period assumes that the business acquisitions subsequent to January 1, 2001 described above occurred on January 1, 2000. The unaudited pro forma results below are based on historical results of operations, include adjustments for depreciation, amortization, interest, taxes and reclassification adjustments necessary to conform the financial statement presentation of EduTrek to CEC. These pro forma results do not necessarily reflect actual results that would have occurred.
Nine Months Ended September 30, ------------------ 2001 2000 -------- --------- Actual Pro forma -------- --------- (Unaudited) Net revenue.......................................................... $374,016 $276,478 Income before cumulative effect of change in accounting principle.... 19,061 6,081 Net income........................................................... 19,061 5,303 Basic income per share attributable to common stockholders-- Income before cumulative effect of change in accounting principle. $ 0.44 $ 0.16 ======== ======== Net income........................................................ $ 0.44 $ 0.14 ======== ======== Diluted income per share attributable to common stockholders-- Income before cumulative effect of change in accounting principle. $ 0.42 $ 0.15 ======== ======== Net income........................................................ $ 0.42 $ 0.13 ======== ========
Note 4--Accrued Restructuring and Severance In connection with our acquisition of California Culinary Academy ("CCA"), we previously disclosed our intention to restructure certain operations of CCA, including two of its College of Food locations, and discontinuing that program and terminating certain employees. As of April 3, 2000, we recorded an initial reserve estimate of approximately $1.6 million for primarily severance pay and expenses associated with terminated programs of this restructuring. During March 2001, we increased the reserve estimate by $1.1 million for future lease obligations that could not be renegotiated. This adjustment, under purchase accounting, was treated as an increase in goodwill and was not taken into current operations. As of September 30, 2001, we have subsequently paid and charged against the reserve approximately $1.7 million of these costs. The remaining reserve of approximately $1.0 million is included in accrued restructuring and severance. In connection with our acquisition of Edutrek International, Inc. ("Edutrek"), we previously disclosed our intention to restructure certain operations of Edutrek, primarily terminating certain employees. Accordingly, we recorded a reserve of approximately $1.3 million for severance pay. Substantially all of the severance accrual has been paid as of September 30, 2001. We also agreed to continue with Edutrek's decision to close its Washington D.C. campus. In connection with the closure, we recorded a reserve of approximately $4.8 million primarily for future lease obligations and the estimated costs in excess of revenues related to providing the education for students enrolled at the campus. As of September 30, 2001, we have subsequently paid and charged against the reserve approximately $1.1 million of these costs. Of the approximate $3.7 million remaining reserve, $2.4 million is included in accrued restructuring and severance and $1.3 million is included in other long term liabilities. In connection with our acquisition of Le Chef College of Hospitality Careers, Inc. ("Texas Culinary Academy"), we previously disclosed our intention to restructure certain operations of Texas Culinary Academy, including closing its current facility after currently enrolled students have completed their programs. Newly 7 enrolled students will attend classes at Texas Culinary Academy's new facility beginning in January 2002. In connection with the closure, we recorded a reserve of approximately $0.2 million for the future lease obligations on the old facility for periods after March 2003. The reserve is included in other long term liabilities. Note 5--Comprehensive Income The disclosure of comprehensive income and accumulated other comprehensive income, which encompasses net income and foreign currency translation adjustments, is as follows:
Nine Months Ended September 30, ---------------- 2001 2000 ------- ------ Net Income................................. $19,061 $9,512 Other Comprehensive Loss Foreign currency translation adjustment. (79) (347) ------- ------ Comprehensive Income....................... $18,982 $9,165 ======= ======
Note 6--Recent Accounting Pronouncement On December 3, 1999, the Securities Exchange Commission released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on the recognition, presentation, and disclosure of revenue in financial statements. The SAB outlines basic criteria that must be met before registrants may recognize revenue, including persuasive evidence of the existence of an arrangement, the delivery of products or services, a fixed and determinable sales price, and reasonable assurance of collection. Prior to the release of SAB 101, our revenue recognition policy was in compliance with generally accepted accounting principles. Through December 31, 1999, we recognized application and registration fees as revenue upon receipt. Effective January 1, 2000, we adopted a change in accounting principle to comply with the specific provisions and guidance of SAB 101. As a result, we recognized a cumulative charge of $0.8 million, net of taxes, in the first quarter of 2000. SAB 101 requires us to recognize revenue related to application and registration fees over the program period. For additional information refer to our annual report on Form 10-K for pro forma information reflecting the effect of the change in the accounting principle assuming SAB 101 had been adopted at the beginning of the period. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, is effective for fiscal years beginning after June 15, 2000. This statement requires that all derivative financial instruments, such as interest rate swap contract and foreign exchange contracts, be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair market value of derivative financial instruments are either recognized periodically in income or shareholder's equity (as a component of comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flow. We do not currently hold or issue any derivative financial instruments, but will adopt SFAS 133 if this becomes applicable in the future. On July 20, 2001, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141") and Statement of Accounting Standards No. 142, Goodwill and Intangible Assets ("SFAS 142"). SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method and establishes specific criteria for the recognition of acquired intangible assets apart from goodwill. Under SFAS 142, goodwill is no longer subject to amortization over its useful life. Rather, goodwill will be subject to, at least, an annual assessment for impairment by applying a fair-value-based test. Effective January 1, 2002, we will adopt a change in accounting principle to comply with the specific provisions and guidance of SFAS 141 and SFAS 142. The adoption of these new standards will cause 8 an elimination of approximately $4.1 million in amortization expense in 2002. This will cause an increase of approximately $3.8 million in net income. The pro forma effects of an elimination of amortization expense in 2001 would be comparable. However, we have not yet completed the intangible asset impairment test required under SFAS 142 or determined whether or not an impairment loss will be recorded in connection with our adoption of the statement. Note 7--Credit Facility As of September 30, 2001, we had approximately $26.5 million of borrowings outstanding and approximately $6.8 million of letters of credit outstanding under our Credit Facility. Note 8--Assets Held For Sale During the second quarter of 2001, we completed the sale of certain real estate property that was acquired as a result of our purchase of California Culinary Academy, Inc. Our net proceeds from this transaction were approximately $1.4 million. We have held the property for sale since the acquisition. There was no gain or loss recognized on the sale. Note 9--Stock Split Our Board of Directors approved a two-for-one stock split effected in the form of a stock dividend. The dividend was paid on September 28, 2001 to stockholders of record on September 17, 2001. All share and per share amounts in the accompanying financial statements and notes thereto and in the body of this Form 10-Q have been retroactively adjusted to reflect this stock split. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The discussion below contains certain forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934) that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. Our actual growth, results, performance and business prospects and opportunities in 2001 and beyond could differ materially from those expressed in, or implied by, any such forward-looking statements. See "Special Note Regarding Forward-Looking Statements" on page 15 for a discussion of risks and uncertainties that could cause or contribute to such material differences. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and attached Notes appearing elsewhere in this document. Background and Overview We are a provider of private, for-profit postsecondary education with 39 campuses throughout the United States and in Canada, the United Kingdom and the United Arab Emirates and we offer a full online program through American InterContinental University Online, our E-learning division. We had approximately 41,100 students enrolled as of October 31, 2001. Our schools enjoy long operating histories and offer a variety of master's degree, bachelor's degree, associate degree, and diploma programs in career-oriented disciplines within our core curricula of: . visual communication and design technologies . information technology . business studies . culinary arts We have invested significant amounts of capital in the hiring of additional personnel and increased marketing and capital improvements at each of the schools we have acquired. The increased costs of personnel and marketing are expensed as incurred and are reflected in general and administrative expenses. Additional depreciation is a result of capital improvements and increased amortization is a result of added goodwill. We have experienced significant growth both internally and through acquisitions with our annual net revenue increasing from $19.4 million in 1995 to $325.3 million in 2000 and net income increasing from $0.1 million in 1995 to $21.4 million in 2000. We believe that EBITDA, while not a substitute for generally accepted accounting principles' measures of operating results, is an important measure of our financial performance and that of our schools. Our EBITDA increased 72%, from $13.0 million in the third quarter of 2000 to $22.4 million in the third quarter of 2001. For the nine months ended September 30, 2001, EBITDA increased 75%, from $33.4 million in the third quarter of 2000 to $58.4 million in the third quarter of 2001. We believe that EBITDA is particularly meaningful due principally to the role acquisitions have played in our development. Our rapid growth through acquisitions has resulted in significant non-cash depreciation and amortization expense, because a significant portion of the purchase price of a school acquired by us is generally allocated to fixed assets, goodwill and other intangible assets. Our principal source of revenue is tuition collected from our students. The academic year is at least 30 weeks in length, but varies both by individual school and program of study. The academic year is divided by term, which is determined by start dates, which vary by school and program. Payment of each term's tuition may be made by full cash payment, financial aid and/or an installment payment plan. If a student withdraws from school prior to the completion of the term, we refund the portion of tuition already paid which is attributable to the period of the term that is not completed. Tuition revenue is recognized ratably over the period of the student's program and is reflected net of bad debt expense. Our campuses charge tuition at varying amounts, depending not only on the particular school, but also on the type of program and the specific curriculum. On average, our campuses increase tuition one or more times annually. 10 Other revenue consists of bookstore sales, computer equipment sales, placement fees, contract training, dormitory and cafeteria fees, rental income, and restaurant revenue. Other revenue is recognized during the period services are rendered or goods are delivered. Educational services and facilities expense includes costs directly attributable to the educational activity of our schools, including salaries and benefits of faculty, academic administrators and student support personnel. Educational services and facilities expense also includes costs of educational supplies and facilities (including rents on school leases), distance learning costs, certain costs of establishing and maintaining computer laboratories, costs of student housing and owned facility costs. General and administrative expense includes salaries and benefits of personnel in recruitment, admissions, accounting, personnel, compliance and corporate and school administration. Costs of promotion and development, advertising and production of marketing materials, and occupancy of the corporate offices are also included in this expense category. Depreciation and amortization includes costs associated with the depreciation of purchased computer laboratories, equipment, furniture and fixtures, courseware, owned facilities, capitalized equipment leases and amortization of intangible assets, primarily including goodwill and non-competition agreements with the previous owners of our schools. Share of affiliate earnings represents our share of the income before provision for income taxes from our American InterContinental University campus in Dubai, United Arab Emirates. The results of their operations are included in our operating results using the equity method of accounting. Acquisitions On January 2, 2001, we completed our acquisition of EduTrek International, Inc., a Georgia corporation and operator of American InterContinental University. EduTrek's shareholders received an aggregate of approximately 2.4 million shares of our common stock (0.1802 shares of our common stock for each share of EduTrek stock) and approximately $2.5 million in cash ($0.1877 per EduTrek share). The acquisition was accounted for as a purchase and the purchase price exceeded the fair market value of identifiable assets acquired and liabilities assumed, resulting in goodwill of approximately $66.8 million. Additionally, at November 30, 2000, one of EduTrek's lenders assigned its $5.0 million promissory note to us, in exchange for $5.0 million plus accrued interest. This note is included in other assets in the accompanying consolidated balance sheet as of December 31, 2000. As part of the acquisition, we acquired a minority interest in the American InterContinental University in Dubai, United Arab Emirates. The entity is accounted for using the equity method. On August 1, 2001, we acquired certain assets and assumed certain liabilities of Le Chef College of Hospitality Careers, Inc., doing business as Texas Culinary Academy. The acquisition was accounted for as a purchase and the purchase price, subject to adjustment, exceeded the fair value of identifiable assets acquired and liabilities assumed, resulting in intangible assets of $1.1 million. 11 Results of Operations The following table summarizes our operating results as a percentage of net revenue for the periods indicated.
Three Months Nine Months Ended Ended September 30, September 30, ------------ ------------ 2001 2000 2001 2000 ----- ----- ----- ----- REVENUE: Tuition and registration fees, net................................ 89.7% 90.0% 90.5% 90.9% Other, net........................................................ 10.3 10.0 9.5 9.1 ----- ----- ----- ----- Total net revenue............................................. 100.0 100.0 100.0 100.0 ----- ----- ----- ----- OPERATING EXPENSES: Educational services and facilities............................... 41.9 41.3 41.8 41.0 General and administrative........................................ 41.3 42.9 42.9 44.2 Depreciation and amortization..................................... 5.8 6.4 6.0 6.6 ----- ----- ----- ----- Total operating expenses...................................... 89.0 90.6 90.7 91.8 ----- ----- ----- ----- Income from operations........................................ 11.0 9.4 9.3 8.2 Interest income............................................... 0.1 0.4 0.1 0.4 Interest expense.............................................. (0.4) (0.3) (0.4) (0.5) Share of affiliate earnings................................... -- -- 0.3 -- ----- ----- ----- ----- Income before provision for income taxes and cumulative effect of change in accounting principle.................................. 10.7 9.5 9.3 8.1 PROVISION FOR INCOME TAXES 4.8 4.2 4.2 3.6 ----- ----- ----- ----- Income before cumulative effect of change in accounting principle. 5.9 5.3 5.1 4.5 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net -- -- -- (0.3) ----- ----- ----- ----- NET INCOME 5.9% 5.3% 5.1% 4.2% ===== ===== ===== =====
Revenue. Net tuition and registration fee revenue increased $45.3 million or 61%, from $74.0 million in the third quarter of 2000 to $119.3 million in the third quarter of 2001. This increase was primarily due to an approximate 32% improvement in net tuition and registration fee revenue on a same-school basis (i.e., schools owned prior to July 3, 2000). This was attributable to a 23% increase in the average student population, tuition increases effective after the third quarter of 2000 and student enrollment mix. Another $21.4 million of increased net tuition and registration fee revenue resulted from schools owned after July 3, 2000. Bad debt expense increased from 3.1% to 3.6% of gross school revenue for the three months ended September 30, 2000 and 2001, respectively. For the nine months ended September 30, 2001, net tuition and registration fee revenue increased $132.7 million or 65%, from $205.6 million to $338.3 million primarily due to an approximate 35% improvement in net tuition and registration fee revenue on a same-school basis (i.e., schools owned prior to January 3, 2000) and $64.0 million of additional net tuition and registration fee revenue from schools owned after January 3, 2000. Bad debt expense increased from 2.7% to 3.1% of gross school revenue for the nine months ended September 30, 2000 and 2001, respectively. Other net revenue increased $5.4 million or 66%, from $8.3 million in the third quarter of 2000 to $13.7 million in the third quarter of 2001. The increase was due to an approximate 9% improvement in other net revenue on a same-school basis (i.e., schools owned prior to July 3, 2000), added other revenue of $4.7 million for the schools owned after July 3, 2000 and the increase in student population mentioned above. For the nine months ended September 30, 2001, other net revenue increased $15.1 million or 73%, from $20.6 million to $35.7 million. Of this increase, $5.7 million was attributable to schools owned prior to January 3, 2000 and $9.4 million was attributable to schools owned after January 3, 2000. 12 Educational Services and Facilities Expense. Educational services and facilities expense increased $21.7 million or 64%, from $34.0 million in the third quarter of 2000 to $55.7 million in the third quarter of 2001. Of this increase, $8.8 million was attributable to schools owned prior to July 3, 2000 and $12.9 million was attributable to schools owned after July 3, 2000. These increases were primarily due to the increase in average student population mentioned above, as well as an increase in curriculum development activities. For the nine months ended September 30, 2001, educational services and facilities expense increased $63.6 million or 69%, from $92.9 million to $156.5 million. Of this increase, $27.3 million was attributable to schools owned prior to January 3, 2000 and $36.3 million was attributed to schools owned after January 3, 2000. General and Administrative Expense. General and administrative expense increased $19.8 million or 56%, from $35.2 million in the third quarter of 2000 to $55.0 million in the third quarter of 2001. This increase was attributable to a $11.7 million increase in expenses for schools owned after July 3, 2000 and related increased advertising and marketing expenses (including admissions) of $4.6 for schools owned prior to July 3, 2000 and an increase of $3.5 related to planned corporate and regional infrastructure enhancements. For the nine months ended September 30, 2001, general and administrative expense increased $60.3 million or 60%, from $99.9 million to $160.2 million. Of this increase, $35.1 million was attributable to schools owned after January 3, 2000 and related increased advertising and marketing (including admissions) of $16.8 million for schools owned prior to January 3, 2000 and an increase of $8.4 million related to planned corporate and regional infrastructure enhancements. Depreciation and Amortization Expense. Depreciation and amortization expense increased $2.5 million or 47%, from $5.3 million in the third quarter of 2000 to $7.8 million in the third quarter of 2001. This increase was primarily due to additional capital expenditures for the schools owned after July 3, 2000 and related depreciation expense of $1.0 million. Depreciation expense increased $1.2 million due to the additional depreciation expense for schools owned prior to July 3, 2000. Amortization expense increased 26% or $0.3 million, from $1.2 million in the third quarter of 2000 to $1.5 million in the third quarter of 2001 due to $0.3 million of additional amortization expense for schools owned after July 3, 2000. For the nine months ended September 30, 2001 depreciation and amortization expense increased $7.6 million or 51%, from $15.0 million to $22.6 million. This increase was primarily due to added depreciation expense of $3.1 million for the schools owned after January 3, 2000. Amortization expense increased $1.2 million or 36%, from $3.4 million in the first nine months of 2000 to $4.6 million in the first nine months of 2001, due to added amortization of non-competition agreements and goodwill of $1.5 million for schools owned after January 3, 2000 offset by a $0.3 million decrease in amortization of non-competition agreements for schools owned prior to January 3, 2000. Interest Income. Interest income decreased $0.2 million or 55%, from $0.4 million in the third quarter of 2000 to $0.2 million in the third quarter of 2001, and $0.3 million or 39%, from $0.9 million to $0.6 million for the nine months ended September 30, 2001, due to a decrease in cash available for short-term investment purposes. Interest Expense. Interest expense increased $0.3 million or 120% from $0.3 million in the third quarter of 2000 to $0.6 million in the third quarter of 2001, and $0.6 million or 52%, from $1.1 million to $1.7 million for the nine months ended September 30, 2001, due to the debt incurred related to the acquisition of EduTrek in 2001. Share of affiliate earnings. Share of affiliate earnings from our affiliate in Dubai, United Arab Emirates, was $0.1 million for the third quarter of 2001 and $1.0 million for the nine months ended September 30, 2001. Provision for Income Taxes. The provision for income taxes increased $2.9 million or 85%, from $3.5 million in the third quarter of 2000 to $6.4 million in the third quarter of 2001, and $7.6 million or 96%, from $8.0 million to $15.6 million for the nine months ended September 30, 2001, as a result of increases in pretax income and a one-percentage point increase in the effective income tax rate. 13 Income before Cumulative Effect of Change in Accounting Principle. Net income increased $3.4 million or 78%, from $4.4 million in the third quarter of 2000 to $7.8 million in the third quarter of 2001, and $8.8 million or 85%, from $10.3 million to $19.1 million for the nine months ended September 30, 200, due to the reasons mentioned above. Cumulative Effect of Change in Accounting Principle. We adopted Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, as of January 1, 2000 resulting in a net of tax charge of $0.8 million. SAB 101 requires us to recognize revenue related to application and registration fees over the student benefit period rather than as revenue upon receipt. Net Income. Net income increased $3.4 million or 78%, from $4.4 million in the third quarter of 2000 to $7.8 million in the third quarter of 2001, and $9.6 million or 100%, from $9.5 million to $19.1 million for the nine months ended September 30, 2001, due to the reasons mentioned above. Liquidity and Capital Resources Our merger with EduTrek International, Inc., operator of American InterContinental University, was completed on January 2, 2001. Under the terms of the merger agreement, EduTrek shareholders received an aggregate of approximately 2.4 million shares of our common stock (approximately 0.1802 shares of our stock for each share of EduTrek stock) and approximately $2.5 million in cash (approximately $0.1877 per EduTrek share). There were approximately 13.3 million EduTrek shares outstanding as of the merger date. We finance our operating activities and our internal growth through cash generated from operations. We finance acquisitions through funding from a combination of additional equity investments, credit facilities and cash generated from operations. Net cash provided by operating activities increased from $10.0 million for the third quarter of 2000 to $16.8 million for the third quarter of 2001 due to an increase in net income and depreciation and amortization offset by increases in operating assets and operating liabilities. The overall $0.1 million decrease in operating assets and liabilities for the three months ended September 30, 2001, is net of a $0.8 million decrease in operating assets and liabilities specifically attributed to our acquisition of EduTrek. These planned working capital changes that have occurred since the acquisition date are reported as cash flows from operating activities rather than cash flows from business acquisitions under investing activities. Excluding this effect of the acquisition of EduTrek, net cash provided by activities would have been approximately $17.6 million for the three months ended September 30, 2001. For the nine months ended September 30, 2001, net cash provided by operating activities increased from $9.9 million to $16.1 million due to an increase in net income and depreciation and amortization offset by increases in operating assets and a decrease in operating liabilities. Of the $28.0 million decrease in operating assets and liabilities for the nine months ended September 30, 2001, $16.4 million was attributed specifically to our acquisition of EduTrek. These planned working capital changes that have occurred since the acquisition date flow through cash flows from operating activities rather than cash flows from business acquisitions under investing activities. Excluding this effect of the acquisition of EduTrek, net cash provided by activities would have been approximately $32.5 million for the nine months ended September 30, 2001. Capital expenditures increased from $6.3 million in the third quarter of 2000 to $9.5 million in the third quarter of 2001 due to investments in leasehold improvements on new and expanded facilities and capital equipment necessitated by increasing student population. For the nine months ended September 30, 2001, capital expenditures increased from $15.5 million to $37.6 million due to reasons mentioned above. We expect capital expenditures to be in the range of approximately $42 million to $48 million for all of 2001. We would normally expect capital expenditures to increase as new schools are acquired or opened, student population increases and current facilities and equipment are upgraded and expanded. 14 For the nine months ended September 30, 2001, net receivables increased $29.4 million or 94%, from $31.3 million to $60.7 million. Net receivables were 16% of gross school revenue for the nine months ended in 2001 and 13% of gross school revenue for the same period in 2000. Days Sales Outstanding (DSOs) for total accounts receivable was 40 days for the period ended September 30, 2001. This represents a partial reversal of a prior trend of year-over-year increases in DSOs. DSOs, which fluctuate on a quarterly basis due to the seasonal nature of cash collections, have increased from a range of 6 to 9 days from the second to third quarter in each of the last three years. This year the increase from second quarter was 4 days. The overall increase in receivables was primarily due to a greater number of students taking higher priced programs that result in lower government funding for students as a percentage of cash receipts. This requires many of our students to enter into payment arrangements which may extend beyond their scheduled graduation dates. In order to assist students in funding their education, we have third party private loans available as alternative financing options. Based upon past experience and judgment, we establish an allowance for doubtful accounts with respect to tuition receivables. When a student withdraws, the uncollectible portion of the receivable balance attributable to such student is charged to this allowance for doubtful accounts. Our historical bad debt expense as a percentage of gross school revenue was 3.6% and 3.1%, respectively, for the three and nine months ended September 30, 2001, compared to 3.1% and 2.7%, respectively, for the year earlier periods. Our credit agreement provides for a $90.0 million line of credit. We may obtain letters of credit up to $50.0 million. Outstanding letters of credit reduce the revolving credit facility availability under our credit agreement. Our credit agreement matures on October 26, 2003. Under the credit agreement our borrowings bear interest, payable quarterly, at either: (1)the bank's base or prime rate depending on whether the particular loan is denominated in U.S. or Canadian dollars, plus a specified number of basis points, ranging from 0 to 75, based upon our leverage ratio; or (2)LIBOR, plus a specified number of basis points, ranging from 75 to 200 based upon our leverage ratio. Under the credit agreement, we are required, among other things, to maintain (1) financial ratios with respect to debt to EBITDA and interest coverage and (2) a specified level of net worth. We are also subject to limitations on, among other things, payment of dividends, disposition of assets and incurrence of additional indebtedness. We are required to pledge the stock of our subsidiaries as collateral for the repayment of our obligations under the credit agreement. At September 30, 2001, we had approximately $6.8 million of outstanding letters of credit and $26.5 million of outstanding borrowings under our credit facility. As a result, at September 30, 2001, our remaining credit availability under the credit agreement was approximately $56.7 million. The DOE requires that we keep unbilled Title IV Program funds that are collected in separate cash accounts until the students are billed for the program portion related to those Title IV Program funds. In addition, all funds transferred to our schools through electronic funds transfer program are held in a separate cash accounts until certain conditions are satisfied. As of September 30, 2001, we held nominal amounts of such funds in separate accounts. The restrictions on any cash held in these accounts have not significantly affected our ability to fund daily operations. Special Note Regarding Forward-Looking Statements This Form 10-Q contains certain statements which reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Wherever possible, words such as "anticipate," "believe," "plan," "expect" and similar expressions have been used to identify these "forward-looking" statements. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to risks and uncertainties, which could cause our actual growth, results, performance and business prospects and opportunities to differ from those, expressed in, or implied by, these statements. 15 These risks and uncertainties include, but are not limited to: . implementation of our operating and growth strategy; . risks inherent in operating private for-profit postsecondary educational institutions; . risks associated with general economic and business conditions; . charges and costs related to acquisitions; . our ability to successfully integrate our acquired institutions; . our ability to continue our acquisition strategy; . our ability to attract and retain students at our institutions; . our ability to compete with new and enhanced competition in the education industry; . our ability to meet regulatory and accrediting agency requirements; and . our ability to attract and retain key employees and faculty. We are not obligated to update or revise these forward-looking statements to reflect new events or circumstances. Item 3. Quantitative and Qualitative Disclosure About Market Risk. We are exposed to the impact of interest rate changes, foreign currency fluctuations and changes in the market value of our investments. We have not entered into interest rate caps or collars or other hedging instruments. Our exposure to changes in interest rates is limited to borrowings under revolving credit agreements, which have variable interest rates tied to the prime and LIBOR rates. We estimate that the book value of each of our debt instruments approximated their fair values at September 30, 2001. We are subject to fluctuations in the value of the Canadian dollar and the British pound vis-a-vis the U.S. dollar. Our investments in our foreign operations are not significant and the book value of the assets and liabilities of these operations at September 30, 2001 approximated their fair values. 16 PART II--OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. (a)We held a special meeting of stockholders on September 17, 2001. (b)Our stockholders voted as follows to approve an amendment to the Career Education Corporation Amended and Restated Certificate of Incorporation authorizing an increase in the number of authorized shares of Career Education Corporation's Common Stock from 50,000,000 to 150,000,000 shares:
For: Against: Abstain: ---------- --------- -------- 32,311,022 5,066,104 488
Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 3.3. Amendment No.1 to Amended and Restated Certificate of Incorporation (b) Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the third quarter of 2001. 17 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. CAREER EDUCATION CORPORATION Date: November 14, 2001 By: /S/ JOHN M. LARSON ----------------------------------- John M. Larson Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 By: /S/ PATRICK K. PESCH ----------------------------------- Patrick K. Pesch Executive Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) 18