-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SgAyvrqnFu9yW73Sa9y9kmZPhbnSaVniBrSaeIeWWjUe61ZEpVsVNYl6yh5rNdBY COfMLw8l1GYFWpS5eyudHw== 0000950131-00-003014.txt : 20000505 0000950131-00-003014.hdr.sgml : 20000505 ACCESSION NUMBER: 0000950131-00-003014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAREER EDUCATION CORP CENTRAL INDEX KEY: 0001046568 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 393932190 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23245 FILM NUMBER: 618629 BUSINESS ADDRESS: STREET 1: 2800 WEST HIGGINS ROAD, SUITE 790 CITY: HOFFMAN ESTATES STATE: IL ZIP: 60195 BUSINESS PHONE: 8477813600 MAIL ADDRESS: STREET 1: 2800 WEST HIGGINS ROAD STREET 2: SUITE 790 CITY: HOFFMAN ESTATES STATE: IL ZIP: 60195 10-Q 1 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: March 31, 2000 [_]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 2800 West Higgins Road, Suite 790, Hoffman Estates, IL 60195 (Former address, if changed since last report) 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 As of May 2, 2000, 7,958,909 shares of the registrant's Common Stock, par value $.01, were outstanding. CAREER EDUCATION CORPORATION QUARTER ENDED MARCH 31, 2000 INDEX
Page ---- PART I--FINANCIAL INFORMATION Item 1. Financial Statements Condensed Unaudited Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999............................... 3 Condensed Unaudited Consolidated Statements of Operations for the three months ended March 31, 2000 and 1999............... 4 Condensed Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999............... 5 Notes to Condensed Consolidated Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 8 Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 13 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.............................. 14 SIGNATURES................................................................ 15
2 PART I--FINANCIAL INFORMATION Item 1. Financial Statements CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) (unaudited)
March 31, December 31, 2000 1999 --------- ------------ ASSETS CURRENT ASSETS: Cash.................................................. $ 42,343 $ 44,745 Receivables, net...................................... 15,645 15,941 Inventories, prepaid expenses and other current assets............................................... 10,889 7,825 Deferred income tax assets............................ 1,251 1,011 -------- -------- Total current assets................................ 70,128 69,522 -------- -------- PROPERTY AND EQUIPMENT, net............................. 71,282 69,296 INTANGIBLE ASSETS, net.................................. 74,846 70,484 OTHER ASSETS............................................ 1,257 1,222 -------- -------- TOTAL ASSETS............................................ $217,513 $210,524 ======== ======== LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt.................. $ 2,760 $ 2,324 Accounts payable...................................... 9,420 7,629 Accrued expenses and other current liabilities........ 13,704 16,679 Deferred tuition revenue.............................. 20,181 17,103 -------- -------- Total current liabilities........................... 46,065 43,735 -------- -------- LONG-TERM DEBT, net of current maturities............... 47,916 47,615 DEFERRED INCOME TAX LIABILITIES......................... 4,994 4,128 OTHER LONG-TERM LIABILITIES............................. 1,613 1,365 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT: Preferred stock, $0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding at March 31, 2000 and December 31, 1999....................... Common stock, $.01 par value; 50,000,000 shares authorized; 7,951,182 and 7,876,767 shares issued and outstanding at March 31, 2000 and December 31, 1999, respectively......................................... 79 79 Additional paid-in capital............................ 113,704 113,125 Accumulated other comprehensive loss.................. (401) (372) Retained earnings..................................... 3,543 849 -------- -------- Total stockholders' investment...................... 116,925 113,681 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT.......... $217,513 $210,524 ======== ========
3 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (unaudited)
Three Months Ended March 31, ---------------- 2000 1999 ------- ------- REVENUE: Tuition and registration fees, net.......................... $64,680 $42,121 Other, net.................................................. 5,635 3,314 ------- ------- Total net revenue......................................... 70,315 45,435 ------- ------- OPERATING EXPENSES: Educational services and facilities......................... 27,739 18,521 General and administrative.................................. 31,798 20,928 Depreciation and amortization............................... 4,562 3,074 ------- ------- Total operating expenses.................................. 64,099 42,523 ------- ------- Income from operations.................................... 6,216 2,912 INTEREST EXPENSE, net......................................... 125 212 ------- ------- Income before provision for income taxes and cumulative effect of change in accounting principle................... 6,091 2,700 PROVISION FOR INCOME TAXES.................................... 2,619 1,161 ------- ------- Net income before cumulative effect of change in accounting principle..................................... 3,472 1,539 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of taxes of $587................................................ (778) -- ------- ------- NET INCOME.................................................... $ 2,694 $ 1,539 ======= ======= NET INCOME PER SHARE: Basic-- Income before cumulative effect of change in accounting principle................................................ $ 0.44 $ 0.21 Cumulative effect of change in accounting principle, net of taxes................................................. (0.10) -- ------- ------- Net income.............................................. $ 0.34 $ 0.21 ======= ======= Diluted-- Income before cumulative effect of change in accounting principle................................................ $ 0.42 $ 0.20 Cumulative effect of change in accounting principle, net of taxes................................................. (0.09) -- ------- ------- Net income.............................................. $ 0.33 $ 0.20 ======= ======= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic....................................................... 7,910 7,235 ======= ======= Diluted..................................................... 8,197 7,552 ======= =======
4 CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited)
Three Months Ended March 31, ----------------- 2000 1999 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 2,694 $ 1,539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 4,562 3,074 Compensation expense related to the stock option issuances.............................................. 13 -- Deferred income taxes................................... 740 958 Changes in operating assets and liabilities, net of acquisitions........................................... (1,847) 2,039 ------- -------- Net cash provided by operating activities............. 6,162 7,610 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash........................ (3,047) (13,469) Acquisition and financing transaction costs............... (369) (286) Purchase of property and equipment, net................... (2,979) (4,413) Other assets.............................................. -- 375 ------- -------- Net cash used in investing activities................. (6,395) (17,793) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock.................................. 441 15,548 Equity issuance costs..................................... -- (1,595) Payments of amounts due and notes payable to former owners of acquired businesses, capital lease obligations and other long-term debt..................................... (599) (66) Net borrowings (payments) on revolving loans under Credit Agreement................................................ (2,000) 4,000 ------- -------- Net cash provided by (used in) financing activities... (2,158) 17,887 ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (11) 20 ------- -------- NET INCREASE (DECREASE) IN CASH............................. (2,402) 7,724 CASH, beginning of period................................... 44,745 23,548 ------- -------- CASH, end of period......................................... $42,343 $ 31,272 ======= ======== NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations for purchase of equipment....... $ 996 $ -- Shares of common stock for license fee.................... $ -- $ 2,000 ======= ========
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 three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2000. The condensed consolidated balance sheet at December 31, 1999 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, 1999 that are included in our annual report on Form 10-K. Note 2--Public Offering of Common Stock On March 29, 2000, we filed a registration statement with the Securities and Exchange Commission regarding a proposed public offering of 2,150,000 shares of Common Stock. We expect to be issuing and selling 1,500,000 of such shares of common stock and the remaining 650,000 will be offered by selling stockholders. If the offering is completed, the net proceeds to us from the sale of the shares of common stock, after deducting the discounts, commissions and estimated offering expenses payable by us will be used to repay indebtedness under our credit facility and for general corporate purposes. We will not receive any of the proceeds from the shares of Common Stock sold by the selling stockholders. Note 3--Business Acquisitions The Cooking and Hospitality Institute of Chicago, Inc. On February 1, 2000, we acquired all of the outstanding capital stock of The Cooking and Hospitality Institute of Chicago, Inc. The purchase price was approximately $5.5 million, subject to adjustment. The acquisition was accounted for as a purchase and the purchase price exceeded the fair market value of net assets acquired and liabilities assumed, resulting in goodwill of approximately $5.1 million. California Culinary Academy, Inc. On April 3, 2000, we closed the acquisition of California Culinary Academy, Inc. The purchase price was approximately $20.0 million, subject to adjustment. We also assumed approximately $3.0 million of the debt of California Culinary Academy, Inc. The acquisition will be accounted for as a purchase. 6 CAREER EDUCATION CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) Note 4--Comprehensive Income The disclosure of comprehensive income and accumulated other comprehensive income, which encompasses net income and foreign currency translation adjustments, is as follows:
Three Months Ended March 31, -------------- 2000 1999 ------ ------ Net Income....................................................... $2,694 $1,539 Other Comprehensive (Loss) Income Foreign currency translation adjustment........................ (29) 105 ------ ------ Comprehensive Income............................................. $2,665 $1,644 ====== ======
Note 5--Recent Accounting Pronouncement On December 3, 1999, the Securities and 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. SAB 101 is required to be adopted in the second fiscal quarter of the first fiscal year beginning after December 15, 1999. Prior to the release of SAB 101, our revenue recognition policy was in compliance with generally accepted accounting principles. Effective January 1, 2000, we adopted this change in accounting principle to comply with the specific provisions and guidance of SAB 101. SAB 101 requires us to recognize revenue related to application and registration fees over the student benefit period. Through December 31, 1999, we recognized application and registration fees as revenue upon receipt. As a result, we recognized a cumulative net of tax charge of $0.8 million, in the first quarter of 2000. Note 6--Debt As of March 31, 2000, we had approximately $39.0 million of borrowings outstanding under our Credit Facility. Additionally, we had approximately $0.8 million of outstanding letters of credit as of such date. 7 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 2000 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 13 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 in North America, with approximately 22,900 students enrolled as of April 24, 2000. We have 28 campuses located in 15 states and two Canadian provinces. Our schools enjoy long operating histories and offer a variety of bachelor's degree, associate degree and non-degree programs in career-oriented disciplines within our core curricula of: . visual communication and design technologies . information technology . business studies . culinary arts We have experienced significant growth both internally and through acquisitions. 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 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 80 percent, from $6.0 million in the first quarter of 1999 to $10.8 million in the first quarter of 2000. 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. As a result of our ongoing acquisition strategy, non- cash amortization expense may continue to be substantial. 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. Revenue is recognized ratably over the period of the student's program. Our campuses charge tuition at varying amounts, depending not only on the particular school, but also upon the type of program and the specific curriculum. On average, our campuses increase tuition one or more times annually. Other revenue consists of bookstore sales, placement fees, dormitory and cafeteria fees, contract training, rental income and restaurant revenue. Other revenue is recognized during the period services are rendered. 8 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, contract training 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 goodwill and non-competition agreements with the previous owners of our schools. Acquisitions On February 1, 2000, we acquired all of the outstanding capital stock of The Cooking and Hospitality Institute of Chicago, Inc. The purchase price was approximately $5.5 million, subject to adjustment. The acquisition was accounted for as a purchase and the purchase price exceeded the fair market value of net assets acquired and liabilities assumed, resulting in goodwill of approximately $5.1 million. On April 3, 2000, we closed the acquisition of California Culinary Academy, Inc. The purchase price was approximately $20.0 million, subject to adjustment. We also assumed approximately $3.0 million of debt of California Culinary Academy, Inc. The acquisition will be accounted for as a purchase. 9 Results of Operations The following table summarizes our operating results as a percentage of net revenue for the period indicated.
Three Months Ended March 31, -------------- 2000 1999 ------ ------ REVENUE: Tuition and registration fees, net........................... 92.0% 92.7% Other, net................................................... 8.0 7.3 ------ ------ Total net revenue.......................................... 100.0 100.0 ------ ------ OPERATING EXPENSES: Educational services and facilities.......................... 39.5 40.8 General and administrative................................... 45.2 46.0 Depreciation and amortization................................ 6.5 6.8 ------ ------ Total operating expenses................................... 91.2 93.6 ------ ------ Income from operations....................................... 8.8 6.4 INTEREST EXPENSE, net.......................................... 0.1 0.5 ------ ------ Income before provision for income taxes and cumulative effect of change in accounting principle.................... 8.7 5.9 PROVISION FOR INCOME TAXES..................................... 3.8 2.5 ------ ------ Income before cumulative effect of change in accounting principle................................................... 4.9 3.4 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net....... (1.1) -- ------ ------ NET INCOME..................................................... 3.8% 3.4% ====== ======
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999 Revenue. Net tuition and registration fee revenue increased 54%, from $42.1 million in the first quarter of 1999 to $64.7 million in the first quarter of 2000. The increase was due to an approximate 19% increase in the average student population at our schools which we owned prior to 1999, tuition increases effective after the first quarter of 1999 and student enrollment mix. The increase was also due to added net tuition and registration fee revenue of $14.0 million from schools acquired during and after 1999. Other net revenue increased 70%, from $3.3 million in the first quarter of 1999 to $5.6 million in the first quarter of 2000, primarily due to the schools acquired during and after 1999. Educational Services and Facilities Expense. Educational services and facilities expense increased 50%, from $18.5 million in the first quarter of 1999 to $27.7 million in the first quarter of 2000. Of this increase, $4.5 million was attributable to schools owned prior to 1999 and $4.7 million was attributable to schools acquired during and after 1999. These increases were primarily due to the increase in average student population mentioned above, as well as an increase in curriculum development activities. General and Administrative Expense. General and administrative expense increased 52%, from $20.9 million in the first quarter of 1999 to $31.8 million in the first quarter of 2000. The increase was primarily attributable to $4.0 million of expenses for schools acquired during and after 1999, costs totaling $2.5 million related to planned corporate and regional infrastructure enhancements and increased advertising and marketing (including admissions) of $3.3 million for schools owned prior to 1999. Depreciation and Amortization Expense. Depreciation and amortization expense increased 48%, from $3.1 million in the first quarter of 1999 to $4.6 million in the first quarter of 2000. The increase was primarily due to 10 capital expenditures for schools acquired during and after 1999 and related increased depreciation expense of $0.4 million in 2000. Additionally, depreciation expense increased $1.1 million due to additional depreciation expense associated with capital expenditures for schools owned prior to 1999. Amortization expense remained constant at $1.1 million, primarily due to the decline of amortization of non-competition agreements and goodwill for the schools acquired prior to 1999, offset by the amortization of goodwill for schools acquired during and after 1999. Net Interest Expense. Net interest expense decreased 41%, from $0.2 million in the first quarter of 1999 to $0.1 million in the first quarter of 2000. The decrease was primarily due to the reduction in indebtedness following our March 1999 public offering. Provision for Income Taxes. The provision for income taxes increased from $1.2 million in the first quarter of 1999 to $2.6 million in the first quarter of 2000 as a result of increases in pretax income. Net Income before Cumulative Effect of Change in Accounting Principle. Net income before cumulative effect of change in accounting principle increased 126%, from $1.5 million in the first quarter of 1999 to $3.5 million in the first quarter of 2000, due to the factors noted 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 75%, from $1.5 million in the first quarter of 1999 to $2.7 million in the first quarter of 2000, due to the factors noted above. Liquidity and Capital Resources 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 remaining cash generated from operations. Net cash provided by operating activities decreased from $7.6 million in the first quarter of 1999 to $6.2 million in the first quarter of 2000, due primarily to decreases in the operating assets and liabilities offset by increases in net income and depreciation and amortization. Capital expenditures decreased from $4.4 million in the first quarter of 1999 to $3.0 million in the first quarter of 2000 due primarily to the first quarter of 1999 being unusually high due to a facility move of the School of Computer Technology/Pittsburgh and its International Culinary Academy. 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. Our net receivables at March 31 as a percentage of net revenue for the first quarter decreased from 23% in 1999 to 22% in 2000. This change was primarily due to increased revenues at schools acquired prior to 1999 coupled with better asset management. Based upon past experience and judgment, we establish an allowance for doubtful accounts with respect to tuition receivables. When a student withdraws, the receivable balance attributable to such student is charged to this allowance for doubtful accounts. On March 31, 1999, we amended our credit agreement dated October 26, 1998 to increase our line of credit from $60.0 million to $90.0 million. We may now 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 11 matures on October 26, 2003. Under the credit agreement our borrowings bear interest, payable quarterly, of 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. As of March 31, 2000, we had approximately $0.8 million of outstanding letters of credit and $39.0 million of outstanding borrowings under our credit facility. As a result, at March 31, 2000, our remaining credit availability under the credit agreement was approximately $50.2 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 account until certain conditions are satisfied. As of March 31, 2000, 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. Year 2000 Compliance The Year 2000 Problem. Many information technology ("IT") hardware and software systems and non-IT systems containing embedded technology, such as microcontrollers and microchip processors, can only process dates with six digits, for example, 03/17/98, instead of eight digits, for example, 03/17/1998. This limitation may cause IT systems and non-IT systems to experience problems processing information with dates after December 31, 1999. For example, 01/01/00 could be processed as 01/01/2000 or 01/01/1900. There could also be problems with other dates, such as September 9, 1999, which was a date traditionally used as a default date by computer programmers. These problems may cause IT systems and non-IT systems to suffer miscalculations, malfunctions or disruptions. These problems are commonly referred to as "Year 2000" problems. In late 1997, we began our audit, testing and remediation project to assess our exposure to Year 2000 problems both because of our own IT systems and non-IT systems and because of the systems of our significant vendors, including those who process and disburse student financial aid for us. The discussion below details our efforts to ensure Year 2000 compliance. Our State of Readiness. We completed all of our Year 2000 testing in December, 1999. Based on our testing, we believe that our IT systems and non- IT systems, which, if not Year 2000 compliant, could have material adverse effect on us, as well as the financial and accounting systems, including those necessary for financial aid, of our significant third party vendors are Year 2000 compliant. We also believe that our material non-IT systems, as well as those of our landlords, utility providers and other providers that we control are Year 2000 compliant. Since January 1, 2000, we have had no material disruptions or other problems related to Year 2000 issues. However, despite our testing, assurances from vendors and providers and the lack of Year 2000 issues to date, we cannot be certain that our systems or those of our vendors and providers do not contain undetected errors associated with the Year 2000. The Risks Associated with Our Year 2000 Issues. To date, the cost of remediating our internal Year 2000 problems and the lost opportunity costs arising from diversion of our personnel to Year 2000 problems have not had a material adverse effect on our business, results of operations or financial condition. We spent approximately $300,000 replacing non-compliant servers and desktop computers and upgrading servers and desktop computers. 12 We do not anticipate spending any additional material amounts on Year 2000 compliance; however, we cannot assure you that we will not incur additional costs in connection with Year 2000 problems. We believe the greatest Year 2000 compliance risk, in terms of magnitude, is that the Department of Education may fail to complete its remediation efforts in a timely manner and federal student financial aid funding for our students could be interrupted for a period of time. During any such time, students may not be able to pay their tuition in a timely matter. Because we derive approximately 70% of our revenue from U.S. federal student financial aid programs, such delay is likely to have a material adverse effect on our business, results of operations and financial condition. To date, we do not believe that the Department of Education has experienced any disruptions associated with the Year 2000, and our students have not experienced any delays in tuition payments as a result of the Year 2000. However, we cannot be certain that disruptions or delays will not occur in the future. Contingency Plans. At this time, we believe that we and our significant vendors are Year 2000 compliant. However, to avoid interruptions of our operations, we have developed contingency plans in the event that we experience any Year 2000 problems. With respect to IT-systems, we have distributed guidelines to each of our campuses regarding data backup practices to store the information for our critical business processes in case any of them experience Year 2000 problems. Our contingency plan with respect to the material non-IT systems that we control includes, among other things, investigating the availability and replacement cost of such non-IT systems that have Year 2000 problems, isolating such systems that are not Year 2000 compliant so that they do not affect other systems and adjusting the clocks on such non-IT systems that are not date sensitive. We do not believe that the total costs of such Year 2000 compliance activities will be material. Special Note Regarding Forward-Looking Statements This Form 10-Q contains certain statements, which reflect our expectations regarding our future growth, results of operation, 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. These risks and uncertainties include 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, and our ability to: successfully integrate our acquired institutions and continue our acquisition strategy, attract and retain students at our institutions, meet regulatory and accrediting agency requirements, compete with enhanced competition and new competition in the education industry, and 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 its fair value at March 31, 2000. We are subject to fluctuations in the value of the Canadian dollar vis-a-vis the U.S. dollar. Our investment in our Canadian operations is not significant and the book value of the assets and liabilities of these operations at March 31, 2000 approximated their fair value. 13 PART II--OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit 27--Financial Data Schedule (b) Reports on Form 8-K. We filed a Current Report on Form 8-K on April 11, 2000 to report the consummation of our acquisition of California Culinary Academy, Inc. (Items 5 and 7 of Form 8-K). We filed a Current Report on Form 8-K on April 26, 2000 filing a press release dated April 25, 2000 relating to our first quarter earnings. (Items 5 and 7 of Form 8-K). 14 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 /s/ John M. Larson Date: May 3, 2000 By: _________________________________ John M. Larson Chairman, President and Chief Executive Officer (Principal Executive Officer) Date: May 3, 2000 /s/ Patrick K. Pesch By: _________________________________ Patrick K. Pesch Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 15 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 42,343 0 18,626 (2,981) 1,456 70,128 99,296 (28,014) 217,513 46,065 47,916 0 0 79 116,846 217,513 0 70,315 0 64,099 0 1,877 125 6,091 2,619 3,472 0 0 (778) 2,694 0.42 0.33
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