-----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, EPBL5DbkCJDMIOHxo6EaF+HvRLkDeJsbWjIBm3nH9MwAEUFmEWXGTIv91FPtfoJu k8ZenmjJ6cuC6UlT/3xd/Q== 0001046568-99-000007.txt : 19991103 0001046568-99-000007.hdr.sgml : 19991103 ACCESSION NUMBER: 0001046568-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991102 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: 99739034 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 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, 1999 [ ] 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.) 2800 West Higgins Road, Suite 790, 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 X No As of October 28, 1999, 7,837,775 shares of the registrant's Common Stock, par value $.01, were outstanding. CAREER EDUCATION CORPORATION QUARTER ENDED SEPTEMBER 30, 1999 INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 (unaudited) 3 Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 PART I - FINANCIAL INFORMATION Item 1. Financial Statements CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (unaudited)
September 30, 1999 December 31, 1998 ASSETS CURRENT ASSETS: Cash $ 39,664 $ 23,548 Receivables, net 15,654 12,407 Inventories, prepaid expenses and other current assets 9,092 4,973 Total current assets 64,410 40,928 PROPERTY AND EQUIPMENT, net 63,589 46,403 INTANGIBLE ASSETS, net 66,739 42,645 DEFERRED INCOME TAX ASSETS - 865 OTHER ASSETS 3,257 2,046 TOTAL ASSETS $ 197,995 $ 132,887 LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt $ 264 $ 317 Accounts payable 8,239 2,425 Accrued expenses and other current liabilities 12,766 12,033 Deferred tuition revenue 15,550 10,159 Total current liabilities 36,819 24,934 NON-CURRENT LIABILITIES: Long-term debt, net of current maturities 49,513 22,300 Other long-term liabilities 1,224 1,017 Deferred income tax liability 4,927 - Total non-current liabilities 55,664 23,317 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT: Common stock, $.01 par value; 50,000,000 shares authorized; 7,829,146 and 7,152,896 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively; 78 72 Additional paid-in capital 112,092 95,481 Accumulated other comprehensive income (507) (822) Accumulated deficit (6,151) (10,095) Total stockholders' investment 105,512 84,636 TOTAL LIABILITIES AND STOCKHOLDERS'INVESTMENT $ 197,995 $ 132,887
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, 1999 1998 1999 1998 REVENUE: Tuition and registration fees, net $ 50,094 $ 31,715 $ 137,057 $ 91,659 Other, net 5,511 3,279 12,763 8,257 Total net revenue 55,605 34,994 149,820 99,916 OPERATING EXPENSES: Educational services and facilities 23,172 14,584 62,034 41,419 General and administrative 25,423 16,028 69,591 46,161 Depreciation and amortization 3,731 3,172 10,366 9,233 Compensation expense related to the initial public offering - - - 1,961 Total operating expenses 52,326 33,784 141,991 98,774 Income from operations 3,279 1,210 7,829 1,142 INTEREST EXPENSE, net (366) (247) (911) (987) Income before provision for income taxes and cumulative effect of change in accounting principle 2,913 963 6,918 155 PROVISION FOR INCOME TAXES 1,252 404 2,974 65 Income before cumulative effect of change in accounting principle 1,661 559 3,944 90 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of taxes of $149 - - - (205) NET INCOME (LOSS) $ 1,661 $ 559 $ 3,944 $ (115)
CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Continued (Dollars in thousands, except per share amounts) (unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS: Net income (loss) as reported $ 1,661 $ 559 $ 3,944 $ (115) Dividends on preferred stock - - - (274) Accretion to redemption value of preferred stock and warrants - - - (2,153) Net income (loss) attributable to common stockholders $ 1,661 $ 559 $ 3,944 $ (2,542) NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS: Basic $ 0.21 $ 0.08 $ 0.52 $ (0.40) Diluted $ 0.21 $ 0.08 $ 0.50 $ (0.40) WEIGHTED AVERAGE SHARES OUTSTANDING: Shares used in basic 7,822 7,142 7,626 6,309 Dilutive effect of employee stock options 230 196 267 - Dilutive effect of future issuable shares - - - - Shares used in diluted 8,052 7,338 7,893 6,309 PRO FORMA DATA: Net income (loss) attributable to common stockholders $ (213) Diluted net income (loss) per share attributable to common stockholders $ (0.03) Weighted average shares outstanding used in diluted 6,699
CAREER EDUCATION CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (unaudited)
Nine Months Ended September 30, 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) for the period $ 3,944 $ (115) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 10,366 9,233 Compensation expense related to option issuances 48 1,961 Gain on sale of property and equipment - (14) Deferred income taxes (2,601) (918) Cumulative effect of change in accounting principle - 205 Changes in operating assets and liabilities, net of acquisitions 6,435 (500) Net cash provided by operating activities 18,192 9,852 CASH FLOWS FROM INVESTING ACTIVITIES: Business acquisitions, net of cash (34,752) (4,964) Acquisition costs (1,454) (244) Purchase of property and equipment, net (9,554) (3,117) Other assets 375 (56) Net cash used in investing activities (45,385) (8,381) CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock 15,952 52,620 Dividends paid on preferred stock - (47) Equity issuance costs (1,945) (6,821) Payments of amounts due and notes payable to former owners of acquired businesses, capital lease obligations and other long-term debt (538) (8,118) Net borrowings (payments) on revolving loans under Credit Agreement 29,750 (24,485) Payments on term loans under Credit Agreement - (13,500) Net cash provided by (used in) financing activities 43,219 (351) EFFECT OF EXCHANGE RATE CHANGES ON CASH 90 (287) NET INCREASE IN CASH 16,116 833 CASH, beginning of period 23,548 18,906 CASH, end of period $ 39,664 $ 19,739 NON-CASH INVESTING AND FINANCING ACTIVITIES: Accretion to redemption value of preferred stock and warrants $ - $ (2,153) Dividends on preferred stock added to liquidation value - (227) Issued 50,601 shares of common stock under the Le Cordon Bleu trademark agreement $ 2,000 $ -
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, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. The condensed consolidated balance sheet at December 31, 1998 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, 1998 that are included in our annual report on Form 10-K. Note 2 - Public Offering of Common Stock On March 17, 1999, we sold 530,000 shares of common stock at $29.00 per share pursuant to a public offering. 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, were approximately $13.8 million. The net proceeds from the offering were used for general corporate purposes. Note 3 - Business Acquisitions Harrington Institute of Interior Design, Inc. On January 4, 1999, we acquired all of the outstanding shares of capital stock of Harrington Institute of Interior Design, Inc. for approximately $3.5 million. The acquisition was accounted for as a purchase and the purchase price exceeded the fair value of assets acquired and liabilities assumed, resulting in goodwill of approximately $2.8 million. McIntosh College, Inc. On March 9, 1999, we acquired certain assets and assumed certain liabilities of McIntosh College, Inc. for approximately $5.0 million. The acquisition was accounted for as a purchase and the purchase price exceeded the fair value of assets acquired and liabilities assumed, resulting in goodwill of approximately $4.6 million. Briarcliffe College, Inc. On April 1, 1999, we acquired all of the outstanding shares of capital stock of Briarcliffe College, Inc. for approximately $20.6 million. The acquisition was accounted for as a purchase and the purchase price exceeded the fair value of assets acquired and liabilities assumed, resulting in goodwill of approximately $17.5 million. Brooks Institute of Photography, Inc. Effective June 1, 1999, we acquired all of the outstanding shares of capital stock of Brooks Institute of Photography, Inc. for approximately $6.6 million. The acquisition was accounted for as a purchase and the purchase price exceeded the fair value of assets acquired and liabilities assumed, resulting in goodwill of approximately $2.2 million. 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:
Accumulated Other Comprehensive Loss - Foreign Currency Comprehensive Income Translation Adjustment Balance December 31, 1998 $ (822) Net income for the nine months ended September 30, 1999 $ 3,944 Other Comprehensive Income - Foreign currency translation adjustment 315 315 Comprehensive income for the nine months ended September 30, 1999 $ 4,259 Balance, September 30, 1999 $ (507)
Note 5 - Start-Up Costs Effective January 1, 1998, we adopted the American Institute of Certified Public Accountants Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities," which requires all non-governmental entities to expense the costs of start-up activities as those costs are incurred. We have restated our financial statements for the three and nine months ended September 30, 1998 to reflect this change. Note 6 - Debt On March 31, 1999, we increased our line of credit from $60.0 million to $90.0 million. As of September 30, 1999, we had approximately $41.0 million of borrowings outstanding under our Credit Facility. Additionally, we had approximately $7.7 million of outstanding letters of credit as of such date. 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 1999 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 16 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 22,500 students enrolled as of October 31, 1999 compared to approximately 15,900 students as of October 31, 1998. We have 25 campuses located in 14 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: - information technology - visual communication and design technologies - 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 and amortization is reflected as a result of capital improvements, as well as added goodwill and covenants-not-to-compete from our new acquisitions. We believe that earnings before interest, taxes, depreciation and amortization (EBITDA), while not a substitute for GAAP measures of operating results, is an important measure of our financial performance and that of our schools. For third quarter 1999, EBITDA was $7.0 million, up 59% from $4.4 million for third quarter 1998. For the nine months ended September 30, 1999, EBITDA was $18.2 million, up 75% from $10.4 million for the same period in 1998. Excluding the before-tax non-cash compensation charge of $1.9 million, EBITDA for the nine months ended September 30, 1998 would have been $12.3 million. 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. If a student withdraws from school prior to the completion of the term, we refund a portion of the paid tuition that relates to the portion 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 revenue, restaurant revenue and rental income. Other revenue is recognized during the period services are rendered. 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, 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 previous owners of our schools. Acquisitions On January 4, 1999, we acquired all of the outstanding capital stock of Harrington Institute of Interior Design, Inc. for a purchase price of approximately $3.5 million. On March 9, 1999, we acquired certain assets and assumed certain liabilities of McIntosh College, Inc. for a purchase price of approximately $5.0 million. On April 1, 1999, we acquired all of the outstanding capital stock of Briarcliffe College, Inc. for a purchase price of approximately $20.6 million. Effective June 1, 1999, we acquired all of the outstanding capital stock of Brooks Institute of Photography, Inc. for a purchase price of approximately $6.6 million. Results of Operations The following table summarizes our operating results as a percentage of net revenue:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 REVENUE: Tuition and registration fees, net 90.1 % 90.6 % 91.5 % 91.7 % Other, net 9.9 9.4 8.5 8.3 Total net revenue 100.0 100.0 100.0 100.0 OPERATING EXPENSES: Educational services and facilities 41.7 41.7 41.4 41.5 General and administrative 45.7 45.8 46.5 46.2 Depreciation and amortization 6.7 9.1 6.9 9.2 Compensation expense related to the initial public offering - - - 2.0 Total operating expenses 94.1 96.6 94.8 98.9 Income from operations 5.9 3.4 5.2 1.1 INTEREST EXPENSE, net (0.7) (0.7) (0.6) (0.9) Income before provision for income taxes and cumulative effect of change in accounting principle 5.2 2.7 4.6 0.2 PROVISION FOR INCOME TAXES 2.2 1.1 2.0 0.1 Income before cumulative effect of change in accounting principle 3.0 1.6 2.6 0.1 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of taxes - - - (0.2) NET INCOME (LOSS) 3.0 1.6 2.6 (0.1) NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS 3.0 % 1.6 % 2.6 % (2.5) %
Revenue. Net tuition and registration fee revenue for third quarter 1999 was $50.1 million, up $18.4 million or 58.0% compared to third quarter 1998. On a same school basis, the 37.7% increase was primarily due to a 21.2% increase in average student population, tuition increases, and changes in student enrollment mix. For the nine months ended September 30, 1999, net tuition and registration fee revenue was $137.1 million, up $45.4 million or 49.5% compared to the same period last year. Of this amount, $19.8 million was due to added net tuition revenue for schools acquired during and after the 1998 period. On a same school basis, the increase was 30.6% and was also due to tuition increases, as well as an increase in average student population of 24.6%. Other revenue, net, for third quarter 1999 was $5.5 million, up $2.2 million or 68.1% compared to third quarter 1998. For the nine months ended September 30, 1999, other net revenue was $12.8 million, up $4.5 million or 54.6% compared to the same period last year. These increases were due to an increase in student population for schools owned during the 1998 period. Educational Services and Facilities. Educational services and facilities expense for third quarter 1999 was $23.2 million, up $8.6 million or 58.9% compared to third quarter 1998. On a same school basis, this increase was $4.5 million, or 31.9%. For the nine months ended September 30, 1999 this expense was $62.0 million, up $20.6 million or 49.8% compared to the same period last year. On a same school basis, this increase was $10.6 million, or 26.2%. These increases were mainly attributable to the increase in average student population mentioned above, as well as an increase in curriculum development. General and Administrative. General and administrative expense for third quarter 1999 was $25.4 million, up $9.4 million or 58.6% compared to third quarter 1998. On a same school basis, this increase was $6.6 million and was mainly due to increased advertising and marketing (including admissions) of $3.4 million and planned corporate and regional infrastructure enhancements of $1.8 million. For the nine months ended September 30, 1999 the expenses were $69.6 million, up $23.4 million or 50.8% compared to the same period last year. On a same school basis, this increase was $16.0 million and was mainly due to increased advertising and marketing (including admissions) of $7.7 million and planned corporate and regional infrastructure enhancements of $4.5 million. Depreciation and Amortization. Depreciation and amortization expense for third quarter 1999 was $3.7 million, up $0.6 million or 17.6% compared to third quarter 1998. On a same school basis, it decreased by 0.3% due to decreased amortization related to non-compete agreements. For the nine months ended September 30, 1999 depreciation and amortization was $10.4 million, up $1.1 million or 12.3% compared to the same period last year. On a same school basis, it decreased by 3.5% also due to decreased amortization related to non-compete agreements. Compensation Expense Related to the Initial Public Offering. A before-tax, non-cash compensation charge of approximately $1.9 million was recorded pursuant to amended stock option agreements with two stockholders upon consummation of our initial public offering in February 1998. Net Interest Expense. Net interest expense for third quarter 1999 was $0.4 million compared to $0.2 million in the same period last year. For the nine months ended September 30, 1999 net interest expense was $0.9 million compared to $1.0 million the same period last year. Provision for Income Taxes. The provision for income taxes for third quarter 1999 was $1.3 million, up $0.9 million from the same period last year. For the nine months ended September 30, 1999 the provision for income taxes was $3.0 million compared to $0.1 million for the same period last year. These increases were due to higher pretax income coupled with a 1.0 percentage point higher effective tax rate. Cumulative Effect of Change in Accounting Principle. In January 1998, we adopted Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," which resulted in a net of tax charge of $0.2 million. Net Income (Loss). Net income for third quarter 1999 was $1.7 million compared to $0.6 million in the same period last year due to the reasons discussed above. For the nine months ended September 30, 1999 net income was $3.9 million compared to a net loss of $0.1 million in the same period last year. Net Income (Loss) Attributable to Common Stockholders. Net income attributable to common stockholders increased to $1.7 million in the third quarter of 1999 from $0.6 million in the third quarter of 1998. For the nine months ended September 30, 1999 net income attributable to common stockholders was $3.9 million compared to a net loss of $2.5 million in the same period last year. These increases were due to decreases in dividends on preferred stock and accretion to redemption value of preferred stock and warrants in connection with our initial public offering, conversion of preferred stock into common stock and exercise of warrants. Liquidity and Capital Resources On March 17, 1999, we sold 530,000 shares of common stock at $29.00 per share pursuant to a public offering. 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, were approximately $13.8 million. The net proceeds from the offering were used for general corporate purposes. Net cash provided by operating activities also increased to $18.2 million in the first nine months of 1999 from $9.9 million in the first nine months of 1998, due primarily to increases in net income and operating assets and liabilities. Capital expenditures increased to $9.6 million in the first nine months of 1999 from $3.1 million in the first nine months of 1998. These increases were primarily due to investments in leasehold improvements on new and expanded facilities and capital equipment as a result of increasing student population. Capital expenditures are expected to continue to increase as new schools are acquired, student population increases, and current facilities and equipment are upgraded and expanded. Our net receivables as a percentage of net revenue decreased to 10% in 1999 from 14% in 1998, primarily due to increased revenue at our schools acquired prior to September 1998 coupled with better asset management. Based upon historical experience and judgment, we establish an allowance for doubtful accounts with respect to tuition receivables. When a student withdraws from school, 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 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. At October 29, 1999, we had $15.0 million of outstanding borrowings under our credit facility. Additionally, we had approximately $7.7 million of outstanding letters of credit as of such date. The DOE requires that we keep unbilled Title IV Program funds that are collected in separate cash or cash equivalent 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 programs are held in a separate cash account until certain conditions are satisfied. As of September 30, 1999, 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. 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. Through our audit, testing and remediation project, we have identified and evaluated the readiness of our IT systems and non-IT systems, which, if not Year 2000 compliant, could have a material adverse effect on us. We held planning strategy sessions in the first quarter of 1998 and conducted our Year 2000 audits, upgrade assessments and budget alignments during the remainder of 1998 and continued through 1999. Our evaluation indicated that our administrative IT systems are Year 2000 compliant, but identified the following areas of concern: - our accounting and financial reporting system - our student database system - the systems of third party vendors which process student financial aid applications and loans for us - the Department of Education's systems for processing and disbursing student financial aid - financial institutions which provide loans to our students Based on our assessment and vendors' representations, we believe that the financial and accounting systems, including those systems necessary for financial aid, of our significant third party vendors are compliant at this time. Our Management Information Services department will continue to monitor and spot test our vendors' financial and accounting systems throughout the remainder of the year. We believe that the material non-IT systems that we control are Year 2000 compliant and have completed the process of surveying our landlords, utility providers and other providers of non-IT systems to confirm that such systems are compliant. We have collected documentation from all of our key utility providers and landlords. At this time, all of our campus administration systems Year 2000 evaluations have been completed. Non-compliant computer systems have been replaced at all campuses as of July 31, 1999. The Risks Associated with Our Year 2000 Issues. We do not believe that the cost of remediating our internal Year 2000 problems, or the lost opportunity costs arising from any necessary diversion of our personnel to Year 2000 problems, will have a material adverse effect on our business, results of operations or financial condition. We estimate that we have spent approximately $300,000 to either upgrade or replace non-compliant computer systems. 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 for their tuition in a timely manner. Because we derive approximately 70% of our revenue from U.S. federal student financial aid programs, such delay would likely have a material adverse effect on our business, results of operations and financial condition. Other than public comments provided by the Department of Education's August 13, 1999 status report that states that one hundred percent of the Department's 175 systems are either retired (28) or are Year 2000 compliant and fully implemented (147), we are unable to predict the likelihood of this risk occurring. Contingency Plans. At this time, we expect to be Year 2000 compliant and are satisfied that our significant vendors are compliant. However, to avoid interruptions of our operations, we are continuing to develop 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 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. 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. In addition, we had debt with fixed annual rates of interest at September 30, 1999 of 8.0% totaling $6.9 million and 8.25% totaling $0.2 million. We estimate that the fair value of each of our debt instruments approximated its market value at September 30, 1999. 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 fair value of the assets and liabilities of these operations at September 30, 1999 approximated their fair value. PART II - OTHER INFORMATION Item 1. Legal Proceedings We and our campuses are subject to occasional lawsuits, investigations and claims arising out of the ordinary conduct of our business, including the following: On February 24, 1997, 30 former and current students in Brown's PC/LAN program brought a suit entitled Peter Alsides, et al. v. Brown Institute, Ltd.. in the Fourth Judicial District in Hennepin County, Minnesota against Brown. In October, 1999 the parties agreed in principal to a settlement in an amount which will not be material to our business, results of operations or financial condition. It is anticipated that the settlement agreement will be executed by the parties in November, 1999. Although outcomes cannot be predicted with certainty, we do not believe any other legal proceedings to which we are a party will have a material adverse effect on our business, results of operations or financial condition. Item 6. Exhibits and Reports on Form 8-K. A. Exhibits. Exhibit 27 - Financial Data Schedule B. Reports on Form 8-K. We did not file any Current Reports on Form 8-K during the third quarter of 1999. 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 1, 1999 By: /s/ JOHN M. LARSON John M. Larson President and Chief Executive Officer (Principal Executive Officer) Date: November 1, 1999 By: /s/ PATRICK K. PESCH Patrick K. Pesch Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) EX-27 2 ARTICLE 5 FDS FOR 3RD QUARTER 10-Q
5 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 39,664 0 18,762 (3,108) 1,316 64,410 81,512 (17,923) 197,995 36,819 49,513 0 0 78 105,434 197,995 0 149,820 0 141,991 0 5,195 911 6,918 2,974 3,944 0 0 0 3,944 0.52 0.50
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