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.
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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.
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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.
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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.
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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