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: June 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 X No
As of August 10, 2001, 21,975,882 shares of the registrant's Common Stock,
par value $.01, were outstanding.
CAREER EDUCATION CORPORATION
QUARTER ENDED JUNE 30, 2001
INDEX
PART I--FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Condensed Unaudited Consolidated Balance Sheets as of June
30, 2001 and December 31, 2000.............................. 3
Condensed Unaudited Consolidated Statements of Operations for
the three and six months ended June 30, 2001 and 2000....... 4
Condensed Unaudited Consolidated Statements of Cash Flows for
the six months ended June 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................................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk.... 15
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 16
Item 6. Exhibits and Reports on Form 8-K............................. 16
SIGNATURES............................................................. 17
2
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
June 30, December 31,
2001 2000
-------- ------------
ASSETS
CURRENT ASSETS:
Cash.................................................. $ 273 $ 33,742
Student receivables, net.............................. 44,347 29,800
Other receivables..................................... 4,826 3,851
Inventories........................................... 4,234 2,874
Prepaid expenses and other current assets............. 23,140 13,116
Deferred income tax assets............................ 3,799 2,847
-------- --------
Total current assets................................ 80,619 86,230
-------- --------
PROPERTY AND EQUIPMENT, net............................. 124,094 90,836
INTANGIBLE ASSETS, net.................................. 159,599 93,634
DEFERRED INCOME TAX ASSETS.............................. 9,144 --
OTHER ASSETS............................................ 3,568 9,999
-------- --------
TOTAL ASSETS............................................ $377,024 $280,699
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt.................. $ 7,256 $ 4,494
Accounts payable...................................... 11,264 7,608
Accrued expenses and other current liabilities........ 28,771 21,202
Accrued restructuring and severance................... 3,137 --
Deferred tuition revenue.............................. 27,690 23,610
-------- --------
Total current liabilities........................... 78,118 56,914
-------- --------
DEFERRED RENT OBLIGATIONS............................... 2,559 1,988
LONG-TERM DEBT, net of current maturities............... 32,376 14,626
DEFERRED INCOME TAX LIABILITIES......................... -- 6,185
OTHER LONG-TERM LIABILITIES............................. 2,282 93
COMMITMENTS AND CONTINGENCIES...........................
STOCKHOLDERS' INVESTMENT:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding at June
30, 2001 and December 31, 2000....................... -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 21,844,828 and 20,323,739 shares issued
and outstanding at June 30, 2001 and December 31,
2000, respectively................................... 218 203
Additional paid-in capital............................ 228,356 179,133
Accumulated other comprehensive income................ (379) (698)
Retained earnings..................................... 33,494 22,255
-------- --------
Total stockholders' investment...................... 261,689 200,893
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT.......... $377,024 $280,699
======== ========
3
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Three Months Six Months Ended
Ended June 30, June 30,
----------------- ------------------
2001 2000 2001 2000
-------- ------- -------- --------
REVENUE:
Tuition and registration fees, net.... $109,616 $66,879 $219,029 $131,559
Other, net............................ 11,682 6,702 21,984 12,337
-------- ------- -------- --------
Total net revenue................... 121,298 73,581 241,013 143,896
-------- ------- -------- --------
OPERATING EXPENSES:
Educational services and facilities... 51,913 31,110 100,801 58,849
General and administrative............ 52,641 32,842 105,216 64,640
Depreciation and amortization......... 7,709 5,124 14,834 9,686
-------- ------- -------- --------
Total operating expenses............ 112,263 69,076 220,851 133,175
-------- ------- -------- --------
Income from operations.............. 9,035 4,505 20,162 10,721
Interest income....................... 167 395 396 545
Interest expense...................... (585) (566) (1,100) (841)
Share of affiliate earnings........... 398 -- 975 --
-------- ------- -------- --------
Income before provision for income
taxes and cumulative effect of change
in accounting principle.............. 9,015 4,334 20,433 10,425
PROVISION FOR INCOME TAXES.............. 4,058 1,907 9,194 4,526
-------- ------- -------- --------
Income before cumulative effect of
change in accounting principle....... 4,957 2,427 11,239 5,899
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, net of taxes of
$587................................... -- -- -- (778)
-------- ------- -------- --------
NET INCOME.............................. $ 4,957 $ 2,427 $ 11,239 $ 5,121
======== ======= ======== ========
NET INCOME PER SHARE:
Basic
Income before cumulative effect of
change in accounting principle..... $ 0.23 $ 0.13 $ 0.52 $ 0.35
Cumulative effect of change in
accounting principle, net of taxes. -- -- -- (0.05)
-------- ------- -------- --------
Net Income........................ $ 0.23 $ 0.13 $ 0.52 $ 0.30
======== ======= ======== ========
Diluted
Income before cumulative effect of
change in accounting principle..... $ 0.22 $ 0.13 $ 0.50 $ 0.34
Cumulative effect of change in
accounting principle, net of taxes. -- -- -- (0.05)
-------- ------- -------- --------
Net Income........................ $ 0.22 $ 0.13 $ 0.50 $ 0.29
======== ======= ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................ 21,789 18,319 21,708 17,070
-------- ------- -------- --------
Diluted............................... 22,793 18,825 22,662 17,582
======== ======= ======== ========
4
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
June 30,
------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 11,239 $ 5,121
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 14,834 9,686
Compensation expense related to stock options.......... 26 26
Gain on sale of property and equipment................. 7 --
Deferred income taxes.................................. 1,108 5,452
Changes in operating assets and liabilities, net of
acquisitions.......................................... (27,850) (20,416)
-------- --------
Net cash used in operating activities................ (636) (131)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash....................... (1,332) (23,468)
Acquisition costs and financing transaction costs........ (1,325) (1,396)
Purchase of property and equipment, net.................. (28,120) (9,136)
-------- --------
Net cash used in investing activities................ (30,777) (34,000)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................. 3,669 67,007
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................................ (19,692) (4,197)
Net borrowings (payments) on revolving loans under Credit
Agreement............................................... 14,000 (2,000)
-------- --------
Net cash (used in) provided by financing activities.. (2,023) 56,585
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................... (33) (97)
-------- --------
NET (DECREASE) INCREASE IN CASH ........................... (33,469) 22,357
CASH, beginning of period.................................. 33,742 44,745
-------- --------
CASH, end of period........................................ $ 273 $ 67,102
======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations for purchase of equipment...... $ 1,600 $ 2,578
======== ========
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 six months ended
June 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 (AIU). EduTrek's shareholders received an aggregate of
approximately 1.2 million shares of our common stock (0.0901 shares of our
common stock for each share of EduTrek stock) and approximately $2.5 million
in cash ($0.1877 per 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 $66.1
million as of the end of the second quarter of 2001. 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.
6
Pro Forma Results of Operations
The following unaudited pro forma results of operations (in thousands,
except per share amounts) for the six months ended June 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 bad debt, 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.
For Six Months
Ended June 30,
-----------------
2001 2000
-------- --------
Pro
Actual forma
-------- --------
(Unaudited)
Net revenue............................................... $241,013 $181,690
Income before cumulative effect of change in accounting
principle................................................ 11,239 4,182
Net income................................................ 11,239 3,404
Income before cumulative effect of change in accounting
principle
attributable to common stockholders...................... 11,239 4,182
Net income attributable to common stockholders............ 11,239 3,404
======== ========
Basic income per share attributable to common
stockholders--
Income before cumulative effect of change in
accounting principle................................... $ 0.52 $ 0.23
Net income.............................................. $ 0.52 $ 0.19
======== ========
Diluted income per share attributable to common
stockholders--
Income before cumulative effect of change in accounting
principle.............................................. $ 0.50 $ 0.22
======== ========
Net income.............................................. $ 0.50 $ 0.18
======== ========
On August 1, 2001, we acquired certain assets and assumed certain
liabilities of Le Chef College of Hospitality Careers, Inc., d/b/a 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 estimated goodwill of
$0.8 million.
Note 3--Comprehensive Income
The disclosure of comprehensive income and accumulated other comprehensive
income, which encompasses net income and foreign currency translation
adjustments, is as follows:
Six Months
Ended June 30,
--------------
2001 2000
------- ------
Net Income................................................... $11,239 $5,121
Other Comprehensive Income (Loss)
Foreign currency translation adjustment.................... 319 (202)
------- ------
Comprehensive Income......................................... $11,558 $4,919
======= ======
Note 4--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.
7
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 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 5--Credit Facility
As of June 30, 2001, we had approximately $24.5 million of borrowings
outstanding and approximately $5.8 million of letters of credit outstanding
under our Credit Facility.
Note 6--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.
Note 7--Stock Split
On July 31, 2001, our Board of Directors announced a 2-for-1 stock split to
be effected in the form of a stock dividend. The stock split is subject to the
approval of our stockholders of an amendment to our amended and restated
certificate of incorporation to increase our authorized common stock,
permitting consummation of the stock split. The dividend is expected to be
payable on September 28, 2001 to stockholders of record on September 17, 2001.
All share and per share amounts in the accompanying financial statements have
not been adjusted to reflect this proposed stock dividend. However, once
approved by stockholders, the stock split will be retroactively reflected.
8
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 14 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. We had approximately 31,600 students enrolled as of
July 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. In addition, our annual net income increased 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 78%, from $9.6 million in the second
quarter of 2000 to $17.1 million in the second quarter of 2001. For the six
months ended June 30, 2001, EBITDA increased 76%, to $36.0 million from $20.4
million in the same period in 2000. We believe that EBITDA is particularly
meaningful due principally to the role acquisitions have played in our
development. Our rapid growth through acquisitions has resulted in significant
non-cash depreciation and amortization expense, because a significant portion
of the purchase price of a school acquired by us is generally allocated to
fixed assets, goodwill and other intangible assets.
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.
9
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.
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 (AIU). EduTrek's shareholders received an aggregate of
approximately 1.2 million shares of our common stock (0.0901 shares of our
common stock for each share of EduTrek stock) and approximately $2.5 million
in cash ($0.1877 per 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 $66.1
million as of the end of the second quarter of 2001. 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.
On August 1, 2001, we acquired certain assets and assumed certain
liabilities of Le Chef College of Hospitality Careers, Inc., d/b/a 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 estimated goodwill of
$0.8 million.
10
Results of Operations
The following table summarizes our operating results as a percentage of net
revenue for the periods indicated.
Three Months Six Months
Ended Ended
June 30, June 30,
------------- ------------
2001 2000 2001 2000
------ ----- ----- -----
REVENUE:
Tuition and registration fees, net.............. 90.4% 90.9% 90.9% 91.4%
Other, net...................................... 9.6 9.1 9.1 8.6
------ ----- ----- -----
Total net revenue............................. 100.00 100.0 100.0 100.0
OPERATING EXPENSES:
Educational services and facilities............. 42.8 42.3 41.8 40.9
General and administrative...................... 43.4 44.6 43.7 44.9
Depreciation and amortization................... 6.4 7.0 6.2 6.7
------ ----- ----- -----
Total operating expenses...................... 92.6 93.9 91.7 92.5
------ ----- ----- -----
Income from operations........................ 7.4 6.1 8.3 7.5
Interest income................................. 0.1 0.5 0.2 0.4
Interest expense................................ (0.5) (0.7) (0.5) (0.6)
Share of affiliate earnings..................... 0.3 -- 0.4 --
------ ----- ----- -----
Income before provision for income taxes and
cumulative effect of change in accounting
principle...................................... 7.3 5.9 8.4 7.3
PROVISION FOR INCOME TAXES........................ 3.3 2.6 3.8 3.1
------ ----- ----- -----
Income before cumulative effect of change in
accounting principle........................... 4.0 3.3 4.6 4.2
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net................................... -- -- -- (0.5)
====== ===== ===== =====
NET INCOME ....................................... 4.0% 3.3% 4.6% 3.7%
====== ===== ===== =====
Revenue. Net tuition and registration fee revenue increased 64%, from $66.9
million in the second quarter of 2000 to $109.6 million in the second quarter
of 2001. The increase was due to an approximate 36% improvement in net tuition
and registration fee revenue on a same-school basis (i.e., schools owned as of
April 3, 2000). This was attributable to a 23% increase in the average student
population, tuition increases effective after the second quarter of 2000 and
changes in student enrollment mix. Another $18.4 million (28%) of increased
net tuition and registration fee revenue resulted from schools owned after
April 3, 2000. For the six months ended June 30, 2001, net tuition and
registration fee revenue increased 66% from $131.6 million to $219.0 million
primarily due to an approximate 38% improvement in net tuition and
registration fee revenue on a same-school basis (i.e., schools owned prior to
January 3, 2000) and $46.1 million of additional net tuition and registration
fee revenue from schools owned after January 3, 2000. Bad debt expense
increased from 2.7% to 3.0% of gross student revenue for the six months ended
June 30, 2000 and 2001, respectively.
Other net revenue increased 74%, from $6.7 million in the second quarter of
2000 to $11.7 million in the second quarter of 2001, primarily due to the
increase in student population mentioned above and added other revenue of $3.2
million for the schools owned after April 3, 2000. The increase was due to an
approximate 27% improvement in other net revenue on a same-school basis (i.e.,
schools owned prior to January 3, 2000). For the six months ended June 30,
2001, other net revenue increased 78% from $12.3 million to $22.0 million
primarily due to increase in student population mentioned above and added
other net revenue of $7.8 million for the schools owned after January 3, 2000.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 67%, from $31.1 million in the second quarter of
2000 to $51.9 million in the second quarter of 2001. Of this increase, $9.8
million was attributable to schools owned prior to April 3, 2000 and $11.0
million was attributable
11
to schools owned after April 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 six months ended June
30, 2001, educational services and facilities expense increased 71%, from
$58.8 million to $100.8 million primarily due to the reasons mentioned above
and added educational services and facilities expense of $28.9 million for
schools owned after January 3, 2000.
General and Administrative Expense. General and administrative expense
increased 60%, from $32.8 million in the second quarter of 2000 to $52.6
million in the second quarter of 2001. The increase was primarily attributable
to a $10.4 million increase in expenses for schools owned after April 3, 2000,
and increased advertising and marketing expenses (including admissions) of
$5.3 million and an increase of $2.7 million related to planned corporate and
regional infrastructure enhancements for schools owned prior to April 3, 2000.
For the six months ended June 30, 2001, general and administrative expense
increased 63% from $64.6 million to $105.2 million primarily due to the
reasons mentioned above and added general and administrative expenses of $22.6
million for the schools owned after January 3, 2000.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased 50%, from $5.1 million in the second quarter of 2000 to $7.7
million in the second quarter of 2001. The increase was primarily due to
capital expenditures for schools owned after April 3, 2000 and related
increased depreciation expense of $0.9 million in 2001. Additionally,
depreciation expense increased $1.3 million due to the depreciation expense
for schools owned prior to April 3, 2000. Amortization expense increased 34%
from $1.1 million in the second quarter of 2000 to $1.5 million in the second
quarter of 2001, primarily due to additional amortization of non-competition
agreements and goodwill related to schools owned after Apirl 3, 2000 offset by
a decrease in amortization of non-competition agreements for schools owned
prior to April 3, 2000. For the six months ended June 30, 2001 depreciation
and amortization increased 53% from $9.7 million to $14.8 million. The
increase was primarily due to the reasons mentioned above and added
depreciation expense of $2.2 million for the schools owned after January 3,
2000. Amortization expense increased 40%, from $2.2 million in the first six
months of 2000 to $3.1 million in the first six months of 2001, primarily due
to the reasons mentioned above offset by added amortization expense of $1.2
million for the schools owned after January 3, 2000.
Interest Income. Interest income decreased 58%, from $0.4 million in the
second quarter of 2000 to $0.2 million in the second quarter of 2001, due to a
decrease in cash available for short-tem investment purposes. For the six
months ended June 30, 2001, interest income decreased 27%, from $0.5 million
to $0.4 million due to the reasons mentioned above.
Interest Expense. Interest expense remained fairly consistent at $0.6
million in the second quarter of 2000 and the second quarter of 2001. For the
six months ended June 30, 2001, interest expense increased 31%, from $0.8
million to $1.1 million 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 $0.4 million for the second quarter of
2001 and $1.0 million for the six months ended June 30, 2001.
Provision for Income Taxes. The provision for income taxes increased 113%
from $1.9 million in the second quarter of 2000 to $4.1 million in the second
quarter of 2001 as a result of increases in pretax income and a one-percentage
point increase in the effective income tax rate. For the six months ended June
30, 2001, the provision for income taxes increased 103% from $4.5 million to
$9.2 million due to the reasons mentioned above.
Income before Cumulative Effect of Change in Accounting Principle. Income
before cumulative effect of change in accounting principle increased 104%,
from $2.4 million in the second quarter of 2000 to $5.0 million in the second
quarter of 2001, due to the reasons mentioned above. For the six months ended
June 30, 2001, income before cumulative effect of change in accounting
principle increased 91%, from $5.9 million to $11.2 million due to the reasons
mentioned above.
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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 104%, from $2.4 million in the second
quarter of 2000 to $5.0 million in the second quarter of 2001, due to the
reasons mentioned above. For the six months ended June 30, 2001, net income
increased 120%, from $5.1 million to $11.2 million 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 1.2 million shares of our common stock (approximately 0.09
shares of our stock for each share of EduTrek stock) and approximately $2.5
million in cash (approximately $0.19 per 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 equity issuances, credit facilities and remaining cash
generated from operations. Net cash used in operating activities increased
from $0.1 million for the first six months of 2000 to $0.6 million for the
first six months of 2001 due to increases in operating assets and decreases in
operating liabilities offset by increases in net income and depreciation and
amortization. Of the $27.9 million decrease in operating assets and
liabilities for the six months ended June 30, 2001, $15.6 million was
attributed specifically to our acquisition of EduTrek, in which the
anticipated working capital changes that have occurred since the acquisition
flow through cash flows from operating activities rather than cash flows from
business acquisitions under investing activities. Excluding the effect of the
acquisition of EduTrek, net cash provided by operating activities would have
been approximately $11.6 million for the six months ended June 30, 2001.
Capital expenditures increased from $9.1 million in the first six months of
2000 to $28.1 million in the first six months of 2001 due to investments in
leasehold improvements on new and expanded facilities and investments in
capital equipment necessitated by increasing student population. We expect
capital expenditures to be 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.
Net student receivables at June 30 as a percentage of net student revenue
for the first six months increased from $18.0 million, or 14%, in 2000 to
$44.3 million, or 20%, in 2001, which equates to an increase in days sales
outstanding from 26 days in 2000 to 37 days in 2001. This change 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. 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 student revenue was 3.0% and 2.7%, for the six months
ended June 30, 2001 and 2000, respectively.
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.
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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 June 30, 2001, we had approximately
$5.8 million of outstanding letters of credit and $24.5 million of outstanding
borrowings under our credit facility. As a result, at June 30, 2001, our
remaining credit availability under the credit agreement was approximately
$59.7 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
June 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.
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.
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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 June 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 June 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
The information in response to this item is incorporated by reference to
our Quarterly Report on Form 10-Q for the period ended March 31, 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
None.
(b) Reports on Form 8-K.
None.
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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
/s/ JOHN M. LARSON
Date: August 14, 2001 By: _________________________________
John M. Larson
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2001 /s/ PATRICK K. PESCH
By: _________________________________
Patrick K. Pesch
Executive Vice President,
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial and
Accounting Officer)
17