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, 1998
[ ] 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 39-3932190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2800 West Higgins Road, Suite 790, Hoffman Estates, IL 60195
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (847) 781-3600
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
As of August 13, 1998, 7,142,194 shares of the registrant's Common
Stock, par value $.01, were outstanding.
CAREER EDUCATION CORPORATION
QUARTER ENDED JUNE 30, 1998
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and December 31, 1997 (unaudited).................................... 3
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 1998 (unaudited) and 1997 (unaudited)...... 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 (unaudited) and 1997 (unaudited)................. 6
Notes to Condensed Consolidated Financial Statements................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 9
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................... 17
SIGNATURES............................................................................ 18
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................................... $ 17,774 $ 18,906
Receivables, net................................................... 11,563 12,158
Inventories........................................................ 633 634
Prepaid expenses and other current assets.......................... 2,888 4,498
Deferred income tax assets......................................... 1,009 406
------------- -------------
Total current assets.............................................. 33,867 36,602
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization................................................... 44,026 45,555
INTANGIBLE ASSETS, net.............................................. 37,693 33,579
OTHER ASSETS........................................................ 854 1,881
------------- -------------
TOTAL ASSETS........................................................ $116,440 $117,617
============= =============
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt............................... $ 5,031 $ 3,888
Accounts payable................................................... 3,901 3,580
Accrued expenses and other current liabilities..................... 6,110 7,852
Deferred tuition revenue........................................... 5,302 7,476
------------- -------------
Total current liabilities......................................... 20,344 22,796
------------- -------------
NON-CURRENT LIABILITIES:
Long-term debt, net of current maturities shown above.............. 14,768 60,147
Other long-term liabilities........................................ 1,061 703
Deferred income tax liabilities.................................... 635 1,215
------------- -------------
Total non-current liabilities..................................... 16,464 62,065
------------- -------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK AND WARRANTS............................. -- 40,160
------------- -------------
STOCKHOLDERS' INVESTMENT:
Preferred stock, $0.01 par value; 1,000,000 shares authorized and
unissued......................................................... -- --
Common stock, $0.01 par value; 50,000,000 shares authorized;
7,137,504 shares issued and outstanding at June 30, 1998......... 71 --
Class A, B, C, D and E Common stock, $0.01 par value; no
shares outstanding at June 30, 1998; total of
768,804 issued and outstanding at December 31, 1997.............. -- 9
Warrants........................................................... -- 4,777
Additional paid-in capital......................................... 94,958 71
Accumulated other comprehensive income............................. (500) (297)
Accumulated deficit................................................ (14,897) (11,964)
------------- -------------
Total stockholders' investment.................................... 79,632 (7,404)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT...................... $116,440 $117,617
============= =============
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
PRO
FORMA
Six Months
Three Months Ended Six Months Ended Ended
June 30, June 30, June 30,
------------------ ---------------- ----------
1998 1997 1998 1997 1997
------- ------- ------- ------- ----------
REVENUE:
Tuition and registration fees, net...... $29,756 $12,521 $59,944 $23,073 $47,794
Other, net.............................. 2,569 1,348 4,978 2,579 3,901
------- ------- ------- ------- -------
Total net revenue...................... 32,325 13,869 64,922 25,652 51,695
------- ------- ------- ------- -------
OPERATING EXPENSES:
Educational services and facilities..... 13,661 6,402 26,835 11,090 21,500
General and administrative.............. 15,035 6,247 30,133 10,942 23,724
Depreciation and amortization........... 3,073 1,407 6,125 2,109 5,482
Compensation expense related to the
offering............................... -- -- 1,961 -- --
------- ------- ------- ------- -------
Total operating expenses............... 31,769 14,056 65,054 24,141 50,706
------- ------- ------- ------- -------
Income (loss) from operations........... 556 (187) (132) 1,511 989
INTEREST EXPENSE, net.................... (196) (664) (740) (985) (2,601)
------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes and
extraordinary item..................... 360 (851) (872) 526 (1,612)
PROVISION (BENEFIT) FOR
INCOME TAXES............................ 151 (368) (366) 210 (677)
------- ------- ------- ------- -------
Net Income (loss) before extraordinary
item.................................... 209 (483) (506) 316 (935)
Extraordinary loss on early
extinguishment of debt.................. -- (418) -- (418) (418)
------- ------- ------- ------- -------
NET INCOME (LOSS)........................ $ 209 $ (901) $ (506) $ (102) $(1,353)
======= ======= ======= ======= =======
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net income (loss) as reported.......... $ 209 $ (901) $ (506) $ (102) $(1,353)
Dividends on preferred stock........... -- (439) (274) (739) --
Accretion to redemption value of
preferred stock and warrants.......... -- (240) (2,153) (321) --
------- ------- ------- ------- -------
Net income (loss) attributable to
common stockholders................... $ 209 $(1,580) $(2,933) $(1,162) $(1,353)
======= ======= ======= ======= =======
NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic.................................. $ 0.03 $ (2.06) $ (0.48) $ (1.51) $ (1.76)
Diluted................................ $ 0.03 $ (2.06) $ (0.48) $ (1.51) $ (1.76)
-4-
PRO
FORMA
Six Months
Three Months Ended Six Months Ended Ended
June 30, June 30, June 30,
------------------- ------------------- ----------
1998 1997 1998 1997 1997
-------- -------- -------- -------- ----------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Shares used in basic................. 7,120 768 6,072 768 768
Effect of dilutive employee stock
options............................ 216 -- -- -- --
-------- -------- -------- -------- ----------
Shares used in diluted............... 7,336 768 6,072 768 768
======== ======== ======== ======== ==========
PRO FORMA DATA:
Net income (loss) attributable to
common stockholders................ $ 209 $ (901) $ (604) $ (102) $ (1,353)
======== ======== ======== ======== ==========
Diluted net income (loss) per
share attributable to
common stockholders................ $ 0.03 $ (0.35) $ (0.09) $ (0.04) $ (0.60)
======== ======== ======== ======== ==========
Weighted average shares outstanding
used in diluted.................... 7,336 2,582 6,660 2,273 2,273
======== ======== ======== ======== ==========
-5-
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended June 30,
-------------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period.................................................. $ (506) $ (102)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities--
Warrants issued to bank................................................ -- 180
Extraordinary loss on early extinguishment of debt..................... -- 651
Depreciation, amortization and debt discount........................... 6,125 2,116
Compensation expense related to the offering........................... 1,961 --
Deferred income taxes.................................................. (752) (203)
Changes in operating assets and liabilities, net of acquisition........ (964) (4,821)
--------- ---------
Net cash provided by (used in) operating activities.................. 5,864 (2,179)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition, net of cash........................................ (1,360) (36,850)
Acquisition and organizational costs..................................... (186) (973)
Purchase of property and equipment, net.................................. (1,890) (610)
Other assets............................................................. (59) (5)
--------- ---------
Net cash used in investing activities................................ (3,495) (38,438)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering.................................... 52,492 --
Issuance of common stock................................................. -- 30
Issuance of redeemable preferred stock................................... -- 17,782
Issuance of warrants..................................................... -- 4,788
Dividends paid on preferred stock........................................ (47) (248)
Equity issuance costs.................................................... (6,821) (225)
Debt financing costs..................................................... (47) (837)
Book overdraft........................................................... -- (683)
Payments of amounts due and notes payable to former owners of acquired
businesses............................................................. (7,451) --
Payments of long-term debt............................................... (385) (9)
Net payments on revolving credit facility................................ -- (8,239)
Proceeds from term loan facility......................................... -- 3,400
Repayments of term loan facility......................................... -- (11,650)
Net (payments) borrowings on revolving loans under Credit Agreement...... (27,485) 25,955
Borrowings on term loans under Credit Agreement.......................... -- 12,500
Payments on term loans under Credit Agreement............................ (13,500) --
--------- ---------
Net cash provided by (used in) financing activities.................. (3,244) 42,564
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS......................................................... (257) --
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... (1,132) 1,947
CASH AND CASH EQUIVALENTS, beginning of period............................. 18,906 7,798
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................................... $ 17,774 $ 9,745
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and warrants............ $ (2,153) $ (321)
Dividends on preferred stock added to liquidation value.................. (227) (491)
========= =========
-6-
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six months ended June
30, 1998 are not necessarily indicative of the results that may be expected for
the fiscal year ending December 31, 1998. The condensed consolidated balance
sheet at December 31, 1997 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 thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1997.
Note 2 - Initial Public Offering
On February 4, 1998, the Company sold 3,277,500 shares of its common stock
at $16.00 per share pursuant to an initial public offering ("IPO"). The net
proceeds from the offering of $45.6 million were used to repay $41.5 million of
borrowings under the Company's credit agreement and amounts owed to former
owners of acquired businesses of $4.1 million which were outstanding at that
time. Prior to the consummation of the IPO, all outstanding shares of all series
of preferred stock and accumulated dividends were converted into 2,423,485
shares of common stock and warrants (except for redeemable warrants exercisable
into 32,946 shares of Class E common stock) to purchase 624,320 shares of common
stock were exercised. Subsequent to December 31, 1997 and prior to the
consummation of the IPO, the Company also formed one class of common stock,
increased the number of authorized shares of common stock to 50,000,000 and
completed a 9.376-for-1 stock split and all outstanding shares of common stock
were converted into the new class of common stock at a rate of 1:1. The effect
of the split has been retroactively reflected for all periods in the
accompanying condensed consolidated financial statements.
Pursuant to certain amended stock option agreements with two stockholders
giving them the right to purchase 122,615 shares of common stock at $0.01 per
share, the Company recorded compensation expense totalling approximately $2.0
million in connection with the IPO.
Note 3 - Pro Forma Data
The pro forma data gives effect to the conversion of the preferred stock
into common stock which occurred in connection with the IPO. Net income (loss)
attributable to common stockholders eliminates the effect of dividends on
preferred stock and the accretion to redemption value of preferred stock and
warrants converted prior to the IPO. Historical weighted average shares
outstanding (which includes the dilutive effect of common stock equivalents for
periods with net income) has been adjusted for the assumed conversion of
preferred stock (at its liquidating value) into common stock when computing the
pro forma weighted average shares outstanding. The pro forma income statement
for the six months ended June 30, 1997 reflects the acquisitions of SCT, Gibbs,
IAMD-US and IAMD-Canada as if they had occurred on January 1, 1997.
-7-
Note 4 - New Accounting Pronouncement
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs (which include organization costs). It requires that all nongovernmental
entities expense the costs of start-up activities as those costs are incurred.
Nongovernmental entities are required to adopt this SOP by no later than January
1, 1999. Earlier adoption is permitted. The Company expenses all non-
organizational start-up costs as incurred. At December 31, 1997, the Company had
unamortized organizational costs of approximately $354,000. The Company
anticipates adopting the SOP in the fourth quarter of 1998.
Note 5 - Business Acquisitions
On March 13, 1998, the Company purchased 100% of the outstanding shares of
capital stock of Southern California School of Culinary Arts for approximately
$1.1 million. The acquisition is accounted for as a purchase and based upon
preliminary estimates, the purchase price (subject to adjustment) in excess of
the fair value of assets acquired and liabilities assumed is approximately $1.3
million.
During the second quarter of 1998, the Company recorded approximately $4.5
million in additional purchase price for IAMD-US, based on preliminary estimates
of the final purchase price adjustment in accordance with the provisions
outlined in the IAMD-US stock purchase agreement. This adjustment resulted in
additional goodwill.
Note 6 - Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distributions to owners, in a financial
statement for the period in which they are recognized. The disclosure of
comprehensive income and accumulated other comprehensive income, which
encompasses net income and foreign currency translation adjustments, is as
follows:
Accumulated Other
Comprehensive Income (Loss) -
Foreign Currency
Comprehensive Loss Translation Adjustment
------------------ -----------------------------
Balance December 31, 1997 $ (297)
Net loss for the six months ended
June 30, 1998 $ (506) --
Other Comprehensive Income (Loss) -
Foreign currency translation adjustment (203) (203)
-----------------
Comprehensive loss for the six months
ended June 30, 1998 $ (709)
================= -----------------------------
Balance, June 30, 1998 $ (500)
=============================
The accumulated other comprehensive income (loss) balance as of January 1, 1998
has been restated to conform to the SFAS No. 130 requirements.
Note 7 - Subsequent Event
On July 31, 1998, the Company acquired certain assets and assumed certain
liabilities of Scottsdale Culinary Institute, Inc. for approximately $9.5
million. The acquisition is accounted for as a purchase and based upon
preliminary estimates, the purchase price (subject to adjustment) in excess of
the fair value of assets acquired and liabilities assumed is approximately $9.7
million.
-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 the management of Career Education Corporation and
its subsidiaries (collectively, the "Company" or "CEC"), as well as assumptions
made by, and information currently available to, the Company's management. The
Company's actual growth, results, performance and business prospects and
opportunities in 1998 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 Company's Condensed Consolidated Financial Statements and Notes thereto
appearing elsewhere herein.
Background and Overview
CEC is one of the largest providers of private, for-profit
postsecondary education in North America, with approximately 10,400 students
enrolled as of June 30, 1998. CEC operates 10 schools, with 20 campuses located
in 13 states and two Canadian provinces. These schools enjoy long operating
histories and offer a variety of bachelor's degree, associate degree and non-
degree programs in career-oriented disciplines within the Company's core
curricula of (i) computer technologies, (ii) visual communication and design
technologies, (iii) business studies and (iv) culinary arts.
Net revenue, EBITDA and net income have increased in each of the years
the Company has operated. Net revenue increased to $82.6 million in 1997, from
$7.5 million in 1994; EBITDA increased to $10.4 million in 1997, from a loss of
$0.5 million in 1994; and the net loss decreased to $0.9 million in 1997, from a
loss of $1.6 million in 1994. Student population at the Company's schools
increased 248%, from 3,300 students at December 31, 1995 to 11,500 students at
December 31, 1997. The Company has invested significant amounts of capital in
the hiring of additional personnel and increased marketing and capital
improvements at each of the acquired schools. The increased costs of personnel
and marketing are expensed as incurred and are reflected in general and
administrative expenses. Additional depreciation and amortization is reflected
as a result of the capital improvements.
The Company believes that EBITDA, while not a substitute for GAAP
measures of operating results, is an important measure of the financial
performance of the Company and its campuses. Management believes that EBITDA is
particularly meaningful due principally to the role acquisitions have played in
the Company's development. CEC's rapid growth through acquisitions has resulted
in significant non-cash amortization expense, because a significant portion of
the purchase price of a school acquired by CEC is generally allocated to
goodwill and other intangible assets. In a number of the Company's recent
acquisitions, a large portion of the purchase price has been allocated to non-
competition agreements. As a result of its ongoing acquisition strategy, non-
cash amortization expense may continue to be substantial.
The Company's principal source of revenue is tuition collected from
its 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, the Company refunds a portion of the tuition already
paid which is attributable to the period of the term that is not completed.
Revenue is recognized ratably over the period of the student's program.
-9-
The Company's campuses charge tuition at varying amounts, depending
not only on the particular school, but also upon the type of program (i.e.,
diploma, associate or bachelor's) and the specific curriculum. Each of the
Company's campuses typically implements one or more tuition increases annually.
Other revenue consists of bookstore sales, placement fees, dormitory
and cafeteria fees, and restaurant revenue. Other revenue is recognized during
the period services are rendered.
The Company categorizes its expenses as educational services and
facilities, general and administrative and depreciation and amortization.
Educational services and facilities expense generally consists of expense
directly attributable to the educational activity of the 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), certain
costs of establishing and maintaining computer laboratories, costs of student
housing and all other physical plant and occupancy costs, with the exception of
costs attributable to the Company's corporate offices.
General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance, and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
Depreciation and amortization includes costs associated with the
depreciation of purchased computer laboratories, equipment, furniture and
fixtures, courseware, owned facilities, capitalized equipment leases and
amortization of intangible assets, primarily goodwill and non-competition
agreements with previous owners of the schools.
Acquisitions
On February 28, 1997, the Company acquired all of the outstanding
capital stock of SCT for a purchase price of approximately $4.9 million. In
addition, the Company paid approximately $1.8 million to the former owners of
SCT pursuant to non-competition agreements.
Effective May 31, 1997, the Company acquired all of the outstanding
capital stock of Gibbs for a purchase price of approximately $19.0 million. In
addition, the Company paid $7.0 million to the former owner of Gibbs pursuant to
a non-competition agreement.
On June 30, 1997, the Company acquired all of the outstanding capital
stock of IAMD-U.S. for a purchase price of $3.0 million, which amount may be
increased by up to $5.0 million based on future revenues of IAMD-U.S. operations
and which amount is otherwise subject to adjustment. During the second quarter
of 1998, the Company recorded approximately $4.5 million in additional purchase
price based on preliminary estimates of the final adjustment. In addition, the
Company paid $2.0 million to the former owners of IAMD-U.S. pursuant to non-
competition agreements.
Also on June 30, 1997, the Company acquired all of the capital stock
of IAMD-Canada for a purchase price of $6.5 million, subject to adjustment. In
addition, the Company paid $2.0 million to the former owners of IAMD-Canada
pursuant to non-competition agreements.
On March 13, 1998, the Company acquired all of the outstanding capital
stock of Southern California School of Culinary Arts ("SCSCA"). The acquisition
of SCSCA was accounted for as a purchase. The purchase price was approximately
$1.1 million, subject to adjustment.
-10-
On July 31, 1998, the Company acquired certain assets and assumed certain
liabilities of Scottsdale Culinary Institute ("SCI"). The acquisition of SCI was
accounted for as a purchase. The purchase price was approximately $9.5 million,
subject to adjustment.
Compensation Expense Related to the Offering
As of October 20, 1997, certain option agreements between the Company and
two of its executive officers and directors were amended to fix, upon the
consummation of the Offering, the number of shares of common stock issuable upon
exercise of the stock options provided under these agreements. Under the amended
options, which fully vested upon the consummation of the Offering, the holders
are entitled to purchase an aggregate of 122,615 shares of common stock at an
exercise price of $0.01 per share. As a result, the Company recorded a related
one-time, non-cash compensation expense of approximately $2.0 million in the
first quarter of 1998, substantially reducing operating and net income in such
period. See Note 2 to the Notes to the Company's Condensed Consolidated
Financial Statements.
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
Revenue:
Tuition and registration, net.............................. 92.1% 90.3% 92.3% 89.9%
Other, net................................................. 7.9 9.7 7.7 10.1
------ ------ ------ ------
Net revenue............................................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Operating expenses:
Educational services and facilities........................ 42.3 46.2 41.3 43.2
General and administrative................................. 46.5 45.0 46.4 42.7
Depreciation and amortization.............................. 9.5 10.1 9.5 8.2
Compensation expense related to the offering............... -- -- 3.0 --
------ ------ ------ ------
Total operating expenses.................................. 98.3 101.3 100.2 94.1
------ ------ ------ ------
Income (loss) from operations............................. 1.7 (1.3) (0.2) 5.9
Interest expense, net....................................... (0.6) (4.8) (1.1) (3.9)
------ ------ ------ ------
Income (loss) before provision (benefit) for income taxes
and extraordinary item.................................... 1.1 (6.1) (1.3) 2.0
Provision (benefit) for income taxes........................ 0.5 (2.6) (0.5) 0.8
------ ------ ------ ------
Net income (loss) before extraordinary item................. 0.6 (3.5) (0.8) 1.2
Extraordinary loss on early extinguishment of debt.......... -- (3.0) -- (1.6)
------ ------ ------ ------
Net income (loss)........................................... 0.6 (6.5) (0.8) (0.4)
====== ====== ====== ======
Net income (loss) attributable to common stockholders....... 0.6% (11.4)% (4.5)% (4.5)%
====== ====== ====== ======
Revenue. Net tuition revenue increased 138% from $12.5 million in the
second quarter of 1997 to $29.8 million in the second quarter of 1998, due to an
approximately 17.0% increase in the average number of students attending the
schools which were owned by the Company during the 1997 period and tuition
increases effective in 1998 for these schools, as well as added net tuition
revenue of $14.2 million for schools acquired during and after the 1997 period.
Other net revenue increased 91%, from $1.3
-11-
million in the second quarter of 1997 to $2.6 million in the second quarter of
1998, due to an increase in student population for schools owned during the 1997
period and the addition of $1.0 million from schools acquired during and after
the 1997 period. Net tuition revenue increased 160% from $23.1 million in the
first six months of 1997 to $59.9 million in the first six months of 1998, due
to an approximately 19.8% increase in the average number of students attending
the schools which were owned by the Company during the 1997 period and tuition
increases effective in 1998 for these schools, as well as added net tuition
revenue of $29.9 million for schools acquired during and after the 1997 period.
Other net revenue increased 93%, from $2.6 million in the first six months of
1997 to $5.0 million in the first six months of 1998, due to an increase in
student population for schools owned during the 1997 period and the addition of
$1.9 million from schools acquired after the 1997 period.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 113%, from $6.4 million in the second quarter of
1997 to $13.6 million in the second quarter of 1998. Of this increase, $1.3
million was attributable to the increase in student population for schools owned
during the 1997 period and $5.9 million was attributable to the addition of
educational services and facilities for schools acquired during and after the
1997 period. Educational services and facilities expense increased 142%, from
$11.1 million in the first six months of 1997 to $26.8 million in the first six
months of 1998. Of this increase, $3.2 million was attributable to the increase
in student population for schools owned during the 1997 period and $12.5 million
was attributable to the addition of educational services and facilities for
schools acquired during and after the 1997 period.
General and Administrative. General and administrative expense increased
141%, from $6.2 million in the second quarter of 1997 to $15.0 million in the
second quarter of 1998. The increase was primarily attributable to $7.0 million
of expenses for schools acquired during and after the 1997 period, costs
totalling $1.0 million related to increased personnel at the corporate level to
enhance the Company's infrastructure and increased advertising and marketing
(including admissions) of $0.7 million for schools owned during the 1997 period.
The increase in advertising and marketing expenses reflected, in part, the fact
that the former owners of the acquired schools had reduced their expenditures in
these areas prior to their acquisition by the Company. General and
administrative expense increased 175%, from $10.9 million in the first six
months of 1997 to $30.1 million in the first six months of 1998. The increase
was primarily attributable to $15.0 million of expenses for schools acquired
during and after the 1997 period, costs totalling $2.1 million related to
increased personnel at the corporate level to enhance the Company's
infrastructure and increased advertising and marketing (including admissions) of
$1.8 million for schools owned during the 1997 period. The increase in
advertising and marketing expenses reflected, in part, the fact that the former
owners of the acquired schools had reduced their expenditures in these areas
prior to their acquisition by the Company.
Depreciation and Amortization. Depreciation and amortization expense
increased 118%, from $1.4 million in the second quarter of 1997 to $3.1 million
in the second quarter of 1998. The increase was due to increased depreciation
expense of $0.8 million for schools acquired during and after the 1997 period.
Amortization expense increased from $0.5 million in the second quarter of 1997
to $1.3 million in the second quarter of 1998, primarily due to additional
amortization of non-competition agreements and goodwill for the acquisition of
schools during and after the 1997 period. Depreciation and amortization expense
increased 190%, from $2.1 million in the first six months of 1997 to $6.1
million in the first six months of 1998. The increase was due to increased
capital expenditures for schools owned during the 1997 period and related
increased depreciation expense of $0.4 million in the first six months of 1998.
Additionally, depreciation expense increased $1.8 million due to the
depreciation expense for schools acquired during and after the 1997 period.
Amortization expense increased from $0.7 million in the first six months of 1997
to $2.5 million in the first six months of 1998, primarily due to additional
amortization of non-competition agreements and goodwill for the acquisition of
schools after the 1997 period.
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Compensation Expense Related to the Offering. Pursuant to certain amended
stock option agreements with two stockholders, compensation expense totalling
approximately $2.0 million was recognized upon consummation of the initial
public offering in 1998.
Interest Expense. Interest expense decreased 70% from $0.7 million in the
second quarter of 1997 to $0.2 million in the second quarter of 1998. The
decrease was primarily due to the decrease in borrowings required in 1998 as a
result of IPO proceeds. Interest expense decreased 25% from $1.0 million in the
first six months of 1997 to $0.7 million in the first six months of 1998. The
decrease was primarily due to interest expense on borrowings used to finance the
acquisition of schools during and after the 1997 period.
Provision (Benefit) for Income Taxes. The provision for income taxes
increased from a $0.4 million benefit in the second quarter of 1997 to a $0.2
million provision in the second quarter of 1998 as a result of changes in pretax
income (loss). The benefit for income taxes increased from a $0.2 million
provision in the first six months of 1997 to a $0.4 million benefit in the first
six months of 1998 as a result of changes in pretax income (loss).
Net Income (Loss) before Extraordinary Item. Net income (loss) before
extraordinary item increased to a net income of $0.2 million in the second
quarter of 1998 from a net loss of $0.5 million in the second quarter of 1997.
Net income (loss) before extraordinary item decreased to a net loss of $0.5
million in the first six months of 1998 from a net income of $0.3 million in the
first six months of 1997.
Extraordinary Item. During 1997, the Company recorded an extraordinary
expense of $0.4 million, net of tax, due to the early retirement of debt related
to a credit facility which was terminated and replaced by the Company's current
facility.
Net Income (Loss). Net income (loss) increased to a net income of $0.2
million in the second quarter of 1998 from a net loss of $0.9 million in the
second quarter of 1997. Net income (loss) decreased to a net loss of $0.5
million in the first six months of 1998 from a net loss of $0.1 million in the
first six months of 1997.
Net Income (Loss) Attributable to Common Stockholders. Net income (loss)
attributable to common stockholders increased from a net loss of $1.6 million in
the second quarter of 1997 to a net income of $0.2 million in the second quarter
of 1998. The primary reason for this increase was the accretion in the
redemption value of preferred stock and warrants that occurred in 1997. Net
income (loss) attributable to common stockholders decreased from a net loss of
$1.2 million in the first six months of 1997 to a net loss of $2.9 million in
the first six months of 1998. The primary reason for this increase was the
increased accretion in the redemption value of preferred stock and warrants as a
result of the Company's growth.
Liquidity and Capital Resources
On February 4, 1998, the Company sold 3,277,500 of its shares of common
stock at $16.00 per share pursuant to an initial public offering. The net
proceeds from the offering totalling $45.6 million were used to repay borrowings
of $41.5 million under the Credit Agreement and amounts owed to former owners of
acquired businesses of $4.1 million which were outstanding at that time. Prior
to the initial public offering, the Company financed its operating activities
through cash generated from operations. Acquisitions were financed through a
combination of additional equity investments and credit facilities. Net cash
provided by operating activities increased to $5.9 million in the first six
months of 1998 from
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net cash used of $2.2 million in the first six months of 1997, due primarily to
increases in depreciation and amortization and the result of the non-cash
compensation expense related to the offering.
Capital expenditures increased to $1.9 million in the first six months of
1998 from $0.6 million in the first six months of 1997. These increases were
primarily due to investments in capital equipment as a result of increasing
student population. Capital expenditures are expected to continue to increase as
new schools are acquired, student population increases, and the Company
continues to upgrade and expand current facilities and equipment. The Company
does not have any material commitments for capital expenditures for the
remainder of 1998.
The Company's net receivables as a percentage of net revenue decreased to
18% in 1998 from 47% in 1997. These changes were primarily due to student
receivables at acquired schools. Based upon past experience and judgment, the
Company establishes an allowance for doubtful accounts with respect to tuition
receivables. When a student withdraws, the receivable balance attributable to
such student is charged to this allowance for doubtful accounts. The Company's
historical bad debt expense as a percentage of revenue for the years ended
December 31, 1996 and 1997 was 2%.
On May 30, 1997, the Company entered into the Credit Agreement with LaSalle
National Bank and prepaid approximately $21.2 million of revolving credit notes
and term loans that were outstanding under its previous credit agreement. The
Credit Agreement was amended and syndicated on September 25, 1997. Pursuant to
the Credit Agreement, the Company can borrow $65 million under a revolving
credit facility and $15 million under a term loan, and obtain up to $30 million
in letters of credit. Outstanding letters of credit reduce the revolving credit
facility availability under the Credit Agreement. The Credit Agreement matures
on May 30, 2002; however, availability under the revolving credit facility is
reduced by $10 million on May 30, 2001. The term loan is payable in equal
quarterly installments of $0.75 million, commencing September 30, 1997. The
Company's borrowings under the Credit Agreement bear interest, payable
quarterly, at either (i) a base rate equal to the greater of the (a) bank's
prime rate plus .75% or (b) the federal funds rate plus .50%, or (ii) LIBOR plus
2.00%, at the election of the Company. Under the Credit Agreement, the Company
is required, among other things, to maintain certain financial ratios with
respect to debt to EBITDA, interest coverage and fixed coverage and to maintain
a specified level of net worth. The Company is also subject to restrictions on,
among other things, payment of dividends, disposition of assets and incurrence
of certain additional indebtedness. The Company has pledged the stock of its
subsidiaries as collateral for the repayment of obligations under the Credit
Facility. At August 12, 1998, the Company did not have any outstanding
borrowings under its Credit Facility. Additionally, the Company had
approximately $22.8 million of outstanding letters of credit as of such date.
After giving effect to the IPO and the repayment of the outstanding bank
debt through March 31, 1998, the interest rates applicable to the Credit
Agreement have been revised. Effective April 1, 1998, borrowings under the
Credit Agreement bear interest, payable quarterly, at either (i) a base rate
equal to the greater of the (a) bank's prime rate plus .50% or (b) the federal
funds rate plus .50%, or (ii) LIBOR plus 1.75%, at the election of the Company.
The DOE requires that Title IV Program funds collected by an institution
for unbilled tuition be kept in separate cash or cash equivalent accounts until
the students are billed for the portion of their program related to these Title
IV Program funds. In addition, all funds transferred to the Company through
electronic funds transfer programs are held in a separate cash account until
certain conditions are satisfied. As of June 30, 1998, the Company held nominal
amounts of such funds in separate accounts. The restrictions on any cash held in
these accounts have not significantly affected the Company's ability to fund
daily operations.
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The HEA and its implementing regulations require each higher education
institution to meet an acid test ratio (defined as the ratio of cash, cash
equivalents, restricted cash and current accounts receivable to total current
liabilities) of at least 1:1, calculated at the end of the institution's fiscal
year.
As of August 12, 1998, the Company's remaining credit availability under
the Credit Agreement was approximately $42.2 million. In discussions with the
Company, the DOE has agreed to consider financial information reflecting the
results of the Offering, as well as the 1997 audited financial statements in the
DOE's next review of the financial responsibility of the Company and its U.S.
institutions. The Company believes, based upon their 1997 audited financial
statements and the Company's post-Offering financial information, the Company
and each of its U.S. institutes continue to satisfy each of the DOE's standards
of financial responsibility. The Company is seeking the DOE's review of the
Company's and its U.S. institutions' audited 1997 financial statements and the
Company's post-Offering financial information on an expedited basis. To the
extent the letters of credit are reduced or eliminated, the Company will have
additional availability under the Credit Agreement. The Company believes that it
will have sufficient liquidity to increase the letters of credit should the DOE
so require. However, there can be no assurance that, if required, the Company
will be able to maintain or increase its letters of credit in the future. The
Company believes, based on its audited 1997 financial statements, that each of
its U.S. institutions satisfies each of the DOE's applicable standards of
financial responsibility and that the Company satisfies each of the DOE's
standards of financial responsibility, except for the tangible net worth ratio.
However, the Company believes that based upon the DOE's review of its audited
1997 financial statements and the Company's audited post-Offering balance sheet,
the Company will also satisfy the tangible net worth ratio.
New Accounting Standards
Recently, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 131. SFAS No. 131
requires that a public business enterprise report financial and descriptive
information about its reporting segments on the same basis that it uses
internally for evaluating segment performance and deciding how to allocate
resources to segments. The adoption of this Statement is not expected to have a
material effect on the Company's consolidated financial statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-Up
Activities." This SOP provides guidance on the financial reporting of start-up
costs (which include organization costs). It requires that all nongovernmental
entities expense the costs of start-up activities as those costs are incurred.
Nongovernmental entities are required to adopt this SOP by no later than January
1, 1999. Earlier adoption is permitted. The Company expenses all non-
organizational start-up costs as incurred. At December 31, 1997, the Company had
unamortized organizational costs of approximately $354,000. The Company
anticipates adopting the SOP in the fourth quarter of 1998.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains certain statements which reflect the Company's
expectations regarding its future growth, results of operation, performance and
business prospects and opportunities. Wherever possible, words such as
"anticipate," "believe," "plan," "expect" and similar expressions have been used
to identify these "forward-looking" statements. These statements reflect the
Company's current beliefs and are based on information currently available to
the Company. Accordingly, these statements are subject to risks and
uncertainties which could cause the Company's actual growth, results,
performance and business prospects and opportunities to differ from those
expressed in, or implied by, these statements. These risks and uncertainties
include implementation of the Company's operating and growth strategy, risks
inherent in operating private for-profit postsecondary education institutions,
risks associated
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with general economic and business conditions, charges and costs related to
acquisitions, and the Company's ability to: successfully integrate its acquired
institutions and continue its acquisition strategy, attract and retain students
at its institutions, meet regulatory and accrediting agency requirements,
compete with enhanced competition and new competition in the education industry,
and attract and retain key employees and faculty. The Company is not obligated
to update or revise these forward-looking statements to reflect new events or
circumstances.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 11 - Statement Regarding Computation of Net Income (Loss)
Per Share.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
second quarter of 1998.
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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: August 13, 1998 By: /s/ JOHN M. LARSON
--------------------------------------------
John M. Larson
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 1998 By: /s/ WILLIAM A. KLETTKE
--------------------------------------------
William A. Klettke
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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