SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 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 November 12, 1998, 7,150,896 shares of the registrant's Common Stock,
par value $.01, were outstanding.
CAREER EDUCATION CORPORATION
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 (unaudited)........................................3
Condensed Consolidated Statements of Operations for the three and
nine months ended September 30, 1998 (unaudited) and 1997 (unaudited)....4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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.......................................10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................19
SIGNATURES..........................................................................20
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 19,739 $ 18,906
Receivables, net.................................................... 14,427 12,158
Inventories......................................................... 658 634
Prepaid expenses and other current assets........................... 3,728 4,498
Deferred income tax assets.......................................... 1,208 406
------------------ -----------------
Total current assets.............................................. 39,760 36,602
PROPERTY AND EQUIPMENT, net of accumulated depreciation
and amortization.................................................... 45,086 45,555
INTANGIBLE ASSETS, net................................................ 44,169 33,579
OTHER ASSETS.......................................................... 875 1,881
------------------ -----------------
TOTAL ASSETS.......................................................... $ 129,890 $ 117,617
================== =================
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt................................ $ 652 $ 3,888
Accounts payable.................................................... 4,549 3,580
Accrued expenses and other current liabilities...................... 7,557 7,852
Deferred tuition revenue............................................ 8,263 7,476
------------------ -----------------
Total current liabilities......................................... 21,021 22,796
------------------ -----------------
NON-CURRENT LIABILITIES:
Long-term debt, net of current maturities shown above............... 27,279 60,147
Other long-term liabilities......................................... 1,027 703
Deferred income tax liabilities..................................... 587 1,215
------------------ -----------------
Total non-current liabilities..................................... 28,893 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;
7,144,806 shares issued and outstanding at September 30, 1998..... 71 --
Class A, B, C, D and E Common stock, $0.01 par value; no
shares outstanding at September 30, 1998; total of
768,804 issued and outstanding at December 31, 1997............... -- 9
Warrants............................................................ -- 4,777
Additional paid-in capital.......................................... 95,084 71
Accumulated other comprehensive income.............................. (823) (297)
Accumulated deficit................................................. (14,356) (11,964)
------------------ -----------------
Total stockholders' investment.................................... 79,976 (7,404)
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT........................ $ 129,890 $ 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
Nine
Months
Ended
Three Months Ended Nine Months Ended September
September 30, September 30, 30,
------------------ ------------------ --------
1998 1997 1998 1997 1997
-------- -------- -------- -------- --------
REVENUE:
Tuition and registration fees, net..... $ 31,715 $ 22,542 $ 91,659 $ 45,615 $ 68,172
Other, net............................. 3,279 2,573 8,257 5,152 6,464
-------- -------- -------- -------- --------
Total net revenue.................... 34,994 25,115 99,916 50,767 74,636
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Educational services and facilities.... 14,584 11,179 41,419 22,269 29,849
General and administrative............. 16,028 12,910 46,161 23,852 37,622
Depreciation and amortization.......... 3,203 2,891 9,328 5,000 8,199
Compensation expense related to the
offering.............................. -- -- 1,961 -- --
-------- -------- -------- -------- --------
Total operating expenses............. 33,815 26,980 98,869 51,121 75,670
-------- -------- -------- -------- --------
Income (loss) from operations.......... 1,179 (1,865) 1,047 (354) (1,034)
INTEREST EXPENSE, net.................... (247) (1,061) (987) (2,046) (1,326)
-------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes and
extraordinary item ................... 932 (2,926) 60 (2,400) (2,360)
PROVISION (BENEFIT) FOR
INCOME TAXES ........................... 391 (1,218) 25 (1,008) (991)
-------- -------- -------- -------- --------
Net income (loss) before extraordinary
item................................. 541 (1,708) 35 (1,392) (1,369)
Extraordinary loss on early
extinguishment of debt................. -- -- -- (418) (418)
-------- -------- -------- -------- --------
NET INCOME (LOSS)........................ $ 541 $ (1,708) $ 35 $ (1,810) $ (1,787)
======== ======== ======== ======== ========
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net income (loss) as reported.......... $ 541 $ (1,708) $ 35 $ (1,810) $ (1,787)
Dividends on preferred stock........... -- (705) (274) (1,444) --
Accretion to redemption value of
preferred stock and warrants.......... -- (406) (2,153) (727) (29)
-------- -------- -------- -------- --------
Net income (loss) attributable to
common stockholders................... $ 541 $ (2,819) $ (2,392) $ (3,981) $ (1,816)
======== ======== ======== ======== ========
NET INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic.................................. $ 0.08 $ (3.67) $ (0.38) $ (5.18) $ (0.68)
Diluted................................ $ 0.07 $ (3.67) $ (0.38) $ (5.18) $ (0.68)
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PRO
FORMA
Nine
Months
Ended
Three Months Ended Nine Months Ended September
September 30, September 30, 30,
------------------ ------------------ ---------
1998 1997 1998 1997 1997
-------- -------- -------- -------- ---------
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Shares used in basic................... 7,142 768 6,309 768 2,686
Effect of dilutive employee stock
options............................... 196 -- -- -- --
-------- -------- -------- -------- ---------
Shares used in diluted................. 7,338 768 6,309 768 2,686
======== ======== ======== ======== =========
PRO FORMA DATA:
Net income (loss) attributable to
common stockholders................... $ 541 $ (1,737) $ (63) $ (1,839) $ (1,816)
======== ======== ======== ======== =========
Diluted net income (loss) per share
attributable to common stockholders... $ 0.07 $ (0.46) $ (0.01) $ (0.66) $ (0.37)
======== ======== ======== ======== =========
Weighted average shares outstanding
used in diluted....................... 7,338 3,766 6,699 2,788 4,893
======== ======== ======== ======== =========
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CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
1998 1997
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period......................................... $ 35 $ (1,810)
Adjustments to reconcile net income (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........................... 9,328 5,083
Compensation expense related to the offering........................... 1,961 --
Gain on sale of property and equipment................................. (14) --
Deferred income taxes.................................................. (918) (1,008)
Changes in operating assets and liabilities, net of acquisitions....... (540) (7,841)
--------- ----------
Net cash provided by (used in) operating activities................ 9,852 (4,745)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash....................................... (4,964) (36,054)
Acquisition and organizational costs..................................... (244) (1,450)
Purchase of property and equipment, net.................................. (3,449) (2,077)
Proceeds on sale of property and equipment............................... 332 --
Other assets............................................................. (56) (6)
--------- ----------
Net cash used in investing activities.............................. (8,381) (39,587)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering.................................... 52,440 --
Issuance of common stock................................................. 180 30
Issuance of redeemable preferred stock................................... -- 17,782
Issuance of warrants..................................................... -- 4,788
Dividends paid on preferred stock........................................ (47) (372)
Equity issuance costs.................................................... (6,821) (225)
Debt financing costs..................................................... (47) (965)
Book overdraft........................................................... -- (683)
Payments of amounts due and notes payable to former owners of acquired
businesses.............................................................. (4,050) --
Payments of long-term debt............................................... (4,021) (276)
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...... (24,485) 25,885
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................ (351) 41,975
--------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS.......................................................... (287) 7
--------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 833 (2,350)
CASH AND CASH EQUIVALENTS, beginning of period............................. 18,906 7,798
--------- ----------
CASH AND CASH EQUIVALENTS, end of period................................... $ 19,739 $ 5,448
========= ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and warrants............ $ (2,153) $ (727)
Dividends on preferred stock added to liquidation value.................. (227) (1,072)
========= ==========
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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 nine months ended
September 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. 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, completed a 9.376-for-1 stock
split and converted all outstanding shares of common stock 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 nine months ended September 30, 1997 reflects the acquisitions of SCT,
-7-
Gibbs, IAMD-US and IAMD-Canada and gives effect to the IPO as if they had
occurred on January 1, 1997.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
START-UP COSTS
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.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which is effective for
the fiscal years beginning after December 15, 1997. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company is
evaluating the disclosure requirements of SFAS 131 and believes that its
adoption will not have a material impact on the Company's future reported
results.
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
$1.0 million. The acquisition is accounted for as a purchase and the resulting
purchase price in excess of the fair value of assets acquired and liabilities
assumed is approximately $1.3 million.
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 $8.0
million.
-8-
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 income for the nine months ended
September 30, 1998 $ 35 --
Other Comprehensive Income (Loss) -
Foreign currency translation adjustment (526) (526)
Comprehensive loss for the nine months --------------------
ended September 30, 1998 $ (491)
==================== --------------------------
Balance, September 30, 1998 $ (823)
==========================
The accumulated other comprehensive income (loss) balance as of January 1, 1998
has been restated in connection with the Company's adoption of SFAS No. 130.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of 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 13,600 students enrolled as of
September 30, 1998. CEC operates 10 schools, with 20 campuses located in 13
states and two Canadian provinces. Many of 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 depreciation and amortization expense, because a significant portion of
the purchase price of a school acquired by CEC is generally allocated to fixed
assets, 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.
-10-
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.
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.
-11-
On June 30, 1997, the Company acquired all of the outstanding capital stock
of IAMD-U.S. for an initial purchase price of $3.0 million, which amount was
further increased by $4.7 million during the third quarter of 1998, based on the
results of IAMD-U.S. operations and the calculation of the final purchase price
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. 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") for a purchase
price of approximately $1.0 million. The acquisition of SCSCA was accounted for
as a purchase.
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.
-12-
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the period indicated.
Nine Months
Three Months Ended Ended
September 30, September 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
Revenue:
Tuition and registration, net............................ 90.6% 89.8% 91.7% 89.9%
Other, net............................................... 9.4% 10.2% 8.3% 10.1%
------- ------- ------- -------
Total net revenue...................................... 100.0% 100.0% 100.0% 100.0%
------- ------- ------- -------
Operating expenses:
Educational services and facilities...................... 41.7% 44.5% 41.5% 43.9%
General and administrative............................... 45.8% 51.4% 46.2% 47.0%
Depreciation and amortization............................ 9.1% 11.5% 9.3% 9.8%
Compensation expense related to the offering............. 0.0% 0.0% 2.0% 0.0%
------- ------- ------- -------
Total operating expenses............................... 96.6% 107.4% 99.0% 100.7%
------- ------- ------- -------
Income (loss) from operations.......................... 3.4% -7.4% 1.0% -0.7%
Interest expense, net...................................... -0.7% -4.3% -0.9% -4.0%
------- ------- ------- -------
Income (loss) before provision (benefit) for income taxes
and extraordinary item................................. 2.7% -11.7% 0.1% -4.7%
Provision (benefit) for income taxes....................... 1.2% -4.9% 0.1% -2.0%
Net income (loss) before extraordinary item................ 1.5% -6.8% 0.0% -2.7%
Extraordinary loss on early extinguishment of debt......... 0.0% 0.0% 0.0% -0.9%
------- ------- ------- -------
Net income (loss).......................................... 1.5% -6.8% 0.0% -3.6%
======= ======= ======= =======
Net income (loss) attributable to common stockholders...... 1.5% -11.2% -2.4% -7.8%
======= ======= ======= =======
Revenue. Net tuition revenue increased 41% from $22.5 million in the
third quarter of 1997 to $31.7 million in the third quarter of 1998, due to an
approximate 25.9% 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. Other net revenue increased 27%,
from $2.6 million in the third quarter of 1997 to $3.3 million in the third
quarter of 1998, due to an increase in student population for schools owned
during the 1997 period. Net tuition revenue increased 101% from $45.6 million in
the first nine months of 1997 to $91.7 million in the first nine months of 1998,
due to an approximately 21.2% 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 $48.4 million for schools acquired during and after the 1997
period. Other net revenue increased 60%, from $5.2 million in the first nine
months of 1997 to $8.3 million in the first nine months of 1998, due to an
increase in student population for schools owned during the 1997 period.
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Educational Services and Facilities Expense. Educational services and
facilities expense increased 30%, from $11.2 million in the third quarter of
1997 to $14.6 million in the third quarter of 1998. Of this increase, $1.5
million was attributable to the increase in student population for schools owned
during the 1997 period and $1.9 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 86%, from
$22.3 million in the first nine months of 1997 to $41.4 million in the first
nine months of 1998. Of this increase, $4.7 million was attributable to the
increase in student population for schools owned during the 1997 period and
$14.4 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
24%, from $12.9 million in the third quarter of 1997 to $16.0 million in the
third quarter of 1998. The increase was primarily attributable to $1.3 million
of expenses for schools acquired during and after the 1997 period and increased
advertising and marketing (including admissions) of $0.8 million for schools
owned during the 1997 period. General and administrative expense increased 94%,
from $23.9 million in the first nine months of 1997 to $46.2 million in the
first nine months of 1998. The increase was primarily attributable to $16.3
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 $2.6 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 11%, from $2.9 million in the third quarter of 1997 to $3.2 million in
the third quarter of 1998. The increase was due to increased depreciation
expense of $0.3 million for schools acquired during and after the 1997 period.
Amortization expense did not change from $1.3 million in the third quarter of
1997 to $1.3 million in the third quarter of 1998. Depreciation and
amortization expense increased 87%, from $5.0 million in the first nine months
of 1997 to $9.3 million in the first nine 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 nine months
of 1998. Additionally, depreciation expense increased $2.1 million due to the
depreciation expense for schools acquired during and after the 1997 period.
Amortization expense increased from $2.0 million in the first nine months of
1997 to $3.8 million in the first nine months of 1998, primarily due to
additional amortization of non-competition agreements and goodwill for the
acquisition of schools after the 1997 period.
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 77% from $1.1 million in the
third quarter of 1997 to $0.2 million in the third 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 52% from $2.0 million in the first
nine months of 1997 to $1.0 million in the first nine months of 1998. The
decrease
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was primarily due to interest expense on borrowings used to finance the
acquisition of schools during and after the 1997 period and the result of IPO
proceeds during the 1998 period.
Provision (Benefit) for Income Taxes. The provision (benefit) for income
taxes increased from a $1.2 million benefit in the third quarter of 1997 to a
$0.4 million provision in the third quarter of 1998 as a result of changes in
pretax income (loss). The provision (benefit) for income taxes increased from a
$1.0 million benefit in the first nine months of 1997 to a $0.03 million
provision in the first nine 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 $0.5 million in the third
quarter of 1998 from a net loss of $1.7 million in the third quarter of 1997.
Net income (loss) before extraordinary item increased to a net income of $0.04
million in the first nine months of 1998 from a net loss of $1.4 million in the
first nine 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 $0.5
million in the third quarter of 1998 from a net loss of $1.7 million in the
third quarter of 1997. Net income (loss) increased to a net income of $0.04
million in the first nine months of 1998 from a net loss of $1.8 million in the
first nine months of 1997.
Net Income (Loss) Attributable to Common Stockholders. Net income (loss)
attributable to common stockholders increased from a net loss of $2.8 million in
the third quarter of 1997 to a net income of $0.5 million in the third quarter
of 1998. The primary reason for this increase was the dividends on preferred
stock and accretion in the redemption value of preferred stock and warrants that
occurred in 1997. Net income (loss) attributable to common stockholders
increased from a net loss of $4.0 million in the first nine months of 1997 to a
net loss of $2.4 million in the first nine 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 $9.9 million in the first nine
months of 1998 from net cash used of $4.7 million in the first nine months of
1997, due primarily to increases in depreciation and amortization and the result
of the non-cash compensation expense related to the offering.
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Capital expenditures increased to $3.4 million in the first nine months of
1998 from $2.1 million in the first nine 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
14% in 1998 from 26% 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. The Credit
Agreement was then amended and restated on October 26, 1998 (the "Amended and
Restated Credit Agreement") to reduce the borrowing amount and to provide for
Canadian Dollar loans. Pursuant to the Amended and Restated Credit Agreement,
the Company can borrow $60 million under a revolving credit facility ($10
million of which may be drawn in Canadian Dollars) and obtain up to $35 million
in letters of credit. Outstanding letters of credit reduce the revolving credit
facility availability under the Amended and Restated Credit Agreement. The
Amended and Restated Credit Agreement matures on October 26, 2003. Currently,
the Company's borrowings under the Amended and Restated Credit Agreement bear
interest, payable quarterly, at either (i) 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 the leverage ratio of the Company or (ii) LIBOR, plus a specified number of
basis points (ranging from 75 to 200) based upon the leverage ratio of the
Company. Under the Amended and Restated Credit Agreement, the Company is
required, among other things, to maintain certain financial ratios with respect
to debt to EBITDA and interest coverage and to maintain a specified level of net
worth. The Company also is 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
November 12, 1998, the Company had approximately $27.6 million of outstanding
letters of credit, but it did not have any outstanding borrowings under its
Credit Facility. As a result, at November 12, 1998, the Company's remaining
credit availability under the Credit Agreement was approximately $32.4 million.
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 September 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.
YEAR 2000 COMPLIANCE
The Year 2000 Issue. In the next year and a half, most large companies
will face a potentially serious problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the Year 2000. This problem could force information systems
to either shut down or provide incorrect data and information. The Company
began the process of identifying the necessary changes to its computer programs
and hardware as well as assessing the progress of its significant vendors in
their remediation efforts in late 1997. The discussion below details the
Company's efforts to ensure Year 2000 compliance.
The Company's State of Readiness. The Company has identified and evaluated
the readiness of its internal and third party informational and non-
informational technology systems, which, if not Year 2000 compliant, could have
a direct major impact to the Company. The Company's evaluation has identified
the following areas of concern: (i) the Company's accounting and financial
reporting system, (ii) the Company's student database system, (iii) the systems
of third party vendors which process student financial aid applications and
loans for the Company, and (iv) the DOE's systems for processing and disbursing
student financial aid.
Based on its assessment and vendors' representations, the Company believes
that the systems of its significant third party vendors (financial and
accounting systems, including financial aid) will be Year 2000 complaint by mid-
year 1999.
The Company is highly dependent on student funding provided through Title
IV programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the DOE's computer systems. According to the DOE, their systems should be
brought into certifiable compliance in early 1999.
The Risks of the Company's Year 2000 Issues. The Company believes the
greatest Year 2000 compliance risk, in terms of magnitude, is that the DOE may
fail to complete its remediation efforts in a timely manner and Title IV funding
for its students could be interrupted for a period of time. Other than public
comments provided by the DOE, the Company is unable to predict the likelihood of
this risk occurring.
Contingency Plans. At this time, the Company fully expects to be Year 2000
compliant and is satisfied that its significant vendors are or will be
compliant. While the Company fully expects all of its informational and non-
informational technology systems to be complaint by the Year 2000, it is
beginning to develop contingency plans in the event one or more of its
identified areas of concern are not complaint. The Company does not believe that
the total costs of such Year 2000 compliance activities will be material.
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NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"), which is effective for
the fiscal years beginning after December 15, 1997. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company is
evaluating the disclosure requirements of SFAS 131 and believes that its
adoption will not have a material impact on the Company's future reported
results.
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 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 10.1 - First Amendment to the Career Education
Corporation 1998 Employee Stock Purchase Plan
dated April 1, 1998.
Exhibit 10.2 - First Amendment to the Career Education
Corporation 1998 Employee Incentive Compensation
Plan dated July 29, 1998.
Exhibit 11 - Statement Regarding Computation of Net Income
(Loss) Per Share.
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on August 14, 1998
(as amended by a Form 8-K/A filed September 30, 1998) to report
the Company's consummation of its acquisition of Scottsdale
Culinary Institute, Inc. (Items 2 and 7 of Form 8-K).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Career Education Corporation
Date: November 12, 1998 By: /s/ JOHN M. LARSON
--------------------------------
John M. Larson
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 12, 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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