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: March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From __________ to __________.
Commission File Number: 0-23245
Career Education Corporation
(Exact name of registrant as specified in its charter)
Delaware 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 May 6, 1999, 7,816,342 shares of the registrant's
Common Stock, par value $.01, were outstanding.
CAREER EDUCATION CORPORATION
QUARTER ENDED MARCH 31, 1999
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999
(unaudited) and December 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 (unaudited) and 1998 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 (unaudited) and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
March 31, 1999 December 31, 1998
ASSETS
CURRENT ASSETS:
Cash $ 31,272 $ 23,548
Receivables, net 10,486 12,407
Inventories, prepaid expenses and other current assets 7,195 4,973
Total current assets 48,953 40,928
PROPERTY AND EQUIPMENT, net 50,150 46,403
INTANGIBLE ASSETS, net 49,022 42,645
DEFERRED INCOME TAX ASSETS 0 865
OTHER ASSETS 3,550 2,046
TOTAL ASSETS $ 151,675 $ 132,887
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt $ 278 $ 317
Accounts payable 6,436 2,425
Accrued expenses and other current liabilities 9,559 12,033
Deferred tuition revenue 12,110 10,159
Total current liabilities 28,383 24,934
NON-CURRENT LIABILITIES:
Long-term debt, net of current maturities 19,245 22,300
Other long-term liabilities 1,323 1,017
Total non-current liabilities 20,568 23,317
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Common stock, $.01 par value; 50,000,000 shares
authorized; 7,809,016 and 7,152,896 shares
issued and outstanding at March 31, 1999 and
December 31, 1998, respectively; 78 72
Additional paid-in capital 111,919 95,481
Accumulated other comprehensive income (717) (822)
Accumulated deficit (8,556) (10,095)
Total stockholders' investment 102,724 84,636
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT $ 151,675 $ 132,887
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
1999 1998
REVENUE:
Tuition and registration fees, net $ 42,121 $ 30,188
Other, net 3,314 2,409
Total net revenue 45,435 32,597
OPERATING EXPENSES:
Educational services and facilities 18,521 13,174
General and administrative 20,928 15,098
Depreciation and amortization 3,074 3,020
Compensation expense related to the initial public offering 0 1,961
Total operating expenses 42,523 33,253
Income (loss) from operations 2,912 (656)
INTEREST EXPENSE, net 212 544
Income (loss) before provision (benefit) for income taxes and
cumulative effect of change in accounting principle 2,700 (1,200)
PROVISION (BENEFIT) FOR INCOME TAXES 1,161 (504)
Income (loss) before cumulative effect of change in accounting
principle 1,539 (696)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of taxes of $149 0 (205)
NET INCOME (LOSS) $ 1,539 $ (901)
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Continued
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended
March 31,
1999 1998
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Net income (loss) as reported $ 1,539 $ (901)
Dividends on preferred stock 0 (274)
Accretion to redemption value of preferred stock and warrants 0 (2,153)
Net income (loss) attributable to common stockholders $ 1,539 $ (3,328)
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS:
Basic $ 0.21 $ (0.72)
Diluted $ 0.20 $ (0.72)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares used in basic 7,235 4,638
Dilutive effect of employee stock options 235 0
Dilutive effect of future issuable shares 82 0
Shares used in diluted 7,552 4,638
PRO FORMA DATA:
Net income (loss) attributable to common stockholders $ (999)
Diluted net income (loss) per share attributable to common $
stockholders $ (0.17)
Weighted average shares outstanding used in dulited 5,820
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
Three Months Ended
March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the period $ 1,539 $ (901)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,074 3,020
Compensation expense related to the initial public offering 0 1,961
Deferred income taxes 958 (961)
Cumulative effect of change in accounting principle 0 205
Changes in operating assets and liabilities, net of acquisitions 2,039 618
Net cash provided by operating activities 7,610 3,942
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash (13,469) (850)
Acquisition costs (286) (55)
Purchase of property and equipment, net (4,413) (921)
Other assets 375 3
Net cash used in investing activities (17,793) (1,823)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 15,548 52,440
Dividends paid on preferred stock 0 (47)
Equity issuance costs (1,595) (6,821)
Payments of amounts due and notes payable to former owners of acquired
businesses, capital lease obligations and other long-term debt (66) (7,587)
Net borrowings (payments) on revolving loans under Credit Agreement 4,000 (30,235)
Payments on term loans under Credit Agreement 0 (13,500)
Net cash provided by (used in) financing activities 17,887 (5,750)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 20 (101)
NET INCREASE (DECREASE) IN CASH 7,724 (3,732)
CASH, beginning of period 23,548 18,906
CASH, end of period $ 31,272 $ 15,174
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock and warrants $ 0 $ (2,153)
Dividends on preferred stock added to liquidation value $ 0 $ (227)
Issued 50,601 shares of common stock under the Le Cordon Bleu
trademark agreement $ 2,000 $ 0
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 months ended March 31, 1999 are
not necessarily indicative of the results that may be expected
for the fiscal year ending December 31, 1999. The condensed
consolidated balance sheet at December 31, 1998 has been derived
from the audited consolidated financial statements at that date,
but does not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. For additional information, refer to the
consolidated financial statements and footnotes for the year
ended December 31, 1998 that are included in our annual report on
Form 10-K.
Note 2 - Public Offering of Common Stock
On March 17, 1999, we sold 530,000 shares of common stock at
$29.00 per share pursuant to a public offering. The net proceeds
to us from the sale of the shares of common stock, after
deducting the discounts, commissions and estimated offering
expenses payable by us, were approximately $13.8 million. The net
proceeds from the offering were used for general corporate
purposes.
Note 3 - Business Acquisitions
Harrington Institute of Interior Design, Inc.
On January 4, 1999, we acquired all of the outstanding
shares of capital stock of Harringtion Institute of Interior
Design, Inc. for approximately $3.5 million. The acquisition was
accounted for as a purchase and the purchase price exceeded the
fair value of assets acquired and liabilities assumed, resulting
in goodwill of approximately $2.8 million.
McIntosh College, Inc.
On March 9, 1999, we acquired certain assets and assumed
certain liabilities of McIntosh College, Inc. The purchase price
was approximately $5.0 million, subject to adjustment. The
acquisition was accounted for as a purchase and the purchase
price exceeded the fair value of assets acquired and liabilities
assumed, resulting in goodwill of approximately $4.6 million.
Briarcliffe College, Inc.
On April 1, 1999, we acquired certain assets and assumed
certain liabilities of Briarcliffe College, Inc. The purchase
price was approximately $20.0 million, subject to adjustment. The
acquisition will be accounted for as a purchase, with the excess
of the purchase price over the fair value of assets acquired and
liabilities assumed being recorded as goodwill.
Note 4 - Comprehensive Income
The disclosure of comprehensive income and accumulated other
comprehensive income, which encompasses net income and foreign
currency translation adjustments, is as follows:
Accumulated Other
Comprehensive Loss -
Foreign Currency
Comprehensive Income Translation Adjustment
Balance December 31, 1998 $ (822)
Net income for the three months ended
March 31, 1999 $ 1,539
Other Comprehensive Income -
Foreign currency translation adjustment 105 105
Comprehensive income for the three months
ended March 31, 1999 $ 1,644
Balance, March 31, 1999 $ (717)
Note 5 - Start-Up Costs
Effective January 1, 1998 we adopted the American Institute
of Certified Public Accountants Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities," which requires
all non-governmental entities to expense the costs of start-up
activities as those costs are incurred. We have restated our
financial statements for the quarter ended March 31, 1998 to
reflect this change.
Note 6 - Debt
On March 31, 1999, we increased our line of credit from
$60.0 million to $90.0 million. As of March 31, 1999, we had
approximately $15.3 million of borrowings outstanding under our
Credit Facility. Additionally, we had approximately $18.1
million of outstanding letters of credit as of such date.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The discussion below contains certain forward-looking
statements (as such term is defined in Section 21E of the
Securities Exchange Act of 1934) that are based on the beliefs of
our management, as well as assumptions made by, and information
currently available to, our management. Our actual growth,
results, performance and business prospects and opportunities in
1999 and beyond could differ materially from those expressed in,
or implied by, any such forward-looking statements. See "Special
Note Regarding Forward-Looking Statements" on page 15 for a
discussion of risks and uncertainties that could cause or
contribute to such material differences.
The following discussion and analysis should be read in
conjunction with the Condensed Consolidated Financial Statements
and attached Notes appearing elsewhere in this document.
Background and Overview
We are a provider of private, for-profit postsecondary
education in North America, with approximately 15,300 students
enrolled as of March 31, 1999. We have 24 campuses located in 14
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 our core curricula of:
- information technology
- visual communication and design technologies
- business studies
- culinary arts
We have experienced significant growth both internally and
through acquisitions. We have invested significant amounts of
capital in the hiring of additional personnel and increased
marketing and capital improvements at each of the schools we have
acquired. The increased costs of personnel and marketing are
expensed as incurred and are reflected in general and
administrative expenses. Additional depreciation and
amortization is reflected as a result of capital improvements, as
well as, added goodwill and covenants-not-to-compete from our new
acquisitions.
We believe that EBITDA, while not a substitute for GAAP
measures of operating results, is an important measure of our
financial performance and that of our schools. Our year-to-date
EBITDA as of March 31, 1999, was $6.0 million compared to $2.4
million for the comparable period in 1998. However, 1998 includes
a before tax non-cash compensation charge of $1.9 million.
Excluding this charge, first quarter 1998 EBITDA would have been
$4.3 million. Our management believes that EBITDA is particularly
meaningful due principally to the role acquisitions have played
in our development. Our rapid growth through acquisitions has
resulted in significant non-cash depreciation and amortization
expense, because a significant portion of the purchase price of a
school acquired by us is generally allocated to fixed assets,
goodwill and other intangible assets. As a result of our ongoing
acquisition strategy, non-cash amortization expense may continue
to be substantial.
Our principal source of revenue is tuition collected from
our students. The academic year is at least 30 weeks in length,
but varies both by individual school and program of study. The
academic year is divided by term, which is determined by start
dates, which vary by school and program. Payment of each term's
tuition may be made by full cash payment, financial aid and/or an
installment payment plan. If a student withdraws from school
prior to the completion of the term, we refund 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.
Our campuses charge tuition at varying amounts, depending
not only on the particular school, but also upon the type of
program and the specific curriculum. Each of our 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.
Educational services and facilities expense includes costs
directly attributable to the educational activity of our schools,
including salaries and benefits of faculty, academic
administrators and student support personnel. Educational
services and facilities expense also includes costs of
educational supplies and facilities (including rents on school
leases), 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 our corporate offices.
General and administrative expense includes salaries and
benefits of personnel in recruitment, admissions, accounting,
personnel, compliance, corporate and school administration.
Costs of promotion and development, advertising and production of
marketing materials, and occupancy of the corporate offices are
also included in this expense category.
Depreciation and amortization includes costs associated with
the depreciation of purchased computer laboratories, equipment,
furniture and fixtures, courseware, owned facilities, capitalized
equipment leases and amortization of intangible assets, primarily
goodwill and non-competition agreements with previous owners of
our schools.
Acquisitions
On January 4, 1999, we acquired all of the outstanding
capital stock of Harringtion Institute of Interior Design, Inc.
for a purchase price of approximately $3.5 million.
On March 9, 1999, we acquired certain assets and assumed
certain liabilities of McIntosh College, Inc. The purchase price
was approximately $5.0 million, subject to adjustment.
On April 1, 1999, we acquired certain assets and assumed
certain liabilities of Briarcliffe College, Inc. The purchase
price was approximately $20.0 million, subject to adjustment.
Results of Operations
The following table summarizes our operating results as a
percentage of net revenue for the period indicated.
Three Months Ended
March 31,
1999 1998
REVENUE:
Tuition and registration fees, net 92.7 % 92.6 %
Other, net 7.3 7.4
Total net revenue 100.0 100.0
OPERATING EXPENSES:
Educational services and facilities 40.8 40.4
General and administrative 46.0 46.3
Depreciation and amortization 6.8 9.3
Compensation expense related to the initial public offering 0.0 6.0
Total operating expenses 93.6 102.0
Income (loss) from operations 6.4 (2.0)
INTEREST EXPENSE, net 0.5 1.7
Income (loss) before provision (benefit) for income taxes
and cumulative effect of change in accounting principle 5.9 (3.7)
PROVISION (BENEFIT) FOR INCOME TAXES 2.5 (1.6)
Income (loss) before cumulative effect of change in
accounting principle 3.4 (2.1)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net 0 (0.7)
NET INCOME (LOSS) 3.4 (2.8)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS: 3.4 % (10.2) %
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Revenue. Net tuition and registration fee revenue for the
first quarter of 1999 increased 39.5% to $42.1 million compared
to the first quarter of 1998. On a same school basis, this
increase would have been 26.9% and was due to an increase in
student population of 17.5% and tuition increases effective in
1998 and 1999. Other net revenue for the first quarter increased
37.6% compared to the first quarter of 1998. On a same school
basis, this increase would have been 22.0% and was also due to an
increase in student population.
Educational Services and Facilities. Educational services
and facilities expense for the first quarter of 1999 increased
40.6% to $18.5 million compared to the first quarter of 1998. On
a same school basis, this increase would have been 26.8% and was
attributable to the increase in student population.
General and Administrative. General and administrative
expense for the first quarter of 1999 increased 38.6% to $20.9
million compared to the first quarter of 1998. On a same school
basis, this increase would have been 21.8% and was primarily due
to increased advertising and marketing (including admissions) of
$1.8 million for our schools owned prior to the 1998 period and
infrastructure enhancements at the corporate level totaling $1.3
million. The increase in advertising and marketing expenses was
partly due to the former owners of certain schools reducing their
expenditures in these areas prior to our acquisition of the
schools.
Depreciation and Amortization. Depreciation and amortization
expense for the first quarter of 1999 increased 1.8% to $3.1
million compared to the first quarter of 1998.
Compensation Expense Related to the Initial Public Offering.
Pursuant to amended stock option agreements with two
stockholders, compensation expense totaling approximately $2.0
million was recognized upon consummation of our initial public
offering in February 1998.
Interest Expense. Interest expense for the first quarter of
1999 decreased 61.0% to $0.2 million compared to the first
quarter of 1998. The decrease was primarily due to a reduction of
indebtedness resulting from the application of the net proceeds
of our initial public offering.
Provision (Benefit) for Income Taxes. The provision
(benefit) for income taxes increased from a $0.5 million benefit
in the first quarter of 1998 to a $1.2 million provision in the
first quarter of 1999, as a result of changes in pretax income
(loss).
Cumulative Effect of Change in Accounting Principle. In
January 1998, we adopted Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities," which resulted in a net of
tax charge of $0.2 million.
Net Income (Loss). Net income increased to $1.5 million in
the first quarter of 1999 from a net loss of $0.9 million in the
first quarter of 1998, due to the reasons discussed above.
Net Income (Loss) Attributable to Common Stockholders. Net
income attributable to common stockholders increased to $1.5
million in the first quarter of 1999 from a net loss of $3.3
million in the first quarter of 1998. The increase was due to
decreases in dividends on preferred stock and accretion to
redemption value of preferred stock and warrants in connection
with our initial public offering, conversion of preferred stock
into common stock and exercise of warrants.
Liquidity and Capital Resources
On March 17, 1999, we sold 530,000 shares of common stock at
$29.00 per share pursuant to a public offering. The net proceeds
to us from the sale of the shares of common stock, after
deducting the discounts, commissions and estimated offering
expenses payable by us, were approximately $13.8 million. The net
proceeds from the offering were used for general corporate
purposes. Net cash provided by operating activities also
increased to $7.6 million in the first three months of 1999 from
$3.9 million in the first three months of 1998, due primarily to
increases in net income and operating assets and liabilities.
Capital expenditures increased to $4.4 million in the first
three months of 1999 from $0.9 million in the first three months
of 1998. 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 current
facilities and equipment are upgraded and expanded.
Our net receivables as a percentage of net revenue decreased
to 23.1% in 1999 from 33.1% in 1998, primarily due to increased
revenue at our schools acquired prior to March, 1998. Based upon
past experience and judgment, we establish 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.
On March 31, 1999, we amended our credit agreement dated
October 26, 1998 to increase our line of credit from $60.0
million to $90.0 million. We can now obtain letters of credit up
to $50.0 million. Outstanding letters of credit reduce the
revolving credit facility availability under our credit
agreement. Our credit agreement matures on October 26, 2003.
Under the credit agreement our borrowings bear interest, payable
quarterly, of either (1) the bank's base or prime rate depending
on whether the particular loan is denominated in U.S. or Canadian
dollars, plus a specified number of basis points, ranging from 0
to 75, based upon our leverage ratio or (2) LIBOR, plus a
specified number of basis points, ranging from 75 to 200 based
upon our leverage ratio. Under the credit agreement, we are
required, among other things, to maintain (1) financial ratios
with respect to debt to EBITDA and interest coverage and (2) a
specified level of net worth. We are also subject to limitations
on, among other things, payment of dividends, disposition of
assets and incurrence of additional indebtedness. We are required
to pledge the stock of our subsidiaries as collateral for the
repayment of our obligations under the credit agreement. At May
6, 1999, we had $1.0 million outstanding borrowings under our
credit facility. Additionally, we had approximately $18.4 million of
outstanding letters of credit as of such date.
We submitted our audited 1998 financial statements to the
Department of Education ("DOE") in early 1999 to ask for the
release of $17.6 outstanding letters of credit to the DOE and to
eliminate the Title IV Program funding limitation of $2.0 million
for Southern California School of Culinary Arts ("SCSCA"). In
April 1999 we received DOE approval to release all of the
outstanding letters of credit and to eliminate SCSCA's funding
limitation. We are now awaiting the original letters of credit
from the DOE, at which time these obligations will be cancelled.
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 our schools through electronic
funds transfer programs are held in a separate cash account until
certain conditions are satisfied. As of March 31, 1999, we held
nominal amounts of such funds in separate accounts. The
restrictions on any cash held in these accounts have not
significantly affected our ability to fund daily operations.
Year 2000 Compliance
The Year 2000 Problem. Many IT hardware and software
systems and non-IT systems containing embedded technology, such
as microcontrollers and microchip processors, can only process
dates with six digits, for example, 03/17/98, instead of eight
digits, for example, 03/17/1998. This limitation may cause IT
systems and non-IT systems to experience problems processing
information with dates after December 31, 1999. For example,
01/01/00 could be processed as 01/01/2000 or 01/01/1900. There
could also be problems with other dates, such as September 9,
1999, which was a date traditionally used as a default date by
computer programmers. These problems may cause IT systems and non-
IT systems to suffer miscalculations, malfunctions or
disruptions. These problems are commonly referred to as ''Year
2000'' problems. In late 1997, we began our audit, testing and
remediation project to assess our exposure to Year 2000 problems
both because of our own IT systems and non-IT systems and because
of the systems of our significant vendors, including those who
process and disburse student financial aid for us. The discussion
below details our efforts to ensure Year 2000 compliance.
Our State of Readiness. Through our audit, testing and
remediation project, we have identified and evaluated the
readiness of our IT systems and non-IT systems, which, if not
Year 2000 compliant, could have a material adverse effect on us.
We held planning strategy sessions in the first quarter of 1998
and conducted our Year 2000 audits, upgrade assessments and
budget alignments during the remainder of 1998. Our evaluation
indicated that our administrative IT systems are Year 2000
compliant, but identified the following areas of concern:
- our accounting and financial reporting system
- our student database system
- the systems of third party vendors which process student
financial aid applications and loans for us
- the Department of Education's systems for processing and
disbursing student financial aid
- financial institutions which provide loans to our students
Based on our assessment and vendors' representations, we
believe that the financial and accounting systems, including
those necessary for financial aid, of our significant third party
vendors will be Year 2000 compliant by mid-year 1999.
We believe that the material non-IT systems that we control
are Year 2000 compliant and have begun the process of surveying
our landlords, utility providers and other providers of non-IT
systems to confirm that such systems are compliant. We expect to
complete this process in the second quarter of 1999.
We also expect that all of our Year 2000 testing will be
completed by the second quarter of 1999.
The Risks Associated with Our Year 2000 Issues. Although we
are unable at this time to quantify with certainty our internal
costs resulting from our Year 2000 problems, we do not believe
that the cost of remediating our internal Year 2000 problems or
the lost opportunity costs arising from any necessary diversion
of our personnel to Year 2000 problems will have a material
adverse effect on our business, results of operations or
financial condition. We estimate that the cost of replacing non-
compliant servers and desktop computers to be approximately
$200,000. Alternatively, we estimate that the cost of upgrading
such servers and desktop computers to be approximately $100,000.
The choice to replace or upgrade these servers and computers will
be made on a case-by-case basis.
We believe the greatest Year 2000 compliance risk, in terms
of magnitude, is that the Department of Education may fail to
complete its remediation efforts in a timely manner and federal
student financial aid funding for our students could be
interrupted for a period of time. During any such time, students
may not be able to pay for their tuition in a timely manner.
Because we derive approximately 70% of our revenue from U.S.
federal student financial aid programs, such delay is likely to
have a material adverse effect on our business, results of
operations and financial condition. Other than public comments
provided by the Department of Education's March 8, 1999 status
report that states that all of its 14 mission-critical IT Systems
are Year 2000 compliant, we are unable to predict the likelihood
of this risk occurring.
Contingency Plans. At this time, we expect to be Year 2000
compliant and are satisfied that our significant vendors are or
will be compliant. However, to avoid interruptions of our
operations, we have begun developing contingency plans in the
event that we experience any Year 2000 problems. With respect to
IT-systems, we have distributed guidelines to each of our
campuses regarding data backup practices to store the information
for our critical business processes in case any of them
experience Year 2000 problems. Our contingency plan with respect
to the material non-IT systems that we control includes, among
other things, investigating the availability and replacement cost
of such non-IT systems that have Year 2000 problems, isolating
such systems that are not Year 2000 compliant so that they do not
affect other systems and adjusting the clocks on such non-IT
systems that are not date sensitive. We do not believe that the
total costs of such Year 2000 compliance activities will be
material.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains certain statements, which reflect
our expectations regarding our future growth, results of
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 our
current beliefs and are based on information currently available
to us. Accordingly, these statements are subject to risks and
uncertainties, which could cause our actual growth, results,
performance and business prospects and opportunities to differ
from those, expressed in, or implied by, these statements. These
risks and uncertainties include implementation of our operating
and growth strategy, risks inherent in operating private for-
profit postsecondary educational institutions, risks associated
with general economic and business conditions, charges and costs
related to acquisitions, and our ability to: successfully
integrate our acquired institutions and continue our acquisition
strategy, attract and retain students at our 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. We
are not obligated to update or revise these forward-looking
statements to reflect new events or circumstances.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to the impact of interest rate changes,
foreign currency fluctuations and changes in the market value of
our investments. We have not entered into interest rate caps or
collars or other hedging instruments.
Our exposure to changes in interest rates is limited to
borrowings under revolving credit agreements, which have variable
interest rates tied to the prime and LIBOR rates. We estimate
that the fair value of each of our debt instruments approximated
its market value at March 31, 1999.
We are subject to fluctuations in the value of the Canadian
dollar vis-a-vis the U.S. dollar. Our investment in our Canadian
operations is not significant and the fair value of the assets
and liabilities of these operations at March 31, 1999
approximated their fair value.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We and our institutions are subject to occasional lawsuits,
investigations and claims arising out of the ordinary conduct of
our business, including the following:
On February 24, 1997, 30 former and current students in
Brown's PC/LAN program brought a suit entitled Peter Alsides, et
al. v. Brown Institute, Ltd. in the Fourth Judicial District in
Hennepin County, Minnesota against Brown alleging breach of
contract, fraud, misrepresentation, violation of the Minnesota
Consumer Fraud Act, violation of the Minnesota Deceptive Trade
Practices Act and negligent misrepresentation. Plaintiffs allege
that Brown failed to provide them with the education for which
they contracted and which had been represented to them upon
enrollment. There are currently 36 plaintiffs, who are seeking
to recover their tuition, interest and costs. Brown's motion for
summary judgment was granted in May 1998. Plaintiffs
appealed the motion, and on April 13, 1999, the lower court's
decision was affirmed in part and reversed in part. The Minnesota
Court of Appeals affirmed the dismissal of all claims constituting
educational malpractice, but held claims which fall under the
Minnesota Consumer Fraud Act and Minnesota Deceptive Trade Practices
Act and which constitute specific violations of promises made to
students may be brought against us. We believe that all of these
claims are frivolous and without merit and we are vigorously contesting
the allegations. We are considering whether to petition the state
supreme court for review or to make a new motion for summary
judgment before the lower court. A trial date has been set for
some time between late September and late October 1999.
Although outcomes cannot be predicted with certainty, we do
not believe that the above described matter or any other legal
proceedings to which we are a party will have a material adverse
effect on our business, results of operations or financial condition.
Item 6. Exhibits and Reports on Form 8-K.
A. Exhibits.
Exhibit 4.1 - Amendment No. 1 and Consent
to the Amended and Restated Credit Agreement,
dated as of February 24, 1999, by and between
Career Education Corporation, as Borrower,
the Co-Borrowers named therein, the Lenders
named therein, LaSalle National Bank, as
administrative agent, and The Bank of Nova Scotia,
as foreign currency agent (collectively the "Parties").
The schedule and exhibits to this Amendment
have not been included herewith, but will be
furnished to the Commission upon request.
Exhibit 4.2 - Amendment No. 2 to the
Amended and Restated Credit Agreement, dated
as of March 31, 1999, by and
between the Parties. The schedule and
exhibit to this Amendment have not been
included herewith, but will be furnished to
the Commission upon request.
Exhibit 27 - Financial Data Schedule
B. Reports on Form 8-K.
We filed a Current Report on Form 8-K on
January 19, 1999 (as amended by a Form 8-K/A filed
March 18, 1999) to report the consummation of our
acquisition of Harrington Institute of Interior
Design, Inc. (Items 2 and 7 of Form 8-K).
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: May 7, 1999 By: /s/ JOHN M. LARSON
John M. Larson
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 1999 By: /s/ WILLIAM A. KLETTKE
William A. Klettke
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)