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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
Commission File Number 0-23245
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CAREER EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
36-3932190
Delaware (I.R.S. Employer ID No.)
(State of Incorporation)
2895 Greenspoint Parkway, Suite 600 60195
Hoffman Estates, Illinois (zip code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (847) 781-3600
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the registrant's voting stock held by non-
affiliates of the registrant, based upon the $45.13 per share closing sale
price of the registrant's Common Stock on March 15, 2001, was approximately
$970,113,540. For purposes of this calculation, the Registrant's directors and
executive officers have been assumed to be affiliates.
The number of shares outstanding of the registrant's Common Stock, par value
$.01, as of March 15, 2001 was 21,742,303.
Portions of our Notice of Annual Meeting and Proxy Statement for our Annual
Meeting of Stockholders, scheduled to be held on May 11, 2001, are incorporated
by reference into Part III of this Report.
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CAREER EDUCATION CORPORATION
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I.................................................................... 1
ITEM 1. BUSINESS....................................................... 1
ITEM 2. PROPERTIES..................................................... 24
ITEM 3. LEGAL PROCEEDINGS.............................................. 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 24
PART II................................................................... 25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITYAND RELATED STOCKHOLDER
MATTERS......................................................... 25
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA................ 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................... 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................ 34
PART III.................................................................. 35
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............. 35
ITEM 11. EXECUTIVE COMPENSATION......................................... 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................. 35
PART IV................................................................... 36
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K........................................................ 36
PART I
ITEM 1. BUSINESS
The discussion below contains certain forward-looking statements, as such
term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, that are based on the beliefs of our management, as well as
assumptions made by, and information currently available to, our management.
Our actual growth, results, performance and business prospects and
opportunities in 2001 and beyond could differ materially from those expressed
in, or implied by, any such forward-looking statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Special Note Regarding Forward-looking Statements" on page 33 for a discussion
of risks and uncertainties that could cause or contribute to such material
differences.
Overview
We are a provider of private, for-profit postsecondary education with 38
campuses throughout the United States and Canada, the United Kingdom and the
United Arab Emirates. We have approximately 33,400 students enrolled as of
January 31, 2001 and our schools enjoy long operating histories and offer a
variety of master's degree, bachelor's degree, associate degree, and diploma
programs in career-oriented disciplines.
We were founded in January 1994 by John M. Larson, our Chairman, President
and Chief Executive Officer, who has over 26 years of experience in the career-
oriented education industry. We were formed to capitalize on opportunities in
the large and highly fragmented postsecondary school industry. Since our
inception, we have completed 21 acquisitions and have opened two branch
campuses. We have acquired schools that we believe possess strong curricula,
leading reputations and broad marketability, but that have been undermanaged
from a marketing and/or financial standpoint. We seek to apply our expertise in
operations, marketing and curricula development, as well as our financial
strength, to improve the performance of these schools.
Our schools offer educational programs principally in the following four
career-related fields of study--identified by us as areas with highly
interested and motivated students, strong entry-level employment opportunities
and ongoing career and salary advancement potential:
. Visual Communication and Design Technologies: These programs include
desktop publishing, graphic design, fashion design, interior design,
graphic imaging, webpage design and animation.
. Information Technology: These programs include PC/LAN, PC/Net, computer
technical support, computer network operation, computer information
management and computer programming.
. Business Studies: These programs include business administration,
business operations and e-commerce.
. Culinary Arts: These programs include culinary arts, restaurant
management and pastry arts.
1
Our schools are summarized in the following table:
Year Month Principal Degree
School Founded Acquired Curricula (1) Granting
- ------ ------- -------- ------------- --------
Al Collins Graphic Design School 1978 1/94 IT, VC Yes
Tempe, AZ (2)
Brooks College 1970 6/94 VC Yes
Long Beach, CA
Allentown Business School 1869 7/95 B, IT, VC Yes
Allentown, PA
Brown Institute 1946 7/95 CA, IT, VC Yes
Mendota Heights, MN
Western Culinary Institute 1983 10/96 CA No
Portland, OR
School of Computer Technology 1967 2/97 CA, IT, VC Yes
Fairmont, WV (3)
Pittsburgh, PA (3)
The Katharine Gibbs Schools 1911 5/97 B, IT, VC Yes
Boston, MA
Melville, NY
Montclair, NJ (4)
New York, NY
Norwalk, CT (4)
Philadelphia, PA
Piscataway, NJ (5)
Providence, RI (5)
International Academy of Merchandising
& Design 1977 6/97 VC, IT Yes
Chicago, IL (3)
Tampa, FL (3)
Orlando, FL (3)
International Academy of Design 1983 6/97 VC, IT No
Montreal, PQ (3)
Toronto, ON (3)
Southern California School of Culinary
Arts (6) 1994 3/98 CA No
South Pasadena, CA
Scottsdale Culinary Institute 1986 7/98 CA Yes
Scottsdale, AZ
Harrington Institute of Interior
Design 1931 1/99 VC Yes
Chicago, IL
McIntosh College 1896 3/99 B, CA, IT Yes
Dover, NH
Briarcliffe College 1966 4/99 B, IT, VC Yes
Bethpage, NY
Patchogue, NY
Brooks Institute of Photography 1945 6/99 VC Yes
Santa Barbara, CA
Washington Business School (7) 1950 12/99 B No
Vienna, VA
Cooking and Hospitality Institute of
Chicago 1983 2/00 CA Yes
Chicago, IL
California Culinary Academy 1977 4/00 CA Yes
San Francisco, CA
2
Year Month Principal Degree
School Founded Acquired Curricula (1) Granting
- ------ ------- -------- ------------- --------
SoftTrain Institute 1987 7/00 IT No
Toronto, ON
Retter Business College (3) 1975 10/00 VC No
Ottawa, ON
American InterContinental University
(8) 1970 1/01 B, IT, VC Yes
Atlanta, GA (Dunwoody and Buckhead)
Dubai, United Arab Emirates
Los Angeles, CA
Ft. Lauderdale, FL
London, England
Washington, D.C.
- --------
(1) The programs offered by our schools include business studies ("B"),
culinary arts ("CA"), information technology ("IT") and visual
communication and design technologies ("VC").
(2) This campus is now using the name Collins College.
(3) This campus is now using the name International Academy of Design and
Technology.
(4) This campus is now using the name Gibbs College.
(5) Does not offer degree programs.
(6) This campus is now using the name California School of Culinary Arts.
(7) This campus is now using the name Gibbs School.
(8) In addition, our purchase of the American InterContinental University
included a campus in Washington, D.C. Since this campus was being taught
out at the time of the acquisition and is expected to be closed in
December, 2001, references to this campus throughout this Annual Report on
Form 10-K have been excluded.
3
Industry Background
Based on estimates for 1996 by the Department of Education's National Center
for Education Statistics, postsecondary education is a $225 billion industry in
the U.S., with over 14 million students obtaining some form of postsecondary
education. Of this total, approximately 3.2 million students are enrolled in
approximately 4,600 private, degree-granting schools. Federal funds available
to support postsecondary education exceed $40 billion each year and have grown
steadily over the last two decades. Additionally, the federal government
guaranteed over $32 billion in student loans in 1997 and is expected to
guarantee loans at comparable levels in the future. State, local and private
funds for career-oriented training are also available.
Several national economic, demographic and social trends are converging to
contribute to growing demand for career-oriented post secondary education:
Changes in Workplace Demands. The workplace is becoming increasingly
knowledge-intensive. Rapid advances in technology have increased demands on
employers and their employees, requiring many new workers to have some form of
training or education beyond the high school level. The increasing
technological skills required for entry level jobs are spurring demand for
specialized training which, in many cases, is not provided by traditional two
and four year colleges. The U.S. Department of Labor projects that between 1996
and 2006 jobs requiring (1) a bachelor's degree are expected to increase
approximately 24%, (2) an associate degree are expected to increase
approximately 31% and (3) postsecondary vocational training are expected to
increase approximately 14%. As of December 31, 2000, approximately 65% of our
U.S. students were enrolled in bachelor's degree programs or associate degree
programs and the remaining 35% of our U.S. students were enrolled in vocational
diploma/certificate programs. As of December 31, 2000, approximately 8% of our
students were enrolled in our Canadian schools. Furthermore, career-oriented
schools generally have the ability to react quickly to the changing needs of
the nation's business and industrial communities. Additionally, to meet the new
workplace demands, many major companies are now using career-oriented
institutions to provide customized training for their employees on a
contractual basis. Small to medium-sized companies are also using proprietary
career-oriented schools to fill their needs for training to maintain or
increase the skill levels of their employees.
Increasing Numbers of High School Graduates. In 2000, U.S. high school
graduates represented over 2.8 million new prospective postsecondary students,
the largest pool of potential enrollees. This is projected to grow to 3.2
million in 2008. Over the 18 years prior to 1993, the number of high school
graduates had been declining. However, this trend has changed favorably as
children of the "baby boom" generation are entering their high school years.
These members of the "echo boom," as it is commonly known, are expected to
boost enrollment in postsecondary educational programs to as high as 15.8
million students by 2006, an increase of over 10% from approximately 14.3
million in the fall of 1996.
Growing Demand for Postsecondary Education. High school graduates and adults
are seeking postsecondary education in increasing numbers. The U.S. Department
of Education estimates that 70% of the high school graduates pursue some form
of postsecondary education. The Department of Labor projects the number of jobs
requiring at least an associate degree or higher to grow by more than 14%
between 1996 and 2006. In part because of the recent trend toward corporate
downsizing, enrollment in postsecondary programs is expected to increase
substantially as individuals seek to enhance their skills or re-train for new
job requirements.
Recognition of the Value of Postsecondary Education. We believe that
prospective students are increasingly recognizing the income premium and other
improvements in career prospects associated with a postsecondary education. On
average, (1) a female with an associate degree earns 33% more than a female
high school graduate, and a male with an associate degree earns 19% more than a
male high school graduate, while (2) a female with a bachelor's degree earns
57% more than a female high school graduate, and a male with a bachelor's
degree earns 53% more than a male high school graduate. Independent research
studies have demonstrated that prospective students consider these benefits in
making their education decisions.
4
Reduction in Public Education Funding. The reduction of federal, state or
provincial and local funding of public educational institutions in recent years
has forced educational institutions to cut back spending on general operations.
As a result, some schools have become underfunded and overcrowded. This trend
may provide an opportunity for proprietary institutions to serve, at more
competitive prices, the postsecondary education needs of individuals who would
have otherwise attended public schools.
Decreasing Size of Military Forces. Due to defense budget cuts and the
corresponding reduction in the U.S. armed forces, the U.S. military, a
traditional provider of technical and career-oriented training, is able to
provide fewer educational opportunities. According to the U.S. Department of
Defense, the aggregate number of military personnel has declined 35% since
1989, with the aggregate number of individuals on active duty in the military
services declining from 2.13 million in 1989 to 1.38 million in 2000. This has
left an educational void to be filled by other sources, including proprietary
career-oriented schools.
We believe that private, for-profit, career-oriented schools are uniquely
positioned to take advantage of these national trends. We also believe that
similar factors are creating a favorable climate for career-oriented
postsecondary education in Canada and other international markets.
Business and Operating Strategy
Our business and operating strategy has enabled us to achieve significant
improvements in the performance of our schools. We believe this strategy will
enable us to continue to capitalize on the favorable economic, demographic and
social trends which are driving demand for career-oriented education, thereby
strengthening our position as a premier, professionally managed system of
career-oriented postsecondary educational institutions. The key elements of our
business and operating strategy are as follows:
Focusing on Core Curricula. Our schools offer educational programs
principally in four career-related fields of study:
. visual communication and design technologies, offered at 24 campuses
. information technology, including Internet and intranet technology,
offered at 25 campuses
. business studies, offered at 17 campuses
. culinary arts, offered at eight campuses
We perceive a growing demand by employers for individuals possessing skills
in these particular fields. We also believe there are many entry-level
positions and ongoing career and salary advancement potential for individuals
who have received advanced training in these areas. We recognize that these
employment opportunities have attracted highly interested and motivated
students. These students include both recent high school graduates and adults
seeking formal training in these fields as well as degrees, diplomas and
certificates evidencing their knowledge and skills. Our experience and
expertise in these attractive areas of study enable us to differentiate
ourselves from many of our competitors and to effectively tailor our
acquisition and marketing plans.
Adapting and Expanding Educational Programs. We strive to meet the changing
needs of our students and the employment market. We continually refine and
adapt our courses to ensure that both students and employers are satisfied with
the quality and breadth of our educational programs. Through various means,
including student and employer surveys and curriculum advisory boards comprised
of business and community members, our schools regularly evaluate their program
offerings and consider revisions to existing classes and programs, as well as
the introduction of new courses and programs of study within our core
curricula. We selectively duplicate programs that have been successful
elsewhere in our school system. In 2000, we successfully duplicated 10 programs
and plan to continue this curricula migration in the future.
Investing for Future Growth. We make substantial investments in our people,
facilities, management information systems and classroom technologies to
prepare our company for continued growth. We devote
5
particular attention to attracting and retaining both corporate and school-
level management, and focus on employee development in order to facilitate
internal promotions. We make substantial investments in facilities and
classroom technologies to attract, retain and prepare students for the
increasing technical demands of the workplace. Additionally, we have made
significant investments in our management information systems to standardize
applications and processes across our schools in order to maintain effective
and expedient communication between our schools and corporate management, as
well as to ensure the smooth integration of newly acquired schools.
Emphasizing School Management Autonomy and Accountability. We provide
significant autonomy and appropriate performance-based incentives to our
campus-level managers. We believe these policies foster an important sense of
personal responsibility for achieving campus performance objectives. We also
believe our willingness to grant local autonomy provides our schools and us
with a significant advantage in recruiting and retaining highly-motivated
individuals with an entrepreneurial spirit. Management of each of our campuses
is principally directed by a campus president and local managers, who are
accountable for the campuses' operations and profitability. Regional oversight
ensures adherence to business plans, while business strategy, finance and
accounting consolidation functions are centralized at our executive offices in
Hoffman Estates, Illinois. When a new school is acquired, we evaluate the
capabilities of existing campus management personnel, and typically retain a
significant portion, which contributes to our ability to rapidly integrate
acquired schools into our system. We also determine the acquired school's needs
for additional or stronger managers in key areas and, where necessary, take
appropriate action by hiring new managers or assigning experienced staff to the
school's campuses.
Direct Response Marketing. We seek to increase school enrollment and
profitability through intensive local, regional and national direct response
marketing programs designed to maximize each school's market penetration. We
also use the Internet to attract potential students and believe that this
medium will be an increasingly important marketing tool. Because many of our
schools have been significantly under-marketed prior to their acquisition, we
believe that major benefits can result from carefully crafted, targeted
marketing programs that leverage schools' curriculum strength and brand name
recognition. After every acquisition, we design a marketing program tailored to
the particular school to highlight its strengths and to improve student lead
generation and student enrollment rates. Our management uses a diversified
media, direct response approach, including direct mail, Internet-based
advertising, infomercials, other television-based advertising, newspaper
advertising and other print media, to attract potential students. We place
particular emphasis on high school recruitment because it produces a steady
supply of new students.
Improving Student Retention. We emphasize the retention of students, from
initial enrollment to completion of their courses of study, at each of our
schools. Because, as at any postsecondary educational institution, a
substantial portion of our students never finish their educational programs for
personal, financial or academic reasons, substantial increases in revenue and
profitability can be achieved through modest improvements in student retention
rates. Our costs to keep current students in school are much less than the
expense of the marketing efforts associated with attracting new students;
therefore, student retention efforts, if successful, are extremely beneficial
to operating results. We strive to improve retention by treating students as
valued customers. We consider student retention the responsibility of the
entire staff of each school, from admissions to faculty and administration to
career counseling services, and provide resources and support for the retention
efforts developed by our local school administrators. School personnel
typically employ an approach based upon establishing personal relationships
with students; for example, students may receive a telephone call from a school
counselor or faculty member if they miss classes. During 2000, we laid the
groundwork for a highly innovative retention program called S.O.S. (Save Our
Students). Its centerpiece is a chief student advocate who is responsible for
implementing the program on campus. In addition, our corporate staff regularly
tracks retention rates at each school and provides feedback and support to the
efforts of local school administrators. As of December 31, 2000, our retention
rate was approximately 76%. This rate was determined in accordance with the
standards of the Accrediting Council for Independent Colleges and Schools,
which determines retention rates by dividing the total number of student
dropouts by the sum of (1) beginning student population, (2) new starts and (3)
student re-enters.
6
Emphasizing Employment of Graduates. We believe that the high rates of
employment for graduates of our schools enhance the overall reputation of the
schools as well as their ability to attract new students. High placement rates
also lead to low student loan default rates, which are necessary to allow our
schools to continue to participate in the federal student financial aid
programs. We consider student placement to be a high priority and allocate a
significant amount of time and resources to placement services. Due at least in
part to this emphasis, 94% of our graduates for the academic year ended June
30, 2000, who were available for employment had found employment relating to
their fields of study within six months of graduation. We are committed to
maintaining or improving these graduate employment rates and newly acquired
schools will be expected to meet similar graduate employment success standards.
Growth Strategy
We believe we can achieve superior long-term growth in revenue and
profitability by continuing to expand existing operations and acquire
additional schools in attractive markets. We believe we can achieve additional
growth in the future by establishing new campuses and also by entering new
service areas and expanding internationally.
Expanding Existing Operations. We believe that our existing 38 campuses can
achieve significant internal growth in enrollment, revenue and profitability.
We are executing our business and operating strategy, including all of the
elements described above, to accomplish this growth. We believe that expansion
of operations at our existing schools, along with acquisitions of new schools
and opening of branch campuses, will be the primary generators of our growth in
the near term.
Acquiring Additional Schools. To date, we have grown by acquiring new
schools in the U.S., Canada, the United Kingdom, and the United Arab Emirates
and then applying our expertise in marketing and school management to increase
enrollment, revenue and profitability at those schools. We expect that this
process will continue to be an important element of our growth strategy. We may
also continue to acquire operations outside North America where we believe
significant opportunities exist. We have an active acquisition program and from
time to time engage in, and are currently engaged in, evaluations of, and
discussions with, possible acquisition candidates, including evaluations and
discussions relating to acquisitions that may be material in size or scope.
We make selective acquisitions of for-profit, career-oriented schools, which
have capable faculty and operations staff, as well as quality educational
programs, which stand to benefit from our educational focus, marketing and
operating strengths. We target schools which we believe have the potential to
generate superior financial performance. Generally, such schools demonstrate
the following characteristics:
. ""Schools of Choice" --Possessing leading reputations in career-oriented
disciplines within local, regional and national markets
. Success--Demonstrating the ability to attract, retain and place students,
while meeting applicable federal and state regulatory criteria and
accreditation standards
. Marketable Curricula--Offering programs that provide students with
relevant training and the skills necessary to obtain attractive jobs and
advance in their selected fields
. Broad Marketability--Attracting students from each of the high school,
adult and international market segments
. Attractive Facilities and Geographic Locations--Providing geographically
desirable locations and modern facilities to attract and prepare students
for the demands of the increasingly competitive workplace
We believe that significant opportunities exist for growth through
acquisition. Some opportunities result from institutions having limited
resources to manage increasingly complex regulations or to fund the significant
7
cost of developing new educational programs necessary to meet changing demands
of the employment market. We believe that a substantial number of schools
exhibiting the characteristics described above exist in the U.S. and Canadian
markets and that such schools can be successfully integrated into our marketing
and administrative structure. We believe that competition in Canada is not
currently as intense as in the U.S. Few of the largest U.S. operators of
postsecondary career-oriented schools currently have a significant Canadian
presence. We believe that, given our existing Canadian operations, we are well
positioned to take advantage of these opportunities.
We analyze acquisition targets for their long-term profit potential,
enrollment potential and long-term demographic trends, concentration of likely
employers within the region, level of competition, facility costs and
availability and quality of management and faculty. We carefully investigate
any potential acquisition target for its history of regulatory compliance, both
as an indication of future regulatory costs and compliance issues and as an
indication of the school's overall condition. Significant regulatory compliance
issues in the school's past will generally remove a school from our
consideration as an acquisition candidate.
After we complete an acquisition, we immediately begin to apply our business
strategy to boost enrollment and improve the acquired schools' profitability.
We assist acquired schools in achieving their potential through a highly
focused and active management role, as well as through capital contributions.
We selectively commit resources to improve marketing, advertising,
administration and regulatory compliance at each acquired school. We may also
commit further resources to enhance management depth. We retain acquired
schools' brand names to take advantage of their established reputation in
local, regional and national markets as "schools of choice."
By acquiring new schools, we are also able to realize economies of scale in
terms of our management information systems, accounting and audit functions,
employee benefits and insurance procurement. We also benefit from the exchange
of ideas among school administrators regarding faculty development, student
retention programs, recruitment, curriculum, financial aid and student
placement programs.
Establishing New Campuses. We have currently added two new campuses and we
expect to continue to most likely establish these new campuses as additional
locations of existing institutions, but we may also establish campuses as
entirely separate, freestanding institutions. Opening new campuses would enable
us to capitalize on new markets or geographic locations that exhibit strong
enrollment potential and/or the potential to establish a successful operation
in one of our core curricula areas. We believe that this strategy will allow us
to continue to grow rapidly even if appropriate acquisition opportunities are
not readily available.
Entering New Service Areas. While we expect that our current career-oriented
school operations will continue to provide the substantial majority of our
revenue in the near term, we plan to develop new education-related services
that we believe offer strong long-term growth potential. In 1999, we introduced
our first pilot distance learning program, which offers educational products
and services through the Internet and other distribution channels. In February,
2001 we began enrolling students into American InterContinental University
Online, our online university division. We also plan to expand our contract
training business, which provides customized training on a contract basis for
business and government organizations, and which is currently a limited part of
the operations of a few of our schools. Although we have not yet actively
targeted the growing market for contract training services, we believe that
contract training can become a much more significant part of our business.
Recruiting International Students. We believe that trends similar to those
impacting the market for postsecondary career-oriented education in the U.S.
and Canada are occurring outside of North America. As a result, we believe that
there may be significant international opportunities in private, for-profit
postsecondary education and will continue our marketing efforts in selected
countries to increase international student enrollments at our schools.
8
Student Recruitment
Our schools seek to attract students with both the desire and ability to
complete their academic programs. Therefore, to produce interest among
potential students, each of our schools engages in a wide variety of marketing
activities.
We believe that the reputation of our schools in local, regional and
national business communities and the recommendations of satisfied former
students are important factors contributing to success in recruiting new
students. Each school's admissions office is charged with marketing the
school's programs through a combination of admissions representatives, direct
mailings and radio, Internet, television and print media advertising, in
addition to providing the information needed by prospective students to assist
them in making their enrollment decisions.
As of December 31, 2000, our schools employed approximately 380 admissions
representatives, each of whom focuses his or her efforts on the following
areas: (1) out-of-area/correspondence recruiting, (2) high school recruiting or
(3) in-house/local recruiting. Correspondence representatives work with
students who live outside of the immediate school area to generate interest
through correspondence with potential enrollees who have learned of the school
through regional or national advertising. We believe that we are able to
significantly boost enrollment by targeting students outside of the schools'
local populations. High school recruiting representatives conduct informational
programs at local secondary schools and follow up with interested students
outside of school, either at their homes or on our school campus. The
interpersonal relationships formed with high school counselors and faculty may
have significant influence over a potential student's choice of school. In
2000, approximately 39% of our student population was under the age of 20. We
believe that the relationships of our schools' representatives with the
counseling departments of high schools are good and that the brand awareness
and placement rates of our schools assist representatives in gaining access to
counselors. In-house representatives are also available to speak with
prospective students who visit campuses and to respond to calls generated
through the school's advertising campaigns. Representatives interview and
advise students interested in specific careers to determine the likelihood of
their success in completing their educational programs. The admissions
representatives are full-time, salaried employees of the schools. Regulations
of the Department of Education prevent us from giving our U.S. employees
incentive compensation based, directly or indirectly, upon the number of
students recruited.
We also engage in significant direct mail campaigns. We purchase mailing
lists from a variety of sources, and we mail brochures regularly during the
course of the year, with frequency determined by the number of school starts in
a given year. We believe direct mailings offer a fast and cost-effective way to
reach a targeted population.
In addition, each school develops advertising for a variety of media,
including radio, television and the Internet, which is run locally, regionally
and sometimes nationally. While multi-media advertising is generally more
appropriate for local markets, some initiatives have been successfully utilized
on a national basis. We have found infomercials to be a particularly effective
tool nationally because their length enables schools to convey a substantial
amount of information about their students, faculty, facilities and, most
importantly, their course offerings. We also believe that the personal flavor
of the presentation typical of infomercials is well suited to attracting
potential applicants. As an additional marketing tool, all of our schools have
established web sites, which can be easily accessed for information about these
schools and their educational programs. Although we retain independent
advertising agencies, we design and produce a portion of our direct marketing
and multi-media advertising and communications in-house, through Career
Education Corporation (CEC) Creative Services Group. While a majority of CEC
Creative Services Group's operations involve designing and producing
advertising for us, an immaterial amount of revenue may be generated by
providing these services to other businesses outside the postsecondary
education industry as opportunities arise.
We closely monitor the effectiveness of our marketing efforts. We estimate
that, in 2000, admissions representatives were responsible for attracting
approximately 41% of student enrollments, direct mailings were
9
responsible for approximately 10%, television, radio and print media
advertising were responsible for approximately 34%, Web sites were responsible
for 10%, and the remaining 5% was attributable to various other methods.
Student Admissions and Retention
The admissions and entrance standards of each school are designed to
identify those students who are best equipped to meet the requirements of their
chosen fields of study. The most important qualifications for students include
a strong desire to learn, passion for their area of interest, initiative and a
high likelihood of successfully completing their programs. These
characteristics are generally identified through personal interviews by
admissions representatives. We believe that a success-oriented student body
results in higher retention and placement rates, increased satisfaction on the
part of students and their employers and lower student default rates on
government loans. To be qualified for admission to one of our schools, each
applicant must have a high school diploma or a General Education Development
certificate. Many of our schools also require that applicants obtain certain
minimum scores on academic assessment examinations.
We recognize that our ability to retain students until graduation is an
important indicator of our success and that modest improvements in retention
rates can result in meaningful increases in school revenue and profitability.
As with other postsecondary educational institutions, many of our students do
not complete their programs for a variety of personal, financial or academic
reasons. As a result, student retention is considered an entire school's
responsibility, from admissions to faculty and administration to career
counseling services. To minimize student withdrawals, faculty and staff members
at each of our campuses strive to establish personal relationships with
students. Each campus devotes staff resources to advising students regarding
academic and financial matters, part-time employment and other matters that may
affect their success. However, while there may be many contributors, each
campus has a Director of Student Management specifically responsible for
monitoring and coordinating the student retention efforts. In addition, our
corporate staff regularly tracks retention rates at each campus and provides
feedback and support to appropriate local campus administrators.
Curriculum Development and Faculty
We believe that curriculum is an important component of our operations,
because students choose, and employers recruit from, career-oriented schools
based on the type and quality of technical education offered. The curriculum
development efforts of our schools are a product of their operating partnership
with students and the business and industrial communities.
The relationship of each of our schools with the business community plays a
significant role in the development and adaptation of school curriculum. Each
school has one or more program advisory boards composed of members of the local
and regional business community who are engaged in businesses directly related
to the educational offerings provided by the school. These boards provide
valuable input to the school's education department, which allows the school to
keep programs current and provide students with the training and skills that
these employers seek.
We also endeavor to enhance and maintain the relevancy of our curricula by
soliciting ideas through student and employer surveys and by requiring students
in selected programs to complete an internship during their school experience.
We have developed a number of techniques designed both to gain valuable
industry insight for ongoing curriculum development and enhance the overall
student experience. These techniques include (1) classroom discussions with
industry executives, (2) part-time job placement within a student's industry of
choice and (3) classroom case studies that are based upon actual industry
issues.
Our schools are in continuous contact with employers through their faculty,
many of whom are industry professionals. The schools hire a significant number
of part-time faculty holding positions in business and industry because
specialized knowledge is required to teach many of the schools' courses and to
provide students with current, industry-specific training. The schedules of
business and industry professionals often
10
permit them to teach the many evening courses offered by our schools. Unlike
traditional four-year colleges, instructors in our schools are not awarded
tenure and are evaluated, in part, based upon student evaluations. As of
January 31, 2001, our schools employed approximately 2,600 faculty and staff
members, of whom approximately 37% were full-time employees and approximately
63% had been hired on a part-time, adjunct basis.
School Administration
We provide significant operational autonomy and appropriate performance-
based compensation to local school administrators who have demonstrated the
ability to undertake such responsibility, based on our belief that success is
driven by performance at the local level through enrollment growth, student
retention rates and placement rates. In addition, each of our schools requires,
to a certain extent, different resources and operating tactics due to a variety
of factors, including curriculum, demographics, geographic location and size.
Management of each of our schools is principally in the hands of a school
president who has accountability for the school's operations and profitability.
Each of our schools has five primary operating departments: admissions,
financial aid, education, placement and accounting.
Business strategy, finance and accounting consolidation functions are
centralized at our corporate headquarters. Our corporate staff develops long-
term and short-term operating strategies for the schools and works closely with
local administrators to accomplish their goals and ensure adherence to our
strategy. We maintain stringent quality standards and controls at both the
corporate and individual school levels. Activities at the corporate level
include regular reporting processes which track the vital statistics of each
school's operations, including leads, enrollments, retention rates, placements
and financial data. These reports allow management to monitor the performance
of each campus. Each operating department at the campus level is also required
to compile quantitative reports at regular intervals, including reports on
admissions, financial aid, academic performance and placement.
We use a number of quality and financial controls. Information is tracked
through an advanced, PC-based management information system, which currently
runs on a decentralized basis, but also allows centralized access to account
information.
Tuition and Fees
Currently, total tuition for completion of a diploma/certificate program
offered by our schools, assuming full time attendance, ranges from $7,000 to
$34,000, for completion of an associate's degree program ranges from $15,000 to
$25,000, for completion of a bachelor's degree program ranges from $25,000 to
$85,000, and for completion of a master's degree program ranges from $45,000 to
$100,000. In addition to these tuition amounts, students at our schools
typically must purchase textbooks and supplies as part of their educational
programs.
Our institutions bill students for their tuition and other institutional
charges based on the specific instructional format or formats of the school's
educational programs. Each institution's refund policies must meet the
requirements of the Department of Education and such institution's state and
accrediting agencies. The U.S. Department of Education requires that a
proportionate return of Title IV funds be disbursed to individual students,
based on the number of days enrolled during a payment period or period of
enrollment, for those students who cease attendance within the first 60% of
their payment period or period of enrollment. Refunds of tuition and other
institutional charges are based on state refund requirements or institutional
refund policies, as applicable.
Graduate Employment
We believe that employment of graduates of our schools in occupations
related to their fields of studies is critical to the reputation of the schools
and their ability to continue to recruit students successfully. We believe
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that our schools' most successful form of recruiting is through referrals from
satisfied graduates. A strong placement office is important to maintain and
elevate the school's reputation, as well as manage the rate at which former
students default on their loans.
We devote a significant amount of time and resources to student placement,
which we believe to be the ultimate indicator of our success. We believe that
our average placement rate is attractive to prospective students. Student
placement is a top priority of each of our schools beginning on the first day
of student enrollment. This approach heightens the students' awareness of the
placement department and keeps students focused on their goal--job placement
within their field of choice. Moreover, our schools include career development
instruction in our curricula, which includes the preparation of resumes, cover
letters, networking and other essential job-search tools. Placement office
resources are regularly available to our graduates. With such assistance, our
graduates find employment with a wide variety of businesses located not only in
the schools' local markets but also regionally and nationally.
Each campus' placement department also plays a role in marketing the campus'
curriculum to the business community to produce job leads for graduates. As of
December 31, 2000, approximately 100 employees worked in the placement
departments of our campuses. Placement counselors participate in professional
organizations, advisory boards, trade shows and community events to keep
apprised of industry trends and maintain relationships with key employers.
Partnerships with local and regional businesses are established through
internships and curriculum development programs and facilitate placement of
graduates in local and regional businesses. The placement department also
assists current students in finding part-time jobs while attending school.
These part-time placements often lead to permanent positions.
Based on survey information received from graduating students and employers,
we believe that of the 8,751 students graduating from our schools during the
academic year ended June 30, 2000, 93.6% of the 8,189 available graduates,
which excludes students who are continuing their education, are in active
military service or are disabled or deceased, as well as students from foreign
countries who are legally ineligible to work in the U.S., obtained employment
in fields related to their program of study within six months following their
graduation.
The reputation of some of our schools allows them to charge fees to
employers upon placement of many of their students. Our other schools do not
currently receive such placement fees, nor, we believe, do any of our principal
proprietary competitors. We believe that, as an additional source of revenue,
we may be able to replicate these placement fee programs at some of our other
schools.
Technology
We are committed to providing our students access to the technology
necessary for developing skills required to succeed in the careers for which
they are training. Through regular consultation with business representatives,
we ensure that all our schools provide their students with industry-current
computer hardware, computer software and equipment meeting industry-specific
technical standards. In each program, students use the types of equipment that
they will eventually use in their careers of choice. For example, graphic
animation students use sophisticated computer multimedia animation and digital
video editing equipment and supplies, and visual communication and design
technologies students make significant use of technologies for computer-related
design and layout and digital pre-press applications.
Employees
As of December 31, 2000, Career Education Corporation and our schools had a
total of approximately 2,500 full-time and 2,400 part-time employees. We do not
have any collective bargaining agreements with our employees. We consider our
relations with our employees to be good.
Competition
The postsecondary education market is highly fragmented and competitive,
with no single institution having a significant market share. Our schools
compete with traditional public and private two-year and four-
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year colleges and universities, other proprietary schools, including those that
offer distance learning programs and alternatives to higher education such as
immediate employment and military service. Private and public colleges and
universities may offer courses of study similar to those of our schools. Some
public institutions are able to charge lower tuition than our schools due in
part to government subsidies, government and foundation grants, tax-deductible
contributions and other financial sources not available to proprietary schools.
However, tuition at private, non-profit institutions is, on average, higher
than the average tuition rates of our schools. Other proprietary career-
oriented schools also offer programs that compete with those of our schools. We
believe that our schools compete with other educational institutions
principally based upon the quality of their educational programs, reputation in
the business community, costs of programs and graduates' ability to find
employment. Some of our competitors in both the public and private sectors may
have substantially greater financial and other resources than us.
Changes in the regulatory environment have stimulated consolidation in the
postsecondary education industry. Regulations adopted in recent years have
tightened standards for educational content, established strict standards for
student loan default rates, required intensified scrutiny by state education
agencies and accrediting agencies and created more stringent standards for the
evaluation of an institution's financial responsibility and administrative
capability. As a result, some career-oriented schools have been forced to close
because they lacked sufficient quality or financial resources or could not
manage the increased regulatory burden. At the same time, despite increasing
demand, potential new entrants face significant barriers to entry due to the
highly regulated nature of the industry and the considerable expense of start-
up operations.
Financial Aid and Regulation
Our schools and students in the U.S. and Canada participate in a wide
variety of government-sponsored financial aid programs. For this reason, our
schools are subject to extensive regulatory requirements imposed by government
funding agencies and other bodies. For the 2000 fiscal year, we derived
approximately 66% of our total net revenue on a cash basis from such government
sponsored financial aid received by our students and we estimate that
approximately 68% of our students receive government sponsored financial aid.
Our students also finance their education through family contributions and
individual resources.
Nature of Federal Support for Postsecondary Education in the U.S. While many
states support public colleges and universities primarily through direct state
subsidies, the federal government provides a substantial part of its support
for postsecondary education in the form of grants and loans to students who can
use those funds at any institution that has been certified as eligible by the
Department of Education. These federal programs are authorized by Title IV of
the Higher Education Act of 1965, as amended, and are collectively referred to
as the "Title IV Programs."
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the Higher Education Act as the difference
between the cost of attending the institution and the amount a student can
reasonably contribute to that cost. All recipients of Title IV Program funds
must maintain a satisfactory grade point average and progress in a timely
manner toward completion of their program of study.
Students at our schools receive grants, loans and work opportunities to fund
their education under the following Title IV Programs, although not every
campus participates in all programs: (1) the Federal Family Education Loan
("FFEL") program, (2) the William D. Ford Federal Direct Loan ("FDL") program,
(3) the Federal Pell Grant ("Pell") program, (4) the Federal Supplemental
Educational Opportunity Grant ("FSEOG") program, (5) the Federal Perkins Loan
("Perkins") program and (6) the Federal Work-Study ("FWS") program.
FFEL. Loans made under the FFEL program are federally guaranteed. Loans are
made by banks and other lending institutions, but if a student or parent
defaults on a loan, payment is guaranteed by a federally recognized guaranty
agency, which is then reimbursed by the Department of Education. Students with
financial need qualify for interest subsidies while in school and during grace
periods. Our schools and their students use a wide variety of lenders and
guaranty agencies and have not experienced difficulties in identifying lenders
and guaranty agencies willing to make and guarantee FFEL loans.
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FDL. Under the FDL program, students or their parents may obtain loans
directly from the Department of Education rather than from commercial lenders.
The conditions on FDL loans are generally the same as on loans made under the
FFEL program.
Pell. Under the Pell program, the Department of Education makes grants to
students who demonstrate financial need.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. An institution is required to make a 25% matching contribution for
all federal funds received under this program.
Perkins. Perkins loans are made from a revolving institutional account, 75%
of which is capitalized by the Department of Education and the remainder by
the institution. Each institution is responsible for collecting payments on
Perkins loans from its former students and lending those funds to currently
enrolled students.
FWS. Under the FWS program, federal funds are used to pay up to 75% of the
cost of part-time employment of eligible students to perform work for the
institution or certain off-campus organizations. The remaining 25% is paid by
the institution or the employer.
Regulation of Federal Student Financial Aid Programs for U.S. Schools. To
participate in the Title IV Programs, an institution must be authorized to
offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the
Department of Education and certified as eligible by the Department of
Education. The Department of Education will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the Higher Education Act and the Department of
Education's extensive regulations regarding institutional eligibility. An
institution must also demonstrate its compliance to the Department of
Education on an ongoing basis. These standards are applied primarily on an
institutional basis, with an institution defined as a main campus and its
additional locations, if any. Under this definition, each of our U.S. campuses
is a separate institution, except for Briarcliffe-Patchogue, which is an
additional location of Briarcliffe-Bethpage, Gibbs-Piscataway, which is an
additional location of Gibbs-Montclair, and the IADT-Fairmont (formerly known
as the School of Computer Technology-Fairmont), which is an additional
location of the IADT-Pittsburgh (formerly known as School of Computer
Technology-Pittsburgh). American InterContinental University campuses in
Dunwoody, Dubai, Los Angeles, Ft. Lauderdale, and London are additional
locations of American InterContinental University-Buckhead. All of our U.S.
schools currently participate in the Title IV Programs.
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and
abuse. As a result, Congress has required the Department of Education to
increase its level of regulatory oversight of institutions to ensure that
public funds are properly used. Under the Higher Education Act, accrediting
agencies and state licensing agencies also have responsibilities for
overseeing institutions' compliance with Title IV Program requirements. As a
result, each of our institutions is subject to frequent reviews and detailed
oversight and must comply with a complex framework of laws and regulations.
Because the Department of Education periodically revises its regulations and
changes its interpretation of existing laws and regulations, we cannot assure
you that the Department of Education will agree with our understanding of each
Title IV Program requirement.
Significant factors relating to the Title IV Programs that could adversely
affect us include the following:
Legislative Action. Political and budgetary concerns significantly affect
the Title IV Programs. Congress must reauthorize the Higher Education Act
approximately every six years. The most recent reauthorization in October 1998
reauthorized the Higher Education Act for an additional five years. Congress
reauthorized all of the Title IV Programs in which our schools participate,
generally in the same form and at funding levels no less than for the prior
year. While the 1998 reauthorization of the Higher Education Act made numerous
changes to Title IV Program requirements, we believe that these changes will
not have a material adverse effect on our
14
business, results of operations or financial condition. In addition, Congress
reviews and determines federal appropriations for the Title IV Programs on an
annual basis. Congress can also make changes in the laws affecting the Title IV
Programs in those annual appropriations bills and in other laws it enacts
between the Higher Education Act reauthorizations. Since a significant
percentage of our revenue is derived from the Title IV Programs, any action by
Congress that significantly reduces Title IV Program funding or the ability of
our schools or students to participate in the Title IV Programs could have a
material adverse effect on our business, results of operations or financial
condition. Legislative action may also increase our administrative costs and
require us to adjust our practices in order for our schools to comply fully
with the Title IV Program requirements.
Cohort Default Rates. A significant component of Congress' initiative to
reduce abuse in the Title IV Programs has been the imposition of limitations on
institutions whose former students default on the repayment of their federally
guaranteed or funded student loans above specific rates. All of our
institutions have implemented aggressive student loan default management
programs aimed at reducing the likelihood of students failing to repay their
loans in a timely manner. Those programs emphasize the importance of students
meeting loan repayment requirements and provide for extensive loan counseling,
methods to increase student persistence and completion rates and graduate
employment rates, and proactive borrower contacts after students cease
enrollment.
An institution's cohort default rate under the FFEL and FDL programs is
calculated on an annual basis as the rate at which student borrowers scheduled
to begin repayment on their loans in one federal fiscal year default on those
loans by the end of the next federal fiscal year. An institution whose cohort
default rates equal or exceed 25% for three consecutive years will no longer be
eligible to participate in the FFEL, FDL or Pell programs for the remainder of
the federal fiscal year in which the Department of Education determines that
such institution has lost its eligibility and for the two subsequent federal
fiscal years. An institution whose cohort default rate under the FFEL or FDL
program for any federal fiscal year exceeds 40% may have its eligibility to
participate in all of the Title IV Programs limited, suspended or terminated by
the Department of Education.
15
None of our institutions had a FFEL or FDL cohort default rate of 25% or
greater for any of the last three federal fiscal years. The following table
sets forth the FFEL and FDL cohort default rates for our institutions for
federal fiscal years 1998, 1997, and 1996, the most recent years for which the
Department of Education has published such rates:
FFEL and FDL
Cohort Default
Rate
----------------
School 1998 1997 1996
------ ---- ---- ----
American InterContinental University
Atlanta, GA (Dunwoody and Buckhead)................... 8.4% 8.9% 13.1%
Dubai, United Arab Emirates,
Los Angeles, CA, Ft. Lauderdale, FL
and London, England
Allentown Business School
Allentown, PA......................................... 9.2 13.4 9.7
Briarcliffe College
Bethpage & Patchogue, NY.............................. 7.9 10.2 13.3
Brooks College
Long Beach, CA........................................ 16.3 19.3 21.1
Brooks Institute of Photography
Santa Barbara, CA..................................... 6.0 4.4 9.7
Brown Institute
Mendota Heights, MN................................... 9.5 14.9 17.4
California Culinary Academy
San Francisco, CA..................................... 2.7 8.4 9.3
California School of Culinary Arts*
South Pasadena, CA.................................... -- -- --
Collins College
Tempe, AZ............................................. 10.0 14.7 15.4
The Cooking and Hospitality Institute of Chicago
Chicago, IL........................................... 7.9 13.1 11.9
Gibbs College
Norwalk, CT........................................... 5.6 11.0 16.0
Montclair, NJ and Piscataway, NJ...................... 16.5 16.1 14.5
Gibbs School
Vienna, VA............................................ 9.2 7.9 10.7
Harrington Institute of Interior Design
Chicago, IL........................................... 1.4 7.8 6.8
International Academy of Design and Technology
Chicago, IL........................................... 6.8 11.3 13.8
Pittsburgh, PA and Fairmont, WV....................... 9.5 11.1 12.9
Tampa, FL............................................. 7.5 10.0 11.2
The Katharine Gibbs Schools
Boston, MA............................................ 14.2 17.3 16.2
Melville, NY.......................................... 7.6 10.6 12.7
New York, NY.......................................... 8.5 11.2 17.3
Providence, RI........................................ 18.5 14.0 14.9
McIntosh College
Dover, NH............................................. 7.7 9.3 6.8
Scottsdale Culinary Institute
Scottsdale, AZ........................................ 5.2 5.9 4.0
Western Culinary Institute
Portland, OR.......................................... 7.5 9.2 9.8
- --------
* California School of Culinary Arts did not begin participating in the FFEL
or FDL programs until being acquired by us in March 1998.
An institution whose cohort default rate under the FFEL or FDL program
equals or exceeds 25% for any one of the three most recent federal fiscal
years, or whose cohort default rate under the Perkins program exceeds 15% for
any year, may be placed on provisional certification status by the Department
of Education for up to four years. Six of our institutions have Perkins cohort
default rates in excess of 15% for students who
16
were scheduled to begin repayment in the 1998-99 federal award year, the most
recent year for which such rates have been calculated. The Perkins cohort
default rates for these six institutions ranged from 26.23% to 100.0%. These
rates include three institutions that previously notified the Department of
Education that they are no longer participating in the Perkins Loan program. To
date, the Department of Education has placed only three of our institutions,
Allentown, Gibbs-Melville and Gibbs-Montclair, on provisional certification for
their cohort default rates. Each institution was placed on provisional
certification for its Perkins default rate, either alone or in combination with
other reasons. Total Perkins loans disbursed during 1999-2000 represented less
than 1% of our total net revenue and we do not expect this level to increase in
the future. See "--Eligibility and Certification Procedures."
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy specific standards of financial responsibility.
The Department of Education evaluates institutions for compliance with these
standards each year, based on the annual audited financial statements of the
institution or its parent corporation, and following a change of control of the
institution. The Department of Education calculates the institution's composite
score based on its:
. equity ratio, which measures the institution's capital resources, ability
to borrow and financial viability,
. primary reserve ratio, which measures the institution's ability to
support current operations from expendable resources and
. net income ratio, which measures the institution's ability to operate at
a profit.
An institution that does not meet the Department of Education's minimum
composite score may demonstrate its financial responsibility by posting a
letter of credit in favor of the Department of Education in an amount equal to
at least 50% of the Title IV Program funds received by the institution during
its prior fiscal year or posting such letter of credit in an amount equal to at
least 10% of the Title IV Program funds received by the institution during its
prior fiscal year and accepting other conditions on its participation in the
Title IV Programs.
Under a separate standard of financial responsibility, an institution that
has made late student refunds in either of its last two fiscal years must post
a letter of credit with the Department of Education in an amount equal to 25%
of the total Title IV Program refunds paid by the institution in its prior
fiscal year. Based on this standard, we currently have posted a total of
$150,318 in letters of credit with respect to two International Academy of
Design and Technology campuses, one Gibbs campus and McIntosh College.
Change of Ownership or Control. When we acquire an institution that is
eligible to participate in the Title IV Programs, that institution undergoes a
change of ownership resulting in a change of control as defined by the
Department of Education. Upon such a change of control, an institution's
eligibility to participate in the Title IV Programs is subject to review, and
the institution could lose its eligibility unless it can reestablish its state
authorization and accreditation and satisfy the other requirements to be
recertified by the Department of Education as an eligible institution under our
ownership. If an institution is recertified following a change of control, it
will be on a provisional basis.
Under a 1998 amendment to the Higher Education Act and subsequent
regulations, the Department of Education may provisionally and temporarily
certify an institution following a change of control under certain
circumstances while the Department of Education reviews the institution's
application. The Department of Education has provided such temporary
certification to each institution we have acquired since January 1999 in
periods of time ranging from 10 to 40 days after closing.
Each U.S. institution we have acquired has undergone a certification review
under our ownership and has been certified to participate in the Title IV
Programs. Eleven of our U.S. institutions are presently participating in Title
IV Programs under provisional certification (eight due to change of ownership)
and the remaining twelve have been granted regular certification. American
InterContinental University, which we acquired in
17
January 2001, has been certified under our ownership on a temporary and
provisional basis and has filed its application to obtain provisional
certification.
Some other types of transactions can also cause a change of control. The
Department of Education, state education agencies and the accrediting agencies
that accredit our schools have their own definitions of when a transaction is
deemed a change of control. With respect to a publicly traded corporation, such
as us, Department of Education regulations issued and effective November 2000
provide that a change of control occurs under either of two standards. First, a
change of control occurs if a person acquires such ownership and control that
the corporation if required to file a Current Report on Form 8-K with the
Securities and Exchange Commission disclosing a change of control. Second, a
change of control occurs if a shareholder (other than an institutional
investor) that owns at least 25% of the corporation's voting stock and more
voting stock that any other shareholder ceases to satisfy either of those
conditions. Most of the states and accrediting agencies include the sale of a
controlling interest of common stock in the definition of a change of control.
A change of control under the definition of one of these agencies would require
the affected institution to reaffirm its state authorization or accreditation.
The requirements to obtain such reaffirmation from the states and accrediting
agencies with jurisdiction over our schools vary widely.
The potential adverse effects of a change of control could influence future
decisions by us and our stockholders regarding the sale, purchase, transfer,
issuance or redemption of our capital stock.
Opening Additional Schools and Adding Educational Programs. The Higher
Education Act generally requires that proprietary institutions be fully
operational for two years before applying to participate in the Title IV
Programs. However, an institution that is certified to participate in the Title
IV Programs may establish an additional location and apply to participate in
the Title IV Programs at that location without reference to the two-year
requirement, if such additional location satisfies all other applicable
eligibility requirements. Our expansion plans are based, in part, on our
ability to open new campuses as additional locations of our existing
institutions. Under a recently issued regulation that will take effect on July
1, 2001, an institution that satisfies certain conditions may open an
additional location that may begin participation in the Title IV Programs as
soon as the institution notifies the Department of Education of such location,
rather than waiting for Department of Education approval.
Generally, an institution that is eligible to participate in the Title IV
Programs may add a new educational program without Department of Education
approval if that new program leads to an associate level or higher degree and
the institution already offers programs at that level, or if it prepares
students for gainful employment in the same or related occupation as an
educational program that has previously been designated as an eligible program
at that institution and meets minimum length requirements. If an institution
erroneously determines that an educational program is eligible for the Title IV
Programs, the institution would likely be liable for repayment of the Title IV
Program funds provided to students in that educational program. We do not
believe that current Department of Education regulations will create
significant obstacles to our plans to add new programs.
Some of the state education agencies and accrediting agencies with
jurisdiction over our campuses also have requirements that may affect schools'
ability to open a new campus, acquire an existing campus, establish an
additional location of an existing institution or begin offering a new
educational program. We do not believe that these standards will have a
material adverse effect on our expansion plans.
The "90/10 Rule." Under a provision of the Higher Education Act commonly
referred to as the "90/10 Rule," a proprietary institution, such as each of our
institutions, would cease being eligible to participate in the Title IV
Programs if, on a cash accounting basis, it derived more than 90% of its
revenue for any fiscal year from the Title IV Programs. Any institution that
violates this rule becomes ineligible to participate in the Title IV Programs
as of the first day of the fiscal year following the fiscal year in which it
exceeds 90%, and is unable to apply to regain its eligibility until the next
fiscal year. If one of our institutions violated the 90/10 Rule and became
ineligible to participate in the Title IV Programs but continued to disburse
Title IV Program funds, the Department of Education would require the
institution to repay all Title IV Program funds received by the institution
after the effective date of the loss of eligibility.
18
We have calculated that, since this requirement took effect in 1995, none of
our institutions has derived more than 83% of its revenue from the Title IV
Programs for any fiscal year. We regularly monitor compliance with this
requirement to minimize the risk that any of our institutions would derive more
than the maximum percentage of its revenue from the Title IV Programs for any
fiscal year. If an institution appeared likely to approach the maximum
percentage threshold, we would evaluate making changes in student funding and
financing to ensure compliance with the rule.
Administrative Capability. The Department of Education assesses the
administrative capability of each institution that participates in the Title IV
Programs under a series of separate standards. Failure to satisfy any of the
standards may lead the Department of Education to find the institution
ineligible to participate in the Title IV Programs or to place the institution
on provisional certification as a condition of its participation. A violation
of these requirements could also subject the institutions to other penalties.
See "-- Compliance with Regulatory Standards and Effect of Regulatory
Violations."
One standard, which applies to programs with the stated objective of
preparing students for employment, requires the institution to show a
reasonable relationship between the length of the program and the entry-level
job requirements of the relevant field of employment. We believe we have made
the required showing for each of our applicable programs. Short-term
educational programs that provide less than 600 clock hours, 16 semester hours
or 24 quarter hours of instruction must demonstrate that 70% of all students
who enroll in such programs complete them within a prescribed time and that 70%
of the graduates of such programs obtain employment in the occupation for which
they were trained within a prescribed time. Some of the Gibbs institutions
offer such short-term programs, but students enrolled in these programs
represent a small percentage of our total enrollment. To date, the applicable
institutions have been able to establish that their short-term educational
programs meet the required completion and placement percentages.
Other standards provide that an institution may be found to lack
administrative capability and be placed on provisional certification if its
student loan default rate under the FFEL and FDL programs is 25% or greater for
any of the three most recent federal fiscal years, or if its Perkins cohort
default rate exceeds 15% for any federal award year. Three of our institutions
have been placed on provisional certification or determined by the Department
of Education to lack administrative capability due to their Perkins default
rates, either alone or in conjunction with other reasons.
An additional standard prohibits an institution from providing any
commission, bonus or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to any person or entity
engaged in any student recruitment, admission or financial aid awarding
activity. We believe that our current compensation plans are in compliance with
the Higher Education Act standards, although the regulations of the Department
of Education do not establish clear criteria for compliance.
Eligibility and Certification Procedures. The Higher Education Act and its
implementing regulations require each institution to apply to the Department of
Education for continued certification to participate in the Title IV Programs
at least every six years, or when it undergoes a change of control. The
Department of Education may place an institution on provisional certification
status if it finds that the institution does not fully satisfy all of the
eligibility and certification standards. The Department of Education may
withdraw an institution's provisional certification without advance notice if
the Department of Education determines that the institution is not fulfilling
all material requirements, and may more closely review an institution that is
provisionally certified if it applies for approval to open a new location or
make any other significant change. Provisional certification does not otherwise
limit an institution access to Title IV Program funds. In addition, an
institution must obtain Department of Education approval for substantial
changes (i.e., changes in an institution's accrediting agency or state
authorizing agency, as well as changes to an institution's structure or certain
basic educational features).
An institution seeking certification to participate in the Title IV Programs
after a change of control will be provisionally certified for a limited period,
following which the institution must reapply for continued certification. If at
that time the institution satisfies all conditions for full certification, the
Department of
19
Education will recertify the institution and remove the provisional status.
Otherwise, the Department of Education may recertify the institution on a
continued provisional basis. Each institution that we have acquired was
initially certified by the Department of Education for participation in the
Title IV Programs under our ownership on a provisional basis. Eight of our
institutions remain on provisional certification status because the initial
period of their provisional certification has not expired. Three institutions
have been recertified by the Department of Education upon the expiration of
their initial provisional period, but remain on provisional status for other
reasons. Allentown, Gibbs-Melville and Gibbs-Montclair are on provisional
certification status because their Perkins cohort default rate at the time of
the Department of Education's review was above 30%, and each institution was
told that it would remain on provisional certification until it reduced its
Perkins default rate below 30%.
Compliance with Regulatory Standards and Effect of Regulatory Violations.
Our schools are subject to audits and program compliance reviews by various
external agencies, including the Department of Education, state authorizing
agencies, guaranty agencies and accrediting agencies. The Higher Education Act
and its implementing regulations also require that an institution's
administration of Title IV Program funds be audited annually by an independent
accounting firm, and the resulting audit report submitted to the Department of
Education for review. If the Department of Education or another regulatory
agency determined that one of our institutions improperly disbursed Title IV
Program funds or violated a provision of the Higher Education Act or the
Department of Education's regulations, that institution could be required to
repay such funds, and could be assessed an administrative fine. The Department
of Education could also subject the institution to heightened cash monitoring,
under which the institution's federal funding requests would be more carefully
reviewed by the Department of Education, or the Department of Education could
transfer the institution from the advance system of receiving Title IV Program
funds to the reimbursement system, under which an institution must disburse its
own funds to students and document the students' eligibility for Title IV
Program funds before receiving such funds from the Department of Education.
Violations of Title IV Program requirements could also subject us or our
schools to other civil and criminal penalties.
Significant violations of Title IV Program requirements by us or any of our
institutions could be the basis for a proceeding by the Department of Education
to limit, suspend or terminate the participation of the affected institution in
the Title IV Programs. Generally, such a termination extends for 18 months
before the institution may apply for reinstatement of its participation. There
is no proceeding pending to fine any of our institutions or to limit, suspend
or terminate any of our institutions' participation in the Title IV Programs,
and we have no reason to believe that any such proceeding is contemplated. Any
such action that substantially limited our schools' participation in the Title
IV Programs could have a material adverse effect on our business, results of
operations or financial condition.
State Authorization for U.S. Schools
We are subject to extensive regulation in each of the 15 states in which we
currently operate schools and in other states in which our schools recruit
students. Each of our campuses must be authorized by the applicable state
agency or agencies to operate and grant degrees or diplomas to its students. In
addition, state authorization is required for an institution to become and
remain eligible to participate in the Title IV Programs. Currently, each of our
U.S. campuses is authorized by the applicable state agency or agencies.
The level of regulatory oversight varies substantially from state to state.
In some states, the campuses are subject to licensure by an agency that
regulates proprietary schools and also by a separate higher education agency.
State laws establish standards for instruction, qualifications of faculty,
location and nature of facilities, financial policies and other operational
matters. State laws and regulations may limit our schools' ability to operate
or to award degrees or diplomas or offer new degree programs. Some states
prescribe standards of financial responsibility that are different from those
prescribed by the Department of Education. We believe that each of our campuses
is in substantial compliance with state authorizing and licensure laws. If any
one of our campuses lost its state authorization, the campus would be unable to
offer its programs and we would be forced to close that campus. Closing one of
our campuses for any reason could have a material adverse effect on our
business, results of operations or financial condition.
20
Accreditation for U.S. Schools
Accreditation is a non-governmental process through which an institution
submits to a qualitative review by an organization of peer institutions.
Accrediting agencies primarily examine the academic quality of the
institution's instructional programs, and a grant of accreditation is generally
viewed as confirmation that an institution's programs meet generally accepted
academic standards. Accrediting agencies also review the administrative and
financial operations of the institutions they accredit to ensure that each
institution has the resources to perform its educational mission.
Accreditation by an accrediting agency recognized by the Department of
Education is required for an institution to be certified to participate in the
Title IV Programs. Accrediting agencies must adopt specific standards in
connection with their review of postsecondary institutions to be recognized by
the Department of Education. All of our U.S. campuses are accredited by an
accrediting agency recognized by the Department of Education. Fifteen of our
campuses are accredited by the Accrediting Council for Independent Colleges and
Schools ("ACICS"), six of our campuses are accredited by the Accrediting
Commission of Career Schools and Colleges of Technology ("ACCSCT"), six of our
campuses are accredited by the Southern Association of Colleges and Schools
Commission on Colleges, one of our campuses is accredited by the Accrediting
Commission for Community and Junior Colleges of the Western Association of
Schools and Colleges, one of our campuses is accredited by the National
Association of Schools of Art and Design, one of our campuses is accredited by
the New England Association of Schools and Colleges--Commission on Technical
and Career Institutions and two of our campuses are accredited by the Middle
States Association of Colleges and Schools--Commission on Higher Education. In
addition, four of our campuses' interior design programs are accredited by the
Foundation for Interior Design Education Research and four of our campuses'
culinary arts programs are accredited by the American Culinary Federation
Educational Institute Accrediting Commission, accrediting agencies which are
not recognized by the Department of Education.
An accrediting agency may place a campus on "reporting" status to monitor
one or more specified areas of performance. A campus placed on reporting status
is required to report periodically to its accrediting agency on that campus'
performance in the specified areas. None of our campuses is on reporting status
with its accrediting agency. If any of our campuses lose its accreditation, the
campus would be ineligible to continue its participation in the Title IV
Programs. The loss of Title IV funding for any of our campuses could have a
material adverse effect on our business, results of operation or financial
condition.
Canadian Regulation
Depending on their province of residence, our Canadian students may receive
loans under the Canada Student Loan Program, the Ontario Student Loans Plan and
the Quebec Loans and Bursaries Program. Canadian schools must meet eligibility
standards to administer these programs and must comply with extensive statutes,
rules, regulations and requirements. We believe our Canadian schools currently
hold all necessary registrations, approvals and permits and meet all
eligibility requirements to administer these governmental financial aid
programs. If our Canadian schools cannot meet these and other eligibility
standards or fail to comply with applicable requirements, it could have a
material adverse effect on our business, results of operations or financial
condition.
Ontario. The Ontario Ministry of Training, Colleges and Universities
("Ontario Ministry") provides financial assistance to eligible students through
the Ontario Student Assistance Plan ("OSAP"). This plan includes two main
components, the Canada Student Loan Program and the Ontario Student Loans Plan.
To maintain the right to administer OSAP, our schools located in Ontario,
Internatioal Academy of Design and Technology in Ottawa and Toronto and the
SoftTrain Institute (the "Ontario Schools"), must, among other things, be
registered and in good standing under the Private Vocational Schools Act
(Ontario) and abide by the rules, regulations and administrative manuals of the
Canada Student Loan Program, Ontario Student Loans Plan and other OSAP-related
programs. In order to attain initial eligibility, an institution has to
establish that it has (1) been in good standing under the Private Vocational
Schools Act (Ontario) for at least 12 months, (2) offered an eligible program
for at least 12 months and (3) graduated at least one class with a minimum of
five students enrolled in
21
an eligible program that satisfied specific requirements with respect to class
size and graduation rate. Pursuant to Ontario Ministry rules, during the first
two years of initial eligibility, an institution has its administration of OSAP
independently audited, and full eligibility is not granted until these audits
confirm that the school is properly administering OSAP. Our Ontario Schools
have been granted full eligibility. Under Ontario Ministry rules, our Ontario
Schools must advise the Ontario Ministry before they take any material action
that may result in their failure or inability to meet any rules, regulations or
requirements related to OSAP.
In order for our Ontario Schools to establish any new branches, they must
obtain OSAP-designation from the Ontario Ministry. We do not believe that
OSAP's requirements will create significant obstacles to our plans to acquire
additional institutions or open new branches in Ontario.
Our Ontario Schools may submit applications for loans only to students
enrolled in educational programs that have been designated as OSAP-eligible by
the Ontario Ministry. To be eligible, among other things, a program must be
registered with the Private Vocational Schools Unit of the Ontario Ministry,
must be of a minimum length and must lead to a diploma or certificate. We do
not anticipate that these program approval requirements will create significant
problems with respect to our plans to add new educational programs.
Under Ontario Ministry rules, an institution cannot automatically acquire
OSAP designation through the acquisition of other OSAP-eligible institutions.
When there is a change of ownership, including a change in controlling
interest, in a non-incorporated OSAP-eligible institution, the Ontario Ministry
will require evidence of the institution's continued capacity to properly
administer the program before extending OSAP designation to the new owner. We
do not believe that this annual filing will be considered a change of ownership
for purposes of OSAP. Given that the Ontario Ministry periodically revises its
regulations and other requirements and changes its interpretations of existing
laws and regulations, we cannot assure you that the Ontario Ministry will agree
with our understanding of each requirement.
Our Ontario Schools are required to audit their OSAP administration annually
and the Ontario Ministry is authorized to conduct its own audits of our
administration of these programs. We have complied with these requirements on a
timely basis. Based on the most recent annual compliance audits, our Ontario
schools are in substantial compliance with OSAP requirements and we believe
that the schools continue to be in substantial compliance with these
requirements.
The Ontario Ministry has the authority to take any measures it deems
necessary to protect the integrity of the administration of OSAP. If the
Ontario Ministry deems a failure to comply to be minor, the Ontario Ministry
will advise us of the deficiency and provide us with an opportunity to remedy
it. If the Ontario Ministry deems the failure to comply to be serious in
nature, the Ontario Ministry has the authority to: (1) condition our continued
OSAP designations upon our meeting specific requirements during a specific time
frame; (2) suspend our OSAP designations; or (3) revoke our OSAP designations.
When the Ontario Ministry determines that any non-compliance in our OSAP
administration is serious, the Ontario Ministry has the authority to contract
with an independent auditor, at our expense, to conduct a full audit in order
to quantify the deficiencies and to require repayment of all loan amounts. In
addition, the Ontario Ministry may impose a penalty up to the amount of the
damages assessed in the independent audit.
Adopting a practice similar to that of the U.S. Department of Education, the
Ontario Ministry calculates for each school student loan default rates on the
basis of incidences of default and expresses the default rates as a percentage
of the total number of loans issued to students attending that school.
Beginning with loans issued in the 1998-99 award year (August 1, 1998 to July
31, 1999), institutions with a 1997 default rate which is 15 percentage points
or more above the 1997 provincial average of 23.5% (i.e. 38.5%) will be
required to share the cost of defaults. In the 1999-2000 award year, this
policy will apply to institutions with a 1998 default rate 10 percentage points
or more above 23.5% (i.e. 33.5%). In the 2000-2001 award year, this policy will
apply to institutions with a 1999 default rate above 28.5%. For the 2001-2002
award year, this policy will apply to institutions with a 2000 default rate of
25.0%. Our International Academy of Design and Technology school in Toronto had
an overall default rate of 18.1% in 2000, 16.7% in 1999, and 23.8% in 1998. Our
International Academy of Design and Technology school in Ottawa had an overall
default rate of 13.0% in 2000 and 15.4% in 1999. The default rates for our
SoftTrain Institute in Toronto are not recorded by the Ontario Ministry.
22
For the purpose of calculating default rates, student loan
recipients/defaulters are assigned to the last institution they attended. An
Ontario student loan is in default when the Ontario government has paid a
bank's claim for an inactive loan. A loan is inactive when no payments were
made by the student for at least 90 days. The overall 2000 default rate for
Ontario post-secondary institutions (which includes universities, colleges and
private vocational schools) is 15.7%, a decrease of 2.5% from the 1999 default
rate of 18.2%. The 2000 default rate for the private vocational school sector,
as a whole, is 28.9%.
The Ontario Ministry has stated that while the decrease in the overall
default rate is encouraging, it remains, from the Ontario government's
perspective, unacceptably high. The Ontario Ministry's business plan requires
that the overall default rate for Ontario post-secondary institutions be
reduced to 10.0% within the next two years, failing which the institution in
question will be responsible for sharing the cost of defaults.
On December 20, 2000, the Ontario legislature passed the Ministry of
Training, Colleges and Universities Statute Law Amendment Act, that will bring
about several changes to Ontario's college and university system. The
legislation and changes will expand access to Ontario students to degree
programs by allowing the establishment of privately funded degree granting
institutions in the province, as well as permitting Ontario community colleges
to offer applied degrees. The legislation (passed but not yet proclaimed in
force) permits the Minister of Training, Colleges and Universities to appoint
inspectors to ensure that institutions are administering OSAP properly and is
part of the government's commitment to ensure both the viability of private
institutions and the protection of both taxpayers and students.
The legislation also creates now provincial offences to prevent OSAP abuse
(for example, obtaining awards, grants and student loans to which a person is
not entitled, for assisting a person in obtaining an award, grant or loan to
which the person is not entitled, for failing to provide information when
required and for providing false information in connection with an award, grant
or student loan). An individual convicted of any one of the offences could be
subject to a fine of not more than $25,000 and/or a term of imprisonment of not
more than one year. A corporation convicted of an offence could be subject to a
fine of not more than $100,000
Federal bankruptcy legislation exempts federal and provincial student loans
from being included in bankruptcy proceedings for a 10-year period following a
students' completion of his or her studies.
We may only operate a private vocational school in Ontario if the school is
registered under the Private Vocational Schools Act (Ontario). Upon payment of
the prescribed fee and satisfaction of the conditions prescribed by the
regulations under the Private Vocational Schools Act (Ontario) and by the
Private Vocational Schools Unit of the Ontario Ministry, an applicant or
registrant such as one of our Ontario Schools are entitled to registration or
renewal of registration to conduct or operate a private vocational school
unless:
. the school cannot reasonably be expected to be financially responsible in
the conduct of the private vocational school,
. the past conduct of the officers or directors provides reasonable grounds
for belief that the operations of the school will not be carried on in
accordance with relevant law and with integrity and honesty,
. it can reasonably be expected that the course or courses of study or the
method of training offered by the school will not provide the skill and
knowledge requisite for employment in the vocation or vocations for which
the applicant or registrant is offering instruction, and
. the applicant is carrying on activities that are, or will be, if the
applicant is registered, in contravention of the Private Vocational
Schools Act (Ontario) or the regulations under that Act.
An applicant for registration to conduct or operate a private vocational
school is required to submit with the application a bond in an amount
determined in accordance with the regulations under the Private Vocational
23
Schools Act (Ontario). Our Ontario Schools are currently registered under the
Private Vocational Schools (Ontario) Act for all locations, and we do not
believe that there will be any impediment to renewal of such registrations on
an annual basis.
The Private Vocational Schools Act Ontario provides that a "registration" is
not transferable. However, the Private Vocational Schools Unit of the Ontario
Ministry takes the position that a purchase of shares of a private vocational
school does not invalidate the school's registration under the Ontario Private
Vocational Schools Act. We do not believe that this annual filing will
invalidate the registrations of our Ontario Schools.
If our Ontario Schools are convicted of violating the Ontario Private
Vocational Schools Act or the regulations under that Act, the school can be
fined up to $25,000 Canadian dollars.
Quebec. Our Quebec students may receive loans under the Quebec Loans and
Bursaries Program subject to student eligibility criteria. Under an Act
Respecting Private Education, our International Academy of Design school in
Montreal may not operate as a private educational institution without holding a
permit issued by the Quebec Minister of Education. Permits cannot be
transferred without the written authorization of the Quebec Minister and we
must notify that Minister of any amalgamation, sale or transfer affecting our
Quebec school. The Quebec Minister can modify or revoke our permit in certain
circumstances, such as if we do not comply with the conditions, restrictions or
prohibitions of the permit or if we are to become insolvent. We must be
provided with a chance to present our views before our permit can be revoked.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Hoffman Estates, Illinois, near
Chicago, and our 38 campuses are located throughout the United States and
Canada, the United Kingdom and the United Arab Emirates. Each campus contains
teaching facilities, including modern classrooms, laboratories and, in the case
of the schools with culinary arts programs, large, well-equipped kitchens.
Admissions and administrative offices are also located at each campus.
Additionally, Brooks College campus includes a dormitory and student cafeteria.
Western, Scottsdale, California School of Culinary Arts, California Culinary
Academy and The Cooking and Hospitality Institute of Chicago lease and operate
restaurants in conjunction with their culinary arts program.
We lease all of our facilities, except the primary Gibbs facility in
Montclair, New Jersey and the facility at Brooks Institute of Photography,
which we own. As of December 31, 2000, we owned approximately 170,000 square
feet, which includes four buildings in New Orleans held for sale acquired
through our California Culinary Academy purchase. As of December 31, 2000, we
have entered into leases for approximately 1.8 million square feet. The leases
have remaining terms ranging from less than one year to ten years.
We actively monitor facility capacity in light of our current utilization
and projected enrollment growth. We have plans to lease approximately 120,000
additional square feet in 2001 to accommodate our growth. We believe that our
schools can acquire any necessary additional capacity on reasonably acceptable
terms. We devote capital resources to facility improvements and expansions as
necessary.
ITEM 3. LEGAL PROCEEDINGS
We and our institutions are subject to occasional lawsuits, investigations
and claims arising out of the ordinary conduct of our business. Although
outcomes cannot be predicted with certainty, we do not believe that any legal
proceeding to which we are a party will have a material adverse effect on our
business, results of operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fourth quarter of 2000.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been quoted on the Nasdaq National Market (the
"National Market") under the symbol "CECO" since January 29, 1998.
The following table sets forth the range of high and low sales prices per
share for our common stock as reported on the National Market, where the stock
trades under the symbol "CECO," for the periods indicated. All share prices
reflect our 2-for-1 stock split effected in the form of a stock dividend in
August 2000. The initial public offering price of our common stock on January
28, 1998 was $8.00 per share.
High Low
------ ------
1999:
First Quarter............................................. $18.50 $13.75
Second Quarter............................................ 19.50 14.94
Third Quarter............................................. 17.00 11.50
Fourth Quarter............................................ 19.25 10.97
2000:
First Quarter............................................. $19.88 $15.56
Second Quarter............................................ 24.63 14.00
Third Quarter............................................. 45.25 24.13
Fourth Quarter............................................ 45.50 26.00
The closing price of our common stock as reported on the National Market on
March 15, 2001 was $45.13 per share. As of March 15, 2001, there were 61
holders of record of our common stock.
We have never paid a cash dividend on our common stock. We do not anticipate
paying any cash dividends on our common stock in the foreseeable future and we
plan to retain our earnings to finance future growth. The declaration and
payment of dividends on our common stock are subject to the discretion of our
board of directors. Our board's decision to pay future dividends will depend on
general business conditions, the effect on our financial condition and other
factors our board may consider to be relevant. Our ability to pay dividends on
our common stock is limited if we are not in compliance with the terms of our
credit agreement or we fail to meet a specified leverage ratio.
25
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere herein and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Our selected statement of operations data
set forth below for the years ended December 31, 2000, 1999 and 1998 and the
balance sheet data as of December 31, 2000, 1999 and 1998 are derived from our
audited consolidated financial statements.
Year Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands,
except per share data)
Statement of Operations Data:
Revenue:
Tuition and registration fees, net............. $295,674 $199,057 $132,926
Other, net..................................... 29,619 17,747 11,306
-------- -------- --------
Total net revenue............................ 325,293 216,804 144,232
Operating Expenses:
Educational services and facilities............ 129,628 85,490 57,151
General and administrative..................... 135,691 96,406 63,856
Depreciation and amortization.................. 20,594 14,557 12,163
Compensation expense related to the initial
public offering............................... -- -- 1,961
-------- -------- --------
Total operating expenses..................... 285,913 196,453 135,131
-------- -------- --------
Income from operations.......................... 39,380 20,351 9,101
Interest income................................. 1,484 329 166
Interest expense................................ (1,358) (1,482) (1,416)
-------- -------- --------
Income before provision for income taxes and
cumulative effect of change in accounting
principle...................................... 39,506 19,198 7,851
Provision for income taxes...................... 17,322 8,255 3,350
-------- -------- --------
Income before cumulative effect of change in
accounting principle........................... 22,184 10,943 4,501
Cumulative effect of change in accounting
principle (net of taxes)....................... (778) -- (205)
-------- -------- --------
Net income...................................... $ 21,406 $ 10,943 $ 4,296
======== ======== ========
Income attributable to common stockholders:
Income before cumulative effect of change in
accounting principle.......................... $ 22,184 $ 10,943 $ 4,501
Dividends on preferred stock................... -- -- (274)
Accretion to redemption value of preferred
stock and warrants (2)........................ -- -- (2,153)
-------- -------- --------
Income before cumulative effect of change in
accounting principle........................... $ 22,184 10,943 2,074
Cumulative effect of change in accounting
principle, net................................. (778) -- (205)
-------- -------- --------
Net income attributable to common stockholders.. $ 21,406 $ 10,943 $ 1,869
======== ======== ========
Net income per share attributable to common
stockholders
Basic.......................................... $ 1.14 $ 0.71 $ 0.14
======== ======== ========
Diluted........................................ $ 1.10 $ 0.69 $ 0.14
======== ======== ========
Other Data:
EBITDA (3)...................................... $ 59,974 $ 34,908 $ 21,264
EBITDA margin (3)............................... 18.4% 16.1% 14.7%
Capital expenditures, net....................... 28,453 12,169 6,383
Student population (4).......................... 29,000 22,500 15,900
Number of Campuses (5).......................... 30 26 20
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
(Dollars in thousands)
Balance Sheet Data:
Cash............................................ $ 33,742 $ 44,745 $ 23,548
Working capital................................. 29,316 25,787 15,994
Total assets.................................... 280,699 210,524 132,887
Total debt...................................... 19,120 49,939 22,617
Total stockholders' investment.................. 200,893 113,681 84,636
- --------
(1) Represents the dividends paid on, or added to the redemption value of
outstanding preferred stock. See Note 3 of the Notes to our Consolidated
Financial Statements.
26
(2) See Note 3 of the Notes to our Consolidated Financial Statements.
(3) For any period, EBITDA equals earnings before interest expense, taxes,
depreciation and amortization, including amortization of debt discount and
deferred financing costs. EBITDA margin equals EBITDA as a percentage of
net revenue. We have included information concerning EBITDA and EBITDA
margin because we believe they allow for a more complete analysis of our
results of operations. EBITDA and EBITDA margin should not be considered as
alternatives to, nor is there any implication that they are more meaningful
than, any measure of performance or liquidity as promulgated under GAAP.
(4) Represents the approximate total student population at our schools as of
October 31.
(5) Represents the total number of campuses operated by us as of the end of the
period.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion below contains certain forward-looking statements (as such
term is defined in Section 21E of the Securities Exchange Act of 1934) that are
based on the beliefs of our management, as well as assumptions made by, and
information currently available to, our management. Our actual growth, results,
performance and business prospects and opportunities in 2001 and beyond could
differ materially from those expressed in, or implied by, any such forward-
looking statements. See "Special Note Regarding Forward-Looking Statements" on
page 33 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
Selected Historical Consolidated Financial Data and our Consolidated Financial
Statements and Notes thereto appearing elsewhere herein.
Background and Overview
We are a provider of private, for-profit postsecondary education with 38
campuses throughout the United States and in Canada, the United Kingdom and the
United Arab Emirates. We have approximately 33,400 students enrolled as of
January 31, 2001 and our schools enjoy long operating histories and offer a
variety of master's degree, bachelor's degree, associate degree, and diploma
programs in career-oriented disciplines within our core curricula of:
. visual communication and design technologies
. information technology
. business studies
. culinary arts
We have 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 is a result of capital improvements and
increased amortization is a result of added goodwill.
We have experienced significant growth both internally and through
acquisitions with our net revenue increasing from $19.4 million in 1995 to
$325.3 million in 2000. In addition, our net income increased from $0.1 million
in 1995 to $21.4 million in 2000. In addition, we believe that EBITDA, while
not a substitute for generally accepted accounting principles' measures of
operating results, is an important measure of our financial performance and
that of our schools. For the year ended December 31, 2000, EBITDA was $60.0
million, up 72 percent from $34.9 million for 1999. We believe that EBITDA is
particularly meaningful due principally to the role acquisitions have played in
our development. Our rapid growth through acquisitions has resulted in
27
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 the portion of 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, and is reflected
net of bad debt expense.
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. On average, our campuses increase tuition one or more times
annually.
Other revenue consists of bookstore sales, placement fees, contract
training, dormitory and cafeteria fees, rental income, 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), distance learning
costs, certain costs of establishing and maintaining computer laboratories,
costs of student housing and owned facility costs.
General and administrative expense includes salaries and benefits of
personnel in recruitment, admissions, accounting, personnel, compliance and
corporate and school administration. Costs of promotion and development,
advertising and production of marketing materials, and occupancy of the
corporate offices are also included in this expense category.
Depreciation and amortization includes costs associated with the
depreciation of purchased computer laboratories, equipment, furniture and
fixtures, courseware, owned facilities, capitalized equipment leases and
amortization of intangible assets, primarily goodwill and non-competition
agreements with the previous owners of our schools.
Acquisitions
On March 13, 1998, we acquired all of the outstanding capital stock of
Southern California School of Culinary Arts for a purchase price of
approximately $1.0 million.
On July 31, 1998, we acquired certain assets and assumed certain liabilities
of Scottsdale Culinary. The purchase price was approximately $9.9 million.
On January 4, 1999, we acquired all of the outstanding shares of capital
stock of Harrington. The purchase price was approximately $3.5 million.
On March 9, 1999, we acquired certain assets and assumed certain liabilities
of McIntosh. The purchase price was approximately $5.0 million.
On April 1, 1999, we acquired all of the outstanding shares of capital stock
of Briarcliffe. The purchase price was approximately $20.6 million.
On June 1, 1999, we acquired certain assets and assumed certain liabilities
of Brooks Institute of Photography. The purchase price was approximately $6.6
million.
28
On December 3, 1999, we acquired all of the outstanding shares of capital
stock of Washington Business School. The purchase price was approximately $2.9
million.
On February 1, 2000, we acquired all of the outstanding shares of capital
stock of The Cooking and Hospitality Institute of Chicago. The purchase price
was approximately $5.1 million.
On April 3, 2000, we closed the acquisition of California Culinary Academy.
The purchase price for the shares and assumed debt were approximately $19.1
million and $3.0 million, respectively.
On July 28, 2000, we closed the acquisition of SoftTrain number. The
purchase price was approximately $0.5 million.
On October 2, 2000, we closed the acquisition of Retter Business College.
The purchase price was approximately $0.4 million.
On January 2, 2001, we closed the acquisition of EduTrek International,
Inc., a Georgia corporation and operator of American InterContinental
University (AIU). EduTrek's shareholders received an aggregate of 1.2 million
shares of our common stock and $2.5 million in cash. The acquisition was
accounted for as a purchase and the purchase price, subject to adjustment,
exceeded the fair market value of identifiable assets acquired and liabilities
assumed, resulting in goodwill of approximately $65 million. Additionally, at
November 30, 2000, one of EduTrek's lenders, Sylvan Learning Systems, Inc.,
assigned its $5.0 promissory note to us in exchange for $5.0 million plus
accrued interest.
Results of Operations
The following table summarizes our operating results as a percentage of net
revenue for the periods indicated.
Year Ended
December 31,
-------------------
2000 1999 1998
----- ----- -----
Revenue:
Tuition and registration fees, net...................... 90.9% 91.8% 92.2%
Other, net.............................................. 9.1 8.2 7.8
----- ----- -----
Total net revenue..................................... 100.0 100.0 100.0
----- ----- -----
Operating expenses:
Educational services and facilities..................... 39.8 39.4 39.6
General and administrative.............................. 41.7 44.5 44.3
Depreciation and amortization........................... 6.3 6.7 8.4
Compensation related to the initial public offering..... -- -- 1.4
----- ----- -----
Total operating expenses.............................. 87.8 90.6 93.7
----- ----- -----
Income from operations.................................... 12.2 9.4 6.3
Interest income........................................... 0.5 0.2 0.1
Interest Expense.......................................... (0.4) (0.7) (1.0)
----- ----- -----
Income before provision for taxes and cumulative effect of
change in accounting principle........................... 12.3 8.9 5.4
Provision for income taxes................................ 5.3 3.8 2.3
----- ----- -----
Income before cumulative effect of change in accounting
principle................................................ 7.0 5.1 3.1
Cumulative effect of change in accounting principle (net
of taxes)................................................ (0.2) -- (0.1)
----- ----- -----
Net income................................................ 6.8 5.1 3.0
===== ===== =====
Net income attributable to common stockholders............ 6.8% 5.1% 1.3%
===== ===== =====
29
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Revenue. Net tuition and registration fee revenue increased 49%, from $199.1
million in 1999 to $295.7 million in 2000. The increase was due to an
approximate 22% increase in the average student population at the schools which
we owned prior to 1999, tuition increases effective in 2000 and student
enrollment mix. The increase was also due to added net tuition and registration
fee revenue of $34.6 million for schools acquired during and after 1999. Bad
debt expense increased 38% from $6.7 million in 1999 to $9.2 million in 2000,
but remained fairly consistent from year to year as a percentage of gross
revenue. Other net revenue increased 67%, from $17.7 million in 1999 to $29.6
million in 2000, primarily due to the schools acquired during and after 1999.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 52% from $85.5 million in 1999 to $129.6 million
in 2000. Of this increase, $22.0 million was attributable to schools owned
prior to 1999 and $20.6 million was attributable to schools acquired during and
after 1999. These increases were primarily due to the increase in average
student population mentioned above, an increase in contract training costs, as
well as an increase in curriculum development.
General and Administrative Expense. General and administrative expense
increased 41%, from $96.4 million in 1999 to $135.7 million in 2000. The
increase was primarily attributable to $13.5 million of expenses for schools
acquired during and after 1999, costs totaling $7.9 million related to planned
corporate and regional infrastructure enhancements and increased advertising
and marketing (including admissions) of $13.8 million for schools owned prior
to 1999.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 41%, from $14.6 million in 1999 to $20.6 million in 2000. This
increase was due to increased capital expenditures for schools acquired during
and after 1999 and related increased depreciation expense of $1.1 million in
2000. Additionally, depreciation expense increased $5.2 million due to the
depreciation expense for schools owned prior to 1999. Amortization expense
decreased from $4.9 million in 1999 to $4.6 million in 2000, primarily due to
the decline of amortization of non-competition agreements for the acquisition
of schools prior to 1999.
Interest Income. Interest income increased 351% from $0.3 million in 1999 to
$1.5 million in 2000 due to investments related to the proceeds from our May
2000 public offering.
Interest Expense. Interest expense decreased 8%, from $1.5 million in 1999
to $1.4 million in 2000. The overall change in interest expense was primarily
due to a reduction in indebtedness following our May 2000 public offering.
Provision for Income Taxes. The provision for income taxes increased 110%
from $8.3 million in 1999 to $17.3 million in 2000 as a result of the increase
in pretax income. We expect our effective tax rate to increase in 2001 due to
the impact of nondeductible goodwill amortization associated with the EduTrek
merger.
Income before Cumulative Effect of Change in Accounting Principle. Income
before cumulative effect of change in accounting principle increased to $22.2
million in 2000 from $10.9 million in 1999, due to the reasons noted above.
Cumulative Effect of Change in Accounting Principle. We adopted Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, as of January 1, 2000,
resulting in a net of tax charge of $0.8 million in 2000. SAB 101 requires us
to recognize revenue related to application and registration fees over the
students benefit period rather than as revenue upon receipt.
Net Income. Net income increased to $21.4 million in 2000 from $10.9 million
in 1999, due to the reasons noted above.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue. Net tuition and registration fee revenue increased 50%, from $132.9
million in 1998 to $199.1 million in 1999. The increase is due to an
approximate 18% increase in the average student population at our
30
schools, which we owned prior to 1998, tuition increases effective in 1999, and
student enrollment mix. The increase was also due to added net tuition and
registration fee revenue of $27.1 million for schools acquired during and after
1998. Bad debt expense increased 34% from $5.0 million in 1998 to $6.7 million
in 1999, but remained fairly consistent from year to year as a percentage of
gross revenue. Other net revenue increased 57%, from $11.3 million in 1998 to
$17.7 million in 1999, due to the schools acquired during and after 1998.
Educational Services and Facilities Expense. Educational services and
facilities expense increased 50%, from $57.2 million in 1998 to $85.5 million
in 1999. Of this increase, $14.0 million was attributable to schools owned
prior to 1998 and $14.3 million was attributable to schools acquired during and
after 1998. These increases were primarily due to the increase in average
student population mentioned above, as well as an increase in curriculum
development.
General and Administrative Expense. General and administrative expense
increased 51%, from $63.9 million in 1998 to $96.4 million in 1999. The
increase was primarily attributable to $11.2 million of expenses for schools
acquired prior to 1998, costs totaling $6.6 million related to planned
corporate and regional infrastructure enhancements and increased advertising
and marketing (including admissions) of $10.4 million for schools owned prior
to 1998.
Depreciation and Amortization Expense. Depreciation and amortization expense
increased 20%, from $12.2 million in 1998 to $14.6 million in 1999. The
increase was due to increased capital expenditures for schools owned during
1998 and related increased depreciation expense of $1.2 million in 1999.
Additionally, depreciation expense increased $1.4 million due to the
depreciation expense for schools owned prior to 1998. Amortization expense
decreased from $5.1 million in 1998 to $4.9 million in 1999, primarily due to
the decline of amortization of non-competition agreements for the acquisition
of schools prior to 1998.
Compensation Expense Related to the Initial Public Offering. A before-tax,
non-cash compensation charge of approximately $2.0 million was recorded
pursuant to amended stock option agreements with two stockholders upon
consummation of our initial public offering in February 1998.
Interest Income. Interest income increased 98% to $0.3 million in 1999 from
$0.2 million in 1998 due to investments related to the proceeds from our March
1999 public offering.
Interest Expense. Interest expense increased 5%, from $1.4 million in 1998
to $1.5 million in 1999. The overall change in interest expense was primarily
due to a reduction of indebtedness resulting from the application of the net
proceeds of a public offering of common stock in March 1999.
Provision for Income Taxes. The provision for income taxes increased from
$3.4 million in 1998 to $8.3 million in 1999 as a result of changes in pretax
income.
Income before Cumulative Effect of Change in Accounting Principle. Income
before cumulative effect of change in accounting principle increased to $10.9
million in 1999 from $4.5 million in 1998.
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 in 1998.
Net Income. Net income increased to $10.9 million in 1999 from $4.3 million
in 1998, due to the factors noted above.
Net Income Attributable to Common Stockholders. Net income attributable to
common stockholders increased from $1.9 million in 1998 to $10.9 million in
1999. The primary reason for this increase was due to the increase in net
income discussed above and decreases in dividends on preferred stock and
accretion to redemption value of preferred stock and warrants in connection
with our initial public offering.
31
Seasonality
Our results of operations fluctuate primarily as a result of changes in the
level of student enrollment at our schools. Our schools experience a seasonal
increase in new enrollments in the fall, traditionally when the largest numbers
of new high school graduates begin postsecondary education. Furthermore,
although we encourage year-round attendance at all schools, some schools have
summer breaks for some of their programs. As a result of these factors, total
student enrollment and net revenue are typically highest in the fourth quarter,
which is October through December, and lowest in the second quarter, which is
April through June, of our fiscal year. Our costs and expenses do not, however,
fluctuate as significantly on a quarterly basis, except for admissions and
advertising costs as these are typically higher in the second and third quarter
in support of seasonally high enrollments. We anticipate that these trends will
continue.
Liquidity and Capital Resources
On May 10, 2000, we sold 4,050,000 shares of common stock at $16.25 per
share pursuant to a public offering. The net proceeds to us from the sale of
the shares of common stock, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, were approximately
$61.6 million. We used $28.5 million of the offering net proceeds to repay
indebtedness under our credit facility and the remaining $33.1 million is being
used for general corporate purposes.
Our merger with EduTrek International, Inc., operator of American
InterContinental University, was completed on January 2, 2001. Under the terms
of the merger agreement, EduTrek shareholders received an aggregate of 1.2
million shares of Career Education Corporation (approximately 0.09 shares of
our stock for each share of EduTrek stock) and $2.5 million in cash
(approximately $0.19 per share). There were approximately 13.32 million EduTrek
shares outstanding.
We finance our operating activities and our internal growth through cash
generated from operations. We finance acquisitions through funding from a
combination of additional equity issuances, credit facilities and cash
generated from operations. Net cash provided by operating activities decreased
to $25.6 million in 2000 from $34.2 million in 1999. The decrease was partially
due to approximately $3.0 million in severance costs and other liabilities
related to acquisitions. Additionally, we paid approximately $7.0 million more
in tax payments than in 1999 as a result of our increased profitability.
Capital expenditures increased to $28.4 million in 2000 from $12.2 million
in 1999. This increase was primarily due to investments in leasehold
improvements on new and expanded facilities and investments in capital
equipment as a result of increasing student population. We expect capital
expenditures to continue to increase as new schools are acquired or opened,
student population increases and current facilities and equipment are upgraded
and expanded.
Our net receivables as a percentage of net revenue increased to 10.3% in
2000 from 7.4% in 1999 due to the increase in student population and higher
priced programs and increased revenues at schools acquired during 1999. 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. Our historical bad debt expense as a percentage of gross
student revenue for the years ended December 31, 2000, 1999 and 1998 was 3.0%,
3.3% and 3.6%, respectively.
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 may 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, at either
(1) the bank's base or prime rate depending on whether the particular loan
is denominated in U.S. or Canadian dollars, plus a specified number of
basis points, ranging from 0 to 75, based upon our leverage ratio or
(2) LIBOR, plus a specified number of basis points, ranging from 75 to 200
based upon our leverage ratio.
32
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 December 31, 2000, we had approximately $6.0 million of
outstanding letters of credit and $10.5 million of outstanding borrowings under
our credit facility. As a result, at December 31, 2000, our remaining credit
availability under the credit agreement was approximately $73.5 million.
The DOE requires that we keep unbilled Title IV Program funds that are
collected in separate cash accounts until the students are billed for the
program portion related to those Title IV Program funds. In addition, all funds
transferred to our schools through electronic funds transfer program are held
in a separate cash account until certain conditions are satisfied. As of
December 31, 2000, 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.
Recent Accounting Pronouncement
On December 3, 1999, the Securities Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on
the recognition, presentation, and disclosure of revenue in financial
statements. The SAB outlines basic criteria that must be met before registrants
may recognize revenue, including persuasive evidence of the existence of an
arrangement, the delivery of products or services, a fixed and determinable
sales price, and reasonable assurance of collection. SAB 101 became effective
beginning the first fiscal quarter of the first fiscal year beginning after
December 15, 1999.
Prior to the release of SAB 101, our revenue recognition policy was in
compliance with generally accepted accounting principles. Effective January 1,
2000, we adopted this change in accounting principle to comply with the
specific provisions and guidance of SAB 101. SAB 101 requires us to recognize
revenue related to application and registration fees over the student benefit
period. Through December 31, 1999, we recognized application and registration
fees as revenue upon receipt. As a result, we recognized a cumulative net of
tax charge of $0.8 million, in the first quarter of 2000. This new accounting
requirement did not have a significant effect on 1999 income before the
cumulative effect of the accounting change.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137, is
effective for fiscal years beginning after June 15, 2000. This statement
requires that all derivative financial instruments, such as interest rate swap
contract and foreign exchange contracts, be recognized in the financial
statements and measured at fair value regardless of the purpose or intent for
holding them. Changes in the fair market value of derivative financial
instruments are either recognized periodically in income or shareholder's
equity (as a component of comprehensive income), depending on whether the
derivative is being used to hedge changes in fair value or cash flow. We do not
currently hold or issue any derivative financial instruments, but will adopt
SFAS 133 if this becomes applicable in the future.
Special Note Regarding Forward-Looking Statements
This Form 10-K contains certain statements which reflect our expectations
regarding our future growth, results of operations, performance and business
prospects and opportunities. Wherever possible, words such as "anticipate,"
"believe," "plan," "expect" and similar expressions have been used to identify
these "forward-looking" statements. These statements reflect our current
beliefs and are based on information currently available to us. Accordingly,
these statements are subject to risks and uncertainties, which could cause our
actual growth, results, performance and business prospects and opportunities to
differ from those, expressed in, or implied by, these statements.
33
These risks and uncertainties include, but are not limited to:
. implementation of our operating and growth strategy;
. risks inherent in operating private for-profit postsecondary educational
institutions;
. risks associated with general economic and business conditions;
. charges and costs related to acquisitions;
. our ability to successfully integrate our acquired institutions;
. our ability to continue our acquisition strategy;
. our ability to attract and retain students at our institutions;
. our ability to compete with new and enhanced competition in the education
industry;
. our ability to meet regulatory and accrediting agency requirements; and
. our ability to attract and retain key employees and faculty.
We are not obligated to update or revise these forward-looking statements to
reflect new events or circumstances.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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. The weighted average annual interest rate of these
credit agreements and bank note payables was 9.5% at December 31, 2000. In
addition, we had capital lease obligations totaling $7.7 million with a
weighted average rate of 5.24% and $0.9 million of debt with fixed annual rates
of interest of 7.0% or less at December 31, 2000. We estimate that the book
value of each of our debt instruments approximated its fair value at December
31, 2000.
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 book value of the assets and liabilities of these operations at
December 31, 2000 approximated their fair value.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets are as of December 31, 2000 and 1999 and the
consolidated statements of operations, cash flows and stockholders' investment
are for each of the years ended December 31, 2000, 1999 and 1998:
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets, page F-2.
Consolidated Statements of Operations, page F-3.
Consolidated Statements of Cash Flows, page F-5.
Consolidated Statements of Stockholders' Investment, page F-6.
Notes to Consolidated Financial Statements, page F-8.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information in response to this item is incorporated by reference from
the sections captioned "PROPOSAL NO. 1--ELECTION OF DIRECTORS" and "EXECUTIVE
OFFICERS" of the definitive Proxy Statement to be filed in connection with our
2001 Annual Meeting of Stockholders (the "2001 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in response to this item is incorporated by reference from
the section of the 2001 Proxy Statement captioned "SECURITY OWNERSHIP OF
MANAGEMENT AND PRINCIPAL STOCKHOLDERS."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in response to this item is incorporated by reference from
the sections of the 2001 Proxy Statement captioned "EXECUTIVE COMPENSATION" and
"COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION."
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K or
incorporated by reference as set forth below:
1. Financial Statements of Career Education Corporation and its
subsidiaries.
Report of Independent Public Accountants, page F-1.
Consolidated Balance Sheets at December 31, 2000 and 1999, page F-2.
Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998, page F-3.
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998, page F-5.
Consolidated Statements of Stockholders' Investment for the years
ended December 31, 2000, 1999 and 1998, page F-6.
Notes to Consolidated Financial Statements, page F-8.
2. (a) Exhibits:
*2.1 Asset Purchase Agreement dated as of September 30, 1996, among the Registrant,
WCI Acquisition, Ltd., Phillips Educational Group of Portland, Inc., and
Phillips Colleges, Inc. Schedules and exhibits to this Asset Purchase Agreement
have not been included herewith, but will be furnished supplementally to the
Commission upon request.
*2.2 Stock Sale Agreement dated as of April 7, 1997, between K-III Prime
Corporation, Inc. and the Company. Schedules and exhibits to this Stock Sale
Agreement have not been included herewith, but will be furnished supplementally
to the Commission upon request.
*2.3 Stock Purchase Agreement dated as of June 30, 1997, among IAMD Acquisition I,
Ltd. and Clem Stein, Jr., Marion Stein, Leonard Rutstein, Barbara Ann Scott
King, Thomas V. King, William W. Wirtz and David Powell. Schedules and exhibits
to this Stock Purchase Agreement have not been included herewith but will be
furnished supplementally to the Commission upon request.
*2.4 Share Purchase Agreement dated as of June 30, 1997, among the Company and Clem
Stein, Jr., Leonard Rutstein, Barbara Ann Scott King and Lawrence N. Gross.
Schedules and exhibits to this Share Purchase Agreement have not been included
herewith, but will be furnished supplementally to the Commission upon request.
**2.5 Asset Purchase Agreement dated as of July 1, 1998 by and among Scottsdale
Institute, Inc., an Arizona corporation, The Frank G. and Elizabeth S. Leite
Revocable Trust dated April 14, 1992, Frank G. Leite and Elizabeth S. Leite,
and SCI Acquisition I, Ltd., a Delaware Corporation. Schedules and exhibits to
this Asset Purchase Agreement have not been included herewith, but will be
furnished supplementally to the Commission upon request.
36
+3.1 Amended and Restated Certificate of Incorporation of the Company.
+3.2 Amended and Restated By-laws of the Company.
*4.1 Form of specimen stock certificate representing Common Stock.
***4.2 Amended and Restated Credit Agreement dated as of October 26, 1998 among
the Company, 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. Schedules and exhibits to this
Credit Agreement have not been included herewith, but will be furnished
supplementally to the Commission upon request.
****4.3 Amendment No. 1 and Consent to the Amended and Restated Credit Agreement,
dated as of February 24, 1999, by and between the Parties.
****4.4 Amendment No. 2 to the Amended and Restated Credit Agreement, dated as of
March 31, 1999, by and between the Parties.
*10.1 Career Education Corporation 1995 Stock Option Plan, as amended. +++
*10.2 Form of Option Agreement under the Company's 1995 Stock Option Plan. +++
*10.3 Career Education Corporation 1998 Employee Incentive Compensation Plan as
amended. +++
*10.4 Form of Option Agreement under the Company's 1998 Employee Incentive
Compensation Plan. +++
*10.5 Career Education Corporation 1998 Non-Employee Directors' Stock Option
Plan. +++
*10.6 Form of Option Agreement under the Company's 1998 Non-Employee Directors'
Stock Option Plan. +++
*10.7 Career Education Corporation 1998 Employee Stock Purchase Plan.
*10.8 Amended and Restated Option Agreement dated as of July 31, 1995, between
the Company and John M. Larson, and Amendment thereto dated as of October
20, 1997. +++
*10.9 Supplemental Option Agreement dated July 31, 1995, between the Company and
John M. Larson. +++
*10.10 Amended and Restated Option Agreement dated as of July 31, 1995, between
the Company and Robert E. Dowdell, and Amendment thereto dated as of
October 20, 1997. +++
*****10.11 Employment Agreement dated as of August 1, 2000, between the Company and
John M. Larson. +++
*10.12 Form of Indemnification Agreement for Directors and Executive
Officers. +++
*10.13 Career Education Corporation Amended and Restated Stockholders' Agreement
dated as of July 31, 1995, as amended on February 28, 1997 and May 30,
1997.
*10.14 Registration Rights Agreement dated as of July 31, 1995, between the
Company, Electra Investment Trust P.L.C. and Electra Associates, Inc., and
Amendment No. 1 thereto.
*10.15 Securities Purchase Agreement dated as of July 31, 1995 among the Company,
Electra Investment Trust P.L.C. and Electra Associates, Inc.
*10.16 Securities Purchase Agreement dated as of February 28, 1997, among the
Company, Heller Equity Capital Corporation, Electra Investment Trust
P.L.C., Robert E. Dowdell, John M. Larson, Wallace O. Laub and Constance
L. Laub and William A. Klettke.
37
*10.17 Securities Purchase Agreement dated as of May 30, 1997 among the Company,
Heller Equity Capital Corporation, Electra Investment Trust P.L.C. and
William A. Klettke.
*10.18 Form of Management Fee Agreement between the Company and each of its
subsidiaries.
*10.19 Form of Tax Sharing Agreement between the Company and each of its
subsidiaries.
+10.20 Registration Rights Agreement between the Company and Heller Equity Capital
Corporation.
+10.21 Agreement between the Company and Heller Equity Capital Corporation,
regarding designation of directors of the Company.
++10.22 Stock Purchase Agreement dated as of November 25, 1998 by and between the
Company and Robert C. Marks and the Robert C. Marks Trust dated October 9,
1997.
21 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP with respect to financial statements of Career
Education Corporation and Subsidiaries.
- --------
* Incorporated herein by reference to our Registration Statement on Form S-1,
effective as of January 28, 1998.
** Incorporated herein by reference to our Report on Form 8-K dated August 14,
1998.
*** Incorporated herein by reference to our Registration Statement on Form S-1,
effective as of March 17, 1999.
**** Incorporated herein by reference to our Quarterly Report on Form 10-Q for
the period ended March 31, 1999.
***** Incorporated herein by reference to our Quarterly Report on Form 10-Q for
the period ended September 30, 2000.
+ Incorporated herein by reference to our Annual Report on Form 10-K for the
year ended December 31, 1997.
++ Incorporated herein by reference to our Report on Form 8-K dated January
19, 1999.
+++ Management contract or compensatory plan or arrangement required to be
filed as an Exhibit on this Form 10-K.
(b) Reports on Form 8-K:
We filed a Current Report on Form 8-K on October 27, 2000, to report our
entering into a merger agreement with EduTrek International, Inc. (Items 5
and 7 of Form 8-K).
We filed a Current Report on Form 8-K on December 1, 2000, to report our
entering into a ninth amendment to EduTrek's Credit Agreement with First
Union National Bank (Items 5 and 7 ofForm 8-K).
38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 29th day of
March 2001.
Career Education Corporation
/s/ Patrick K. Pesch
By: _________________________________
Patrick K. Pesch,Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ John M. Larson Chairman, President, and March 29, 2001
____________________________________ Chief Executive Officer
John M. Larson (Principal Executive
Officer)
/s/ Patrick K. Pesch Senior Vice President, Chief March 29, 2001
____________________________________ Financial Officer,
Patrick K. Pesch Treasurer and Secretary
(Principal Financial and
Accounting Officer)
/s/ Robert E. Dowdell Director March 29, 2001
____________________________________
Robert E. Dowdell
/s/ Thomas B. Lally Director March 29, 2001
____________________________________
Thomas B. Lally
/s/ Wallace O. Laub Director March 29, 2001
____________________________________
Wallace O. Laub
/s/ Keith K. Ogata Director March 29, 2001
____________________________________
Keith K. Ogata
39
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Career Education Corporation:
We have audited the accompanying consolidated balance sheets of CAREER
EDUCATION CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of December
31, 2000 and 1999 and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Career
Education Corporation and Subsidiaries as of December 31, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 in conformity with accounting
principles generally accepted in the United States.
As explained in Note 4 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for application
and registration fees to comply with the specific provisions and guidance of
Staff Accounting Bulletin No. 101, Revenue Recognition.
Arthur Andersen LLP
Chicago, Illinois
January 31, 2001
F-1
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31,
------------------
2000 1999
-------- --------
ASSETS
CURRENT ASSETS:
Cash..................................................... $ 33,742 $ 44,745
Receivables--
Students, net of allowance for doubtful accounts of
$5,499 and $2,723 at December 31, 2000 and 1999,
respectively.......................................... 29,800 13,595
Other.................................................. 3,851 2,346
Inventories.............................................. 2,874 1,468
Prepaid expenses and other current assets................ 13,116 6,357
Deferred income tax assets............................... 2,847 1,011
-------- --------
Total current assets................................. 86,230 69,522
-------- --------
PROPERTY AND EQUIPMENT, net................................ 90,836 69,296
INTANGIBLE ASSETS, net..................................... 93,634 70,484
OTHER ASSETS............................................... 9,999 1,222
-------- --------
TOTAL ASSETS............................................... $280,699 $210,524
======== ========
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $ 4,494 $ 2,324
Accounts payable......................................... 7,608 7,629
Accrued expenses--
Payroll and related benefits........................... 8,763 5,535
Income taxes........................................... 2,435 5,470
Other.................................................. 10,004 5,674
Deferred tuition revenue................................. 23,610 17,103
-------- --------
Total current liabilities............................ 56,914 43,735
-------- --------
LONG-TERM DEBT, net of current maturities.................. 14,626 47,615
DEFERRED INCOME TAX LIABILITIES............................ 6,185 4,128
OTHER LONG-TERM LIABILITIES................................ 2,081 1,365
COMMITMENTS AND CONTINGENCIES..............................
STOCKHOLDERS' INVESTMENT:
Preferred stock, $0.01 par value; 1,000,000 shares
authorized, no shares issued and outstanding at December
31, 2000 and 1999....................................... $ -- $ --
Common stock, $0.01 par value; 50,000,000 shares
authorized; 20,323,739 and 15,753,534 shares issued and
outstanding at December 31, 2000 and 1999............... 203 158
Additional paid-in capital............................... 179,133 113,046
Accumulated other comprehensive loss..................... (698) (371)
Retained earnings........................................ 22,255 848
-------- --------
Total stockholders' investment....................... 200,893 113,681
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' INVESTMENT............. $280,699 $210,524
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-2
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
For the Year Ended
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
REVENUE:
Tuition and registration fees, net............. $295,674 $199,057 $132,926
Other, net..................................... 29,619 17,747 11,306
-------- -------- --------
Total net revenue............................ 325,293 216,804 144,232
-------- -------- --------
OPERATING EXPENSES:
Educational services and facilities............ 129,628 85,490 57,151
General and administrative..................... 135,691 96,406 63,856
Depreciation and amortization.................. 20,594 14,557 12,163
Compensation expense related to the initial
public offering............................... -- -- 1,961
-------- -------- --------
Total operating expenses..................... 285,913 196,453 135,131
-------- -------- --------
Income from operations....................... 39,380 20,351 9,101
Interest income................................ 1,484 329 166
Interest expense............................... (1,358) (1,482) (1,416)
-------- -------- --------
Income before provision for income taxes and
cumulative effect of change in accounting
principle................................... 39,506 19,198 7,851
PROVISION FOR INCOME TAXES....................... 17,322 8,255 3,350
-------- -------- --------
Income before cumulative effect of change in
accounting principle........................ 22,184 10,943 4,501
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, net of taxes of $587 and $149 in 2000
and 1998, respectively.......................... (778) -- (205)
-------- -------- --------
NET INCOME....................................... $ 21,406 $ 10,943 $ 4,296
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-3
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS--(continued)
(In thousands, except per share amounts)
For the Year Ended
December 31,
------------------------
2000 1999 1998
------- ------- -------
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Income before cumulative effect of change in
accounting principle.............................. $22,184 $10,943 $ 4,501
Dividends on preferred stock....................... -- -- (274)
Accretion to redemption value of preferred stock
and warrants...................................... -- -- (2,153)
------- ------- -------
Income before cumulative effect of change in
accounting principle attributable to common
stockholders.................................... 22,184 10,943 2,074
Cumulative effect of change in accounting
principle......................................... (778) -- (205)
------- ------- -------
Net income attributable to common stockholders... $21,406 $10,943 $ 1,869
======= ======= =======
INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Basic--
Income before cumulative effect of change in
accounting principle............................ $ 1.18 $ 0.71 $0.16
Cumulative effect of change in accounting
principle....................................... (0.04) -- (0.02)
------- ------- -------
Net income..................................... $ 1.14 0.71 $ 0.14
======= ======= =======
Diluted--
Income before cumulative effect of change in
accounting principle............................ $ 1.14 $ 0.69 $ 0.15
Cumulative effect of change in accounting
principle....................................... (0.04) -- (0.01)
------- ------- -------
Net income..................................... $ 1.10 $ 0.69 $ 0.14
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.............................................. 18,687 15,370 13,042
======= ======= =======
Diluted............................................ 19,390 15,878 13,594
======= ======= =======
PRO FORMA INFORMATION (unaudited):
Income attributable to common stockholders--
Income before cumulative effect of change in
accounting principle attributable to common
stockholders, as reported....................... $2,074
Dividends on preferred stock..................... 274
Accretion to redemption value of preferred stock
and warrants.................................... 2,055
-------
Pro forma income before cumulative effect of change
in accounting principle attributable to common
stockholders...................................... 4,403
Cumulative effect of change in accounting
principle....................................... (205)
-------
Pro forma net income attributable to common
stockholders.................................. $ 4,198
=======
Pro forma diluted income per share attributable to
common stockholders--
Income before cumulative effect of change in
accounting principle............................ $ 0.15
Cumulative effect of change in accounting
principle....................................... (0.01)
-------
Net income....................................... $ 0.14
=======
Pro forma diluted weighted average number of common
and common stock equivalent shares outstanding.... 14,058
=======
The accompanying notes are an integral part of these consolidated statements.
F-4
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
For the Year Ended
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 21,406 $ 10,943 $ 4,296
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization................ 20,594 14,557 12,163
Deferred income taxes........................ 4,363 750 (1,311)
Cumulative effect of change in accounting
principle................................... 778 -- 205
Compensation expense related to options...... 52 61 2,212
Loss (gain) on sale of property and
equipment................................... 22 -- (14)
Changes in operating assets and liabilities,
net of acquisitions--
Receivables, net........................... (16,705) (2,914) (4,237)
Inventories, prepaid expenses and other
current assets............................ (7,662) (2,804) 814
Deposits and other non-current assets...... 2,377 704 (352)
Accounts payable........................... (3,140) 4,517 (1,383)
Accrued expenses and other liabilities..... 138 3,854 8,031
Tax benefit associated with option
exercises................................. 1,253 838 --
Deferred tuition revenue................... 2,160 3,685 1,803
-------- -------- --------
Net cash provided by operating
activities.............................. 25,636 34,191 22,227
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash............. (31,651) (42,136) (5,860)
Acquisition and financing transaction costs.... (3,273) (1,554) (372)
Purchases of property and equipment, net....... (28,453) (12,169) (6,383)
Other current assets........................... -- -- (73)
Proceeds from sale of property and equipment... -- -- 332
-------- -------- --------
Net cash used in investing activities.... (63,377) (55,859) (12,356)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock....................... 67,952 16,623 52,765
Dividends paid on preferred stock.............. -- -- (47)
Equity and debt financing costs................ (4,125) (2,094) (7,085)
Payments of long-term debt..................... (2,929) (1,568) (8,295)
Net payments of capital lease obligations...... (3,509) -- --
Net proceeds from (payments on) revolving loans
under Credit Agreement........................ (30,500) 29,750 (28,735)
Payments on term loans under Credit Agreement.. -- -- (13,500)
-------- -------- --------
Net cash provided by (used in) financing
activities.............................. 26,889 42,711 (4,897)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... (151) 154 (332)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH.................. (11,003) 21,197 4,642
CASH, beginning of year.......................... 44,745 23,548 18,906
-------- -------- --------
CASH, end of year................................ $ 33,742 $ 44,745 $ 23,548
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-5
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
Common Stock
--------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class D Class E Common Stock
---------------- ---------------- ------------------ ---------------- ---------------- -------------------
5,625,600 $0.01 937,600 $0.01 937,600 $0.01 937,600 $0.01 1,875,200 $0.01 50,000,000 $0.01
Shares Par Shares Par Shares Par Shares Par Shares Par Shares Par
Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value Authorized Value
---------- ----- ---------- ----- ---------- ------- ---------- ----- ---------- ----- ---------- --------
BALANCE, December
31, 1997........... 49,224 492 47,818 478 655,382 6,554 -- -- 16,380 164 -- --
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation....... -- -- -- -- -- -- -- -- -- -- -- --
Total
comprehensive
income..........
Preferred stock
and warrant
accretion......... -- -- -- -- -- -- -- -- -- -- -- --
Dividends......... -- -- -- -- -- -- -- -- -- -- -- --
Compensatory
options........... -- -- -- -- -- -- -- -- -- -- -- --
Conversion of
preferred and
common stock...... (49,224) (492) (47,818) (478) (655,382) (6,554) -- -- (16,380) (164) 6,384,074 63,841
Issuance of
common stock...... -- -- -- -- -- -- -- -- -- -- 6,576,558 65,766
Warrants
exercised......... -- -- -- -- -- -- -- -- -- -- 1,314,534 13,145
Options
exercised......... -- -- -- -- -- -- -- -- -- -- 30,626 306
------- ----- ------- ----- -------- ------- --- ---- ------- ----- ---------- --------
BALANCE, December
31, 1998........... -- $ -- -- $ -- -- $ -- -- $-- -- $ -- 14,305,792 $143,058
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation....... -- -- -- -- -- -- -- -- -- -- -- --
Total
comprehensive
income..........
Compensatory
options........... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
common stock...... -- -- -- -- -- -- -- -- -- -- 1,213,830 12,138
Options
exercised......... -- -- -- -- -- -- -- -- -- -- 233,912 2,339
Share issuance
obligation........ -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- ---------- --------
BALANCE, December
31, 1999........... -- $ -- -- $ -- -- $ -- -- $-- -- $ -- 15,753,534 $157,535
Net income........ -- -- -- -- -- -- -- -- -- -- -- --
Foreign currency
translation....... -- -- -- -- -- -- -- -- -- -- -- --
Total
comprehensive
income..........
Compensatory
options........... -- -- -- -- -- -- -- -- -- -- -- --
Issuance of
common stock...... -- -- -- -- -- -- -- -- -- -- 4,255,404 42,554
Options
exercised......... -- -- -- -- -- -- -- -- -- -- 314,801 3,148
Share issuance
obligation........ -- -- -- -- -- -- -- -- -- -- -- --
------- ----- ------- ----- -------- ------- --- ---- ------- ----- ---------- --------
BALANCE, December
31, 2000........... -- -- -- -- -- -- -- -- -- -- 20,323,739 $203,237
======= ===== ======= ===== ======== ======= === ==== ======= ===== ========== ========
Total
Amount
--------
BALANCE, December
31, 1997........... $ 7,688
Net income........ --
Foreign currency
translation....... --
Total
comprehensive
income..........
Preferred stock
and warrant
accretion......... --
Dividends......... --
Compensatory
options........... --
Conversion of
preferred and
common stock...... 56,153
Issuance of
common stock...... 65,766
Warrants
exercised......... 13,145
Options
exercised......... 306
--------
BALANCE, December
31, 1998........... $143,058
Net income........ --
Foreign currency
translation....... --
Total
comprehensive
income..........
Compensatory
options........... --
Issuance of
common stock...... 12,138
Options
exercised......... 2,339
Share issuance
obligation........ --
--------
BALANCE, December
31, 1999........... $157,535
Net income........ --
Foreign currency
translation....... --
Total
comprehensive
income..........
Compensatory
options........... --
Issuance of
common stock...... 42,554
Options
exercised......... 3,148
Share issuance
obligation........ --
--------
BALANCE, December
31, 2000........... $203,237
========
The accompanying notes are an integral part of these consolidated statements.
F-6
CAREER EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (Continued)
Warrants
----------
Accumulated
Class E Additional Other Retained Total
Common Paid-in Comprehensive Earnings Stockholders'
Stock Capital Loss (Deficit) Investment
---------- ------------ ------------- ------------ -------------
BALANCE, December 31,
1997................... 4,777,427 $ 70,936 $(296,602) $(11,963,582) $ (7,404,133)
---------- ------------ --------- ------------ ------------
Net income............ -- -- -- 4,296,048 4,296,048
Foreign currency
translation.......... -- -- (525,238) -- (525,238)
------------
Total comprehensive
income............. -- -- -- -- 3,770,810
Preferred stock and
warrant accretion.... -- -- -- (2,152,834) (2,152,834)
Dividends............. -- -- -- (274,424) (274,424)
Compensatory options.. -- 2,171,635 -- -- 2,171,635
Conversion of
preferred and common
stock................ 38,714,151 -- -- 38,770,304
Issuance of common
stock................ -- 45,753,303 -- -- 45,819,069
Warrants exercised.... (4,777,427) 8,533,729 -- -- 3,769,447
Options exercised..... -- 165,346 -- -- 165,652
---------- ------------ --------- ------------ ------------
BALANCE, December 31,
1998................... -- 95,409,100 (821,840) (10,094,792) 84,635,526
---------- ------------ --------- ------------ ------------
Net income............ -- -- -- 10,943,383 10,943,383
Foreign currency
translation.......... -- -- 450,269 -- 450,269
------------
Total comprehensive
income............. -- -- -- -- 11,393,652
Compensatory options.. -- 61,167 -- -- 61,167
Issuance of common
stock................ -- 15,118,096 -- -- 15,130,234
Options exercised..... -- 1,458,094 -- -- 1,460,433
Share issuance
obligation........... -- 1,000,000 -- -- 1,000,000
---------- ------------ --------- ------------ ------------
BALANCE, December 31,
1999................... -- 113,046,457 (371,571) 848,591 113,681,012
---------- ------------ --------- ------------ ------------
Net income............ -- -- -- 21,406,086 21,406,086
Foreign currency
translation.......... -- -- (326,322) -- (326,322)
------------
Total comprehensive
income............. -- -- -- -- 21,079,764
Compensatory options.. -- 52,000 -- -- 52,000
Issuance of common
stock................ -- 63,628,967 -- -- 63,671,521
Options exercised..... -- 2,405,310 -- -- 2,408,458
---------- ------------ --------- ------------ ------------
BALANCE, December 31,
2000................... -- $179,132,734 $(697,893) $ 22,254,677 $200,892,755
========== ============ ========= ============ ============
The accompanying notes are an integral part of these consolidated statements.
F-7
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
1. DESCRIPTION OF THE COMPANY
Career Education Corporation ("CEC", collectively with its subsidiaries "we"
or "our") owns and operates 38 campuses that provide private, for-profit
postsecondary education throughout the United States and Canada, the United
Kingdom and the United Arab Emirates. The number of campuses include the six
campuses acquired in the EduTrek transaction described in Note 16. Our schools
enjoy long operating histories and offer a variety of master's degree,
bachelor's degree, associate degree and diploma programs in career-oriented
disciplines within our core curricula of:
. visual communication and design technologies
. information technology
. business studies
. culinary arts
2. STOCK OFFERINGS
On February 4, 1998, we sold 6,555,000 shares of our common stock at $8.00
per share pursuant to an initial public offering ("IPO"). The net proceeds from
the offering of $45.6 million were used to repay borrowings under the Credit
Agreement (Note 6) totaling $41.5 million 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 4,846,970 shares
of common stock and warrants (except for redeemable warrants exercisable into
32,947 shares of Class E common stock) to purchase 1,248,640 shares of common
stock. Subsequent to December 31, 1997 and prior to the consummation of the
IPO, we also authorized one class of preferred stock and one class of common
stock, increased the number of authorized shares of common stock to 50,000,000
and completed a 18.752-for-1 stock split. The effect of the split has been
retroactively reflected for all periods presented in the accompanying
consolidated financial statements.
On March 17, 1999, we sold 1,060,000 shares of common stock at $14.50 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.
On May 10, 2000, we sold 4,050,000 shares of common stock at $16.25 per
share pursuant to a public offering. The net proceeds to us from the sale of
the shares of common stock, after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, were approximately
$61.6 million. We used $28.5 million of the offering net proceeds to repay
indebtedness under our credit facility and the remaining $33.1 million is being
used for general corporate purposes.
3. SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements include the accounts of CEC and our
wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in the consolidation. The results of operations
of all acquired businesses have been consolidated for all periods subsequent to
the date of acquisition.
b. Concentration of Credit Risk
We extend unsecured credit for tuition to a significant portion of the
students who are in attendance at the campuses operated by our subsidiaries. A
substantial portion of credit extended to students is repaid through
F-8
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
the students' participation in various federally funded financial aid programs
under Title IV of the Higher Education Act of 1965, as amended ("Title IV
Programs"). The following table presents the amounts and percentages of the
Company's U.S. institutions' cash receipts collected from Title IV Programs for
the years ended December 31, 2000, 1999, and 1998 (such amounts were determined
based upon each U.S. institution's cash receipts for the twelve-month period
ended December 31, pursuant to the regulations of the United States Department
of Education ("DOE") at 34 C.F.R. (S) 600.5) (amounts in thousands):
For the Year Ended
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Total Title IV funding..................... $177,632 $131,019 $ 90,086
Total cash receipts........................ $279,513 $197,673 $132,553
Total Title IV funding as a percentage of
total cash receipts....................... 64% 66% 68%
Transfers of funds from the financial aid programs are made in accordance
with DOE requirements. Changes in DOE funding of Title IV Programs could impact
our ability to attract students.
c. Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred. Marketing and
advertising costs included in general and administrative expenses were
approximately $36,568,000, $24,238,000, and $16,915,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.
d. Inventories
Inventories consisting principally of program materials, books and supplies
are stated at the lower of cost, determined on a first-in, first-out basis, or
market.
e. Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
recognized utilizing the straight-line method over the useful lives of the
related assets for financial reporting purposes and using an accelerated method
for income tax purposes. Leasehold improvements and assets recorded under
capital leases are amortized on a straight-line basis over their estimated
useful lives or lease terms, whichever is shorter. Maintenance, repairs and
minor renewals and betterments are expensed; major improvements are
capitalized. The estimated cost basis and useful lives of property and
equipment at December 31, 2000 and 1999, are as follows (dollars in thousands):
December 31,
---------------
2000 1999 Life
------- ------- -------------
Land....................................... $ 3,625 $ 3,858
Buildings and improvements................. 8,348 1,603 13-35 years
Classroom equipment, courseware and other
instructional materials................... 74,244 60,380 1-18 years
Furniture, fixtures and equipment.......... 17,581 13,899 3-10 years
Leasehold improvements..................... 26,657 13,970 life of lease
Vehicles................................... 142 110 3-5 years
------- -------
130,597 93,820
Less--Accumulated depreciation and
amortization.............................. 39,761 24,524
------- -------
$90,836 $69,296
======= =======
F-9
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
The gross cost of assets recorded under capital classroom equipment leases,
included above, amounts to $13,260,000 and $9,010,000 at December 31, 2000 and
1999, respectively. The accumulated amortization related to these assets
included above is $6,681,000 and $2,544,000 at December 31, 2000 and 1999,
respectively.
f. Intangible Assets
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the business purchases described in Note
5. Other intangibles represent the value of the shares issued to Le Cordon
Bleu. Goodwill related to each acquisition is being amortized on a straight-
line basis over its estimated useful lives. Covenants not-to-compete are being
amortized either on a straight-line or accelerated basis over their useful
lives. At December 31, 2000 and 1999, the cost basis and useful lives of
intangible assets consist of the following (dollars in thousands):
December 31,
---------------
2000 1999 Lives
------- ------- ---------
Goodwill........................................ $94,939 $68,461 40 years
Covenants not-to-compete........................ 13,395 13,365 2-5 years
Other intangibles............................... 3,000 2,000 10 years
------- -------
111,334 83,826
Less--Accumulated amortization.................. 17,700 13,342
------- -------
$93,634 $70,484
======= =======
On an ongoing basis, we review intangible assets and other long-lived assets
for impairment whenever events or circumstances indicate that carrying amounts
may not be recoverable. To date, no such events or changes in circumstances
have occurred. If such events or changes in circumstances occur, we will
recognize an impairment loss if the undiscounted future cash flows expected to
be generated by the asset (or acquired business) are less than the carrying
value of the related asset. The impairment loss would adjust the asset to its
fair value.
g. Revenue Recognition
Revenue is derived primarily from programs taught at our schools. Tuition
revenue and one time fees such as application fees are recognized on a
straight-line basis over the length of the applicable program. Dormitory and
cafeteria revenues charged to students are recognized on a straight-line basis
over the length of the students' program. Other dormitory and cafeteria
revenues are recognized as earned. Other revenue such as, textbook sales,
placement revenue, restaurant revenue, and contract training are recognized as
services are performed or goods are delivered. Revenue is reflected net of bad
debt expense. If a student withdraws, future revenue is reduced by the amount
of the refund due to the student. Refunds are calculated in accordance with
federal, state and accrediting agency standards. Deferred tuition revenue
represents the portion of payments received but not earned and is reflected as
a current liability in the accompanying consolidated balance sheets as such
amount is expected to be earned within the next year.
h. Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
F-10
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
i. Income Taxes
We file a consolidated federal income tax return and provide for deferred
income taxes under the asset and liability method of accounting. This method
requires the recognition of deferred income taxes based upon the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
j. Fair Value of Financial Instruments
The carrying value of current assets and liabilities reasonably approximates
their fair value due to their short maturity periods. The carrying value of our
debt obligations reasonably approximates their fair value as the stated
interest rate approximates current market interest rates of debt with similar
terms.
k. Accretion to Redemption Value of Preferred Stock and Warrants
Accretion to redemption value of redeemable preferred stock and warrants
represents the change in the redemption value of outstanding preferred stock
and warrants that existed prior to our IPO. The change in redemption value was
accreted over the earliest period redemption could occur using the effective
interest method. The redemption values are based on the estimated fair market
values of the classes of stock and consider the amounts we received for the
sale of equity instruments, prices paid for acquired businesses and our
operations.
l. Income Per Share Attributable to Common Stockholders
The weighted average number of common shares used in determining basic and
diluted net income per share attributable to common stockholders for the years
ended December 31, 2000, 1999 and 1998 is as follows (in thousands):
For the Year Ended
December 31,
--------------------
2000 1999 1998
------ ------ ------
Common shares outstanding (basic).................... 18,687 15,370 13,042
Common stock equivalents............................. 687 390 518
Common stock contingently issuable................... 16 118 34
------ ------ ------
Diluted.............................................. 19,390 15,878 13,594
====== ====== ======
m. Unaudited Pro Forma Diluted Net Income per Share Attributable to Common
Stockholders
Unaudited pro forma diluted income before extraordinary item and cumulative
effect of change in accounting principle and net income per share attributable
to common stockholders is based on the weighted average number of shares of
common stock equivalents outstanding after retroative adjustments for (i) the
stock split described in Note 2, (ii) shares of redeemable preferred stock
converted into shares of common stock (determined by dividing the liquidation
value, including paid-in-kind dividends, by the initial public offering price
of $8.00 per share), (iii) the exercise of warrants to purchase shares of
common stock, (iv) the
F-11
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
conversion of all existing classes of common stock into a single new class of
common stock and (v) common stock equivalents (if dilutive) using the treasury
stock method.
n. Stock-Based Compensation
We account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
have adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS
No. 123) related to options and warrants issued to employees and directors.
Expense associated with stock options and warrants issued to non-employees/non-
directors is recorded in accordance with SFAS No. 123.
o. Foreign Currency Translation
For the years ended December 31, 2000, 1999 and 1998, revenues and expenses
related to Canadian-based operations have been translated at average exchange
rates in effect at the time that the underlying transactions occurred.
Transaction gains or losses are included in income. Assets and liabilities of
these operations have been translated at the year-end exchange rate, with gains
and losses resulting from such translation being included in accumulated other
comprehensive income.
p. Supplemental Disclosures of Cash Flow Information
For the Year Ended
December 31,
---------------------------
2000 1999 1998
-------- -------- -------
(in thousands)
CASH PAID FOR--
Interest........................................ $ 1,107 $ 1,389 $ 1,534
Taxes, excluding a refund of $900,000 in 1998... 13,142 6,200 1,860
======== ======== =======
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion to redemption value of preferred stock
and warrants................................... $ -- $ -- $ 2,153
Dividends on preferred stock added to
liquidation value.............................. -- -- 227
Capital lease obligations for purchases of
equipment...................................... 4,341 6,180 --
Shares of common stock for license fee.......... 1,000 2,000 --
Conversion of all Class A, B, C, and E common
stock and all series of redeemable preferred
stock into 6,384,074 shares of common stock in
connection with the IPO. Value of the
redeemable preferred stock at the date of
conversion..................................... -- -- 77,552
======== ======== =======
ACQUISITION ACTIVITY:
Fair value of assets acquired................... $ 13,730 $ 21,899 $ 3,736
Fair value of liabilities assumed............... (13,160) (12,248) (1,971)
Goodwill........................................ 26,158 30,721 9,507
-------- -------- -------
Purchase price, including acquisition costs..... $ 26,728 $ 40,372 $11,272
======== ======== =======
F-12
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
q. Segment Information
We operate in one industry segment. Operations in geographic regions outside
the United States are not significant.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-
Up Activities." SOP 98-5 requires that all nongovernmental entities expense the
costs of start-up activities (which include organization costs) as these costs
are incurred. As prescribed by the literature, we adopted the provisions of SOP
98-5 in the fourth quarter of 1998, effective January 1, 1998, and recorded a
net of tax charge of $205,000 representing the cumulative effect of the change
in accounting principle.
On December 3, 1999, the Securities Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, to provide guidance on
the recognition, presentation, and disclosure of revenue in financial
statements. The SAB outlines basic criteria that must be met before registrants
may recognize revenue, including persuasive evidence of the existence of an
arrangement, the delivery of products or services, a fixed and determinable
sales price, and reasonable assurance of collection. Prior to the release of
SAB 101, our revenue recognition policy was in compliance with generally
accepted accounting principles. Through December 31, 1999, we have recognized
application and registration fees as revenue upon receipt. Effective January 1,
2000, we adopted a change in accounting principle to comply with the specific
provisions and guidance of SAB 101. As a result, we recognized a cumulative
charge of $778,000, net of taxes. SAB 101 requires us to recognize revenue
related to application and registration fees over the program period. The pro
forma information below reflects the effect of the change in the accounting
principle assuming SAB101 had been adopted at the beginning of each period
presented:
Pro Forma SAB 101 Data
For the Year Ended
December 31,
----------------------
2000 1999 1998
------- ------- ------
(in thousands, except
share amounts)
Pro forma income attributable to common stockholders
before cumulative effect of change in accounting
principle............................................. $22,184 $10,736 $1,883
Pro forma net income attributable to common
stockholders
Pro forma--basic per share attributable to common
stockholders:
Income before cumulative effect of change in
accounting principle................................ $ 1.14 $ 0.70 $ 0.14
------- ------- ------
Net income........................................... $ 1.14 $ 0.70 $ 0.14
======= ======= ======
Pro forma--diluted per share attributable to common
stockholders:
Income before cumulative effect of change in
accounting principle................................ $ 1.10 $ 0.68 $ 0.14
------- ------- ------
Net income........................................... $ 1.10 $ 0.68 $ 0.14
======= ======= ======
F-13
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, requires that all derivative
financial instruments, such as interest rate swap contract and foreign exchange
contracts, be recognized in the financial statements and measured at fair value
regardless of the purpose or intent for holding them. Changes in the fair
market value of derivative financial instruments are ether recognized
periodically in income or shareholder's equity (as a component of comprehensive
income), depending on whether the derivative is being used to hedge changes in
fair value or cash flow. SFAS No. 137 amended the effective date of SFAS No.
133 to fiscal years beginning after June 15, 2000. We do not currently hold or
issue any derivative financial instruments, but will adopt SFAS 133 if this
becomes applicable in the future.
5. BUSINESS ACQUISITIONS
Southern California School of Culinary Arts, Ltd. (SCSCA)
On March 13, 1998, through CA Acquisitions, Ltd., we acquired 100% of the
outstanding shares of capital stock of Southern California School of Culinary
Arts, Ltd. for $1,010,000. The acquisition was accounted for as a purchase and
the purchase price exceeded the fair value of identifiable assets acquired and
liabilities assumed, resulting in goodwill of approximately $1,235,000.
Scottsdale Culinary Institute, Ltd. (SCI)
On July 31, 1998, through SCI Acquisitions, Ltd., we acquired certain assets
and assumed certain liabilities of Scottsdale Culinary Institute, Inc. for
approximately $9,857,000. The acquisition was accounted for as a purchase and
the purchase price exceeded the fair value of identifiable assets acquired and
liabilities assumed, resulting in goodwill of approximately $8,272,000.
Harrington Institute of Interior Design, Inc. (Harrington)
On January 4, 1999, we acquired all of the outstanding shares of capital
stock of Harrington Institute of Interior Design, Inc. for approximately
$3,540,000. The acquisition was accounted for as a purchase and the purchase
price exceeded the fair value of identifiable assets acquired and liabilities
assumed, resulting in goodwill of approximately $2,724,000.
McIntosh College, Inc. (McIntosh)
On March 9, 1999, we acquired certain assets and assumed certain liabilities
of McIntosh College, Inc. for approximately $4,968,000. The acquisition was
accounted for as a purchase and the purchase price exceeded the fair value of
identifiable assets acquired and liabilities assumed, resulting in goodwill of
approximately $4,619,000.
Briarcliffe College, Inc. (Briarcliffe)
On April 1, 1999, we acquired all of the outstanding shares of capital stock
of Briarcliffe College, Inc. for approximately $20,639,000. The acquisition was
accounted for as a purchase and the purchase price exceeded the fair value of
identifiable assets acquired and liabilities assumed, resulting in goodwill of
approximately $17,988,000.
F-14
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Brooks Institute of Photography, LLC (BIP)
On June 1, 1999, through Brooks Institute of Photography, LLC, we acquired
all of the outstanding shares of capital stock of Brooks Institute of
Photography, Inc. for approximately $6,553,000. The acquisition was accounted
for as a purchase and the purchase price exceeded the fair value of
identifiable assets acquired and liabilities assumed, resulting in goodwill of
approximately $2,308,000.
Washington Business School, Ltd. (WBS)
On December 3, 1999, through WBS Acquisitions, Ltd., we acquired all of the
outstanding shares of capital stock of Washington Business School, Inc. for
approximately $2,872,000. The acquisition was accounted for as a purchase and
the purchase price exceeded the fair value of identifiable assets acquired and
liabilities assumed, resulting in goodwill of approximately $3,082,000.
The Cooking and Hospitality Institute of Chicago, Inc. (CHIC)
On February 1, 2000, we acquired all of the outstanding shares of capital
stock of The Cooking and Hospitality Institute of Chicago, Inc. for
approximately $5,126,000. The acquisition was accounted for as a purchase and
the purchase price, subject to adjustment, exceeded the fair value of
identifiable assets acquired and liabilities assumed, resulting in goodwill of
approximately $4,794,000
California Culinary Academy, Inc. (CCA)
On April 3, 2000, we closed the acquisition of California Culinary Academy,
Inc. The purchase price was approximately $19,132,000. We also assumed
approximately $3,000,000 of the debt of California Culinary Academy, Inc. The
acquisition was accounted for as a purchase and the purchase price, subject to
adjustment, exceeded the fair market value of identifiable assets acquired and
liabilities assumed, resulting in goodwill of approximately $20,356,000. In
connection with the acquisition we recorded a severance liability of
$3,000,000, all of which has been paid as of December 31, 2000.
SoftTrain Institute Inc. (SoftTrain)
On July 28, 2000, we acquired all of the outstanding capital stock of
SoftTrain Institute Inc. The purchase price was approximately $508,000. The
acquisition was accounted for as a purchase and the purchase price, subject to
adjustment, exceeded the fair market value of identifiable assets acquired and
liabilities assumed, resulting in goodwill of approximately $523,000.
Retter Business College Corp. (Retter)
On October 2, 2000, we acquired all of the outstanding capital stock of
Retter Business College Inc. The purchase price was approximately $377,000. The
acquisition was accounted for as a purchase and the purchase price, subject to
adjustment, exceeded the fair market value of identifiable assets acquired and
liabilities assumed, resulting in goodwill of approximately $485,000.
F-15
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
Pro Forma Results of Operations
The following unaudited pro forma results of operations (in thousands,
except per share amounts) for the years ended December 31, 2000, 1999 and 1998,
assume that the business acquisitions subsequent to January 1, 1998 described
above occurred at the beginning of the year preceding the year of the
acquisition. The unaudited pro forma results below are based on historical
results of operations, include adjustments for depreciation, amortization,
interest and taxes and do not necessarily reflect actual results that would
have occurred.
For the Year Ended
December 31,
--------------------------
2000 1999 1998
-------- -------- --------
(Unaudited)
Pro forma net revenue............................... $330,326 $248,840 $175,696
Pro forma income before cumulative effect of change
in accounting principle............................ 21,632 8,326 3,429
Pro forma net income................................ 20,854 8,326 3,224
Pro forma income before cumulative effect of change
in accounting principle attributable to common
stockholders....................................... 21,632 8,326 1,002
Pro forma net income attributable to common
stockholders....................................... 20,854 8,326 797
======== ======== ========
Pro forma basic income per share attributable to
common stockholders--
Pro forma income before cumulative effect of
change in accounting principle................... $ 1.16 $ 0.55 $ 0.08
======== ======== ========
Pro forma net income.............................. $ 1.12 $ 0.55 $ 0.06
======== ======== ========
Pro forma diluted income per share attributable to
common stockholders--
Pro forma income before cumulative effect of
change in accounting principle................... $ 1.12 $ 0.52 $ 0.08
======== ======== ========
Pro forma net income.............................. $ 1.08 $ 0.52 $ 0.06
======== ======== ========
6. DEBT
Our debt at December 31, 2000 and 1999, consisted of the following:
December 31,
---------------
2000 1999
------- -------
(in thousands)
Revolving loans under Credit Agreement with a syndicate of
banks as discussed below...................................... $10,500 $41,000
Notes payable to former owners of acquired businesses bearing
annual interest at rates up to 7%............................. 529 2,029
Equipment under capital leases, secured by related equipment,
discounted at a weighted average interest rate of 5.24%....... 7,760 6,521
Other.......................................................... 331 389
------- -------
19,120 49,939
Less--Current portion.......................................... 4,494 2,324
------- -------
$14,626 $47,615
======= =======
F-16
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
We maintain a credit agreement (the "Credit Agreement") with a bank
(syndicated on September 25, 1997) which has been amended from time to time.
Under the current amended Credit Agreement, we can borrow up to $90,000,000
under a revolving credit facility ("Revolving Loans") and can obtain up to
$50,000,000 in letters of credit; however, outstanding letters of credit reduce
the revolving credit facility availability. The amended Credit Agreement
matures on October 26, 2003.
Borrowings under the amended Credit Agreement bear interest, payable
quarterly, at 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 at
LIBOR, plus a specified number of basis points, ranging from 75 to 200, (based
upon our leverage ratio), at our election.
At December 31, 2000, we had outstanding $10,500,000 in revolving credit
borrowings and outstanding letters of credit totaling approximately $5,995,000
(approximately $165,000 of total outstanding letters of credit were used to
meet certain Department of Education financial responsibility requirements)
under the Credit Agreement. At December 31, 2000, all borrowings were at the
bank's prime rate, which was 9.5% at December 31, 2000.
CEC and our subsidiaries have collectively guaranteed repayment of amounts
outstanding under the Credit Agreement. In addition, we have pledged the stock
of our subsidiaries as collateral for repayment of the debt. We may voluntarily
make principal prepayments but are required to do so if we generate excess cash
flows, sell certain assets, or upon the occurrence of certain other events.
Under the Credit Agreement we are limited in our ability to take certain
actions, including paying dividends, as defined, selling or disposing of
certain assets or subsidiaries, making annual rental payments in excess of 15%
of consolidated revenues in any given year, and issuing subordinated debt in
excess of $5,000,000, among other things. We are required to maintain certain
financial ratios, including a quarterly interest coverage ratio of at least
1.75:1, certain levels of consolidated net worth, and funded debt to
consolidated earnings before interest, taxes, depreciation, and amortization of
3.50:1, among others. At December 31, 2000, we were in compliance with the
covenants of the Credit Agreement, as amended.
We intend to refinance amounts owed to former owners of acquired businesses
noted above through availability under our Credit Agreement and, therefore,
such amounts have been classified as long-term.
At December 31, 2000, future annual principal payments of debt were as
follows (in thousands):
2001............................................................. $ 4,494
2002............................................................. 3,365
2003............................................................. 10,678
2004............................................................. 156
2005............................................................. 95
2006 and thereafter.............................................. 332
-------
Total............................................................ $19,120
=======
7. STOCKHOLDERS' INVESTMENT
In connection with the consummation of the IPO on February 4, 1998, we
amended and restated our certificate of incorporation and converted all classes
of outstanding common stock into one class of common stock, with a par value of
$0.01, at a rate of 18.752 shares of common stock for every share of existing
common stock. The shares of common stock disclosed in these financial
statements, and notes hereto, retroactively reflect this split.
F-17
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
On October 29, 1998, we entered into an agreement with Le Cordon Bleu
Limited granting us exclusive rights to use the "Le Cordon Bleu" name in the
United States and Canada in connection with our culinary education programs. We
have developed a curriculum with Le Cordon Bleu for use at our culinary schools
and have issued Le Cordon Bleu a total of 241,524 shares of common stock. Under
this agreement we also payLe Cordon Bleu royalties based on tuition collected
from students enrolled in Le Cordon Bleu programs at our schools. The agreement
expires on December 31, 2008, but can be renewed for two five-year successive
terms.
On July 25, 2000, we issued 39,120 shares of our common stock to Le Cordon
Blue Limited in connections with our licensing of the Le Cordon Bleu Restaurant
Management Program in the United States and Canada. This issuance was made
without general solicitation or advertising. We have entered into an agreement
providing certain rights to Le Cordon Bleu Limited.
During 2000, our Board of Directors approved a 2-for-1 stock split effected
in the form of a stock dividend. The dividend was paid on August 25, 2000, to
shareholders of record on August 14, 2000. All share and per share amounts in
the accompanying financial statements and in the body of this Form 10-K have
been retroactively adjusted to reflect this stock dividend.
8. REDEEMABLE PREFERRED STOCK AND WARRANTS
In connection with the IPO consummated on February 4, 1998, all classes of
outstanding redeemable preferred stock were converted into 4,846,466 shares of
Common Stock by dividing the liquidation value of preferred stock on that date
(including all accrued paid-in-kind dividends) by $8.00 , the initial public
offering price of the common stock. The reedemable preferred stock had been
issued to provide funding for various acquisitions consumated before our IPO.
In connection with the issuance of preferred stock and debt prior to 1998,
we issued warrants exercisable into 474,144 shares of common stock. These
warrants were subject to adjustment , exercisable at any time, and had an
exercise price of $0.005 per share. These warrants were adjusted to be 404,594
based upon the results of our operations through December 31, 1997 and were
exercised in connection with the IPO during 1998. We accreted the difference
between the value of the warrants at the date of issuance and the IPO date
using the effective interest method.
9. STOCK OPTIONS AND WARRANTS
Stock Options
Certain stockholders were granted options to purchase up to a total of
approximately 13.5% of the outstanding shares of our common stock. These
options, which have an exercise price of $0.005 per share, were to be earned
and become exercisable based upon certain financial returns earned and realized
in a cash payment by certain stockholders and are subject to other conditions.
During 1997, the option agreements were amended to fix the number of shares
that the stockholders may exercise only upon completion of the IPO. The amended
agreements fixed the number of shares the holders were entitled to earn at
245,230 shares. These options became fully vested upon the IPO closing and we
recorded compensation expense of approximately $2.0 million related to these
agreements in 1998.
We maintain stock option plans for our directors, officers, employees, and
consultants. Under these plans we can grant stock options, stock appreciation
rights, restricted stock, deferred stock and other awards that are exercisable
into shares of common stock. Stock options may be either incentive stock
options or nonqualified
F-18
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
stock options. No stock option or appreciation right shall be exercisable more
than ten years after the date of grant. At December 31, 2000, the plans have a
total of approximately 1.75 million shares of common stock reserved and
available to grant.
Stock option activity under all of our stock option plans is as follows:
Weighted
Average
Exercise
Shares Price Range Price
--------- ------------ --------
Outstanding as of December 31, 1997............ 361,120 $ 0.01-7.36 $ 3.67
Granted...................................... 1,521,330 0.01-13.13 9.19
Exercised.................................... (30,626) 0.01-8.00 4.09
Cancelled.................................... (33,056) 7.36-13.13 8.48
--------- ------------ ------
Outstanding as of December 31, 1998............ 1,818,768 0.01-13.13 8.19
--------- ------------ ------
Granted...................................... 1,239,100 11.81-18.63 15.00
Exercised.................................... (233,912) 0.01-13.13 2.66
Cancelled.................................... (361,362) 7.36-18.63 13.45
--------- ------------ ------
Outstanding as of December 31, 1999............ 2,462,594 0.01-18.63 11.37
--------- ------------ ------
Granted...................................... 805,000 17.31-32.00 23.96
Exercised.................................... (314,801) 0.01-15.19 3.67
Cancelled.................................... (54,920) 8.00-24.00 13.72
========= ============ ======
Outstanding as of December 31, 2000............ 2,897,873 $ 0.01-32.00 $15.66
========= ============ ======
Stock options exercisable at
December 31, 1998............................ 520,844 $ 0.01-13.12 $ 1.96
========= ============ ======
December 31, 1999............................ 604,236 $ 0.01-18.63 $ 6.11
========= ============ ======
December 31, 2000............................ 749,916 $ 0.01-32.00 $11.32
========= ============ ======
The following table summarizes information about all stock options
outstanding as of December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Number Weighted Number
Outstanding Weighted Average Exercisable Weighted
as of Average Remaining at Average
December 31, Exercise Contractual December 31, Exercise
Exercise Price Ranges 2000 Price Life 2000 Price
- --------------------- ------------ -------- ----------- ------------ --------
$ 0.01-$ 1.94........... 70,740 1.76 4.68 70,740 $ 1.76
$ 6.93-$ 9.88........... 489,583 8.07 6.98 233,526 7.99
$11.81-$13.44........... 1,064,750 12.74 8.10 308,250 12.88
$14.00-$19.84........... 561,800 18.19 8.52 137,400 18.42
$24.00-$32.00........... 711,000 24.62 9.52 -- --
--------- ------ ---- ------- ------
$ 0.01-$32.00........... 2,897,873 $15.66 8.26 749,916 $11.32
========= ====== ==== ======= ======
The fair value of each option is estimated on the date of grant based on
the Black-Scholes option pricing model and assumptions used to value the
options. The weighted average fair value of the options granted
F-19
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
during the years ended December 31, 2000, 1999 and 1998 and assumptions used to
value the options are as follows:
For the Year Ended
--------------------
2000 1999 1998
------ ----- -----
Dividend yield...................................... -- -- --
Risk-free interest rate............................. 6.5% 6.0% 8.0%
Volatility.......................................... 60% 60% 60%
Expected life....................................... 7 7 10
Weighted average fair value of options granted...... $13.76 $8.51 $7.24
Warrants
In connection with the issuance of preferred stock and debt prior to 1998,
we issued warrants exercisable into a shares of common stock. These warrants
were exercisable at any time and had an exercise price of $.01 per share. All
outstanding warrants were exercised into 657,267 shares of common stock in
connection with the consummation of the IPO.
Pro Forma SFAS No. 123 Results
Had we accounted for our stock options in accordance with SFAS No. 123, pro
forma income before cumulative effect of change in accounting principle and net
income , and pro forma income before cumulative effect of change in accounting
principle and net income attributable to common stockholders would have been as
follows (in thousands, except per share data):
December 31,
----------------------
2000 1999 1998
------- ------- ------
Pro forma income before
cumulative effect of change in accounting
principle.......................................... $19,885 $10,156 $3,754
Pro forma net income................................ 19,107 10,156 3,549
Pro forma income before cumulative effect of change
in accounting principle attributable to common
stockholders....................................... 19,885 10,156 1,327
Pro forma net income attributable to common
stockholders....................................... 19,107 10,156 1,122
======= ======= ======
Pro forma diluted income before
cumulative effect of change in accounting
principle per share attributable to common
stockholders....................................... $ 1.03 $ 0.64 $ 0.10
======= ======= ======
Pro forma diluted net income per share
attributable to common stockholders................ $ 0.99 $ 0.64 $ 0.08
======= ======= ======
The pro forma disclosure is not likely to be indicative of pro forma results
which may be expected in future years because of the fact that options vest
over several years, pro forma compensation expense is recognized as the options
vest and additional awards may also be granted.
F-20
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
For the Year Ended
December 31,
----------------------
2000 1999 1998
------- ------ -------
Current--
Federal......................................... $ 9,618 $5,026 $ 3,688
State and local................................. 2,482 1,430 973
Foreign......................................... 859 1,049 --
------- ------ -------
Total current................................. 12,959 7,505 4,661
------- ------ -------
Deferred--
Federal......................................... 3,172 576 (923)
State and local................................. 734 139 (182)
Foreign......................................... 457 35 (206)
------- ------ -------
Total deferred provision (benefit)............ 4,363 750 (1,311)
------- ------ -------
Total provision for income taxes.................. $17,322 $8,255 $ 3,350
======= ====== =======
A reconciliation of the statutory U.S. federal income tax rate to the
effective income tax rate is as follows:
For the Year
Ended
December 31,
----------------
2000 1999 1998
---- ---- ----
Statutory U.S. Federal income tax rate.................. 35.0% 34.0% 34.0%
Foreign taxes........................................... 0.9 1.8 (0.3)
State and local income taxes, net of Federal benefit.... 5.3 5.4 6.7
Permanent differences and other......................... 2.6 1.8 2.3
---- ---- ----
Effective income tax rate............................... 43.8% 43.0% 42.7%
==== ==== ====
The Foreign taxes reflected above include the effect of both the Federal
and Provincial taxes incurred by our foreign subsidiaries.
Components of deferred income tax assets and liabilities consist of the
following (in thousands):
December 31,
----------------
2000 1999
------- -------
Deferred income tax assets:
Tax net operating loss carryforwards................. $ 1,909 $ 623
Stock options........................................ 339 541
State tax credit..................................... 351 441
Allowance for doubtful accounts...................... 2,594 796
Covenants not-to-compete............................. 3,984 3,462
Deferred rent obligation............................. 741 549
Other................................................ 633 215
------- -------
Total deferred income tax assets................... 10,551 6,627
------- -------
Deferred income tax liabilities:
Depreciation and amortization........................ 13,645 9,744
Other................................................ 244 --
------- -------
Total deferred income tax liabilities.............. 13,889 9,744
------- -------
Net deferred income tax liability.................. $(3,338) $(3,117)
======= =======
F-21
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
We have purchased certain tax net operating loss carryforwards in connection
with our business acquisitions. At December 31, 2000, we have Federal and state
tax net operating loss carryforwards totaling $3.6 million and $4.0 million,
respectively. We have not recorded a valuation allowance because we believe
that deferred income tax assets will be realized in the future.
11. COMMITMENTS AND CONTINGENCIES
Litigation
We are subject to occasional lawsuits, investigations and claims arising out
of the normal conduct of our business. In certain cases, claims against
acquired businesses relating to events which occurred during the periods we did
not own them are indemnified by the former owners. Management does not believe
the outcome of any pending claims will have a material impact on our financial
position or results of operations.
Leases and Licensing Agreements
We rent most of our school facilities and certain equipment under non-
cancelable operating leases expiring at various dates through 2015. The
facility leases require us to make monthly payments covering rent, taxes,
insurance and maintenance costs. Rent expense, exclusive of taxes, insurance
and maintenance of the facilities and equipment, for the years ended December
31, 2000, 1999 and 1998 was approximately $27,371,000, $19,542,000 and
$14,304,000, respectively.
Future minimum lease payments under these leases as of December 31, 2000,
are as follows (in thousands):
Capital Operating
Leases Leases Total
------- --------- -------
2001.............................................. $4,785 $ 29,193 33,978
2002.............................................. 2,653 26,579 29,232
2003.............................................. 199 25,178 25,377
2004.............................................. 195 24,236 24,431
2005.............................................. 124 20,778 20,902
2006 and thereafter............................... 373 112,716 113,089
------ -------- -------
8,329 $238,680 247,009
====== ======== =======
Less--Portion representing interest at a weighted
average
rate of 5.24%.................................... 569
------
Principal payments................................ 7,760
Less--Current portion............................. 4,481
------
$3,279
======
Payments under licensing agreements for the years ended December 31, 2000
and 1999 was approximately $2,400,000 and $190,000, respectively.
12 . REGULATORY
Our U.S. schools are subject to extensive regulation by federal and state
governmental agencies and accrediting bodies. In particular, the Higher
Education Act ("HEA"), and the regulations promulgated
F-22
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
thereunder by the U.S. Department of Education ("DOE"), subject our U.S.
schools to significant regulatory scrutiny on the basis of numerous standards
that schools must satisfy in order to participate in the various federal
student financial assistance programs under Title IV of the HEA ("Title IV
Programs").
To participate in the Title IV Programs, an institution must be authorized
to offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the DOE
and certified as eligible by the DOE. The DOE will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the DOE's extensive regulations
regarding institutional eligibility. An institution must also demonstrate its
compliance to the DOE on an ongoing basis.
Political and budgetary concerns significantly affect the Title IV Programs.
Congress must reauthorize the HEA approximately every six years. The most
recent reauthorization in October 1998 reauthorized the HEA for an additional
five years (the "1998 HEA Reauthorization"). Congress reauthorized all of the
Title IV Programs in which our schools participate, generally in the same form
and at funding levels no less than for the prior year.
A significant component of Congress' initiative to reduce abuse in the Title
IV Programs has been the imposition of limitations on institutions whose former
students default on the repayment of their federally guaranteed or funded
student loans above specific rates (cohort default rate). An institution whose
cohort default rates equal or exceed 25% for three consecutive years will no
longer be eligible to participate in the FFEL, FDL or Pell programs. An
institution whose cohort default rate under certain Title IV programs for any
federal fiscal year exceeds 40% may have its eligibility to participate in all
of the Title IV Programs limited, suspended or terminated by the DOE.
All institutions participating in the Title IV Programs must satisfy
specific standards of financial responsibility. Based on the institution's
annual audited financial statements, the DOE evaluates institutions for
compliance with these standards each year and following a change of ownership
of the institution. In reviewing our financial statements, it has been the
DOE's practice to measure financial responsibility on the basis of the
financial statements of both our institutions and CEC on a consolidated basis.
For purposes of measuring financal responsibility, the DOE calculates the
institution's composite score based on its (i) equity ratio, which measures the
institution's capital resources, ability to borrow and financial viability;
(ii) primary reserve ratio, which measures the institution's ability to support
current operations from expendable resources; and (iii) net income ratio, which
measures the institution's ability to operate at a profit. An institution that
does not meet the DOE's minimum composite score may demonstrate its financial
responsibility by posting a letter of credit in favor of the DOE in an amount
equal to at least 50% of the Title IV Program funds received by the institution
during its prior fiscal year or posting such letter of credit in an amount
equal to at least 10% of the Title IV Program funds received by the institution
during its prior fiscal year and accepting other conditions on its
participation in the Title IV Programs.
The DOE also assesses the administrative capability of each institution that
participates in the Title IV Programs. In addition, each institution is
required to apply to the DOE for continued certification to participate in the
Title IV Programs at least every six years, or when it undergoes a change of
control.
When we acquire an institution that is eligible to participate in the Title
IV Programs, that institution undergoes a change of ownership resulting in a
change of control ("change of control") as defined by the DOE. Upon a change of
control, an institution's eligibility to participate in the Title IV Programs
is subject to
F-23
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
review, and the institution could lose its eligibility unless it can
reestablish its state authorization and accreditation and satisfy the other
requirements to be recertified by the Department of Education as an eligible
institution under our ownership. If an institution is recertified following a
change of control, it will be on a provisional basis. Under a 1998 ammendment
to the HEA and subsequent regulations, the DOE may provisionally and
temporarily certify an institution following a change of control under certain
circumstances while the DOE reviews the institution's application. The DOE has
provided such temporary certification to each institution we have acquired
since January 1999 in periods of time ranging from 10 to 40 days after closing.
Each of the U.S. institutions we have acquired has undergone a certification
review under our ownership and has been certified to participate in the Title
IV Programs. American InterContinental University, which we acquired in January
2001, has been certified under our ownership on a temporary and provisional
basis and has filed its application to obtain provisional certification.
In Canada, there are several government programs that provide students
attending eligible institutions with government funding. The provisions
governing an eligible institution vary by province and generally require an
institution's programs qualifying for funding to meet certain rules and
regulations and also to have the administration of the program independently
audited.
13. EMPLOYEE BENEFIT PLANS
We maintain a contributory profit sharing plan established pursuant to the
provisions of Section 401(k) of the Internal Revenue Code that provides
retirement benefits for our eligible employees. This plan requires matching
contributions to eligible employees. Our matching contributions were
$1,475,000, $1,033,000 and $699,000 for the years ended December 31, 2000, 1999
and 1998, respectively.
We maintain an employee stock purchase plan which provides for the issuance
of up to 1,000,000 shares of common stock to be purchased by our eligible
employees through periodic offerings. Our employees may purchase common stock
through payroll deductions (not to exceed $20,000 per person within any
calendar year) at 85% of the fair market value. As of December 31, 2000,
employees have cumulatively purchased 139,269 shares under the Employee Stock
Purchase Plan.
14. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
2000 Quarters First Second Third Fourth
- ------------- ------- ------- ------- -------
(in thousands, except per share
data)
Net revenue................................... $70,315 $73,581 $82,261 $99,136
Income before cumulative effect of change in
accounting principle......................... 3,472 2,427 4,391 11,894
Income before cumulative effect of change in
accounting principle per share:
Basic....................................... 0.22 0.13 0.22 0.59
Diluted..................................... 0.21 0.13 0.21 0.56
Net income.................................... 2,694 2,427 4,391 11,894
Net income per share:
Basic....................................... $ 0.34 $ 0.13 $ 0.22 $ 0.59
Diluted..................................... 0.33 0.13 0.21 0.56
1999 Quarters First Second Third Fourth
- ------------- ------- ------- ------- -------
(in thousands, except per share
data)
Net revenue................................... $45,435 $48,780 $55,605 $66,984
Income from operations........................ 2,912 1,638 3,279 12,522
Net income.................................... 1,539 744 1,661 6,999
Net income per share:
Basic....................................... $ 0.11 $ 0.05 $ 0.11 $ 0.45
Diluted..................................... 0.10 0.05 0.11 0.43
F-24
CAREER EDUCATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000, 1999 and 1998
15. VALUATION AND QUALIFYING ACCOUNTS
Balance Charges Balance
at to Increase Amounts at
Beginning Net Due to Written- End of
of Period Revenue Acquisitions off Period
--------- ------- ------------ -------- -------
(in thousands)
Student receivable allowance
activity for
the year ended December 31,
2000........................ $2,723 $9,235 $1,845 $(8,304) $5,499
Student receivable allowance
activity for
the year ended December 31,
1999........................ 2,127 6,697 361 (6,462) 2,723
Student receivable allowance
activity for
the year ended December 31,
1998........................ 1,516 4,983 71 (4,443) 2,127
16. SUBSEQUENT EVENT
On January 2, 2001, we completed our acquisition of EduTrek International,
Inc., a Georgia corporation and operator of American InterContinental
University (AIU). EduTrek shareholders approved the acquisition at a special
meeting held on January 2, 2001. Pursuant to the terms of the merger agreement,
EduTrek's shareholders received an aggregate of 1,203,733 shares of our common
stock (0.0901 shares of our common stock for each share of EduTrek stock) and
$2,507,666 in cash ($0.1877 per share). There were 13,359,970 EduTrek shares
outstanding. The acquisition was accounted for as a purchase and the purchase
price, subject to adjustment, exceeded the fair market value of identifiable
assets acquired and liabilities assumed, resulting in goodwill of approximately
$65,000,000. Additionally, at November 30, 2000, one of EduTrek's lenders,
Sylvan Learning Systems, Inc., assigned its $5.0 million promissory note to us,
in exchange for $5.0 million plus accrued interest. This note is included in
other assets in the accompanying consolidated balance sheet as of December 31,
2000.
F-25