<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1997 Commission File No. 0-16992
-------------- -------
CONCORDE CAREER COLLEGES, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 43-1440321
- ------------------------------- ---------------------------------
(State of other jurisdiction of (I. R. S. Employer Identification
Incorporation or Organization) Number)
4th Floor, City Center Square
12th & Baltimore, P. O. Box 26610
Kansas City, Missouri 64196
- --------------------------------------------------------------------------------
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (816) 474-8002
---------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.10 Par Value
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.
(1) Yes X No (2) Yes X No
----- ----- ----- -----
As of April 23, 1997 Concorde Career Colleges, Inc. had 6,966,576 shares of
Common Stock outstanding.
================================================================================
<PAGE>
CONCORDE CAREER COLLEGES, INC.
Form 10-Q
Three Months Ended March 31, 1997
INDEX
PART I - FINANCIAL INFORMATION
Page
----
<TABLE>
<CAPTION>
Item 1. Financial Information
<S> <C>
Notes to Condensed Consolidated Financial Statements
Note 1...................................................... 1
Note 2...................................................... 1
Note 3...................................................... 2
Condensed Consolidated Balance Sheets............................ 3,4
Condensed Consolidated Statements of Operations.................. 5
Condensed Consolidated Statements of Cash Flows.................. 6
Consolidated Statement of Changes in Stockholders' Equity........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Operations...................................... 8
</TABLE>
PART II - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Legal Proceedings............................................ 13
Item 2. Change in Securities......................................... 13
Item 3. Defaults Upon Senior Securities.............................. 14
Item 4. Submission of Matters to a Vote of Security Holders.......... 14
Item 5. Other Information............................................ 14
Item 6. Exhibits..................................................... 14
Signatures............................................................ 15
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
Overview
The discussion set forth below, as well as other portions of this Form
10-Q, may contain forward-looking comments. Such comments are based upon
information currently available to management and management's perception
thereof as of the date of this Form 10-Q. Actual results of the Company's
operations could materially differ from those forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, potential adverse effects of regulations;
impairment of federal funding; adverse legislative action; student loan default;
changes in federal or state authorization or accreditation; changes in market
needs and technology; changes in competition and the effects of such changes;
changes in the economic, political or regulatory environments, litigation
involving the Company; changes in the availability of a stable labor force; or
changes in management strategies. Readers should take these factors into account
in evaluating any such forward-looking comments.
Note 1:
- ------
The condensed interim consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (the "Commission").
Certain information and footnote disclosures normally included in financial
statements prepared according to generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Company's 1996 Report on Form 10-K that was filed by the
Company with the Commission on March 31, 1997.
The information included in these interim financial statements reflects all
normal recurring adjustments that are, in the opinion of management, necessary
to fairly state the results of the periods presented.
Due to the inherent seasonal nature of the career training business,
annualization of amounts in these interim financial statements may not
necessarily be indicative of the actual operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Company has litigation pending which arose in the normal course of
business. See further discussion in "Contingencies" and "Legal Proceedings".
Note 2:
- ------
Primary earnings per share is computed by deducting accrued and imputed
preferred dividends from net income and adding convertible subordinated debt
interest (net of income taxes) in order to determine net income attributable to
common shareholders. This amount is then divided by weighted average number of
common shares outstanding and common stock equivalents.
Fully diluted earnings per share is computed by deducting accrued preferred
dividends from net income and adding convertible subordinated debt interest (net
of taxes). This amount is then divided by the weighted average number of common
shares outstanding during the year after giving effect for common stock
equivalents arising from stock options and for warrants and preferred stock
assumed converted to common stock.
Primary earnings per weighted average common and common equivalent share is
shown after a reduction for preferred stock dividends of $38,000 and an addition
of $9,000 for convertible debt interest in 1997 and a reduction of $60,000 for
preferred stock dividends in 1996. Dividends for the three months ended March
31, 1997, included accrued dividends of $28,000 for Class A preferred Stock and
imputed dividends of $10,000 for Class B Preferred Stock.
Note 3:
- ------
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P., affiliated Baltimore-based venture capital funds
("Cahill-Warnock"), for the issuance by the Company and purchase by Cahill-
Warnock of (i) 55,147 shares of the Company's new Class B Voting Convertible
Preferred Stock ("Voting Preferred Stock") for $1.5 million and (ii) 5%
Debentures due 2003 ("New Debentures") for $3.5 million (collectively, the
"Cahill Transaction"). Cahill-Warnock subsequently assigned (with the Company's
consent) its rights and obligations to acquire 1,838 shares of Voting Preferred
Stock to James Seward, a Director of the Company, and Mr. Seward purchased such
shares for their purchase price of approximately $50,000. The New Debentures
have nondetachable warrants ("Warrants") for approximately 2,573,529 shares of
Common Stock, exercisable beginning August 25, 1998 at an exercise price of
$1.36 per share of Common Stock. These funds were used to redeem essentially all
outstanding obligations that were owed to CenCor, Inc., the Company's former
parent.
1
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 5,284,000 $ 4,261,000
Net receivables
Accounts receivable........................................... 14,709,000 16,756,000
Notes receivable.............................................. 3,673,000 4,392,000
Allowance for uncollectible accounts.......................... (1,614,000) (1,645,000)
----------- -----------
16,768,000 19,503,000
Deferred income taxes............................................ 916,000 916,000
Supplies and prepaid expenses.................................... 723,000 732,000
----------- -----------
Total current assets.................................... 23,691,000 25,412,000
FIXED ASSETS, NET:................................................. 2,184,000 2,539,000
INTANGIBLE ASSETS, NET
less accumulated amortization of $1,863,000 at March 31, 1997
and $1,820,000 at December 31, 1996, respectively................ 725,000 768,000
OTHER ASSETS:
Long-term notes receivable....................................... 3,035,000 3,001,000
Allowance for uncollectible notes................................ (1,171,000) (1,243,000)
Other............................................................ 398,000 390,000
----------- -----------
Total other assets............................................ 2,262,000 2,148,000
----------- -----------
$28,862,000 $30,867,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated statements.
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Deferred student tuition.............................................. $14,210,000 $16,572,000
Current debt due related party........................................ 400,000
Accrued salaries and wages............................................ 719,000 862,000
Current income taxes payable.......................................... 254,000 439,000
Accounts payable and other accrued liabilities........................ 2,499,000 2,731,000
----------- -----------
Total current liabilities........................................... 17,682,000 21,004,000
DEFERRED INCOME TAXES.................................................. 429,000 429,000
SUBORDINATED DEBT DUE TO RELATED PARTY, CENCOR......................... 2,419,000
SUBORDINATED DEBT DUE TO RELATED PARTY, CAHILL-WARNOCK................. 3,500,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, ($.10 par value, 600,000 shares authorized)
Class A, 260,385 shares issued and outstanding....................... 26,000
Class B, 55,147 shares issued and outstanding........................ 6,000
Common stock, $.10 par value, 19,400,000 shares
authorized, 6,993,376 shares issued and 6,966,576 shares outstanding.. 699,000 699,000
Capital in excess of par.............................................. 7,954,000 7,736,000
Accumulated deficit................................................... (1,347,000) (1,385,000)
Less-treasury stock, 26,800 shares, at cost........................... (61,000) (61,000)
----------- -----------
Total stockholders' equity........................................... 7,251,000 7,015,000
----------- -----------
$28,862,000 $30,867,000
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated statements.
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
Ended March 31,
---------------------------
1997 1996
---- ----
<S> <C> <C>
STUDENT TUITION AND
OTHER REVENUE:........................................... $9,431,000 $11,032,000
---------- -----------
OPERATING EXPENSES:
Payroll costs............................................ 4,465,000 4,924,000
Occupancy................................................ 1,203,000 1,349,000
Instructional materials and supplies..................... 639,000 1,071,000
Advertising.............................................. 747,000 711,000
Other general and administrative......................... 1,377,000 1,454,000
Provision for uncollectible accounts..................... 476,000 522,000
---------- ------------
Total operating expenses............................. 8,907,000 10,031,000
---------- ------------
OPERATING INCOME........................................... 524,000 1,001,000
INTEREST EXPENSE........................................... 136,000 270,000
---------- ------------
INCOME BEFORE INCOME TAXES AND GAIN ON SALE................ 388,000 731,000
GAIN ON SALE OF ASSETS..................................... 313,000
---------- ------------
INCOME BEFORE INCOME TAXES................................. 701,000 731,000
PROVISION FOR INCOME TAXES................................. 196,000 183,000
---------- ------------
NET INCOME................................................. $ 505,000 $ 548,000
========== ============
WEIGHTED AVERAGE COMMON AND
COMMON SHARE EQUIVALENTS
OUTSTANDING
Primary.............................................. 8,537,000 7,645,000
========== ============
Fully Diluted........................................ 8,947,000 7,645,000
========== ============
EARNINGS PER WEIGHTED AVERAGE COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING
Primary.............................................. $0.06 $0.06
========== ============
Fully Diluted........................................ $0.05 $0.06
========== ============
</TABLE>
See accompanying notes to condensed consolidated statements.
4
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES:
Net income ............................................. $ 505,000 $ 548,000
Adjustments to reconcile net income to net cash
provided by operating activities -
Gain on sale of assets ............................. (313,000)
Depreciation and amortization ...................... 232,000 271,000
Provision for losses on accounts receivable ........ 476,000 522,000
Change in assets and liabilities, net -
Change in receivables .......................... 2,153,000 (626,000)
Change in deferred student tuition ............. (2,362,000) 31,000
Change in deferred income taxes ................ (181,000)
Change in accrued income taxes ................ (185,000)
Other changes in assets and liabilities, net ... (430,000) 446,000
----------- ----------
Total adjustments .......................... (429,000) 463,000
----------- ----------
Net operating activities ................... 76,000 1,011,000
CASH FLOWS--INVESTING ACTIVITIES:
Proceeds from sale ..................................... 725,000
Capital expenditures ................................... (190,000) (60,000)
----------- ----------
Net investing activities ................... 535,000 (60,000)
----------- ----------
CASH FLOWS--FINANCING ACTIVITIES:
Class A Preferred stock redemption ..................... (1,302,000)
Class A Preferred stock dividend payments .............. (467,000)
Principal payments on debt due CenCor .................. (2,819,000) (681,000)
Class B Preferred stock issued ......................... 1,500,000
Subordinated debt issued to Cahill-Warnock ............. 3,500,000
----------- ----------
Net financing activities ................... 412,000 (681,000)
----------- ----------
Net increase in cash & cash equivalents .... 1,023,000 270,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........... 4,261,000 3,295,000
----------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................. $ 5,284,000 $3,565,000
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .......................................... $ 132,000 $ 22,000
Income taxes ...................................... 379,000
Cash received during the period for:
Interest .......................................... 102,000 70,000
</TABLE>
See accompanying notes to condensed consolidated statements.
5
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION> Capital
Preferred Common in Excess Accumulated Treasury
Stock Stock of Par Deficit Stock
---------- -------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996............. $ 26,000 $699,000 $ 7,736,000 $(1,385,000) $(61,000)
Class A Preferred Stock Redemption... (26,000) (1,276,000)
Class B Preferred Stock Issuance..... 6,000 1,494,000
Net Income........................... 505,000
Class A Preferred Dividend Payments.. (467,000)
-------- --------- ----------- ----------- --------
BALANCE, March 31, 1997................ $ 6,000 $699,000 $ 7,954,000 $(1,347,000) $(61,000)
======== ======== =========== =========== ========
</TABLE>
(The remainder of this page was left intentionally blank.)
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
- ----------------------
The Company owns and operates proprietary postsecondary schools which offer
career training, primarily in the allied health field (together the Resident
Schools.) The Company previously owned Person/Wolinsky Associates which offered
review courses for the CPA exam. The assets of Person/Wolinsky Associates were
sold on August 2, 1996.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
<S> <C> <C>
1997 1996
------ -------
Resident Schools.......................................... $9,431 $ 9,850
CPA Review Courses........................................ 1,182
------ -------
Total................................................ $9,431 $11,032
====== =======
</TABLE>
The following table presents the relative percentage of revenues derived
from the Resident Schools and the CPA Review Courses and certain consolidated
statement of earning items as a percentage of total revenue for periods
indicated.
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
<S> <C> <C>
1997 1996
------ -------
Allied Health & Computer Schools......................... 100.0% 89.3%
CPA Review Courses........................................ 10.7
-----
Total..................................................... 100.0 100.0
===== =====
Operating expenses:
Payroll costs........................................... 47.3 44.6
Occupancy............................................... 12.8 12.2
Instructional materials and supplies.................... 6.8 9.7
Advertising............................................. 7.9 6.5
Other general and administrative........................ 14.6 13.2
Provision for uncollectible accounts.................... 5.0 4.7
----- -----
Total operating expenses................................ 94.4 90.9
Operating income.......................................... 5.6 9.1
Interest expense.......................................... 1.5 2.4
----- -----
Income before income taxes and gain on sale............... 4.1 6.7
----- -----
Gain on sale of assets.................................... 3.3 .
----- -----
Income before income taxes................................ 7.4 6.7
Provision for income taxes................................ 2.0 1.7
----- -----
Net income................................................ 5.4% 5.0%
===== =====
</TABLE>
(The remainder of this page was left intentionally blank.)
<PAGE>
Results of Operations
QUARTER ENDED MARCH 31, 1997 COMPARED TO
QUARTER ENDED MARCH 31, 1996
Net income decreased $43,000 or 7.8% to $505,000 for the three months ended
March 1997 compared to $548,000 for the same period in 1996. The Company
benefited from a $313,000 gain from the sale of its Michigan building in January
1997. Net income available to common shareholders, after cumulative preferred
dividends was $467,000 in 1997 compared to $488,000 in 1996.
Total revenue decreased 14.5% or $1,601,000 to $9,431,000 for the three
months ended March 31, 1997 compared to $11,032,000 for the same period in 1996.
During August 1996 the Company sold the assets of the San Jose, California
school. In addition the Company sold the assets of Person/Wolinsky Associates,
which offered review courses for the CPA exam. These sales, collectively the
"Asset Sales", accounted for a reduction of $1,644,000 in revenue compared to
1996. Revenue from the twelve operating schools increased slightly from a modest
price increase in 1996. Student population at the twelve schools remained flat
compared to 1996.
Total operating expenses decreased $1,124,000 or 11.2% to $8,907,000
compared to $10,031,000 for the three months ending March 31, 1996. The Asset
Sales resulted in a decrease of $1,550,000 in operating expenses.
Payroll decreased $459,000 or 9.3% to $4,465,000 compared to $4,924,000 for
the three months ending March 31, 1996. Payroll decreased $661,000 as a result
of the Asset Sales. The offsetting payroll increase of $202,000 is due to
additional salary expense and increased staff.
Occupancy decreased $146,000 or 10.8% to $1,203,000 from $1,349,000 in
1996. Occupancy decreased $334,000 due to the Asset Sales. The offsetting
increase is primarily due to increased rent and insurance expense.
Material and supplies decreased $432,000 or 40.3% to $639,000 compared to
$1,071,000 in 1996. The Asset Sales accounted for $305,000 of the decrease. The
remaining decrease is primarily due to the timing of textbook expense.
Advertising increased $36,000 or 5.1% to $747,000 from $711,000 in 1996.
The Asset Sales resulted in an advertising decrease of $92,000. Newspaper and
television advertising both increased in 1997.
General and administrative expenses decreased $77,000 or 5.3% to $1,377,000
from $1,454,000 in 1996. The Asset Sales accounted for a decrease of $154,000.
The resulting increase is primarily due to increased professional fees.
Provision for uncollectible accounts decreased $46,000 or 8.8% to $476,000
from $522,000 in 1996. The Schools wrote off $574,000 of accounts receivable
compared to $392,000 in 1996. The offsetting decrease was due to decreased
accruals for bad debt.
Interest expense decreased $134,000 to $136,000 from $270,000 in 1996. The
Company accrued $158,000 in the first quarter of 1996 for an additional payment
due Cencor. This accrual was eliminated in December 1996 as part of the
refinancing discussed below.
The gain from the sale of the Company's Michigan property sale was $313,000
before any tax effect. See further discussion in "Liquidity and Capital
Resources."
In 1997, a tax provision of $196,000 or 28.0% was recorded compared to
$183,000 or 25.0% in 1996. This provision is a result of evaluating the
Company's needs as it related to provision for assessment of taxes. During
future evaluation the provision for assessment of taxes may increase or decrease
the overall provision for income taxes.
Primary weighted average common and common share equivalents outstanding
increased to 8,537,000 from 7,645,000. This increase is due to the dilutive
effect of the Company's warrants and incentive stock option plan. Primary
earnings per weighted average common and common share equivalent (EPS) was $0.06
for both at March 31, 1997 and 1996. Fully diluted earnings per common share and
common share equivalent was $0.05 and $0.06 at March 31, 1997 and 1996,
respectively. Primary EPS is shown after a reduction for preferred stock
dividends of $38,000 and an addition of $9,000 for convertible debt interest in
1997 and $60,000 in 1996. Dividends for the three months ending March 31, 1997
included $28,000 accrued dividends for Class A Preferred Stock and $10,000
imputed dividends for Class B Preferred Stock.
<PAGE>
Liquidity and Capital Resources
Asset Sales
On August 2, 1996 the assets of Person/Wolinsky Associates, a wholly owned
subsidiary of the Company, were sold. As a result of the sale the Company
received proceeds of $879,000. In addition, a $750,000 non-compete agreement is
payable to the Company in ten equal annual installments. On December 17, 1996
the Company received the first $75,000 non-compete payment in connection with
the sale of Person/Wolinsky assets.
On August 30, 1996 the Company sold the assets of its Allied Health School
located in San Jose, California. The Company received proceeds of $50,000 at
closing and a $300,000 promissory note due and paid on February 28, 1997 for
the School's assets.
On January 31, 1997 the Company sold its Michigan building and land for
$725,000. Proceeds of $310,000 from the sale were used to redeem 26,568 shares
of Class A Preferred Stock held by CenCor and $45,000 of accumulated dividends.
CenCor, Inc. Agreement
The Restructuring Agreement discussed below was effective for the period
between October 30, 1992 and February 25, 1997.
Effective October 30, 1992, the Company and CenCor, Inc. ("CenCor") entered
into a Restructuring, Security and Guaranty Agreement ("Restructuring
Agreement") pursuant to which the Company was released from its obligations
relating to assumed subordinated indebtedness issued by CenCor. As
consideration for the release, the Company issued to CenCor the Old Debenture,
representing the full principal amount of the assumed subordinated debt and
accrued interest through October 30, 1992. CenCor was also entitled to an amount
equal to 25% of the amount by which the "market capitalization" of the Company
exceeded $3,500,000 ("Additional Payment").
In December 1993, the Restructuring Agreement was amended to provide for
the assignment by the Company to CenCor of approximately $8,400,000 of accounts
and notes receivable written-off by the Company in the normal course of business
and thereby discharged $559,000 of interest that had accrued on the Old
Debenture through December 31, 1993.
In November 1994, CenCor exchanged $3,000,000 face value of the Debenture
for 300,000 shares of Class A Preferred Stock of the Company (the "Class A
Preferred Stock"). The Class A Preferred Stock, had a share liquidation
preference of $10.00 per share. The Company also assigned to CenCor additional
accounts and notes receivable with a face value of approximately $15,000,000
that had been written-off by the Company in the normal course of business and
included the discharge of approximately $495,000 of interest representing
interest accrued on the Old Debenture through December 31, 1994.
On December 30, 1996 CenCor, Inc. and the Company amended the Restructuring
Agreement (the "Fourth Amendment"). The Fourth Amendment, among other provisions
extended the due date of the Old Debenture and Unsecured Debt to January 1, 1998
and increased quarterly principal payments. Contingent upon a successful
refinancing, the Fourth Amendment also reduced the Additional Payment to $10 and
provided for terms and allocation of the CenCor Repayment. In addition, the
Company agreed to pay CenCor $1,333 per day for the number of days the closing
date extended beyond December 20, 1996.
As a result of the Cahill Transaction entered into on February 25, 1997,
discussed below, all obligations due CenCor were paid, redeemed, or otherwise
satisfied on that date, except for a continuing obligation to convey written-off
receivables in connection with interest discharged in the 1993 and 1994
agreements. At March 31, 1997 the remaining commitment was $274,000.
Cahill, Warnock Transactions
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P., affiliated Baltimore-based venture capital funds
("Cahill-Warnock"), for the issuance by the Company and purchase by Cahill-
Warnock of (i) 55,147 shares of the Company's new Class B Voting Convertible
Preferred Stock ("Voting Preferred Stock") for $1.5 million and (ii) 5%
Debentures due 2003 ("New Debentures") for $3.5 million (collectively, the
"Cahill Transaction"). Cahill-Warnock subsequently assigned (with the Company's
consent) its rights and obligations to acquire 1,838 shares of Voting Preferred
Stock to James Seward, a Director of the Company, and Mr. Seward purchased such
shares for their purchase price of approximately $50,000. The New Debentures
have nondetachable warrants ("Warrants") for approximately 2,573,529 shares of
Common Stock, exercisable beginning August 25, 1998 at an exercise price of
$1.36 per share of Common Stock.
See "Part II - Change in Securities" for additional discussion.
9
<PAGE>
Bank Financing
In conjunction with the Refinancing, the Company negotiated a $3,000,000
secured revolving credit facility on March 13, 1997 with Security Bank of Kansas
City. Funds borrowed under this facility will be used for working capital
purposes. This facility has a variable interest rate of prime plus one percent,
and no commitment fee. It is secured by all cash, accounts and notes
receivable, furniture and equipment, and capital stock of the subsidiaries. At
March 31, 1997 the Company had not borrowed any funds against the new bank line
of credit.
Cash Flows and Other
Net cash provided by operating activities decreased to $76,000 for the
three months ended March 31, 1997 from $1,011,000 during the same period in
1996. The decreased cash flow is directly attributed to less profitable
operations, and the sale of Person/Wolinsky. Net receivables before bad debt
charge off decreased by $2,152,000 in 1997 compared to an increase of $626,000
in 1996. Deferred student tuition decreased in 1997 by $2,362,000 compared to
an increase of $31,000 in 1996.
Capital expenditures in 1997 were $190,000 compared to $60,000 in 1996.
For both periods, expenditures were primarily for additional classroom equipment
and leasehold improvements. The Company received approximately $725,000 from the
sale of the Michigan land and building. Financing activities increased cash
$412,000 in 1997 as the Company retired the outstanding debt and preferred stock
due CenCor, Inc. and received cash from the issuance of new debentures and
preferred stock.
The Company is moving its North Hollywood, California School to a new
location during 1997. The Company has entered into a lease agreement for a new
building which will provide a much improved facility with better access,
additional space for new programs, and additional parking. Leasehold
improvements and new equipment will cost approximately $850,000.
During 1996 the Company instituted a policy which results in most students
paying a portion of their tuition while they attend school. As the Company
continues to decrease its reliance on Title IV funding the provision for bad
debt expense may increase and cash from operations may be temporarily reduced.
The Company's recently adopted policy that all new student notes will be
serviced by a professional agency is expected to help reduce the effects.
Contingencies
The Company generally relies on the availability of various federal and
state student financial aid programs to provide funding for the students
attending the Schools. The Company also relies on the availability of lending
institutions willing to participate in these programs and to grant loans to
these students. If all of the Schools would be limited, suspended or terminated
from participation in the federal or state student financial aid programs, or if
lending institutions withdrew access to student loans, the Company's continuing
operations would be in doubt.
During July 1993, nine former students of the Jacksonville, Florida School
filed individual lawsuits against the School, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. These suits
have since been dismissed, and these and additional former students have been
added to another complaint which was filed in the Circuit Court, Fourth Judicial
District, Duval County, Florida (Case 93-04005-CA). The latter case was served
on August 26, 1993, and was amended to comprise 69 plaintiffs. Concorde
Careers-Florida, Inc. doing business as ConCorde Career Institute in
Jacksonville, Florida ("the Jacksonville School") a wholly owned subsidiary of
the Company, filed various objections and motions, including Motions to Dismiss
and Motions to Strike. After hearings, the trial court dismissed the lawsuit,
but allowed the lawsuit to be amended on behalf of one plaintiff, and authorized
the remaining plaintiffs to file individual suits if they so desired. The order
of dismissal was appealed and reversed. During the appeal process, two
additional suits making essentially the same claims were filed. In May 1995,
plaintiffs requested permission to amend the complaint by the 69 plaintiffs to
convert the case to a class action, which class would include the plaintiffs in
all three cases. The Jacksonville School opposed the motion, and the proposed
class action complaint was dismissed in August 1995, with permission to amend
again. The amended class action complaint was filed in September 1995, and the
Jacksonville School again moved to dismiss the complaint, and to strike portions
from the complaint. The motion to dismiss was denied November 7, 1995; the
motion to strike was granted in part and denied in part. The Jacksonville
School has answered the
10
<PAGE>
complaint, and filed numerous affirmative defenses. Discovery restricted to
class certification issues was completed in late Fall 1996. A two-day hearing to
determine whether or not the class should be certified was conducted during mid-
January 1997. The plaintiffs motion for class certification was denied on April
18, 1997. The plaintiffs may appeal this decision. The Company believes these
suits are without merit, and will continue to strongly defend against them
vigorously.
The San Bernardino, California School received its official published 1994
Cohort Default Rate ("CDR") in April 1997. The Company's other Schools received
their official published 1994 Cohort Default Rates in January 1997. Three of the
Company's Schools, Anaheim, San Bernardino, and San Diego, California, have
official published Cohort Default Rates which exceed 25% for three consecutive
years. The 1994 published Cohort Default Rates have been appealed for all three
Schools. On April 25, 1997 the San Diego School received notification that its
1994 CDR erroneous data appeal was processed. The 1994 CDR was lowered but
still remains above 25%. The School continues to have a servicing appeal for
its 1994 CDR pending. The Company believes that the 1994 Cohort Default Rates
for the three Schools should be lowered below 25% through appeals, but it is
possible that the ED will not agree. All three Schools could be in jeopardy of
loss of loan eligibility if the Cohort Default Rates for one of the three
consecutive years is not lowered, but in that event the Company may challenge
the ED's rate determinations in the pending litigation filed in late 1992.
The Company intends to vigorously defend the Schools against any proceeding
by the ED to limit, suspend, or terminate FFELP eligibility. If any of the
Schools loses its eligibility to participate in Federal Loan Programs, the
continuing operation of that School may be in doubt. The Company intends to
closely monitor this situation and will evaluate alternatives to mitigate the
effect on any School of the loss of its eligibility to participate in loan
programs. Among the options available to the Company, one option would be to
restructure the School to use grant funding and alternative third party
financing. This action, if necessary, would be expected to result in a short-
term decline in enrollment and profitability during the period of transition.
In 1994, ED established a policy of recertifying all schools participating
in Title IV programs every five years. The Company recently completed the
process of recertifying the Schools. Full certification has been approved for
Anaheim, North Hollywood, San Bernardino and San Diego, California, Kansas City,
Missouri, Portland, Oregon, Memphis, Tennessee, Tampa, and Miami, Florida (Miami
is an additional location of the Tampa School). Denver, Colorado, Jacksonville
and Lauderdale Lakes, Florida have received provisional certification.
Provisional certification limits the School's ability to add programs and change
the level of educational award. In addition, the School forfeits its right to
due process under ED guidelines. The provisional certifications expire in 1998,
at which time the Schools will again go through the process of certification.
The Company does not believe provisional certification will have a material
impact on its liquidity, results of operations or financial position.
ED also has established certain "Factors of Financial Responsibility" which
the Schools are required to meet to be eligible to receive Title IV Funds.
Although these factors change regularly, the Company believes its Schools
currently meet all applicable factors.
On May 31, 1990, the Company, through a wholly-owned subsidiary, Concorde
Career Institute, Inc., a Florida corporation, acquired substantially all the
assets of Southern Career Institute, Inc. ("SCI"), a proprietary, postsecondary
vocational home-study school specializing in paralegal education, for a total
investment of $5,383,000. The acquisition was accounted for as a purchase and
after the acquisition the school was operated as Southern Career Institute.
In 1991, an accrediting commission failed to reaffirm accreditation of SCI
under the ownership of Concorde Career Institute, Inc. Also in 1991, SCI
received notice from the ED alleging that commencing June 1, 1990 SCI was
ineligible to participate in federal student financial assistance programs. The
ED gave notice that it intends to require SCI to repay all student financial
assistance funds disbursed from June 1, 1990 to November 7, 1990, the effective
date upon which the ED's discontinued disbursing student financial assistance
funds. The amount being claimed by ED is not determinable, but the total of the
amounts shown on six separate notices dated January 13, 1994 is approximately
$2.7 million. By letter dated February 24, 1994, counsel for SCI provided
certain information to the collection agency for ED and offered to settle all
claims of ED for the $9,828 on deposit in the SCI bank account. In December
1996, the Company was informed verbally that the matter had been referred to the
ED's General Counsel.
Because management of SCI had determined in late 1991 to wind down SCI's
operations and discontinue its business, SCI entered into a transaction with an
entity created by the former owner of Southern Career Institute, Inc. as the
purchaser. The purchaser acquired SCI's tuition receivables and agreed to
"teach-out" the then enrolled students, but did not assume any obligations to
ED. The purchaser also agreed to pay SCI a portion of amounts it realized on
collections of the tuition receivables in excess of its operating costs. As of
April 16, 1997 SCI had received payments totaling approximately $30,000 pursuant
to that agreement.
In light of applicable corporate law which limits the liability of
stockholders and the manner in which SCI was operated by Concorde Career
Institute, Inc. as a subsidiary of the Company, it is the opinion of management
of the Company that the Company will not be liable for debts of SCI. Therefore,
if SCI is required to pay the ED's claims it is the opinion of management it
will not have a material adverse impact on the Company's financial condition or
its results of operations.
11
<PAGE>
New Accounting Standards
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, earnings per share. This statement is
effective for financial statements issued for periods ending after December 15,
1997. The Company will adopt this method of calculating earnings per share at
that time.
(The remainder of this page was left intentionally blank.)
12
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Department of Education Matters
The Company is challenging the ED's authority to enforce the 1992 Cohort
Default Rates applicable to the Company in light of the ED's rate correction
regulations applicable to such rates adopted on April 25, 1994 and November 29,
1994, which the Company contends are invalid. The Company had requested the
court to officially suspend the 1992 Cohort Default Rates, but the court has
declined to enter a temporary restraining order or a preliminary injunction
prohibiting publication of the 1992 Cohort Default Rates. The Company,
however, intends to pursue its claims for declaratory and injunctive relief
concerning 1992 rate correction regulations and the Schools' recent default
rates. The Company had previously appealed certain of the 1993 default rates.
The ED decided to not review some of the appeals. The Company may decide to
request the ED to review these appeals.
The Company is also pursuing administrative appeals seeking a reduction of
its recently published 1994 rates. These appeals are being pursued under a rate
correction appeal process established by Congress in late 1993 for the
correction of default rates for demonstrated occurrences of improper loan
servicing and collections. The Company's appeals were commenced early in 1997.
See "Contingencies" for additional discussion.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
Other
During July 1993, nine former students of the Jacksonville, Florida School
filed individual lawsuits against the School, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. The Jacksonville
School has answered the complaint, and filed numerous affirmative defenses.
Discovery restricted to class certification issues was completed in late Fall
1996. A two-day hearing to determine whether or not the class should be
certified was conducted during mid-January 1997. The plaintiffs motion for class
certification was denied on April 18, 1997. The plaintiffs may appeal this
decision. The Company believes these suits are without merit, and will continue
to strongly defend against them vigorously. See "Contingencies" for additional
discussion.
The Company has litigation pending which arose in the ordinary course of
business. Litigation is subject to many uncertainties and the outcome of the
individual matters is not presently determinable. It is management's opinion
that this litigation will not result in liabilities that would have a material
adverse effect on the Company's financial position or results of operations.
Item 2. Change in Securities
--------------------
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, L.P. and
Strategic Associates, L.P., affiliated Baltimore-based venture capital funds
("Cahill-Warnock"), for the issuance by the Company and purchase by Cahill-
Warnock of (i) 55,147 shares of Voting Preferred Stock for $1.5 million and (ii)
5% Debentures due 2003 ("New Debentures") for $3.5 million (collectively, the
"Cahill Transaction"). Cahill-Warnock subsequently assigned (with the Company's
consent) its rights and obligations to acquire 1,838 shares of Voting Preferred
Stock to James Seward, a Director of the Company, and Mr. Seward purchased such
shares for their purchase price of approximately $50,000. The New Debentures
have nondetachable warrants ("Warrants") for approximately 2,573,529 shares of
Common Stock, exercisable beginning August 25, 1998 at an exercise price of
$1.36 per share of Common Stock.
The Voting Preferred Stock has the right to vote, as a class with the
Common Stock (with each share of Voting Preferred Stock having the equivalent
voting power of 20 shares of Common Stock), on all matters presented to holders
of Common Stock. Each share of Voting Preferred Stock is convertible into 20
shares of Common Stock at the election of the holder for no additional
consideration. The Voting Preferred Stock is entitled to a 12% annual dividend
beginning February 25, 2001 and a 15% annual dividend beginning February 25,
2003. The Voting Preferred Stock is mandatorily convertible into Common Stock
upon the successful completion by the Company of a common equity offering
greater than
13
<PAGE>
$20 million at a price greater than $4 per share of Common Stock.
Cahill-Warnock also has certain preemptive rights in future issuance of stock by
the Company.
The New Debentures bear an interest rate of 5% per annum, payable
quarterly, with principal due in February 2003, when the attached Warrants
expire. The Warrants are not exercisable until August 25, 1998, subject to
earlier conversion (at the holder's election) in the event of the successful
completion by the Company of a common equity offering greater than $20 million
at a price greater than $4 per share of Common Stock.
The Voting Preferred Stock held by Cahill-Warnock and New Debenture are
also entitled to certain registration rights (for the underlying Common Stock).
As part of the Cahill Transaction, the Board of Directors of the Company
was increased from three to six members, with Cahill-Warnock having the right to
nominate two Directors. The sixth Director is Dr. Robert Roehrich, the
Company's new President and Chief Executive Officer effective April 1997.
Item 3. Defaults Upon Senior Securities -- None
---------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders -- None
-----------------------------------------------------------
Item 5. Other Information -- None
-------------------------
Item 6. Exhibits and Reports on Form 8-K -- None
----------------------------------------
(The remainder of this page was left intentionally blank.)
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORDE CAREER COLLEGES, INC.
DATED: April 29, 1997
By: /s/ Robert R. Roehrich
-------------------------------------------
Robert R. Roehrich, Chief Executive Officer
By: /s/ Gregg Gimlin
-------------------------------------------
Gregg Gimlin, Chief Financial Officer
--------------------------------------
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