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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1997
Commission file number 0-16992
CONCORDE CAREER COLLEGES, INC.
(Exact name of registrant as specified in its charter)
12th & Baltimore, City Center Square
P. O. Box 26610
Kansas City, Missouri 64196
Telephone: (816) 474-8002
INCORPORATED IN THE STATE OF DELAWARE
43-1440321
(I.R.S. Employer Identification No.)
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
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.
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. [ X ]
Indicate the number of outstanding shares
of the Registrant's Common Stock, as of March 26, 1998:
7,190,176 Shares of Common Stock, $.10 par value
The aggregate market value of Voting Securities (including Common
Stock and Class B Voting Convertible Preferred Stock), held by non-affiliates
of the Registrant was approximately $8,237,000 as of March 26, 1998. Part III
incorporates information by reference to the Registrant's definitive proxy
statement for Annual Meeting of Stockholders to be held May 29, 1998.
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CONCORDE CAREER COLLEGES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1997
Index
ITEM PAGE
- ---- ----
PART I
1. Business..................................................... I-1
2. Properties................................................... I-7
3. Legal Proceedings............................................ I-8
4. Submission of Matters to a Vote of Security Holders.......... I-9
PART II
5. Market for the Registrant's Common Stock and Related Stockholder
Matters...................................................... II-1
6. Selected Financial Data...................................... II-1
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ II-3
8. Financial Statements and Supplementary Data.................. II-12
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... II-35
10. Exhibit 23 - Consent of Independent Accountants.............. II-36
PART III
11. Directors, Executive Officers, Promoters and Control Persons of
the Registrant (Incorporated by Reference)................... III-1
12. Executive Compensation (Incorporated by Reference)........... III-1
13. Security Ownership of Certain Beneficial Owners and Management
(Incorporated by Reference).................................. III-1
14. Certain Relationships and Related Transactions (Incorporated by
Reference)................................................... III-1
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... IV-1
Signatures................................................... IV-5
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PART I
ITEM 1. BUSINESS
OVERVIEW
The discussion set forth below, as well as other portions of this Form
10-K, 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-K and may relate to: (i) the ability of
the Company to realize increased enrollments from investments in
infrastructure made over the past year; (ii) ED's enforcement or
interpretation of existing statutes and regulations affecting the Company's
operations; (iii) and the sufficiency of the Company's working capital,
financings and cash flow from operating activities for the Company's future
operating and capital requirements. 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 defaults changes in
federal or state authorization or accreditation; issues related to the year
2000; 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. The following should be read in conjunction with Part II, Item 7--
Safe Harbor Statement.
On January 31, 1997 the Company sold its Warren, Michigan building for
approximately $725,000 (the "Warren Sale"). Proceeds of $313,000 were paid to
CenCor Inc. ("CenCor") for redemption of approximately 27,000 shares of Class
A Redeemable Preferred Stock (the "Class A Preferred Stock") it then held and
$45,000 of accumulated dividends on the Class A Preferred Stock. The Company
realized a gain of $313,000 before income taxes in 1997 as a result of the
Warren Sale.
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 non-detachable 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 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 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 $20 million at a price greater than $4 per share of
Common Stock. Cahill-Warnock also has certain preemptive rights in future
issuance's of stock by the Company.
The Company used approximately $4.4 million of the funds from the
Cahill-Warnock transaction to redeem 260,385 outstanding shares of its Class A
Preferred Stock and $438,000 of accumulated dividends and its $2.4 million
debenture principal, accrued interest and certain unsecured obligations that
were held by CenCor.
Pursuant to a Stockholders' Agreement among Cahill-Warnock, Messrs.
Brozman and Seward, the Robert F. Brozman Trust (who at the time of the
agreement, together, held an aggregate of 52.8% of the outstanding voting
securities of the Company
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and options to purchase 1,000,000 shares of Common Stock) and the Company,
such holders have agreed to certain restrictions on the transfer and voting of
voting securities held by them.
Also see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Current Trends and Recent Events, and
Liquidity and Capital Resources."
THE COMPANY
The Company owns and operates proprietary, postsecondary institutions
(defined below) that offer career vocational training programs primarily in
the allied health field. As of December 31, 1997, the Company operated
campuses at 12 locations in six states (the "Campuses"). Prior to August 2,
1996, the Company also offered Review Courses for the CPA Examination. For a
comparison of the revenues generated by the Campuses and the CPA Review
Courses, see Item 7, "Management's Discussion and Analysis."
The Company was formed in 1988 as a Delaware corporation. Prior to
March 31, 1998, the Company was the career college division of CenCor. The
Company's principal office is located at 12th and Baltimore, City Center
Square, P.O. Box 26610, Kansas City, Missouri 64196 (telephone: 816/474-8002).
Unless otherwise indicated, the term "Company" refers to Concorde Career
Colleges, Inc. and its direct and indirect wholly owned subsidiaries.
THE CAMPUSES
The Company operates Campuses located in the following cities: North
Hollywood, Anaheim, San Bernardino, and San Diego, California; Denver,
Colorado; Lauderdale Lakes, Jacksonville, Miami (an additional location of the
Tampa Campus) and Tampa, Florida; Kansas City, Missouri; Portland, Oregon; and
Memphis, Tennessee.
The Company has designated each Campus as a "Concorde Career
Institute," to increase name recognition.
ALLIED HEALTH CURRICULUM
The Company's primary allied health programs of study are
Vocational/Practical Nursing, Respiratory Therapy Technician, Surgical
Technician, Pharmacy Technician, Radiology Technician, Medical Secretary,
Medical Assistant, and Dental Assistant. Not all programs are offered at all
Campuses. The Kansas City Campus offers an associate degree in allied health.
Some Campuses utilize different program titles pursuant to state regulations.
In addition, certain Campuses offer selected short term courses, including
Limited X-Ray, Expanded Duties for Dental Assistants, Medical Insurance
Billing, Medical Lab Assistant, Patient Care Assistant, and various
certification test preparations in allied health occupations.
The Campuses are on a non-traditional academic calendar with starting
dates for programs varying by location and type of program. Programs typically
commence monthly at each Campus. The Campus' programs of study usually range
from eight to twenty months and include from 720 to 2,985 hours of
instruction. While most programs are taught in a classroom atmosphere,
hands-on clinical/laboratory experience is an integral part of the curriculum.
Most programs of study include an externship immediately prior to graduation,
varying in duration from four to twelve weeks, depending on the particular
program.
RECRUITMENT AND ADMISSIONS
A typical student is either (i) unemployed and enrolls in order to
learn new skills and obtain employment or (ii) underemployed and enrolls in
order to acquire new skills or to update existing skills to increase his/her
earning capacity. The Company recruits students through advertising in
various media, including television, newspapers and direct mail. Students at
some campuses are also recruited through seminars and lectures presented to
graduating seniors at local high schools. Management estimates that
approximately 25% of all enrollments are the result of referrals from the
Campus' students and graduates.
Each Campus maintains an Admissions Department that is responsible for
conducting admissions interviews with potential applicants to provide
information regarding the Campus' programs and to assist with the application
process. In
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addition, each applicant for enrollment must take and pass an entrance
examination(s) administered by a person other than admissions personnel. The
entrance examination and interview are designed to determine the student's
ability to benefit (ATB) from the instruction provided by the Campus and the
student's level of motivation to complete the program.
The admissions criteria for the Campus vary according to the program
of study. Each applicant for enrollment must have a high school diploma; the
equivalent of a high school diploma; or, at some campuses, must demonstrate the
ability to benefit from the program sought before admission into the Campus is
granted. All students must be beyond the age of compulsory high school
attendance. The Company performs credit checks and/or utilizes a database
maintained by the United States Department of Education ("ED") to identify
applicants who may be in default on a prior student loan.
At December 31, 1997, the Company had approximately 3,700 students in
attendance at the Campuses, including approximately 400 students on
externship.
STUDENT RETENTION
The Company strives to help students complete their program of study
through admissions screening policies, financial aid planning and student
services. Each Campus has a staff member whose function is to provide student
services concerning academic and personal problems that might disrupt or
result in a premature end to a student's studies. Programs of study are
offered in the morning, afternoon, and evening to meet the students'
scheduling needs.
If a student terminates prior to completing a program, federal and
state regulations and accreditation criteria permit the Company to retain only
a certain percentage of the total tuition, which varies with, but equals or
exceeds, the percentage of the program completed. Amounts received by the
Company in excess of such set percentage of tuition are refunded to the
student or the appropriate funding source. See "Financing Student Education,"
below.
STUDENT PLACEMENT
The Company, through the placement personnel at each Campus, provides
job placement assistance services for its graduates. The placement personnel
establish and maintain contact with local employers and other sources of
information on positions available in the local area. Additionally, the Campus's
Director of Graduate Services works with students on preparing resumes and
interviewing techniques. Postgraduate placement assistance is also provided,
including referral to other cities in which the Campuses are located. A number
of graduates do not require placement services. Frequently, the externship
programs at the Campuses result in placement of students with the practitioners
participating in the externship.
CAMPUS ADMINISTRATION
The President and Chief Executive Officer (the "CEO") is responsible
for the overall performance of the Campuses. Reporting to him are: the Vice
President, Compliance/Financial Aid; Vice President, Chief Financial Officer;
Vice President, Education; Vice President, Human Resources; Director,
Information Technology; Director, Student Recruitment; and Director, Quality
Assurance and Accreditation.
Each Campus is operated independently and is managed on site by a
Campus Director reporting to the President and CEO. In addition, each Campus
is staffed with a Financial Aid Director, Director of Admissions, Director of
Education, Director of Graduate Services, Director of Student Services,
Director of Business Services, and several other support staff. Instruction at
each Campus is conducted by professional educators in the field or by former
and current members of the medical community on a full-time or part-time
basis. Instructional staff are selected based upon academic and professional
qualifications, and experience level.
ACCREDITATION AND LICENSING
The Campuses are accredited through various accrediting associations
recognized by ED. These associations are the Accrediting Commission of Career
Schools and Colleges of Technology ("ACCSCT") or the Council on Occupational
Education (the "COE"). Accreditation by a nationally recognized accrediting
body is necessary in order for a Campus to be eligible to participate in
federally sponsored financial aid programs for students. See "Financing
Student Education."
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Additionally, certain Campuses have received accreditation or approval
for specific programs from certain of the following accrediting agencies: The
American Society of Health Systems Pharmacists, American Association of
Medical Assistants Endowment Commission, Committee on Allied Health Education
and Accreditation, the Joint Review Committee for Respiratory Therapy
Education, the American Dental Association, the California Board of Dental
Examiners, and the Board of Vocational Nurse and Psychiatric Technician
Examiners. While such programmatic accreditation/approvals are not necessary
for participation in federally sponsored financial aid programs, they are
required for certification and/or licensure of graduates from some of the
programs offered by certain of the Campuses, such as the Vocational or
Practical Nurse program offered at the San Bernardino, San Diego, Denver,
North Hollywood and Anaheim Campuses. Additionally, such accreditation or
approvals have been obtained because management believes they enhance the
students' employment opportunities in those states that recognize these
accrediting agencies.
The qualifications of faculty members are regulated by applicable
accrediting bodies. These accrediting bodies have certain faculty standards
that must be met before the Campuses are given an accreditation renewal. In
addition, depending upon the curriculum being taught, faculty members must
meet certain standards set by applicable state licensing laws before annual
licensing of the Campuses.
Each Campus is also licensed as an educational institution under
applicable state and local licensing laws, and is subject to a variety of
state and local regulations. Such regulations may include approval of the
curriculum, faculty and general operations.
FINANCING STUDENT EDUCATION
Tuition and other ancillary fees at the Campuses vary from program to
program, depending on the subject matter and length of the program. The total
cost per program ranges from approximately $6,000 to $20,000.
Most students attending the Campuses utilize federal government grants
and/or the Federal Family Education loan programs available under the Higher
Education Act of 1965, as amended (the "Act"), and various programs
administered thereunder to finance their tuition. The Act and the programs
administered thereunder are currently under review for reauthorization by
Congress. Each Campus has at least one financial aid officer who assists
students in making application for such federal grants and federal loans.
Management estimates that during 1997, 81% of Campus's cash receipts were
derived from funds obtained by students through these programs.
Currently, each of the Campuses is an eligible institution for some or
all of the following federally funded programs: Federal Pell Grant
(Pell), Federal Supplemental Education Opportunity Grant (SEOG), Federal
Perkins Loan, Federal Parent Loan for Undergraduate Students (PLUS), Federal
Stafford Loan, Federal Unsubsidized Stafford Loan, and Veterans Administration
Assistance. Also, some students are eligible for assistance under the
Department of Labor's Job Training Partnership Act. The San Diego Campus is
eligible to participate only in the Pell, Perkins and SEOG programs. See
further discussion, in Part 1, "Regulation".
The states of California, Colorado, Tennessee, Florida, and Oregon
each offer state grants to students enrolled in educational programs of the
type offered by the Campuses. Typically, many restrictions apply in qualifying
and maintaining eligibility for participation in these state programs.
Students at the Campuses principally rely on a combination of two
Federal programs: Federal Pell Grants and Federal Family Education Loans
("FFELs") also referred to as Federal Subsidized Stafford, Unsubsidized
Stafford, and PLUS loans. FFELs are awarded annually to needy students
studying at least half time at an approved postsecondary educational
institution. Federal Pell Grants need not be repaid by the student. The
maximum Pell Grant a student may receive for the 1997-98 award year is $2,700,
($3,000 for 1998-1999). The amount a student actually receives is based on a
federal regulatory formula devised by ED.
FFELs are low interest federal student loans provided by banks and
other lending institutions, the repayment of which is fully guaranteed as to
principal and interest by the federal government through a guarantee agency.
The student pays no interest on a Subsidized Stafford Loan while in school and
for a grace period (up to six months) thereafter; on unsubsidized loans,
interest
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accrues but is capitalized and added to the principal. Parents of dependent
students can receive PLUS loans. There is no interest subsidy for PLUS loans.
The borrower is responsible for all interest that accrues on the loan while the
student is in school. For both subsidized and unsubsidized loans, students do
not need to begin payment until expiration of a six-month grace period following
last day of attendance. After such time, repayment is required in monthly
installments, including a variable interest rate with a current cap at 9%. This
rate is currently under review. A decrease in the rate may result in reduced
availability of lenders willing to participate in these programs. The lenders
making subsidized FFELs receive interest subsidies during the term of the loan
from the federal government, which also pays all interest on these FFELs while
the student attends school and during the grace period. In the event of default,
all FFELs are fully guaranteed as to principal and interest by state or private
guarantee agencies which, in turn, are reimbursed by the federal government
according to the guarantee agency reinsurance provisions contained in the Act.
State and federal student financial aid programs are subject to the
effects of state and federal budgetary processes. There can be no assurance
that government funding for the financial aid programs in which the Company's
students participate will continue to be available or maintained at current
levels. The loss or reduction in funding levels for state and federal student
financial aid programs could have a material adverse effect on the Company.
REGULATION
Both federal and state financial aid programs contain numerous and
complex regulations which require compliance not only by the recipient student
but also by the institution which the student attends. Because of the
importance of compliance with these regulations, the Company monitors the
Campuses' compliance through periodic visits to the individual Campuses by
Corporate Staff. If the Company should fail to materially comply with such
regulations at any of the Campuses, such failure could have serious
consequences, including limitation, suspension, or termination of the
eligibility of that Campus to participate in the funding programs. Audits by
independent certified public accountants of the Campus' administration of
federal funds are mandated by federal regulations. Additionally, these aid
programs require maintaining certain accreditation by the Campuses. See
"Accreditation and Licensing" and "Financing Student Education."
One of ED's principal criteria for assessing a Campus's eligibility to
participate in student loan programs is the cohort default rate threshold
percentage requirements (the "Cohort Default Rate") enacted in the Student
Loan Default Prevention Initiative Act of 1990. Due to concerns about default
rates, the ED has promulgated regulations affecting FFEL, and Federal Perkins
Loan Program loans. Cohort Default Rates are calculated by the Secretary of
Education and are designed to reflect the percentage of current and former
students entering repayment in the cohort year, the fiscal year of the federal
government -- October 1 to September 30, who default on their loans during
that year or the following cohort year. This calculation includes only those
defaulted loans on which federal guaranty claims have been paid. A school may
request that a defaulted loan be removed from the calculation if the school
can demonstrate that the loan was improperly serviced and collected under
guidelines established in ED's regulations. A loan that is included in the
default rate calculation may be subsequently paid by the student, but is not
removed from the cohort calculation.
After January 1, 1991, the Secretary of Education was authorized to
initiate proceedings to limit, suspend or terminate the eligibility of a
Campus to participate in the FFEL Programs if the Cohort Default Rate
for three successive years exceeds the prescribed threshold. Beginning with
the release of 1992 Cohort Default Rates in the summer of 1994, a Cohort
Default Rate equal to or exceeding 25% for each of the three most recent
fiscal years may be used as grounds for terminating FFEL eligibility.
The following table sets forth the 1993, 1994, and 1995 Cohort Default
Rates for each of the Campuses. Publication of the Cohort Default Rates for
1990 and 1991 has been suspended due to two injunctions obtained by the
Company to preclude the ED from using 1990 and 1991 Cohort Default Rates as
grounds to limit, suspend, or terminate the Campus's eligibility for FFEL. The
Company has a pending suit against the ED challenging the 1992, 1993, and 1994
cohort default rates. See Item 3, "Legal Proceedings."
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<TABLE>
<CAPTION>
COHORT DEFAULT COHORT DEFAULT
RATES RATES
CAMPUS 1993 1994 1995(2)(3) 1993 1994 1995(2)(3)
---- ---- --------- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Anaheim, CA 25.7 24.8 28.6 North Hollywood, CA 24.3 19.7 22.0
Denver, CO 20.4 18.7 18.2 Portland, OR 28.8 20.1 12.6
Jacksonville, FL 31.1 17.6 19.9 San Bernardino, CA 31.2 23.8 28.1
Kansas City, MO 20.0 14.7 18.2 San Diego, CA(4) 32.3 28.6 24.3
Lauderdale Lakes, FL 18.2 21.2 28.0 Tampa, FL 24.5 14.8 19.8
Miami, FL (1) 24.5 14.8 19.8
Memphis, TN 16.2 22.1 23.8
</TABLE>
(1) The Miami Campus is an additional location of the Tampa Campus.
(2) Published in November 1997.
(3) Pre-appeal rates.
(4) Not eligible to participate in FFEL program any sooner than October 1999.
The San Diego Campus was notified in September 1997 that it was no
longer eligible to participate in the FFEL Program and that it could not apply
to regain eligibility until at least October of 1999. The Campus did not
maintain loan eligibility because its Cohort Default Rates for one of the three
consecutive published years, 1992, 1993, and 1994 was not below 25%. In
anticipation of the loss of the FFEL Program the Campus had previously arranged,
through effective contingency planning, alternative sources of financing for its
students. The Campus is continuing to operate and provides qualified students
with access to Federal Pell grants and other sources of student financing. The
student population of the San Diego Campus was 200 or approximately 6 percent of
the Company's total student population as of December 31, 1997. The Company is
uncertain if enrollment at the San Diego Campus will materially change.
The Company's Campuses received in November 1997 their official
published 1995 Cohort Default Rates (the "CDR") from ED. Three of the
Company's Campuses have 1995 default rates greater than 25 percent. The three
Campuses, however, have at least one of their three most recent rates below
25% and are, therefore, eligible to continue participating in the FFEL
program. See discussion in Item 2, Cash Flows and Other. To help control
default rates, the Company has instituted aggressive default management at
each campus and monitors activity monthly. Staff at each Campus assist and
educate student borrowers in understanding their rights and responsibilities
as borrowers under these student loans. In addition, each Campus contracts
with a professional loan management company to provide further assistance to
the former student upon graduation or withdrawal.
In 1994, ED established a policy of recertifying all Campuses
participating in Title IV programs every five years. 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
Campus). Denver, Colorado, Jacksonville and Lauderdale Lakes, Florida have
received provisional certification. Provisional certification limits the
Campus's ability to add programs and change the level of educational award.
In addition, the Campus is required to accept certain restrictions on due
process procedures under ED guidelines. The provisional certifications expire
in September 1998, at which time the Campuses will again go through the
process of recertification. 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 Campuses are required to meet to be eligible to receive Title IV
Funds. The three principal standards of financial responsibility are
profitability, the acid test ratio, and tangible net worth. In addition, ED
has issued a new financial responsibility regulation that will become
effective July 1, 1998. The new regulation uses a composite score based upon
three financial ratios. Institutions earning a composite score of 1.50 or
greater will be considered fully financially responsible. The Company
believes that on a consolidated and individual basis, the Campuses and the
Company meet all existing financial responsibility standards and exceed the
financial responsibility factor of 1.50 at December 31, 1997.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
<PAGE>
In September 1997, the Bureau of Consumer Protection of the United
States Federal Trade Commission (the "FTC") notified the Company that it was
conducting an inquiry related to the Company's offering and promotion of
vocational or career training. The Company is cooperating with the FTC to the
fullest extent possible, and believes it has not engaged in any activity that
would violate FTC regulations. The Company believes the inquiry is one of
several being conducted by the FTC pertaining to vocational postsecondary
training institutions. Currently, there is not sufficient information
available to determine the outcome or financial impact on the Company, if any.
COMPETITION
The Campuses are subject to intense competition from public
educational institutions in addition to a large number of other public and
private companies providing postsecondary education, many of which are older,
larger and have greater financial resources than the Company.
Management believes that the educational programs offered, the
Campus's reputation, and marketing efforts are the principal factors in a
student's choice to enroll at a Campus. Additionally, the cost of tuition and
availability of financing, the location and quality of the Campus's
facilities, and job placement assistance offered are important. The specific
nature and extent of competition varies from Campus to Campus, depending on
the location and type of curriculum offered. The Company competes principally
through advertising and other forms of marketing, coupled with specialized
curricula offered at competitive prices.
EMPLOYEES
As of December 31, 1997, the Company had approximately 692 full and
part-time employees, of which approximately 414 were faculty members at its
Campuses. The Company has 235 management and administrative staff members, of
which 201 are employed at the Campuses, and 34 are employed at corporate
headquarters. The remaining 43 employees are admissions personnel at the
Company's Campuses.
Management and supervisory members of the administrative staff and
administrative faculty are salaried. All other faculty and employees are paid
on an hourly basis. The Company employs on both a full-time and part-time
basis, as well as on a substitute/on-call basis. The Company does not have an
agreement with any labor union representing its employees and has not been the
subject of any union organization efforts.
ITEM 2. PROPERTIES
The Company's corporate headquarters is located in Kansas City,
Missouri. All the Campus' facilities are leased. The Company owned a
building in Warren, Michigan, which was sold January 31, 1997. See Item 1 "
Overview."
(The remainder of this page left intentionally blank.)
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The following table sets forth the location, approximate square footage and
expiration of lease terms for each of the Campuses as of December 31, 1997:
<TABLE>
<CAPTION>
SQUARE
LOCATIONS FOOTAGE EXPIRATION (1)
--------- ------- --------------
<S> <C> <C>
Anaheim, CA 17,989 1-31-99
North Hollywood, CA 35,155 12-31-11
San Bernardino, CA 16,950 9-30-98
San Diego, CA 12,244 11-21-98
Denver, CO. 14,860 1-31-03
Lauderdale Lakes, FL 14,016 5-31-00
Jacksonville, FL 12,305 7-31-03
Miami, FL. 8,000 4-30-99
Tampa, FL 14,200 12-31-00
Kansas City, MO 16,000 3-01-01
Kansas City, MO (Home Office) (2) 7,227 10-31-98
Portland, OR. 15,246 11-01-99
Memphis, TN 21,933 7-31-02
</TABLE>
(1) Several of the leases provide renewal options, although renewals may
be at increased rental rates.
(2) Does not include subleased space -- see notes to consolidated
financial statements.
The Company also rents various equipment under leases that are generally
cancelable within 30 days.
ITEM 3. LEGAL PROCEEDINGS
The Company's Campuses are sued from time to time by a student or
students who claim to be dissatisfied with the results of their program of
study. Typically, the claims allege a breach of contract, deceptive
advertising and misrepresentation and the student or students seek
reimbursement of tuition. Punitive damages sometimes are also sought. In
addition, the ED may allege regulatory violations found during routine program
reviews. The Company has, and will continue to dispute these findings as
appropriate in the normal course of business. In the opinion of the Company's
management such pending litigation and disputed findings are not material to
the Company's financial condition or its results of operations.
The Company has a pending suit against the ED challenging the 1992,
1993, and 1994 Cohort Default Rates and the rate correction regulations, which
the ED adopted in 1994. The ED's rate correction regulations contain a very
restrictive standard for removal of defaulted loans from a Campus Cohort
Default Rate due to improper servicing and collection. The Company's suit
contends that the regulations are unlawful because they contravene provisions
of the Higher Education Act of 1965 (as amended) and are arbitrary and
capricious. All of the Company's campuses, with the exception of San Diego,
currently have one or more of their three most recent default rates below 25%,
following administrative appeal rulings and continuing aggressive default
management efforts by the Company, and as a result, proceedings in the suit
are inactive.
During July 1993, nine former students of the Jacksonville, Florida
Campus filed individual lawsuits against the Campus, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. These suits
have since been dismissed by the plaintiffs; however, over time, three others
were filed seeking similar relief on behalf of a total of 95 plaintiffs.
Conversion of one of the three cases to a class action has been attempted;
however, the plaintiff's motion for class certification was denied on April
18, 1997. The Company received a Notice of Appeal on May 19, 1997, which
appealed the order denying certification
<PAGE>
of the class. The purported class representative and the Company filed all
appropriate briefs, and oral argument before the appellate court was held on
January 15, 1998. On February 5, 1998, the appellate court issued a per
curium decision without opinion affirming the trial court's denial of class
certification. As no motion concerning the opinion was filed timely by the
class representative, the opinion is now final. Any further attempted appeal,
if filed, should be dismissed. During the appeal, all activity and progress
in the other suits was stayed. The amount of damages sought is not
determinable. The Company believes these suits are without merit, and will
continue to strongly oppose class certification, and to defend against them
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
(The remainder of this page was left blank intentionally.)
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") is currently traded under
the symbol "CCDC" on the over-the-counter bulletin board (the "OTCBB"). The
following table sets forth the high and low bid information, for the periods
indicated as reported by the OTCBB.
<TABLE>
<CAPTION>
1996 HIGH LOW
---- ---- -----
<S> <C> <C>
First Quarter $0.94 $0.44
Second Quarter $1.06 $0.88
Third Quarter $1.06 $0.55
Fourth Quarter $1.06 $0.88
1997
----
First Quarter $2.00 $0.75
Second Quarter $1.50 $1.06
Third Quarter $2.38 $1.25
Fourth Quarter $2.41 $1.63
</TABLE>
At December 31, 1997, there were 275 holders of record of the Common
Stock.
On March 26, 1998, the bid and asked prices of the Company's Common
Stock on the OTCBB were $2.4375 and $2.125 per share, respectively.
No cash dividends have been paid on the Common Stock and the Company
does not presently intend to pay cash dividends on Common Stock in the
foreseeable future. Class A Preferred Stock dividends of $467,000 and $56,000
were paid in 1997 and 1996 respectively pursuant to the Restructuring,
Security and Guaranty Agreement, as amended with CenCor. See Item 7,
"Liquidity and Capital Resources -- CenCor Agreement."
ITEM 6. SELECTED FINANCIAL DATA
The following data should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Item 8, "Financial Statements and Supplementary Data."
ACCOUNTING CHANGE
During the third quarter of 1997 the Company changed its method of
recognizing tuition revenue. Under the new method, tuition revenue is
deferred and recognized ratably over the period of the program. The Company
previously used a method in which a portion of tuition revenue was recognized
in the month a student began attending classes to offset the costs incurred in
obtaining the new student. The remaining tuition revenue was deferred and
recognized over the term of the program. The Company believes the new method
of revenue recognition is more representative of current industry practice and
is a preferable accounting method.
The effect of both the cumulative change for prior years and the
change for the year ended December 31, 1997 was to decrease net income after
cumulative change in accounting principle by $670,000 ($0.09 per basic share,
$0.06 per diluted share). The cumulative effect on income of the change on
prior years (after reduction for income taxes of $421,000) was a reduction of
$659,000. The effect of the change on the year ended December 31, 1997 was to
decrease income before cumulative effect of a change in accounting principle
by $11,000.
<PAGE>
The following selected data has been derived from the Company's
audited financial statements for the years ended 1997 through 1993.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31(5)
-------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
INCOME STATEMENT DATA: (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues $37,715 $40,119 $39,274 $35,032 $34,781
Operating expenses 36,926 39,254 36,835 34,173 33,066
Operating income 789 865 2,439 859 1,715
Interest expense 454 371 659 1,065 1,152
Gain (loss) on sale of assets 313 (217)
Income (loss) before change in
accounting principle 936 549 1,599 (6) 413
Basic earnings (loss) per share
before change in accounting
principle (1) $.28 $.05 $.19 $(.00) $.06
Diluted earnings (loss) per share
before change in accounting
principle (1) $.20 $.04 $.18 $(.00) $.06
Net income (loss) 277 549 1.599 (6) 413
Basic earnings (loss) per share $.19 $.05 $.19 $(.00) $.06
Diluted earnings (loss) per share $.14 $.04 $.18 $(.00) $.06
BALANCE SHEET DATA:
Total assets $25,524 $24,282 $25,564 $26,238 $26,365
Long-term debt (2) 3,500 2,419 4,066 3,954 10,385
Stockholders' equity 6,735 6,772 6,674 5,075 2,081
DECEMBER 31
-----------------------------------------------
OTHER DATA: 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Number of locations (3):
Health Vocation 12 12 13 13 15
Travel Service -- -- -- -- 1
Total 12 12 13 13 16
Net enrollments (4) 6,367 6,855 7,121 6,701 6,532
</TABLE>
(1) See Note 10 of Notes to Consolidated Financial Statements for the basis of
presentation of earnings per share.
(2) Consists of long term debt and debt due to related party -- see Note 7 of
Notes to Consolidated Financial Statements.
(3) Includes only Campuses open at December 31.
(4) "Net enrollments" are students who begin a program of study, net of
cancellations . The table does not include data for the CPA Review
Courses. The table does include net enrollments for Campuses sold or
closed during the year.
(5) Certain amounts in prior years have been reclassified to conform to
current year presentation.
(The remainder of this page was left blank intentionally.)
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table presents the revenue for the Campuses and CPA
Review Courses for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
(IN THOUSANDS)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Health Vocational Programs $37,638 $38,819 $36,360
CPA Review Courses and other 77 1,300 2,914
------- ------- -------
Total $37,715 $40,119 $39,274
======= ======= =======
</TABLE>
The following table presents the relative percentage of revenues
derived from the Campuses and CPA Review Courses and certain consolidated
statement of operations items as a percentage of total revenues for the
periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Health Vocational Programs 99.8% 96.8% 92.6%
CPA Review Courses and other .2 3.2 7.4
----- ----- -----
Total 100.0 100.0 100.0
Operating expenses:
Instruction costs and services 35.1 32.9 31.4
Selling and promotional 14.3 13.4 13.0
General and administrative 44.7 43.5 45.4
Provision for uncollectable accounts 3.8 8.1 4.0
----- ----- -----
Total 97.9 97.9 93.8
Operating income 2.1 2.1 6.2
Interest expense 1.2 .9 1.7
----- ----- -----
Income before income taxes and gain (loss)
on sale of assets 0.9 1.2 4.5
Gain (loss) on sale of assets 0.8 (.5)
----- ----- -----
Income before income tax 1.7 .7 4.5
Provision (benefit) for income tax (.8) (.6) 0.5
----- ----- -----
Income before cumulative effect of change
in accounting principle 2.5 1.3 4.0
Cumulative effect of change in revenue
recognition method (1.8)
----- ----- -----
Net income .7% 1.3% 4.0%
===== ===== =====
</TABLE>
(The remainder of this page left intentionally blank.)
<PAGE>
SAFE HARBOR STATEMENT
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains certain forward- looking statements within the
meaning of Section 27A of the Securities Act of 1933 (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"),
and the Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Statements in this Form 10-K containing the
words "estimate," "project," "anticipate," "expect," "intend," "believe," and
similar expressions may be deemed to create forward-looking statements which,
if so deemed, speak only as of the date the statement was made. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
This Form 10-K, 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-K and may relate to: (i) the
ability of the company to realize increased enrollments from investments in
infrastructure made over the past year; (ii) ED's enforcement or interpretation
of existing statutes and regulations affecting the Company's operations; and,
(iii) the sufficiency of the Company's working capital, financings and cash flow
from operating activities for the Company's future operating and capital
requirements. 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 defaults; changes in federal or state
authorization or accreditation; issues related to the year 2000; 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.
The forward-looking statements are qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following: (i)
the Company's plans, strategies, objectives, expectations and intentions are
subject to change at anytime at the discretion of the Company; (ii) the effect
of economic conditions in the postsecondary education industry and in the
nation as a whole; (iii) the effect of the competitive pressures from other
educational institutions; (iv) the Company's ability to reduce staff turnover
and the attendant operating inefficiencies; (v) the effect of government
statutes and regulations regarding education and accreditation standards, or
the interpretation or application thereof, including the level of government
funding for, and the Company's eligibility to participate in, student
financial aid programs; and (vi) the role of ED's, Congress', and the public's
perception of for-profit education as it relates to changes in education
regulations in connection with the reauthorization or the interpretation or
enforcement of existing regulations.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates by management
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period, primarily in the areas of provisions for uncollectable
accounts, useful lives of intangible assets, and deferred income taxes.
Actual results could differ from these estimates.
CURRENT TRENDS AND RECENT EVENTS
On January 31, 1997 the Company sold its Warren, Michigan building for
approximately $725,000 (the "Warren Sale"). Proceeds of $310,000 were paid to
CenCor, Inc. (CenCor) for redemption of approximately 27,000 shares of Class A
Preferred Stock then held by CenCor and $45,000 of accumulated preferred
dividends on the Class A Preferred Stock. The Company realized a gain of
$313,000 before income taxes in 1997 as a result of the Warren Sale.
On February 25, 1997 the Company entered into the Cahill Transaction
whereby it issued Voting Preferred Stock, New Debentures, and Warrants to
Cahill-Warnock, a new investor, for an aggregate purchase price of
$5,000,000. Proceeds of $4,409,000 from the Cahill Transaction were used to
redeem from CenCor the principal and accrued interest of the Old Debenture,
principal and accrued interest of the Unsecured Debt, the Class A Preferred
Stock, and the related accumulated preferred dividends. See "Liquidity and
Capital Resources."
<PAGE>
Payroll cost is the Company's primary expense. As the Company continues
to strengthen its staff and increase program offerings in the future, especially
more technical programs, this expense may continue to increase and is reflected
in instruction and general administration costs.
During 1994, the Company closed its Health Vocation Campuses at Van
Nuys, California and Minneapolis, Minnesota and sold the Travel Operations
Campus in Santa Ana, California. During 1996 the Company sold its Campus in
San Jose, California. Also during 1996, the Company sold the assets of
Person/Wolinsky Associates. During 1997 the North Hollywood Campus was moved
to a new location.
Management of the Company currently believes that it can maintain its
profitability and cash position as long as there is no disruption in the
Company's current participation in the Title IV student financial assistance
programs or other unanticipated set-backs. However, the Company cannot predict
the activities that may or may not occur in the uncertain regulatory
environment in which the proprietary vocational training industry operates.
See Item 1, "Business -- Financing Student Education," and "Business --
Regulation."
OPERATING RESULTS
1997 compared to 1996
Net income of the Company decreased $272,000 to $277,000 for the year
ended December 31, 1997 compared to $549,000 for the same period in 1996.
During 1997 the Company recorded a charge of $659,000, net of tax, for a
cumulative change in revenue recognition. Total revenue decreased 6.0% or
$2,404,000 to $37,715,000 from $40,119,000 in 1996. The assets of the CPA
Review Courses and the San Jose Campus were sold in 1996 (the "Asset Sales")
and accounted for $2,337,000 of the revenue decrease. Revenue from the twelve
remaining Campuses decreased $67,000 as a result of a decrease in continuing
student population. Total operating expenses decreased $2,328,000 or 5.9% to
$36,926,000 compared to $39,254,000 in 1996. The Asset Sales resulted in a
decrease of $2,414,000 in operating expenses.
INSTRUCTION COSTS AND SERVICES - increased $50,000 to $13,231,000
compared to $13,181,000 in 1996. The Asset Sales resulted in a decrease of
$706,000 in 1997. The offsetting increase was primarily a result of increased
faculty wages.
SELLING AND PROMOTIONAL - increased $14,000 to $5,406,000 compared to
$5,392,000 in 1996. The Asset Sales resulted in a decrease of $299,000 in
1997. The remaining $313,000 increase is primarily due to additional
advertising and payroll expenses compared to 1996.
GENERAL AND ADMINISTRATIVE - decreased $595,000 or 3.4% to $16,853,000
compared to $17,448,000 in 1996. The Asset Sales resulted in a decrease of
$1,284,000 in 1997. The offsetting increase is primarily due to increased
occupancy expenses and additional payroll expense.
PROVISION FOR UNCOLLECTABLE ACCOUNTS - decreased $1,797,000 or 55.6% to
$1,436,000 from $3,233,000 in 1996. The Asset Sales resulted in a decrease of
$125,000 in 1997. The remaining decrease is due to improved collection of
student notes and policy changes. The Company instituted a policy during 1996
that resulted in most students paying a portion of their tuition while they
attend school. In addition, during 1997 the Company reduced the length of time
students are allowed to repay the tuition not covered by student financial aid
programs. These policy changes in 1997 decreased the amount of at risk money due
the Company and the related write off of notes. The balance of notes receivable
decreased $1,643,000 from the same period in 1996.
INTEREST EXPENSE - increased $83,000 to $454,000 compared to $371,000
in 1996. The increase was due to the Company recording $175,000 of interest
expense related to state and local tax liabilities.
<PAGE>
GAIN FROM SALE - In 1997, the gain from the sale of the Company's
Michigan property was $313,000 before any tax effect compared to a loss of
$214,000 from asset sales in 1996.
PROVISION FOR INCOME TAXES - The Company recorded a tax benefit of
$288,000 in 1997 compared to a tax benefit of $272,000 in 1996. During 1997,
as a result of settlement of outstanding tax issues, the Company released book
tax contingencies totaling $650,000, compared to a reduction of $667,000 in
the valuation allowance recorded during 1996.
EPS AND WEIGHTED AVERAGE COMMON SHARES - Weighted average common
shares increased to 7,034,000 in 1997 from 6,967,000 in 1996 for basic
earnings per share and increased to 11,115,000 in 1997 from 7,829,000 in 1996
for dilutive earnings per share. Basic EPS before accounting change was $0.28
for the year ended December 31, 1997 and $0.05 for the same period in 1996.
Basic EPS is shown after a reduction for preferred stock dividends of $133,000
and an addition of $1,210,000 for the Class A preferred stock redemption in
1997 and a reduction of $216,000 for preferred stock dividends in 1996.
Diluted EPS before accounting change was $0.20 for the year ended December 31,
1997, and $0.04 for the same period in 1996. Diluted EPS is shown after a
reduction for preferred stock dividends of $28,000 and additions of $92,000
for convertible debt interest and $1,210,000 for the gain on the Class A
preferred stock redemption in 1997 and a reduction of $216,000 for preferred
stock dividends in 1996.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE - The effect of both the
cumulative change for prior years and the change for the twelve months ended
December 31, 1997 was to decrease net income after cumulative change in
accounting principle by $670,000 ($0.09 per basic share, $0.06 per diluted
share). The effect of the change on the year ended December 31, 1997 was to
decrease income before cumulative effect of a change in accounting principle by
$11,000. See discussion in Part II, Item 5.
1996 compared to 1995
Net income of the Company decreased $1,050,000 to $549,000 for the
year ended December 31, 1996 compared to $1,599,000 for the same period in
1995.
Total revenue increased 2.2% or $845,000 to $40,119,000 from
$39,274,000 in 1995. The Company did not receive any revenue from the Fall
CPA Review Courses. Revenue from the CPA Review Courses decreased $1,636,000
to $1,278,000 in 1996 compared to revenue of $2,914,000 in 1995. Revenue for
the San Jose Campus decreased $809,000 to $1,111,000 in 1996 from $1,920,000
in 1995. The assets of the CPA Review Courses and the San Jose Campus were
sold in 1996 (the "Asset Sales"). Revenue from the twelve remaining Campuses
increased $3,268,000 or 9.5% as a result of price increases in May 1995 and
January 1996.
Total operating expenses increased $2,419,000 or 6.6% to $39,254,000
compared to $36,835,000 in 1995.
INSTRUCTION COSTS AND SERVICES - increased $866,000 or 7.0% to
$13,181,000 compared to $12,315,000 in 1995. This is primarily due to
increased wages, additional staff and faculty, and additional textbook
expense.
SELLING AND PROMOTIONAL - increased $293,000 or 5.7% to $5,392,000
compared to $5,099,000 in 1995. This increase is primarily due to additional
television and newspaper advertising compared to 1995.
GENERAL AND ADMINISTRATIVE - decreased $396,000 or 2.2% to $17,448,000
compared to $17,844,000 in 1995. This decrease is primarily due to a one-time
charge in 1995 of $282,000 that was incurred due to liabilities at the
Lauderdale Lakes Campus. The remaining decrease is due to reduced
amortization and travel expenses.
PROVISION FOR UNCOLLECTABLE ACCOUNTS - increased $1,656,000 or 105.0%
to $3,233,000 from $1,577,000 in 1995. In the fourth quarter of 1995 a
favorable adjustment of $315,000 to the bad debt reserve was made as a result
of favorable litigation against ED brought by other plaintiffs in this
industry. The remaining increase was due to additional financing provided by
the Company's Campuses for their students since the fourth quarter of 1995. As
a result, the gross value of notes receivable increased $1,043,000 from the
same period in 1995. The provision for bad debt also included an increase of
approximately $559,000 due to a greater number of student promissory notes
being collected by the Campuses instead of a professional note-servicing
agency.
<PAGE>
The Company adopted a new policy in 1996 that all new student notes will be
serviced by a professional agency that was expected to reduce future risk and
required reserve ratios. See discussion in "Liquidity and Resources".
INTEREST EXPENSE - decreased $288,000 to $371,000 from $659,000 in
1995. Reductions in debt and the related expense were responsible for the
decrease.
LOSS FROM SALE OF ASSETS - The loss from the Person/Wolinsky sale was
$124,000. The loss from the sale of the San Jose Campus was $93,000 resulting
in a loss of $217,000 from both sales. Both transactions were accounted for
as sales of assets.
PROVISION FOR INCOME TAXES - The Company recorded a tax benefit of
$272,000 in 1996 compared to a provision of $181,000 in 1995. During 1996 the
Company reduced its valuation allowance related to deferred tax assets by
$667,000 as it became more likely than not the Company would realize the
benefit of these deferred tax assets.
EPS AND WEIGHTED AVERAGE COMMON SHARES - Weighted average common
Shares increased to 6,967,000 in 1996 from 6,955,000 in 1995 for basic
earnings per share and increased to 7,829,000 in 1996 from 7,642,000 in 1995
for diluted earnings per share. Basic EPS was $0.05 for the year ended
December 31, 1996 and $0.19 for the same period in 1995. Basic EPS is shown
after a reduction for preferred stock dividends of $216,000 in 1996 and a
reduction of $248,000 for preferred stock dividends in 1995. Diluted EPS was
$0.04 for the year ended December 31, 1996 and $0.18 for the same period in
1995. Diluted EPS is shown after a reduction for preferred stock dividends of
$216,000 in 1996 and a reduction of $248,000 for preferred stock dividends in
1995.
1995 compared to 1994
Net income increased $1,605,000 to $1,599,000 for the year ended
December 31, 1995 compared to a net loss of $6,000 in 1994.
Total revenue increased 12.1% or $4,242,000, to $39,274,000 from
$35,032,000 in 1994. The 1994 revenue includes $1,135,000 for three Campuses
closed or sold during 1994. Revenue for the CPA Review Course decreased 18.4%
or $658,000 in 1995 to $2,914,000 from $3,572,000 in 1994. This decrease is
the result of a non-recurring enrollment increase in the 1994 Spring session
and downward market conditions in 1995. Revenue from the 13 Campuses
increased 20.2% or $6,066,000 in 1995 as compared to 1994. This increase was
the result of enrollment increases coupled with a modest price increase.
Total operating expenses increased 7.8% or $2,662,000, to $36,835,000
in 1995 from $34,173,000 in 1994.
INSTRUCTION COSTS AND SERVICES - increased $1,207,000 or 10.9% to
$12,315,000 in 1995 compared to $11,108,000 in 1994. This increase was
primarily due to additional payroll in 1995 compared to 1994. Textbook
expense also increased as curriculum was updated and improved.
SELLING AND PROMOTIONAL - increased $923,000 or 22.1% to $5,099,000 in
1995 compared to $4,176,000 in 1994. This increase was due to additional
advertising and increased wages compared to 1994.
GENERAL AND ADMINISTRATIVE - increased $763,000 or 4.5% to $17,844,000
in 1995 compared to $17,081,000 in 1994. This increase was primarily due to
additional outside services, travel, and insurance compared to 1994. In
addition, a provision of $282,000 was established in the first quarter of 1995
when the Company was informed that its Lauderdale Lakes Florida Campus would
be required to refund Title IV funds to government agencies. Those funds had
been previously disbursed to the Campus' students.
PROVISION FOR UNCOLLECTABLE ACCOUNTS - Decreased 12.8% or $231,000 to
$1,577,000 from $1,808,000 in 1994. In the fourth quarter of 1995 a favorable
adjustment of $315,000 to the bad debt reserve was made as a result of
favorable litigation against the ED brought by other plaintiffs in this
industry. The adjustment reverses reserves established during 1994 relating
to refund calculations made during 1994. The 1994 provision was favorably
impacted by the recovery of approximately $495,000 of previously written off
accounts. See "-- Liquidity and Capital Resources."
<PAGE>
INTEREST EXPENSE - Decreased 38.1% or $406,000 to $659,000 in 1995
from $1,065,000 in 1994. This decrease is due to the reduction in debt and
the related debt expense. Debt was reduced in part by conversion of
$3,000,000 debt to equity in 1994.
PROVISION FOR INCOME TAXES - The Company recorded a tax provision of
$181,000 in 1995 as compared to a tax benefit of $200,000 in 1994. During 1995,
the Company reduced the valuation allowance related to deferred tax assets by
$360,000. A valuation allowance of $667,000 remains against the portion of
deferred tax assets that, using a more likely than not criterion, may not be
realizable.
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
commencing December 15, 1996. The Company received the amounts due in 1996
and 1997 in connection with the sale of Person/Wolinsky assets. The income
from the non-compete agreement is being recognized as the payments are earned
over the legally enforceable period.
On August 30, 1996 the Company sold the assets of its San Jose,
California Campus. The Company received proceeds of $300,000 in 1997 for the
Campus' assets.
CenCor, which agreed to release its security interest in the
Person/Wolinsky and San Jose assets and consented to such sales, received in
1996 approximately $377,000 from the sales and $75,000 from the non-compete
payment in the form of redemption of approximately 40,000 shares of Class A
Preferred Stock and $56,000 of accumulated dividends as a result of these
transactions.
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
approximately 27,000 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 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 in the original
principal amount of $5,422,307, representing the full principal amount of the
assumed subordinated debt and accrued interest through October 30, 1992.
Interest on the Old Debenture accrued from October 30, 1992. The first
principal and interest payment was made June 30, 1996. In addition to
compounded quarterly interest, initially at 1% over the effective rate charged
by the Company's bank lender, at August 31, 1997 CenCor was entitled to an
amount equal to 25% of the amount by which the "market capitalization" of the
Company exceeded $3,500,000 ("Additional Payment"). The Restructuring
Agreement was amended in December 1993, November 1994, and December 1996. The
additional payment was reduced to $10 in the December 1996 amendment to the
Restructuring Agreement.
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 amendments. As of December 31, 1997 the commitment was $11,000. The
remaining commitment was fulfilled in January 1998.
<PAGE>
Cahill, Warnock Transactions
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, LP and
Strategic Associates, LP, 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. Approximately $4.4 million of the Cahill-
Warnock transaction funds were used to satisfy CenCor obligations. See Item 1
"Overview." The Voting Preferred Stock has an increasing dividend rate,
therefore the Voting Preferred Stock carrying value has been discounted. This
discount is being amortized over the period from issuance until the perpetual
dividends are payable in 2003 to yield a constant dividend rate of 15%. The
amortization is recorded as a charge against retained earnings and as a credit
to the carrying amount of the Voting Preferred Stock. The amortization for the
year ended December 31, 1997 was $105,000.
Bank Financing
The Company negotiated a $3,000,000 secured revolving credit facility
on March 13, 1997 with Security Bank of Kansas City. This facility expires on
April 30, 1998. 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. The Company had not borrowed any funds under this facility as
of December 31, 1997.
Cash Flows and Other
Net cash flows provided by operating activities decreased to
$1,157,000 in 1997 from $2,588,000 in 1996. The decreased cash flow is a
result of less profitable operations and the timing of income tax payments.
Capital expenditures in 1997 were $1,417,000 compared to $547,000 in
1996. For both years, expenditures were primarily for additional classroom
equipment and leasehold improvements. The North Hollywood Campus was moved to a
new location in 1997. Total capital expenditures for the North Hollywood Campus
were $954,000 in 1997. The Company received approximately $725,000 from the sale
of the Michigan property during 1997. In addition, in 1997 the Company received
$300,000 for payment of a promissory note due from the sale of the San Jose,
California assets. Financing activities increased cash flows $367,000 compared
to a $2,004,000 decrease in 1996. This increase is due to the Cahill Transaction
that occurred on February 25, 1997. The Company believes that existing future
commitments will be paid from cash provided by operating activities, cash on
hand, and if necessary, the existing credit facility.
CONTINGENCIES
The Company generally relies on the availability of various federal
and state student financial aid award programs to provide funding for students
attending the Campuses. The Company also relies on the availability of
lending institutions willing to participate in these programs and to grant
loans to these students. Both federal and state financial aid programs
contain numerous and complex regulations which require compliance not only by
the recipient student but also by the institution which the student attends.
If the Company should fail to materially comply with such regulations at any
of the Campuses, such failure could have serious consequences, including
limitation, suspension, or termination of the eligibility of that Campus to
participate in the funding programs. The Company is not aware of any material
violation of these regulations.
The San Diego Campus was notified in September 1997 that it was no
longer eligible to participate in the Family Federal Education Loan (the "FFEL")
Program and that it could not apply to regain eligibility until at least October
of 1999. The Campus did not maintain loan eligibility because its Cohort Default
Rates for one of the last three consecutive published years, 1992, 1993, and
1994, was not below 25%. In anticipation of the loss of the FFEL Program, the
Campus had previously arranged, through effective contingency planning,
alternative sources of financing for its students. The Campus is continuing to
operate and provides qualified students with access to Federal Pell grants and
other sources of student financing. The student population of the San Diego
Campus was 200 or approximately 6 percent of the Company's total student
population as of December 31, 1997. The Company is uncertain if enrollment at
the San Diego Campus will materially change.
<PAGE>
In September 1997, the Bureau of Consumer Protection of the United
States Federal Trade Commission (the "FTC") notified the Company that it was
conducting an inquiry related to the Company's offering and promotion of
vocational or career training. The Company is cooperating with the FTC to the
fullest extent possible, and believes it has not engaged in any activity that
would violate FTC regulations. The Company believes the inquiry is one of
several being conducted by the FTC pertaining to vocational postsecondary
training institutions. There is not sufficient information available at this
stage to determine the outcome or financial impact on the Company, if any.
During July 1993, former students of the Jacksonville, Florida Campus
filed lawsuits against the Campus, alleging deceptive trade practices, breach
of contract, and fraud and misrepresentation. (See Item 3, "Legal
Proceedings.")
In 1994, ED established a policy of recertifying all schools
participating in Title IV programs every five years. Denver, Colorado,
Jacksonville and Lauderdale Lakes, Florida have received provisional
certification. The remaining Campuses received full certification.
Provisional certification limits the Campus's ability to add programs and
change the level of educational award. In addition, the Campus is required to
accept certain restrictions on due process procedures under ED guidelines.
The provisional certifications expire in 1998, at which time the Campuses will
again go through the process of recertification. The Company does not believe
provisional certification will have a material impact on its liquidity,
results of operations or financial position.
On May 31, 1990, a wholly-owned subsidiary of the Company, 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 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 amount on deposit in the SCI bank account.
In December 1996, SCI was informed verbally that the matter had been
referred to the ED's General Counsel. In September of 1997, SCI received
correspondence from the ED's Financial Improvement and Receivables Group
requesting that SCI pay amounts totaling $2,654,592. SCI has notified the ED
that it disputes these claims, and SCI is pursuing negotiations with the ED in
an effort to resolve the claims.
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.
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, management believes that the
Company is not 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. In
addition, in light of applicable statutory and regulatory provisions existing in
1991 and the ED's interpretation of those provisions, it is the opinion of
management that any debt SCI might be determined to owe to the ED should have no
impact on the existing participation of the Campuses in Federal Financial Aid
programs.
<PAGE>
YEAR 2000 DISCLOSURE
The Company has assessed and continues to assess the impact of the
"year 2000 issue" on its computer systems. Many computer systems and
applications currently use two-digit date fields to designate a year. In such
systems, the "year 2000 issue" exists because date sensitive computer systems
will recognize the year 2000 as the year 1900 or not at all. The Company is
evaluating whether modification or replacement of its software is necessary
for its computer systems to function properly after the year 2000. The
Company uses personal computers (based on Microsoft operating systems) for
both operational and classroom purposes. In the normal course of business,
the Company has scheduled an upgrade of its operational system during 1998,
including replacing both hardware and software. The Company uses major third
party vendors for its accounting systems and for its payroll processing. Both
vendors notified the Company they are "year 2000" compliant. The Company's
financial activity is concentrated with the Department of Education and major
banking and other financial institutions located within the United States. The
Company believes that after its planned upgrade, its operational system will
also be compliant. The Company does not believe that any modification of
existing software or conversion to new software as a direct result of the
"year 2000 issue" will result in a material cost or pose a significant
operational problem for its computer system.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130. In June 1997,
the Financial Accounting Standards Board ("the "FASB") issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (FAS
130). FAS 130 establishes standards for reporting and display of comprehensive
income (the change in net assets of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources
including all changes in equity other than those resulting from investments by
and distributions to owners.) FAS 130 is effective for fiscal years beginning
after December 31, 1997. The Company does not currently have significant
non-owner sourced changes in its net assets and accordingly, management does
not expect adoption of FAS 130 to have a material impact on the Company's
financial statements.
Statement of Financial Accounting Standards No. 131. In June 1997,
the FASB issued Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (FAS
131). FAS 131 establishes standards for the manner in which published
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997. Management does not believe its adoption will have any impact on the
Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK.
Not required.
(The remainder of this page was left blank intentionally.)
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Concorde Career Colleges, Inc. and Subsidiaries:
Report of Independent Accountants. II-13
Consolidated Balance Sheet--December 31, 1997 and 1996. II-14
Consolidated Statement of Operations--For the Three Years
Ended December 31, 1997 II-16
Consolidated Statement of Cash Flows--For the Three Years
Ended December 31, 1997 II-18
Consolidated Statement of Changes In Stockholders'
Equity--For the Three Years Ended December 31, 1997 II-19
Notes to Consolidated Financial Statements--For the Three
Years Ended December 31, 1997 II-20
(The remainder of this page was left blank intentionally.)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Concorde Career Colleges, Inc., and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Concorde Career Colleges, Inc. and its subsidiaries at December
31, 1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 2, the Company changed its method of recognizing tuition
revenue in 1997.
PRICE WATERHOUSE LLP
Kansas City, Missouri
March 12, 1998
(The remainder of this page was left blank intentionally.)
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,393,000 $ 4,261,000
Net receivables (Note 4)
Accounts receivable 10,523,000 10,171,000
Notes receivable 3,758,000 4,392,000
Allowance for uncollectable accounts (1,309,000) (1,645,000)
----------- -----------
12,972,000 12,918,000
Recoverable income taxes 340,000
Deferred income taxes (Note 8) 916,000 916,000
Supplies and prepaid expenses 794,000 732,000
----------- -----------
Total current assets 20,415,000 18,827,000
FIXED ASSETS, NET (Note 5) 2,533,000 2,539,000
INTANGIBLE ASSETS, NET (Note 3) 594,000 768,000
----------- -----------
OTHER ASSETS:
Long-term notes receivable (Note 4) 1,992,000 3,001,000
Allowance for uncollectable notes (Note 4) (616,000) (1,243,000)
Other 383,000 390,000
Deferred income taxes (Note 8) 223,000
----------- -----------
Total other assets 1,982,000 2,148,000
----------- -----------
$25,524,000 $24,282,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES:
Deferred student tuition $10,878,000 $ 9,987,000
Current debt due related party (Note 7) 400,000
Accrued salaries and wages 821,000 862,000
Accrued interest 190,000
Current income taxes payable 439,000
Accounts payable and other accrued
liabilities (Note 6) 3,040,000 2,731,000
----------- -----------
Total current liabilities 14,929,000 14,419,000
LONG-TERM LIABILITIES 360,000 385,000
DEFERRED INCOME TAXES (Note 8) 287,000
SUBORDINATED DEBT DUE TO RELATED PARTY CENCOR 2,419,000
SUBORDINATED DEBT DUE TO RELATED PARTY CAHILL-WARNOCK 3,500,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, 9, and 11)
STOCKHOLDERS' EQUITY (Note 7):
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, 7,129,976 shares issued and 7,103,176
shares outstanding in 1997 (6,993,376 shares
issued and 6,966,576 shares outstanding in 1996) 713,000 699,000
Capital in excess of par 8,000,000 7,736,000
Accumulated deficit (1,923,000) (1,628,000)
Less-treasury stock, 26,800 shares, at cost (61,000) (61,000)
----------- -----------
Total stockholders' equity 6,735,000 6,772,000
----------- -----------
$25,524,000 $24,282,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET REVENUES $37,715,000 $40,119,000 $39,274,000
COSTS AND EXPENSES:
Instruction costs and services 13,231,000 13,181,000 12,315,000
Selling and promotional 5,406,000 5,392,000 5,099,000
General and administrative 16,853,000 17,448,000 17,844,000
Provision for uncollectable accounts 1,436,000 3,233,000 1,577,000
----------- ---------- -----------
Total Expenses 36,926,000 39,254,000 36,835,000
----------- ---------- -----------
OPERATING INCOME 789,000 865,000 2,439,000
INTEREST EXPENSE 454,000 371,000 659,000
----------- ---------- -----------
INCOME BEFORE INCOME TAXES AND GAIN (LOSS) ON SALE 335,000 494,000 1,780,000
GAIN (LOSS) ON SALE OF ASSETS 313,000 (217,000)
----------- ---------- -----------
INCOME BEFORE INCOME TAXES 648,000 277,000 1,780,000
PROVISION (BENEFIT) FOR INCOME TAXES (288,000) (272,000) 181,000
----------- ---------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 936,000 549,000 1,599,000
CUMULATIVE EFFECT ON PRIOR YEARS (TO DECEMBER 31,
1996) OF CHANGE IN REVENUE RECOGNITION METHOD,
NET OF TAX (659,000)
----------- ---------- -----------
NET INCOME $277,000 $549,000 $1,599,000
=========== ========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,034,000 6,967,000 6,955,000
Diluted 11,115,000 7,829,000 7,642,000
BASIC EARNINGS PER SHARE: (Note 10)
Income before cumulative effect of change in
accounting principle $ .28 $ .05 $ .19
Cumulative effect on prior years
(to December 31, 1996) of change in revenue
recognition method (.09)
----------- ---------- -----------
NET INCOME PER SHARE $ .19 $ .05 $ .19
=========== ========== ===========
</TABLE>
(Continued)
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
DILUTED EARNINGS PER SHARE: (Note 10)
Income before cumulative effect of change
in accounting principle $ .20 $ .04 $ .18
Cumulative effect on prior years (to December
31, 1996) of change in revenue recognition method (.06)
-------- -------- ----------
NET INCOME PER SHARE $ .14 $ .04 $ .18
======== ======== ==========
PRO FORMA AMOUNTS ASSUMING THE NEW METHOD OF
RECOGNIZING REVENUE IS APPLIED RETROACTIVELY (NOTE 2):
Net Income $936,000 $546,000 $1,584,000
Net Income Per Common Share:
Basic $ .28 $ .05 $ .19
======== ======== ==========
Diluted $ .20 $ .04 $ .17
======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(The remainder of this page left intentionally blank.)
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net income. $ 277,000 $ 549,000 $ 1,599,000
Adjustments to reconcile net income to net cash
provided by operating activities--
Loss (gain) on sale of assets (313,000) 217,000
Depreciation and amortization. 1,185,000 1,306,000 1,410,000
Provision for uncollectable accounts 1,436,000 3,233,000 1,577,000
Cumulative effect of change in accounting principle 659,000
Deferred income taxes (89,000) (1,149,000) (643,000)
Change in assets and liabilities--
(Increase) decrease in receivables, net (1,408,000) (1,821,000) 12,000
Decrease in deferred student tuition (189,000) (5,000) (118,000)
Other changes in assets and liabilities, net 378,000 290,000 1,383,000
(Decrease) increase in income taxes payable/recoverable (779,000) (32,000) 622,000
---------- ---------- -----------
Total adjustments 880,000 2,039,000 4,243,000
---------- ---------- -----------
Net operating activities 1,157,000 2,588,000 5,842,000
---------- ---------- -----------
CASH FLOWS -- INVESTING ACTIVITIES:
Proceeds from sale of assets 1,025,000 929,000
Capital expenditures (1,417,000) (547,000) (558,000)
---------- ---------- -----------
Net investing activities (392,000) 382,000 (558,000)
---------- ---------- -----------
CASH FLOWS -- FINANCING ACTIVITIES:
Principal payments on debt (2,819,000) (1,552,000) (3,171,000)
Preferred stock redemption (1,769,000) (452,000)
Class B preferred stock issued, net 1,441,000
Subordinated debt issued to Cahill/Warnock 3,500,000
Stock options exercised 14,000
---------- ---------- -----------
Net financing activities 367,000 (2,004,000) (3,171,000)
---------- ---------- -----------
NET INCREASE IN CASH &
CASH EQUIVALENTS 1,132,000 966,000 2,113,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,261,000 3,295,000 1,182,000
---------- ---------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $5,393,000 $4,261,000 $3,295,000
========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest $ 264,000 $ 230,000 $ 297,000
Income taxes $ 653,000 $ 901,000 $ 189,000
CASH RECEIVED DURING THE YEAR FOR:
Interest $ 468,000 $ 427,000 $ 331,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED
DECEMBER 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, 1994 $30,000 $698,000 $8,128,000 $(3,720,000) $(61,000)
Net Income 1,599,000
------- -------- ---------- ----------- --------
BALANCE, December 31, 1995 30,000 698,000 8,128,000 (2,121,000) (61,000)
Net Income 549,000
Preferred Stock Redemptions (4,000) (392,000) (56,000)
Stock Options Exercised 1,000
------- -------- ---------- ----------- --------
BALANCE, December 31, 1996 26,000 699,000 7,736,000 (1,628,000) (61,000)
Net Income 277,000
Class A Preferred Stock Redemption (26,000) (1,276,000)
Class A Preferred Dividend Payments (467,000)
Class B Preferred Stock Issuance 6,000 1,435,000
Class B Preferred Stock Accretion 105,000 (105,000)
Stock Options Exercised 14,000
------- -------- ---------- ----------- --------
BALANCE, December 31, 1997 $ 6,000 $713,000 $8,000,000 $(1,923,000) $(61,000)
======= ======== ========== =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(The remainder of this page was left blank intentionally.)
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
1. BASIS OF PRESENTATION AND TRANSACTIONS WITH CENCOR, INC.:
Basis of Presentation
Concorde Career Colleges, Inc. ("Concorde") and Subsidiaries (the
"Company") owns and operates proprietary, post-secondary schools which offer
career training designed to provide primarily entry-level skills readily
needed in the allied health field. The Company's Campuses offer vocational
training programs in six states, California, Colorado, Florida, Missouri,
Oregon, and Tennessee (the "Campuses"). The Company previously offered review
courses for the Certified Public Accountants ("CPA") Examination which
accounted for 3.2%, and 7.4% of the Company's revenues for the year ended
December 31, 1996 and 1995, respectively. Prior to March 31, 1988, the
Company was a division of CenCor, Inc. ("CenCor"). Assets acquired from
CenCor and liabilities assumed were reflected at the predecessor division's
historical cost.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Concorde and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated.
Use of Estimates
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.
Transactions with CenCor, Inc.
The Chairman of the Board of the Company is also the Chairman of the
Board, President and Treasurer of CenCor. As a result of a refinancing on
February 25, 1997, the Company paid approximately $4,409,000 to CenCor. This
payment satisfied all debts and obligations owned by the Company to CenCor
except for an obligation to convey "written-off" receivables (See Note 7). The
obligation was $11,000 at December 31, 1997 and was fulfilled in January 1998.
The Company under an agreement effective October 1995 subleases space
to CenCor. The agreement expires October 1998. The Company and CenCor do not
allocate charges to each other, otherwise share expenses, or have balances
owing to each other except debt balances as stated in Note 7.
Asset Dispositions
On August 2, 1996 the Company sold the assets of Person/Wolinsky
Associates, a wholly owned subsidiary. As a result of the sale the Company
received cash proceeds of $879,000. The loss from the sale was $124,000 before
income taxes. In addition, a $750,000 non-compete agreement is payable to the
Company in ten equal annual installments commencing December 15, 1996. The
first two $75,000 payments were received as scheduled. The income from the
non-compete agreement is being recognized as the payments are earned over the
legally enforceable period.
On August 30, 1996 the Company sold the assets of its San Jose,
California Campus. The Company received $50,000 cash and a promissory note
that was due and paid on February 28, 1997 for $300,000 which was included in
accounts receivable at December 31, 1996. The loss on the sale was $93,000.
<PAGE>
In conjunction with these 1996 asset sales, proceeds of $377,000 and
$75,000 from the non-compete payment were paid to CenCor in 1996 for
redemption of 40,000 shares of Class A Preferred Stock and $56,000 of
accumulated dividends on the Class A Preferred Stock.
On January 31, 1997 the Company sold its Warren, Michigan building for
approximately $725,000 (the "Warren Sale"). Proceeds of $310,000 were paid to
CenCor for redemption of approximately 27,000 shares of Class A Preferred
Stock then held by CenCor and $45,000 of accumulated preferred dividends on
the Class A Preferred Stock. The Company realized a gain of $313,000 before
income taxes in 1997 as a result of the Warren Sale.
2. SUMMARY OF ACCOUNTING POLICIES:
Recognition of Revenue
During the third quarter of 1997 the Company changed its method of
recognizing tuition revenue. Under the new method, tuition revenue is
deferred and recognized ratably over the period of the program. The Company
previously used a method in which a portion of tuition revenue was recognized
in the month a student began attending classes to offset the costs incurred in
obtaining the new student. The remaining tuition revenue was deferred and
recognized over the term of the program. The Company believes the new method
of revenue recognition is more representative of current industry practice and
is a preferable accounting method.
The effect of both the cumulative change for prior years and the
change for the year ended December 31, 1997 was to decrease net income after
cumulative change in accounting principle by $670,000 ($0.09 per basic share
and $0.06 per diluted share). The cumulative effect on income of the change on
prior years (after reduction for income taxes of $421,000) was a reduction of
$659,000. The effect of the change on the year ended December 31, 1997 was to
decrease income before cumulative effect of a change in accounting principle
by $11,000.
Most students enrolled at schools, subject to curriculum
accreditation, utilize state and federal government grants and/or guaranteed
student loan programs to finance their tuition. During 1997 management
estimates that 81 percent of its cash receipts were derived from funds
obtained by students through federal Title IV student aid programs and 19
percent were derived from state sponsored student education and training
programs and cash received from students and other sources.
The Company charges earnings for the amount of estimated uncollectable
accounts based upon current collection trends. However, unpaid balances are
usually written-off 180 days after the student withdraws or graduates from
the School and/or ceases to make payments. Internal collection efforts, as
well as outside professional services, are used to pursue collection of
delinquent accounts.
All student recruitment and advertising costs are expensed as
incurred. Advertising expenses were $3,225,000, $3,037,000, and $2,820,000 in
1997, 1996, and 1995, respectively.
Presentation
In 1997, the Company offset a portion of accounts receivable by the
amount of deferred student tuition related to students who have not yet
started their program of study. The Company believes this classification is a
better representation of accounts receivables and deferred tuition since these
students have not started class and still have the option of canceling with no
obligation and is more representative of current industry practice. This
change reduced current assets and current liabilities by $4,890,000 and
$6,585,000 at December 31, 1997 and 1996, respectively. This change has also
been reflected in the statement of cash flows for all years presented. In
addition, certain prior year amounts in the statement of operations have been
reclassified to conform to current year presentation.
<PAGE>
Cash and Cash Equivalents
Cash and cash equivalents are those items with maturity of three
months or less. Generally cash equivalents are represented by money market
funds or treasury bills that are carried at cost, which approximates fair
value, on the Company's balance sheet.
Accounts Receivable and Notes Receivable
Accounts receivables are amounts due from students that are expected
to be paid through the use of federal and state sources of funds.
Notes receivable are promissory notes due the Company from current and
former students. The notes are not secured by collateral and have differing
interest rates. It is not practicable to determine the fair value of notes
receivables without incurring excessive costs. The Company has no quoted
market prices or dealer quotes to compare similar loans made to borrowers with
similar credit ratings. In addition, the Company cannot readily establish a
pattern of future cash flows to estimate fair value. However, management
believes that the carrying amounts (net of allowance for doubtful accounts)
recorded at December 31, 1997 are not impaired and are not materially
different from their corresponding fair values.
During and since 1993 the Company had lending institutions or lenders of
last resort access at all of its Campuses. The Company continues to finance a
portion of certain students' tuition not covered by student financial aid
programs. Beginning with the fourth quarter of 1995 the Company instituted a
plan to decrease its reliance on Title IV funding. In addition to seeking
alternative sources of financing for its students, the Campuses began financing
a larger portion of the tuition for most students with promissory notes. Prior
to 1996, promissory notes issued by the Campuses for student tuition were
generally due over 60 months, most bearing interest of 7 to 12 percent, with
payments generally scheduled to commence 30 days after program completion.
Beginning in 1996, promissory notes issued by the Campuses are generally for a
lesser amount and due over 24 months, bearing interest of seven percent, with
payments beginning when the student starts class. During 1997 the Company
further reduced the length of time students are generally allowed to repay the
tuition not covered by student financial aid programs.
Depreciation and Amortization
Furniture and equipment, and buildings are depreciated over the
estimated useful lives of the assets (3 to 10 years for furniture and
equipment and 30 years for buildings) using the straight-line method.
Leasehold improvements are amortized over the shorter of their estimated
useful life or terms of the related leases.
Maintenance and repairs are charged to expense as incurred. The costs
of additions and improvements are capitalized and depreciated over the
remaining useful lives of the assets. The costs and accumulated depreciation
of assets sold or retired are removed from the accounts and any gain or loss
is recognized in the year of disposal.
Income Taxes
The Company accounts for income taxes using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
based on the difference between the financial statement and income tax basis
of assets and liabilities as measured by the enacted tax rates which will be
in effect when the differences reverse. Deferred tax expense (benefit) is
generally the result of changes in the deferred tax assets and liabilities.
Acquisitions
All prior period acquisitions have been accounted for by the purchase
method, under which a portion of the purchase price is assigned to net
tangible assets acquired to the extent of their estimated values. The Company
periodically reviews goodwill to assess recoverability, and impairments would
be recognized in operating results if a permanent diminution in value were to
occur. The excess of the purchase price over net tangible assets acquired is
being charged to income over 5 to 40 years. The total amount of amortization
charged to income was $174,000 in 1997, $223,000 in 1996, and $352,000 in
1995.
<PAGE>
3. INTANGIBLE ASSETS:
<TABLE>
Intangible assets consist of the following
at December 31: 1997 1996
---- ----
<S> <C> <C>
Goodwill $1,511,000 $1,511,000
Other Intangible assets 222,000 1,077,000
---------- ----------
Total Intangible assets 1,733,000 2,588,000
Less accumulated amortization 1,139,000 1,820,000
---------- ----------
Net intangibles $ 594,000 $ 768,000
========== ==========
</TABLE>
4. RECEIVABLES:
<TABLE>
Current receivables consist of the following
at December 31: 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Accounts receivable $10,523,000 $10,171,000 $11,799,000
Notes receivable 3,758,000 4,392,000 3,188,000
Allowance for uncollectable accounts (1,309,000) (1,645,000) (1,394,000)
----------- ----------- -----------
Receivables $12,972,000 $12,918,000 $13,593,000
=========== =========== ===========
</TABLE>
Changes in the allowance for uncollectable accounts were as follows for the
year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning balance $1,645,000 $1,394,000 $2,491,000
Provision for uncollectable
accounts 1,299,000 952,000 158,000
Charge-offs (1,635,000) (701,000) (1,255,000)
---------- ---------- ----------
$1,309,000 $1,645,000 $1,394,000
========== ========== ==========
</TABLE>
Long term notes receivable consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Notes receivable $1,992,000 $3,001,000 $3,204,000
Allowance for uncollectable notes (616,000) (1,243,000) (709,000)
---------- ---------- ----------
Net Long Term Notes Receivable $1,376,000 $1,758,000 $2,495,000
========== ========== ==========
</TABLE>
Changes in the allowance for uncollectable notes were as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Beginning balance $1,243,000 $ 709,000 $ 383,000
Provision for uncollectable notes 137,000 2,281,000 1,419,000
Charge-offs (764,000) (1,747,000) (1,093,000)
---------- ---------- ----------
$ 616,000 $1,243,000 $ 709,000
========== ========== ==========
</TABLE>
<PAGE>
5. FIXED ASSETS:
<TABLE>
<CAPTION>
Fixed assets consist of the following
at December 31: 1997 1996
---- ----
<S> <C> <C>
Furniture and equipment $4,257,000 $ 8,785,000
Leasehold improvements 2,437,000 2,534,000
Buildings and land 490,000
---------- -----------
Gross fixed assets 6,694,000 11,809,000
Less Accumulated depreciation
and amortization 4,161,000 9,270,000
---------- -----------
Net fixed assets $2,533,000 $ 2,539,000
========== ===========
</TABLE>
The Company rents office space and buildings under operating leases
generally ranging in terms from 5 to 15 years. The leases provide renewal
options and require the Company to pay utilities, maintenance, insurance and
property taxes. The Company also rents various equipment under operating leases
that are generally cancelable within 30 days. Rental expense for these leases
was $2,647,000 in 1997, $2,640,000 in 1996, and $2,743,000 in 1995. Aggregate
minimum future rentals payable under the operating leases at December 31, 1997,
were:
1998 $2,249,000
1999 1,528,000
2000 1,407,000
2001 1,148,000
2002 1,014,000
2003 and thereafter 4,189,000
6. ACCOUNTS PAYABLE AND OTHER ACCRUED LIABILITIES:
Accounts Payable and Other Accrued Liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accounts payable $1,073,000 $ 951,000
Accrued vacation 480,000 440,000
Other accrued liabilities 429,000 589,000
Accrued compensation (other than
salaries and wages) 227,000 183,000
Accrued other taxes 580,000 484,000
Accrued health expense 251,000 84,000
---------- ----------
Accounts payable and accrued liabilities $3,040,000 $2,731,000
========== ==========
</TABLE>
(The remainder of this page left intentionally blank.)
<PAGE>
7. LONG-TERM DEBT AND REFINANCING:
<TABLE>
<CAPTION>
Long-term debt consists of the following at
December 31: 1997 1996
---- ----
<S> <C> <C>
Junior secured debenture, variable
interest rate not to exceed 12 percent,
due 1996 through 1998 $2,574,000
Unsecured note payable to CenCor, 7%,
due in 1998 245,000
Secured debenture, five percent,
due February 2003 3,500,000
---------- ----------
Total 3,500,000 2,819,000
Less--current maturities 400,000
---------- ----------
Total long-term debt $3,500,000 $2,419,000
========== ==========
</TABLE>
CenCor, Inc. Agreements
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 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 in the original
principal amount of $5,422,307, representing the full principal amount of the
assumed subordinated debt and accrued interest through October 30, 1992.
Interest on the Old Debenture accrued from October 30, 1992. The first
principal and interest payment was made June 30, 1996. In addition to
compounded quarterly interest, initially at 1% over the effective rate charged
by the Company's bank lender, at July 31, 1997 CenCor was entitled to an
amount equal to 25% of the amount by which the "market capitalization" of the
Company exceeded $3,500,000 ("Additional Payment"). The Restructuring
Agreement was amended in December 1993, November 1994, and December 1996. The
Additional Payment was reduced to $10 in the December 1996 amendment to the
Restructuring Agreement.
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 amendments. The balance due CenCor at December 31, 1997 was $11,000. The
remaining balance was fulfilled in January 1998.
Cahill, Warnock Transactions
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, LP and
Strategic Associates, LP, 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.
<PAGE>
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 $20 million at a price greater than $4 per share of
Common Stock. Cahill-Warnock also has certain preemptive rights in future
issuance's of stock by the Company.
The Voting Preferred Stock has an increasing dividend rate, therefore
the Voting Preferred Stock's carrying value has been discounted. This discount
is being amortized over the period from issuance until the perpetual dividends
are payable in 2003 to yield a constant dividend rate of 15%. The amortization
is recorded as a charge against retained earnings and as a credit to the
carrying amount of the Voting Preferred Stock. The amortization for the year
ended December 31, 1997 was $105,000.
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 President and Chief Executive Officer effective April
1, 1997.
Pursuant to a Stockholders' Agreement among Cahill-Warnock, Messrs.
Brozman and Seward, the Robert F. Brozman Trust (who at the time of the
agreement, together, held an aggregate of 52.8% of the outstanding Voting
Securities and options to purchase 1,000,000 shares of Common Stock) and the
Company, such holders have agreed to certain restrictions on the transfer of
Voting Securities held by them.
In connection with these transactions, the Company incurred $118,000
of stock and debt issuance costs. Stock issuance costs of $59,000 were
applied against the stock proceeds and the remainder was deferred and is being
amortized over the term of the debt.
Pursuant to the December 1996 amendment with CenCor, the Company used
approximately $4.4 million of the funds from the Cahill Transaction to redeem
the 260,385 outstanding shares of its Class A Preferred Stock and $438,000 of
accumulated dividends and its $2.4 million debenture principal, accrued
interest, and certain unsecured obligations which were held by CenCor (the
"CenCor Repayment").
Other
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. This facility expires on April 30, 1998. Funds borrowed
under this facility will be used for working capital purposes. This facility
has an 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 subsidiaries. The Company has not borrowed any funds
under this facility as of December 31, 1997.
Based on the terms of the Company's debt, management estimates that
the carrying values of debt at December 31, 1997 and December 31, 1996 are not
materially different from their corresponding fair value.
The Company has a letter of credit outstanding in the amount of
$321,500. The letter of credit is to comply with United States Department of
Education ("ED") Regulations and is secured by a certificate of deposit in the
amount of $321,500.
<PAGE>
8. INCOME TAXES:
The income tax provision (benefit), excluding the cumulative effect of
a change in accounting method, for the three years ended December 31, 1997,
consist of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current tax expense (benefit)
Federal $(210,000) $ 769,000 $ 765,000
State 11,000 108,000 48,000
--------- ---------- ---------
(199,000) 877,000 813,000
Deferred tax expense (benefit)
Federal (134,000) (1,110,000) (596,000)
State 45,000 (39,000) (36,000)
--------- ---------- ---------
(89,000) (1,149,000) (632,000)
--------- ---------- ---------
Tax provision (benefit) $(288,000) $ (272,000) $ 181,000
========= ========== =========
</TABLE>
The Company's effective income tax expense (benefit) rate, excluding
the cumulative effect of a change in accounting method, differs from the
federal statutory rate of 34% for the three years ended December 31, 1997 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Provision at federal statutory rate $ 220,000 $ 94,000 $ 605,000
State taxes, net of federal benefit 36,000 49,000 7,000
Goodwill amortization 39,000 59,000 29,000
Tax contingency release (650,000)
Fixed assets basis adjustment 176,000
Valuation allowance release (667,000) (360,000)
Other, net 67,000 17,000 (100,000)
--------- --------- ---------
$(288,000) $(272,000) $ 181,000
========= ========= =========
</TABLE>
During the third quarter of 1997, the Company and the Internal Revenue
Service signed agreements relating to outstanding tax issues for tax years
1988 through 1992. During the course of this examination, which was initiated
in 1992, the Company recorded loss contingencies for additional interest and
income taxes. As a result of the final agreement, the Company released tax
contingencies during 1997 of $650,000.
During 1996 and 1995, the Company reduced the valuation allowance
related to deferred tax assets of $667,000 and $360,000, respectively, as it
became more likely than not the Company would realize the benefit of the
corresponding deferred tax assets.
Deferred tax assets and liabilities consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Credit losses $ 693,000 $1,175,000 $ 727,000
Deferred student tuition 396,000
Depreciation and amortization 150,000 90,000 37,000
Other expenses currently deductible
for financial reporting
purposes but not for tax 365,000 343,000 280,000
---------- ---------- ----------
Gross assets 1,604,000 1,608,000 1,044,000
Valuation allowance (667,000)
---------- ---------- ----------
Net assets 1,604,000 1,608,000 377,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Other expenses currently deductible
for tax but not for financial
reporting purposes (465,000) (979,000) (897,000)
Net $1,139,000 $ 629,000 $(520,000)
========== ========= =========
</TABLE>
At December 31, 1997, deferred tax assets included $1,186,000 current
assets and $418,000 non-current assets and deferred tax liabilities included
$270,000 current liabilities and $195,000 non-current liabilities. Current
assets and current liabilities were combined as were non-current assets and
non-current liabilities for financial statement presentation.
At December 31, 1996, deferred tax assets included $916,000 current
assets and $692,000 non-current assets. The non- current assets were combined
with the $979,000 of non-current deferred tax liabilities for financial
statement presentation.
9. STOCK OPTION PLANS:
The Company has an incentive stock option plan (the "1988 Option
Plan") approved in 1988 and amended in 1989 authorizing issuance of 600,000
shares of its common stock to certain officers and employees of the Company.
Options are granted at fair market value on the date of grant for a term of
not more than ten years. In 1994 the Company's Compensation Committee (the
"Compensation Committee") awarded to an officer of the Company the option to
purchase 750,000 shares pursuant to a stock option plan (the "1994 Option
Plan") which was approved at the 1994 stockholders meeting. Under the
option's terms, the officer was granted the right to immediately exercise a
portion of the option to purchase 300,000 shares (granted at 110% of fair
market value). Vesting of the right to purchase the remaining 450,000 shares
was based on performance of the Company through 1996. Of the shares subject to
annual performance vesting, 150,000 shares failed to vest and lapsed in 1994,
as the Company did not attain required performance objectives. These shares
were returned to the plan for future issuance. The Company met the
performance criteria during 1995 and 1996. As a result 150,000 shares were
vested in each year and the Company recognized additional compensation expense
of $113,000 in 1996 and $71,000 in 1995. In 1997 the Compensation Committee
awarded the same officer the option to purchase an additional 400,000 shares
at an excise price of $1.09. The market value on the date of grant was $0.99.
Under the terms of the option, the officer was granted the right to
immediately exercise a portion of the option (80,000 shares). Vesting of the
right to purchase the remaining 320,000 shares is based upon lapse of time
through the next four years.
Also during 1997, the Compensation Committee awarded another officer of
the Company the option to purchase 575,000 shares pursuant to a non-qualified
stock option agreement (the "NQSO"). Under the agreement the officer was granted
the right to immediately exercise 115,000 shares at an exercise price of $1.00.
The right to exercise the remaining shares vests ratably over the next four
years at an exercise price of $1.375. The market value on the date of grant was
$1.375. The Company recognized $43,000 of compensation expense in 1997.
The Company applies Accounting Principles Board (APB) Opinion 25 and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation expense has been recognized for the 1988 Option Plan as the
exercise price equals the stock price on the date of grant. Compensation
expense has been recorded for the 1994 Option Plan performance based options
and the 1997 NQSO as noted above. Had compensation expense been determined
for stock options granted in 1997, 1996, and 1995 based on the fair value at
grant dates consistent with Statement of Financial Accounting Standards ("SFAS
123") "Accounting for Stock Based Compensation," the Company's pro forma net
income before cumulative accounting change and basic and diluted earnings per
share for the three years ended December 31, 1997, 1996, and would have been
as presented below:
<PAGE>
<TABLE>
<CAPTION>
Pro forma EPS
Twelve Months Ended December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma income before cumulative
change in accounting principle $ 355,000 $ 492,000 $1,568,000
========== ========= ==========
Pro forma Basic Earnings Per Share $ 0.20 $ 0.04 $ 0.19
========== ========= ==========
Pro Forma Diluted Earnings Per Share $ 0.15 $ 0.04 $ 0.17
========== ========= ==========
</TABLE>
The pro forma amounts were estimated using the Black-Scholes
option-pricing model with the following assumptions for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average expected life (years) 6 6 6
Expected Volatility 98% 87% 87%
Annual Dividend per share -0- -0- -0-
Risk free interest rate 5.74% 6.25% 6.25%
Weighted average fair value of
options granted $0.98 $0.73 $0.46
</TABLE>
The following table reflects activity in options for the three-year
period ended.
<TABLE>
<CAPTION>
Weighted-Average
Stock Options Number of Shares Exercise Price Option Price Per Share
- ------------------------------- ---------------- ---------------- ----------------------
<S> <C> <C> <C>
Outstanding - December 31, 1994 1,057,500 $0.13 $0.10 to $0.15
Exercised 3,000 $0.10 $0.10
Canceled 69,500 $0.12 $0.10 to $0.28
Issued 73,000 $0.28 $0.28
Outstanding - December 31, 1995 1,058,000 $0.14 $0.10 to $0.28
Exercised 11,400 $0.10 $0.10
Canceled 50,000 $0.30 $0.10 to $0.59
Issued 84,500 $0.69 $0.55 to $1.06
Outstanding - December 31, 1996 1,081,100 $0.17 $0.10 to $1.06
Exercised 136,600 $0.10 $0.10 to $0.13
Canceled 50,000 $0.34 $0.10 to $1.00
Issued 1,021,500 $1.24 $0.78 to $2.25
Outstanding - December 31, 1997 1,916,000 $0.74 $0.10 to $2.25
</TABLE>
<TABLE>
<CAPTION>
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------- ------------ ---------------- -------------- ----------- --------------
(Years)
<S> <C> <C> <C> <C> <C>
$0.10 - $0.13 220,500 5.7 $0.11 208,500 $0.10
$0.15 600,000 6.1 $0.15 600,000 $0.15
$0.28 21,500 7.1 $0.28 8,600 $0.28
$0.55-$0.59 33,500 8.2 $0.58 -0- -0-
$0.78-$1.09 552,000 9.2 $1.06 195,000 $1.04
$1.15-$1.62 471,000 9.3 $1.37 -0- -0-
$2.06-$2.25 17,500 9.9 $2.18 -0- -0-
</TABLE>
<PAGE>
10. EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No.
128 "Earnings Per Share" (SFAS 128), which was issued in February 1997, and
effective for financial statements for interim and annual periods ending after
December 15, 1997. The statement specifies the computation, presentation, and
disclosure requirements for earnings per share. The statement requires the
computation of earning per share under two methods "basic" and "diluted".
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed giving effect to all
dilutive potential common shares that were outstanding during the period
(i.e., the denominator used in the basic calculation is increased to include
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued). All prior period earnings
per share data have been restated. A summary of the calculations of basic and
diluted earnings per share for the years ended December 31, 1997, 1996, and
1995, is presented below:
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
Year Ended December 31, Year Ended December 31,
------------------------------------ --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995 1997 1996 1995
Weighted Average Shares Outstanding 7,034,000 6,967,000 6,955,000 7,034,000 6,967,000 6,955,000
Options 968,000 862,000 687,000
Debt/Non Detachable Warrants 2,179,000
Class B Preferred Stock 934,000
---------- ---------- ---------- ----------- ---------- ----------
Adjusted Weighted Average Shares 7,034,000 6,967,000 6,955,000 11,115,000 7,829,000 7,642,000
---------- ---------- ---------- ----------- ---------- ----------
Income before accounting change $ 936,000 $ 549,000 $1,599,000 $ 936,000 $ 549,000 $1,599,000
Class A Preferred Dividends (28,000) (216,000) (248,000) (28,000) (216,000) (248,000)
Class A Preferred Stock Redemption (1) 1,210,000 1,210,000
Class B Preferred Dividends Accretion (105,000)
Interest on convertible debt, net of tax 92,000
---------- ---------- ---------- ----------- ---------- ----------
Income Available to Common Shareholders
before accounting change 2,013,000 333,000 1,351,000 2,210,000 333,000 1,351,000
Cumulative effect on prior years of
accounting change (659,000) (659,000)
---------- ---------- ---------- ----------- ---------- ----------
Income available to common shareholders 1,354,000 333,000 1,351,000 1,551,000 333,000 1,351,000
========== ========== ========== =========== =========== ==========
Income per share before accounting change 0.28 0.05 0.19 0.20 0.04 0.18
Cumulative per share effect of
accounting change (0.09) 0.00 0.00 (0.06) 0.00 0.00
---------- ---------- ---------- ----------- ----------- ----------
Net income per share $ 0.19 $ 0.05 $ 0.19 $ 0.14 $ 0.04 $ 0.18
========== ========== ========== =========== ========== ==========
</TABLE>
(1) Represents the excess of the carrying value of the preferred stock over
the amount of cash paid to the holder of the preferred stock retired on
February 25, 1997.
<PAGE>
11. CONTINGENCIES AND LITIGATION:
In September 1997, the Bureau of Consumer Protection of the United
States Federal Trade Commission (the "FTC") notified the Company that it was
conducting an inquiry related to the Company's offering and promotion of
vocational or career training. The Company is cooperating with the FTC to the
fullest extent possible, and believes it has not engaged in any activity that
would violate FTC regulations. The Company believes the inquiry is one of
several being conducted by the FTC pertaining to vocational postsecondary
training institutions. There is not sufficient information available at this
stage to determine the financial impact on the Company, if any.
Department of Education Matters
The Company generally relies on the availability of various federal
and state student financial aid award programs to provide funding for students
attending the Campuses. The Company also relies on the availability of
lending institutions willing to participate in these programs and to grant
loans to these students. Both federal and state financial aid programs
contain numerous and complex regulations which require compliance not only by
the recipient student but also by the institution which the student attends.
If the Company should fail to materially comply with such regulations at any
of the Campuses, such failure could have serious consequences, including
limitation, suspension, or termination of the eligibility of that Campus to
participate in the funding programs. The Company is not aware of any material
violation of these regulations.
After January 1, 1991, the Secretary of Education was authorized to
initiate proceedings to limit, suspend or terminate the eligibility of a Campus
to participate in the Federal Loan Programs if the Cohort Default Rate for three
successive years exceeds the prescribed threshold. Beginning with the release of
1992 Cohort Default Rates in the summer of 1994, a Cohort Default Rate equal to
or exceeding 25% for each of the three most recent fiscal years may be used as
grounds for terminating Federal Family Education Loan ("FFEL") eligibility.
The Company has a pending suit against the United States Department of
Education ("ED") challenging the 1992, 1993, and 1994 Cohort Default Rates and
the rate correction regulations, which ED adopted in 1994. ED's rate correction
regulations contain a very restrictive standard for removal of defaulted loans
from a Campus Cohort Default Rate due to improper servicing and collection, and
the Company's suit contends that the regulations are unlawful because they
contravene provisions of the Higher Education Act of 1965 (as amended) and are
arbitrary and capricious. All of the Company's campuses, with the exception of
San Diego, currently have one or more of their three most recent default rates
below 25%, following administrative appeal rulings and continuing aggressive
default management efforts by the Company, and as a result, proceedings in the
suit are inactive.
The San Diego Campus was notified in September 1997 that it was no
longer eligible to participate in the FFEL Program and that it could not apply
to regain eligibility until at least October of 1999. The Campus did not
maintain loan eligibility because its Cohort Default Rate for one of the last
three consecutive published years, 1992, 1993, and 1994 was not below 25%. In
anticipation of the loss of the FFEL Program, the Campus had previously
arranged, through effective contingency planning, alternative sources of
financing for its students. The Campus is continuing to operate and provides
qualified students with access to Federal Pell grants and other sources of
student financing. The Student Population of the San Diego Campus was 200 or
approximately 6 percent of the Company's total student population as of December
31, 1997. The Company is uncertain if enrollment at the San Diego Campus will
materially change.
In 1994, ED established a policy of recertifying all schools
participating in federal Title IV student aid programs every five years. The
Denver, Colorado, Jacksonville and Lauderdale Lakes, Florida Campuses have
received provisional certification. The remaining campuses received full
certification. Provisional certification limits the Campus's ability to add
programs and change the level of educational award. In addition, the Campus
is required to accept certain restrictions on due process procedures under ED
guidelines. The provisional certifications expire in September 1998, at which
time the Campuses will again go through the process of recertification. 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 Campuses are required to meet to be eligible to receive Title IV
Funds. The three principal existing standards of financial responsibility are
profitability, the acid test ratio, and tangible net worth. In addition, ED
has issued a new financial responsibility regulation that will become
effective July
<PAGE>
1, 1998. The new regulation uses a composite score based upon three financial
ratios. Institutions earning a composite score of 1.50 or greater will be
considered fully financially responsible. The Company believes that on a
consolidated and individual basis the Campuses and the Company met all existing
financial responsibility standards and exceed the financial responsibility
factor of 1.50 at December 31, 1997.
The Company assessed each Campus' compliance with the regulatory
provisions contained in 34 CFR 600.5(d) - (e) for the year ended December 31,
1997. These provisions state that the percentage of cash revenue derived by
federal Title IV student aid program funds cannot exceed 85% of total cash
revenues. The following table sets forth the 1997 cash revenue derived from
federal Title IV student aid program funds, non Title IV program funds and the
percentage of Title IV program funds to total funds.
<TABLE>
<CAPTION>
Campus Title IV Funds Non-Title IV Funds Percentage
- ------ -------------- ------------------ ----------
<S> <C> <C> <C>
Anaheim, CA $2,952,000 $730,000 80.2%
Denver, CO 1,851,000 463,000 80.0
Jacksonville, FL 1,665,000 388,000 81.1
Kansas City, MO 1,662,000 353,000 82.5
Lauderdale Lakes, FL 2,402,000 581,000 80.5
Memphis, TN 2,448,000 547,000 81.7
North Hollywood, CA 4,145,000 944,000 81.5
Portland, OR 1,959,000 490,000 80.0
San Bernardino, CA 4,299,000 956,000 81.8
San Diego, CA 1,772,000 533,000 76.9
Tampa, FL (1) 3,114,000 678,000 82.1
</TABLE>
(1) The Miami Campus is an additional location of the Tampa Campus.
Southern Career Institute
On May 31, 1990, a wholly owned subsidiary of the Company, Concorde
Career Institute, Inc., a Florida corporation, acquired substantially all the
assets of Southern Career Institute, Inc. 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
("SCI").
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 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 amount on deposit in the SCI bank account.
In December 1996, SCI was informed verbally that the matter had been referred
to the ED's General Counsel. In September of 1997, SCI received
correspondence from the ED's Financial Improvement and Receivables Group,
requesting that SCI pay amounts totaling $2,654,592. SCI has notified the ED
that SCI disputes the ED's claims for payment, and SCI is pursuing
negotiations to resolve the claims.
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 March 11, 1998, SCI had received payments totaling approximately $30,000
pursuant to that agreement.
<PAGE>
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, management believes that the
Company is not 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. In addition, in light of applicable statutory and regulatory
provisions existing in 1991 and the ED's interpretation of those provisions it
is the opinion of management that any debt SCI might be determined to owe to
the ED should have no impact on the existing participation of the Campuses in
Federal Financial Aid programs.
Other
During July 1993, nine former students of the Jacksonville, Florida
Campus filed individual lawsuits against the Campus, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. These suits have
since been dismissed by the plaintiffs; however, over time, three others were
filed seeking similar relief on behalf of a total of 95 plaintiffs. Conversion
of one of the three cases to a class action has been attempted; however the
plaintiff's motion for class certification was denied on April 18, 1997. The
Company received a Notice of Appeal on May 17, 1997, which appealed the order
denying certification of the class. The purported class representative and the
Company filed all appropriate briefs, and oral argument before the appellate
court was held on January 15, 1998. On February 5, 1998, the appellate court
issued a per curium decision without opinion affirming the trial courts denial
of class certification. As no motion concerning the opinion was filed timely by
the class representative, the opinion is now final. Any further attempted
appeal, if filed, should be dismissed. During the appeal, all activity and
progress in the other suits was stayed. The amount of damages sought is not
determinable. The Company believes these suits are without merit, and will
continue to strongly oppose class certification, and to defend against them
vigorously.
The Company's Campuses are sued from time to time by a student or
students who claim to be dissatisfied with the results of their program of
study. Typically, the claims allege a breach of contract, deceptive
advertising and misrepresentation and the student or students seek
reimbursement of tuition. Punitive damages sometimes are also sought. In
addition, ED may allege regulatory violations found during routine program
reviews. The Company has, and will continue to dispute these findings as
appropriate in the normal course of business. In the opinion of the Company's
management such pending litigation and disputed findings are not material to
the Company's financial condition or its results of operations.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
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 will have a material
adverse effect on the Company's financial position or results of operation.
(The remainder of this page left intentionally blank.)
<PAGE>
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
<TABLE>
<CAPTION>
1997 March 31 June 30 September 30 December 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenue $ 9,388,000 $ 9,220,000 $ 9,319,000 $9,788,000
=========== =========== =========== ==========
Income (loss) before income taxes $ 658,000 $ (63,000) $ (67,000) $ 120,000
=========== =========== =========== ==========
Income before cumulative effect of
change in accounting principle $ 480,000 $ (55,000) $ 517,000 $ (6,000)
=========== =========== =========== ==========
Cumulative effect of change in accounting
principle $ (659,000) $ $ $
=========== =========== =========== ==========
Net income (loss). $ (179,000) $ (55,000) $ 517,000 $ (6,000)
=========== =========== =========== ==========
Basic Earning Per Share:
Income before cumulative effect of change
in accounting principle $ .24 $ (.01) $ .07 $ (.01)
=========== =========== =========== ==========
Cumulative effect of change in accounting
principle $ (.10) $ 0 $ 0 $ 0
=========== =========== =========== ==========
Net Income (loss) $ .14 $ (.01) $ .07 $ (.01)
=========== =========== =========== ==========
Dilutive Earning Per Share:
Income before cumulative effect of change in
accounting principle $ .18 $ (.01) $ .05 $ (.01)
=========== =========== =========== ==========
Cumulative effect of change in accounting
principle $ (.07) $ 0 $ 0 $ 0
=========== =========== =========== ==========
Net Income (loss) $ .11 $ (.01) $ .05 $ (.01)
=========== =========== =========== ==========
1996
Operating revenue. $11,032,000 $ 9,270,000 $10,318,000 $9,499,000
=========== =========== =========== ==========
Income (loss) before income taxes $ 731,000 $ (567,000) $ 742,000 $ (629,000)
=========== =========== =========== ==========
Net income (loss). $ 548,000 $ (425,000) $ 605,000 $ (179,000)
=========== =========== =========== ==========
Basic Earnings (loss) per share. $ .07 $ (.07) $ .08 $ (.03)
=========== =========== =========== ==========
Diluted Earnings (loss) per share $ .06 $ (.07) $ .07 $ (.03)
=========== =========== =========== ==========
1995
Operating revenue. $ 9,889,000 $ 8,457,000 $11,101,000 $9,827,000
=========== =========== =========== ==========
Income before income taxes $ 333,000 $ 18,000 $ 1,061,000 $ 368,000
=========== =========== =========== ==========
Net income. $ 300,000 $ 16,000 $ 955,000 $ 328,000
=========== =========== =========== ==========
Basic Earnings (loss) per share. $ .03 $ (.01) $ .13 $ .04
=========== =========== =========== ==========
Diluted Earnings (loss) per share $ .03 $ (.01) $ .12 $ .03
=========== =========== =========== ==========
</TABLE>
Because the CPA examination is administered twice a year, the
operations of the CPA Review courses were seasonal, impacting the results of
the Company for the quarters ended March 31, and September 30. The Company
sold the assets of the CPA Review courses in August 1996.
<PAGE>
Quarterly amounts for the periods ended March 31, 1997 and June 30,
1997 have been restated from amounts originally filed to reflect changes made
in previously filed Form 10-Q/A's. In addition, all per share amounts have
been restated in accordance with SFAS128.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
(The remainder of this page left intentionally blank.)
<PAGE>
(EXHIBIT 23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-26093) of Concorde Career Colleges, Inc. of our
report dated March 12, 1998, appearing in Part II, Page 13 in this Annual
Report on Form 10-K.
PRICE WATERHOUSE LLP
Kansas City, Missouri
March 27, 1998
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding Directors and Executive Officers is incorporated
herein by reference from the Company's definitive proxy statement. This
information can be found in the proxy statement under the headings: DIRECTORS
and EXECUTIVE OFFICERS.
Item 11. Executive Compensation
Information regarding Executive Compensation is incorporated herein by
reference from the Company's definitive proxy statement. This information can
be found in the proxy statement under the heading: EXECUTIVE COMPENSATION AND
OTHER INFORMATION (specifically excluding disclosures in such section relating
to Item 402(I), (k), and (l) of Regulation S-K.)
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated herein by reference from the Company's definitive
proxy statement. This information can be found in the proxy statement under the
headings: PROXY STATEMENT and STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Item 13. Certain Relationships and Related Transactions
Information regarding Certain Relationships and Related Transactions is
incorporated herein by reference from the Company's definitive proxy statement.
This information can be found in the proxy statement under the headings:
EXECUTIVE COMPENSATION AND OTHER INFORMATION and OTHER TRANSACTIONS.
(The remainder of this page left intentionally blank.)
Part III - Page 1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
DESCRIPTION PAGE
- ----------- -----
1. Financial Statements:
CONCORDE CAREER COLLEGES, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... II-13
Consolidated Balance Sheet.................................. II-14
Consolidated Statement of Operations........................ II-16
Consolidated Statement of Cash Flows........................ II-18
Consolidated Statement of Changes In Stockholders' Equity... II-19
Notes to Consolidated Financial Statements.................. II-20
2. Financial Statement Schedules:
CONCORDE CAREER COLLEGES, INC. AND SUBSIDIARIES
Schedules have been omitted as not applicable or not required under the
instructions contained in Regulations S-X or the information is included
elsewhere in the financial statements or notes thereto.
3. Exhibits:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3(a) -- Restated Certificate of Incorporation of the Registrant,
as amended (Incorporated by reference to Exhibit 3(a) of
the Annual Report on Form 10-K for the year ended December
31, 1994).
3(b) -- Amended and Restated Bylaws of the Registrant
(Incorporated by reference to Exhibit 3(b) of the Annual
Report on Form 10-K for the year ended December 31,
1991).
4(a) -- Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4(a) to Registration Statement on
Form S-1 [SEC File No. 33-21654]).
4(b) -- Specimen Class A Redeemable Preferred Stock Certificate
(Incorporated by reference to Exhibit 4(b) of the Annual
Report on Form 10-K for the year ended December 31, 1994).
4(c) -- Junior Secured Debenture in principal amount of $5,422,307
made by the Company dated October 30, 1992 to CenCor, Inc.
(Incorporated by reference to Exhibit 4(c) of the Annual
Report on Form 10-K for the ended December 31, 1992).
4(d) -- Certificate of Designation of the Class A Redeemable
Preferred Stock (Incorporated by reference to Exhibit 4(d)
of the Annual Report on Form 10-K for the year ended
December 31, 1994).
4(e) -- Certificate of Designation of Class B Convertible
Preferred Stock. (Incorporated by reference to Exhibit
4(e) of the Annual Report on Form 10-K for the year ended
December 31, 1996).
1
<PAGE>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
4(f) -- Specimen Class B Convertible Preferred Stock Certificate.
(Incorporated by reference to Exhibit 4(f) of the Annual
Report on Form 10-K for the year ended December 31, 1996.)
4(g) -- Subordinated Debenture in principal amount of $3,316,250 made
by the Company dated February 25, 1997 to Cahill, Warnock
Strategic Partners Fund, L.P. (Incorporated by reference to
Exhibit 4(g) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
4(h) -- Subordinated Debenture in principal amount of $183,750 made
by the Company dated February 25, 1997 to Strategic
Associates, L.P. (Incorporated by reference to Exhibit 4(h)
of the Annual Report on Form 10-K for the year ended December
31, 1996.)
4(i) -- Common Stock Purchase Warrant dated February 25, 1997 issued
to Cahill, Warnock Strategic Partners Fund, L.P., granting
the right to purchase up to 2,483,419 shares of the Company's
Common Stock. (Incorporated by reference to Exhibit 4(i) of
the Annual Report on Form 10-K for the year ended December
31, 1996.)
4(j) -- Common Stock Purchase Warrant dated February 25, 1997 issued
to Strategic Associates, L.P., granting the right to purchase
up to 135,110 shares of the Company's Common Stock.
4(k) -- Registration Rights Agreement dated February 25, 1997 issued
among the Company; Cahill, Warnock Strategic Partners Fund,
L.P.; and Strategic Associates, L.P. (Incorporated by
reference to Exhibit 4(k) of The Annual Report on Form 10-K
for the year ended December 31, 1996.)
9(a) -- Stockholders' Agreement dated February 25, 1997 among the
Company, Cahill, Warnock Strategic Partners Fund, L.P. ,
Strategic Associates, L.P., Jack L. Brozman, The Estate of
Robert F. Brozman and the Robert F. Brozman Trust under
Agreement dated December 28, 1989 (the "Stockholders
Agreement Parties"). (Incorporated by reference to Exhibit
9(a) of the Annual Report on Form 10-K for the year ended
December 31, 1996.)
9(b) -- Agreement dated March 21, 1997 among the Stockholders
Agreement Parties and James R. Seward. (Incorporated by
reference to Exhibit 4(f) of the Annual Report on Form 10-K
for the year ended December 31, 1996.)
2
<PAGE>
**10(c)(v) -- Dr. Robert R. Roehrich Employment Agreement (Incorporated by
Reference to Exhibit 10(c)(v) to the Quarterly Report on Form
10-Q dated June 30, 1997.)*
10(f) -- Second Amended and Restated Concorde Career Colleges, Inc.
1988 Incentive Stock Option Plan, dated May 4, 1989
(Incorporated by reference to Exhibit 10 (f) (iii) to
Pre-effective Amendment No. 1 to Registration Statement on
Form S-1 [SEC File No. 33-30002]).*
10(g)(i) -- Concorde Career Colleges, Inc. 1994 Incentive Stock Option
Plan. (Incorporated by Reference to Exhibit 10(g) of the
Annual Report on Form 10-K for the year ended December 31,
1993).*
**10(g)(ii) -- Dr. Robert R. Roehrich Option Agreement (Incorporated by
Reference to Exhibit 10(g)(i) to the Quarterly Report on Form
10-Q dated June 30, 1997.)*
10(h)(i) -- Agreement for Transfer of Assets and Assumption of
Liabilities between CenCor and the Company dated as of March
31, 1988. (Incorporated by Reference to Exhibit 10(d) to
Registration Statement on Form S-1 [SEC File No. 33-21654]).
10(h)(ii) -- Amendment to Agreement for Transfer of Assets and Assumption
of Liabilities between CenCor and the Company dated October
30, 1992. (Incorporated by reference to Exhibit 10(g)(ii) of
the Annual Report on Form 10-K for the year ended December
31, 1992).
10(h)(iii)-- Restructuring, Security and Guaranty Agreement between CenCor
and the Company dated October 30, 1992. (Incorporated by
reference to Exhibit 10(g)(iii) of the Annual Report on Form
10-K for the year ended December 31, 1992).
10(h)(iv) -- First Amendment to the Restructuring, Security and Guaranty
Agreement dated December 30, 1993. (Incorporated by reference
to Exhibit 10(h)(iv) of the Annual Report on Form 10-K for
the year ended December 31, 1993).
10(h)(v) -- Assignments of Receivable to Concorde from Guarantors, dated
as of December 30, 1993. (Incorporated by reference to
Exhibit 10(h)(v) of the Annual Report on Form 10-K for the
year ended December 31, 1993).
10(h)(vi) -- Second Amendment to the Restructuring, Security and Guaranty
Agreement dated November 15, 1994 (Incorporated by Reference
to Exhibit 10(h)(vi) of the Annual Report on Form 10-K for
the year ended December 31, 1994).
10(h)(vii)-- Third Amendment to the Restructuring, Security and Guaranty
Agreement dated July 30, 1996 (Incorporated by Reference to
Exhibit 2 of the Quarterly Report on Form 10Q dated June
30,1996).
10(h)(viii)- Fourth Amendment to the Restructuring, Security and Guaranty
Agreement dated December 30, 1996. (Incorporated by reference
to Exhibit 10(h)(viii) of the Annual Report on Form 10-K for
the year ended December 31, 1996.)
3
<PAGE>
10(i) -- Expense Sharing Agreement dated as of January 1, 1993,
between CenCor, Century Acceptance Corporation, La Petite
Academy, Inc. and the Company. (Incorporated by reference to
Exhibit 10(h) to the Annual Report on Form 10-K for the year
ended December 31, 1992).
10(k) -- Asset Purchase Agreement dated July 10, 1996 regarding the
sale of assets of Person/Wolinsky Associates, Inc.
(Incorporated by reference to Exhibit 1 to the Quarterly
Report on Form 10Q dated June 30, 1996).
10(l) -- Convertible Preferred Stock Purchase Agreement dated February
25, 1997 among Cahill, Warnock Strategic Partners Fund,
L.P., Strategic Associates, L.P., and the Company (the
"Purchase Agreement Parties")
10(m) -- Amendment No. 1 to the Convertible Preferred Stock Purchase
Agreement dated March 21, 1997 among the Purchase Agreement
Parties and James R. Seward. (Incorporated by reference to
Exhibit 10(m) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
10(n) -- Subordinated Debenture and Warrant Purchase Agreement dated
as of February 25, 1997 by the Company and Cahill, Warnock
Strategic Partners Fund, L.P. (Incorporated by reference to
Exhibit 10(n) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
10(o) -- Subordinated Debenture and Warrant Purchase Agreement dated
as of February 25, 1997 by the Company and Strategic
Associates, L.P. (Incorporated by reference to Exhibit 10(o)
of the Annual Report on Form 10-K for the year ended December
31, 1996.)
10(p) -- Revolving Credit, Security and Guaranty Agreement dated March
13, 1997 by and among the Registrant and Security Bank of
Kansas City, attached herewith. (Incorporated by reference to
Exhibit 10(p) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
**18 -- Preferability Letter of Price Waterhouse LLP regarding the
change in tuition income recognition (Incorporated by
reference to Exhibit 18 to the Quarterly Report on Form 10-Q
dated September 30, 1997).
**21 -- Subsidiaries of Registrant
23 -- Consent of Price Waterhouse LLP (filed herewith).
* Management contract or compensation plan.
** Previously filed.
B. REPORTS ON FORM 8-K
None.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By / s/ JACK L. BROZMAN
----------------------------
Jack L. Brozman
Chairman of the Board
Date: March 27, 1998
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
SIGNATURE DATE
--------- ----
By /s/ JACK L. BROZMAN March 27, 1998
--------------------------------------------------------------------------
Jack L. Brozman
(Chaiman of the Board, Treasurer and Director)
By /s/ ROBERT R. ROEHRICH March 27, 1998
--------------------------------------------------------------------------
Robert R. Roehrich
(Chief Executive Officer, President and Director)
By /s/ GREGG GIMLIN March 27, 1998
--------------------------------------------------------------------------
M. Gregg Gimlin
(Vice President, Chief Financial Officer, and
Principal Accounting Officer)
By /s/ DAVID A. NICHOLS March 27, 1998
--------------------------------------------------------------------------
David A. Nichols
(Director)
By /s/ JAMES R. SEWARD March 30, 1998
--------------------------------------------------------------------------
James R. Seward
(Director)
By /s/ THOMAS K. SIGHT March 28, 1998
--------------------------------------------------------------------------
Thomas K. Sight
(Director)
By /s/ DAVID L. WARNOCK March 30, 1998
--------------------------------------------------------------------------
David L. Warnock
(Director)
5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 OCT-01-1997
<PERIOD-END> DEC-31-1997 DEC-31-1997
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<PP&E> 6,694,000 0
<DEPRECIATION> 4,161,000 0
<TOTAL-ASSETS> 25,524,000 0
<CURRENT-LIABILITIES> 14,929,000 0
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0 0
6,000 0
<COMMON> 713,000 0
<OTHER-SE> 6,016,000 0
<TOTAL-LIABILITY-AND-EQUITY> 25,524,000 0
<SALES> 37,715,000 9,788,000
<TOTAL-REVENUES> 37,715,000 9,788,000
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<INTEREST-EXPENSE> 454,000 224,000
<INCOME-PRETAX> 648,000 120,000
<INCOME-TAX> (288,000) 126,000
<INCOME-CONTINUING> 936,000 (6,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> (659,000) 0
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<EPS-PRIMARY> 0.19 (.01)
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</TABLE>
