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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31,1999 Commission File No. 0-16992
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CONCORDE CAREER COLLEGES, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 43-1440321
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(State of other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5800 Foxridge, Suite 500
Mission, Kansas 66202
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (913) 831-9977
----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.10 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No ___ (2) Yes X No ___
--- ---
As of April 28, 1999 Concorde Career Colleges, Inc. had 7,852,826 shares of
Common Stock outstanding.
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CONCORDE CAREER COLLEGES, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 1999
INDEX
PART I - FINANCIAL INFORMATION
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PAGE
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Item 1. Financial Statements
Notes to Condensed Consolidated Financial Statements
Note 1 and 2.................................................. 1
Condensed Consolidated Balance Sheets........................... 2,3
Condensed Consolidated Statements of Operations................. 4
Condensed Consolidated Statements of Cash Flows................. 5
Consolidated Statement of Changes in Stockholders' Equity....... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 12
Item 2. Change in Securities............................................ 12
Item 3. Defaults Upon Senior Securities................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............. 12
Item 5. Other Information............................................... 12
Item 6. Exhibits and Reports on Form 8-K................................ 12
Signatures................................................................ 13
</TABLE>
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-
Q, may contain forward-looking comments. Such comments are based upon
information currently available to management and management's perception
thereof as of the date of this Form 10-Q. Actual results of the Company's
operations could materially differ from those forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, potential adverse effects of regulations;
impairment of federal funding; adverse legislative action; student loan default
rates; changes in federal or state authorization or accreditation; changes in
market needs and technology; changes in competition and the effects of such
changes; changes in the economic, political or regulatory environments;
litigation involving the Company; changes in the availability of a stable labor
force; or changes in management strategies. Readers should take these factors
into account in evaluating any such forward-looking comments.
NOTES TO FINANCIAL STATEMENTS
Note 1:
- ------
The condensed interim consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared according to generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's 1998 Annual Report on Form 10-K that was filed by the Company with the
Commission on March 31, 1999 (the "1998 Form 10-K") incorporated herein by
reference.
The information included in these interim financial statements reflects all
normal recurring adjustments that are, in the opinion of management, necessary
to fairly state the results of the periods presented. Annualization of amounts
in these interim financial statements may not necessarily be indicative of the
actual operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
has litigation pending which arose in the normal course of business. See further
discussion in Part I, Item 2 - "Contingencies", and Part II, Item 1 - "Legal
Proceedings".
Note 2:
- ------
Basic earnings per share is computed by deducting imputed preferred
dividends from net income or loss. This amount is then divided by weighted
average number of common shares outstanding.
Diluted earnings per share is computed by deducting imputed preferred
dividends from net income. This amount is then divided by the weighted average
number of common shares outstanding during the year after giving effect for
common stock equivalents (if dilutive) arising from stock options and for
warrants and preferred stock assumed converted to common stock.
1
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................... $ 2,473,000 $ 2,433,000
Accounts receivable.................................. 10,589,000 9,198,000
Notes receivable..................................... 3,640,000 4,071,000
Allowance for uncollectible accounts................. (1,217,000) (1,696,000)
----------- -----------
Net receivables...................................... 13,012,000 11,573,000
Recoverable income taxes................................ 803,000 799,000
Deferred income taxes................................... 1,056,000 824,000
Supplies and prepaid expenses........................... 710,000 784,000
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Total current assets...................................... 18,054,000 16,413,000
FIXED ASSETS, NET:........................................ 3,178,000 3,234,000
INTANGIBLE ASSETS, NET
less accumulated amortization of $493,000 at March 31,
1999 and $478,000 at December 31, 1998, respectively... 420,000 435,000
OTHER ASSETS:
Long-term notes receivable.............................. 1,539,000 996,000
Allowance for uncollectible notes....................... (584,000) (183,000)
Other................................................... 338,000 340,000
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Total other assets................................... 1,293,000 1,153,000
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$22,945,000 $21,235,000
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
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<S> <C> <C>
CURRENT LIABILITIES:
Deferred student tuition...................................... $10,446,000 $ 8,722,000
Accrued salaries and wages.................................... 798,000 680,000
Accrued interest.............................................. 30,000 179,000
Accounts payable and other accrued liabilities................ 2,209,000 2,147,000
----------- -----------
Total current liabilities................................ 13,483,000 11,728,000
OTHER LONG-TERM LIABILITIES..................................... 324,000 332,000
DEFERRED INCOME TAXES........................................... 139,000 139,000
SUBORDINATED DEBT DUE TO RELATED PARTY, CAHILL-WARNOCK.......... 3,500,000 3,500,000
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, ($.10 par value, 600,000 shares authorized)
Class B, 55,147 shares issued and outstanding.............. 6,000 6,000
Common stock, ($.10 par value, 19,400,000 shares authorized)
7,867,126 shares issued and 7,840,326 shares outstanding... 786,000 725,000
Capital in excess of par...................................... 8,445,000 8,143,000
Accumulated deficit........................................... (3,677,000) (3,277,000)
Less-treasury stock, 26,800 shares, at cost................... (61,000) (61,000)
----------- -----------
Total stockholders' equity................................. 5,499,000 5,536,000
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$22,945,000 $21,235,000
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
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1999 1998
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NET REVENUES............................. $8,315,000 $9,094,000
COSTS AND EXPENSES:
Instruction costs and services......... 3,444,000 3,562,000
Selling and promotional................ 1,332,000 1,346,000
General and administrative............. 3,804,000 3,749,000
Provision for uncollectible accounts... 284,000 246,000
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Total.................................. 8,864,000 8,903,000
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OPERATING INCOME (LOSS).................. (549,000) 191,000
INTEREST EXPENSE......................... 45,000 46,000
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INCOME (LOSS) BEFORE INCOME TAXES........ (594,000) 145,000
PROVISION (BENEFIT) FOR INCOME TAXES..... (232,000) 56,000
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NET INCOME (LOSS)........................ $ (362,000) $ 89,000
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WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic.............................. 7,632,000 7,124,000
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Diluted............................ 7,632,000 8,194,000
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BASIC EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE............ $ (.05) $ .01
========== ==========
DILUTED EARNINGS (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE............ $ (.05) $ .01
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
statements.
(The remainder of this page left intentionally blank.)
4
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
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CASH FLOWS -- OPERATING ACTIVITIES: 1999 1998
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Net (loss) income.................................. $ (362,000) $ 89,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities -
Depreciation and amortization.................... 269,000 215,000
Provision for losses on accounts receivable...... 284,000 246,000
Change in assets and liabilities, net -
Change in receivables......................... (1,867,000) 649,000
Change in deferred student tuition............ 1,724,000 (500,000)
Change in deferred income taxes............... (63,000)
Change in recoverable income taxes............ (236,000) (108,000)
Other changes in assets and liabilities, net.. 345,000 (47,000)
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Total adjustments........................... 519,000 392,000
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Net operating activities.................... 157,000 481,000
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CASH FLOWS --INVESTING ACTIVITIES:
Capital expenditures............................... (215,000) (143,000)
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Net investing activities.................... (215,000) (143,000)
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CASH FLOWS --FINANCING ACTIVITIES:
Stock options exercised............................ 98,000 9,000
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Net financing activities..................... 98,000 9,000
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NET INCREASE IN CASH & CASH EQUIVALENTS............. 40,000 347,000
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD............................. 2,433,000 5,393,000
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CASH AND CASH EQUIVALENTS
AT END OF PERIOD................................... $ 2,473,000 $5,740,000
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest......................................... $ 194,000 $ 46,000
Income taxes..................................... 5,000 235,000
Cash received during the period for:
Interest......................................... 44,000 96,000
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
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CONCORDE CAREER COLLEGES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY'
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
CAPITAL
PREFERRED COMMON IN EXCESS ACCUMULATED TREASURY
STOCK STOCK OF PAR DEFICIT STOCK
--------- --------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998........... $ 6,000 $725,000 $8,143,000 $(3,277,000) $(61,000)
Net Loss........................... (362,000)
Class B Preferred Stock Accretion.. 38,000 (38,000)
Stock Options Exercised............ 61,000 264,000
--------- -------- ---------- ----------- --------
BALANCE, March 31, 1999.............. $ 6,000 $786,000 $8,445,000 $(3,677,000) $(61,000)
========= ======== ========== ============ ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(The remainder of this page was left intentionally blank.)
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
---------------------
The Company owns and operates twelve proprietary postsecondary campuses
that offer career vocational education, primarily in the allied health field
(the "Campuses").
The following table presents the relative percentage of revenues of certain
consolidated statement of operations items as a percentage of total revenue for
periods indicated.
THREE MONTHS
ENDED MARCH 31,
----------------
1999 1998
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Revenue................................. 100.0% 100.0%
Operating expenses:
Instruction costs & services.......... 41.4 39.2
Selling & Promotional................. 16.0 14.8
General & administrative.............. 45.8 41.2
Provision for uncollectible accounts.. 3.5 2.7
----- -----
Total operating expenses.............. 106.7 % 97.9%
Operating income (loss)................. (6.7) 2.1
Interest expense........................ .5 .5
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Income (loss) before income taxes....... (7.2)% 1.6%
Provision (benefit) for income taxes.... (2.8) .6
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Net Income (loss)....................... (4.4%) 1.0%
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7
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RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999 COMPARED TO
QUARTER ENDED MARCH 31, 1998
Although the student population as of March 31, 1999 was below the student
population as of March 31, 1998, Concorde has experienced additional prospective
student contacts during 1999 as a result of advertising strategy changes. In
addition, student enrollments, excluding the Miami campus which will close in
the Summer of 1999, increased 8.3% for the three months ended March 31, 1999
compared to the same period in 1998. The student population increased to 3,150
at March 31, 1999 compared to 2,800 at December 31, 1998.
Concorde seeks to increase revenue by expanding the number of programs at
each campus and utilizing existing capacity through a more effective marketing
strategy. The Company plans to add programs, currently existing at other
campuses, in two Florida campuses during 1999. Concorde is also exploring
additional program offerings at other campuses during 1999 and 2000. The
Company believes that by following this strategy, it will return to
profitability in 1999.
The Company accrued $180,000 in 1998 for the closing of the Miami Campus in
1999. Revenue and expenses for the Miami Campus in 1999 will be offset by the
accrual. The Company currently believes the accrual is adequate and no
additional material expenses will be incurred in 1999 for the Miami Campus. The
Miami Campus accounted for $317,000 of revenue, $269,000 of operating expenses
and $48,000 of operating income during the first three months of 1998.
A net loss of $362,000 was recorded for the three months ended March 31,
1999 compared to net income of $89,000 for the same period in 1998. The
$451,000 decrease was primarily due to decreased student population compared to
1998. Total revenue decreased 8.6% or $779,000 to $8,315,000 for the three
months ended March 31, 1999 compared to $9,094,000 for the same period in 1998.
The Miami Campus accounted for reduced revenue of $317,000 in 1999 compared to
1998. The remaining decrease was a result of reduced student population. Total
operating expenses decreased $39,000 to $8,864,000 compared to $8,903,000 for
the three months ended March 31, 1998. The Miami Campus accounted for a
$269,000 decrease in operating expenses in 1999. The $230,000 offsetting
increase was primarily due to increased general and administrative expenses.
INSTRUCTION COSTS AND SERVICES - decreased $118,000 or 3.3% to $3,444,000
compared to $3,562,000 in 1998. The Miami Campus accounted for $118,000 of this
decrease.
SELLING AND PROMOTIONAL - decreased $14,000 to $1,332,000 compared to
$1,346,000 in 1998. The Miami Campus accounted for $59,000 of this decrease.
The offsetting increase resulted from additional wages.
GENERAL AND ADMINISTRATIVE - increased $55,000 to $3,804,000 compared to
$3,749,000 in 1998. The Miami Campus accounted for $106,000 decrease in this
expense category. The offsetting increase was a result of additional
depreciation, seminars and conferences, and outside services compared to 1998.
PROVISION FOR UNCOLLECTIBLE ACCOUNTS - increased $38,000 or 15.4% to
$284,000 compared to $246,000 in 1998.
INTEREST EXPENSE - decreased $1,000 to $45,000 compared to $46,000 in 1998.
INCOME TAXES - In 1999, a tax benefit of $232,000 or 39% was recorded
compared to a tax provision of $56,000 or 39% in 1998.
EPS AND WEIGHTED AVERAGE COMMON SHARES - Basic weighted average common
shares increased to 7,632,000 in 1999 from 7,124,000 in 1998. Diluted weighted
average common shares decreased to 7,632,000 in 1999 from 8,194,000 in 1998.
The decrease was due to the antidilutive effect of the common stock equivalents
in 1999. Basic loss per share was $.05 for the three months ended March 31,
1999 compared to basic earnings per share of $.01 for the same period in 1998.
Basic earnings (loss) per share is shown after a reduction for preferred stock
dividends of $38,000 in 1999 and $33,000 in 1998. Diluted loss per share was
$.05 for the three months ended March 31, 1999 compared to diluted earnings per
share of $.01 for the same period in 1998. Diluted earnings (loss) per share is
shown after a reduction for preferred stock dividends of $38,000 in 1999 and
$33,000 in 1998.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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,
2000. 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 March 31, 1999.
However, the available credit was reduced to approximately $2,400,000 when the
facility was amended on December 28, 1998. The Company may borrow up to
$2,411,000 for working capital purposes. The amendment reduced the maximum
credit available by the stated amount of the issued and outstanding letter of
credit or replaced letter of credit discussed below.
On December 30, 1998 Security Bank of Kansas City issued a $589,000 letter
of credit as security for a lease on the Company's new Garden Grove, California
location. The letter of credit expires April 19, 2000 and will be replaced by
replacement letters of credit expiring annually through April 19, 2004. The
replacement letters of credit will be issued at amounts decreasing 20% annually
from the original issue amount. The letter can only be drawn upon if there is a
default under the lease agreement.
Cash Flows and Other
Net cash provided by operating activities was $157,000 and $481,000 for the
three months ended March 31, 1999 and 1998 respectively. Net receivables after
provision for losses on receivables increased $1,867,000 in 1999 compared to a
decrease of $649,000 in 1998. Deferred student tuition increased in 1999 by
$1,724,000 to $10,446,000 compared to $8,722,000 at December 31, 1998. The
deferred student tuition increase is due to a larger earning student population
at March 31, 1999 compared to December 31, 1998.
Capital expenditures for the three months ended March 31, 1999 were
$215,000 compared to $143,000 in 1998. Capital expenditures in 1999 were
primarily for additional computer equipment.
Financing activities increased cash $98,000 in 1999 compared to $9,000 in
1998. The increase in both years was a result of exercised stock options.
CONTINGENCIES
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. During June 1998, the FTC presented the Company with a
proposed complaint and consent order concerning the inquiry. Subsequently, the
Company and the FTC had several discussions. The primary outstanding issue
involves disclosure and calculation of placement statistics. Each of the
Company's Campuses is accredited by an accrediting association approved by the
United States Department of Education ("ED"). The accrediting associations
provide oversight for many areas of Campus operations including calculation and
disclosure of placement statistics. The Company believes the FTC has calculated
placement statistics in an arbitrary manner that is contrary to the rules and
regulations of the accrediting agencies. The FTC recently altered its position
and now believes the Company can not substantiate certain isolated placement
rates. The Company believes that its placement rates are accurate and can be
substantiated. The Company believes that the placement statistics issue may
affect all companies operating in the proprietary education industry. The
Company continues to communicate with the FTC and evaluate its options.
Currently, there is not sufficient information available to determine the
financial impact on the Company, if any. The Company plans to vigorously defend
against any material action related to this issue because of the Company's
belief that it has materially complied with all applicable rules and
regulations.
The Company generally relies on the availability of various federal and
state student financial assistance 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 approve 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.
9
<PAGE>
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
consecutive 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 Family Federal Education Loan ("FFEL") eligibility.
The Company has a pending suit against the United States Department of
Education (ED) challenging past Cohort Default Rates published for the Company's
Campuses 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 three
consecutive published years, 1992, 1993, and 1994 was not below 25%. The Campus
is continuing to operate and provides qualified students with access to Federal
Pell grants and other sources of student financing including loans made by the
Campus. The student population of the San Diego Campus was 210 or approximately
7 percent of the Company's total population as of March 31, 1999 compared to 204
or approximately 6 percent of the Company's total population as of March 31,
1998.
In 1994, ED established a policy of recertifying all institutions
participating in Title IV programs every five years. Three of the Company's
Campuses, Denver, Colorado, Jacksonville and Lauderdale Lakes, Florida received
provisional certification during 1996. The remaining Campuses received full
certification. Provisional certification limits the Campus' 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 expired during 1998. ED notified
the Company that the Denver Campus is now fully certified. The Jacksonville and
Lauderdale Lakes Campuses received provisional certification due to default
rates. Both Campuses had a default rate greater than 25% for one of the three
previous years. The Company does not believe provisional certification would
have a material impact on its liquidity, results of operations or financial
position.
ED also has established certain "Factors of Financial Responsibility" which
institutions are required to meet to be eligible to participate in Title IV
programs. The three principal standards of financial responsibility applicable
prior to July 1, 1998 were (i) satisfy an acid test ratio of at least 1:1 at the
end of each fiscal year, (ii) have a positive tangible net worth at the end of
each fiscal year, and (iii) not have a cumulative net operating loss during its
two most recent fiscal years that results in a decline of more than 10% of the
institution's tangible net worth at the beginning of that two-year period. An
institution that is determined by the DOE not to meet any one of the standards
of financial responsibility would be entitled to participate in the Title IV
programs if it can demonstrate financially responsibility on an alternative
basis. ED issued a new financial responsibility regulation that became
effective July 1, 1998. ED instituted a transitional period which allows an
institution to use either the old or new regulations for a fiscal year that
begins between July 1, 1997 and June 30, 1998. This transition period applies
to the Company's 1998 fiscal year. The new regulation uses a composite score
based upon three financial ratios. An institution demonstrates that it is
financially responsible by achieving a composite score of at least 1.5, or by
achieving a composite score in the zone from 1.0 to 1.4 and meeting certain
provisions.
ED also allows institutions in the zone up to three consecutive years to
improve their financial condition without requiring surety. An institution in
the zone may need to provide to ED timely information regarding certain
accrediting agency actions and certain financial events that may cause or lead
to a deterioration of the institution's financial condition. In addition,
financial and compliance audits may have to be submitted soon after the end of
the institution's fiscal year. Title IV HEA funds may be subject to cash
monitoring for institutions in the zone. The Company believes that on a
consolidated basis, it meets the three principal financial responsibility
standards: profitability, acid test, and tangible net worth. The Company's
consolidated composite score under the new financial responsibility regulations
would be 1.2. The Company believes that because of the transitional period it
will not be subject to zone requirements.
10
<PAGE>
During July 1993, nine former students of the Jacksonville, Florida School
filed individual lawsuits against the School, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. These cases
were dismissed by the plaintiffs; however, over time three others were filed
seeking similar relief on behalf of a total of 95 plaintiffs. See Part II, Item
1 - "Legal Proceedings".
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. 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 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
ED's General Counsel. In March of 1999, SCI received correspondence from ED's
Financial Improvement and Receivables Group requesting that SCI pay amounts
totaling $2,901,497. The 1999 correspondence was similar to correspondence
received in 1997. SCI has notified ED that it disputes these claims.
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
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 ED's interpretation of those provisions, it is the opinion of
management that any debt SCI might be determined to owe to ED should have no
impact on the existing participation of the Campuses in federal financial aid
programs.
YEAR 2000 DISCLOSURE
The Year 2000 computer issue (commonly referred to as "Y2K") refers to a
condition in computer software where a two-digit field rather than a four-digit
field is used to distinguish a calendar year. Some computer programs and
hardware ("computer systems") and non-information technology systems ("non-
computer systems') could be unable to process information containing dates
subsequent to December 31, 1999 unless corrected. As a result, such programs and
systems could experience errors in calculations, malfunctions or disruptions.
The Company has recently completed the assessment phase of evaluating its
core business information systems for Y2K readiness and has extended that review
to include a wide variety of other computer and non-computer systems. As a
result of routine hardware and software upgrades and computer system purchases
over the last two years, most of the Company's computer systems should not have
a Y2K problem. The Company is continuing the process of updating much of its
existing software for Y2K compliance by acquiring a new third-party software
package to replace existing administrative software. In addition the Company
may spend a minimal amount of time modifying existing administrative software
until the new system is implemented. The administrative software upgrade will
be complete by summer 1999. The administrative system is not being replaced
solely because of Y2K issues. Sufficient testing of the Company's Computer
Systems has not been completed to fully validate readiness. Additional testing
is planned during 1999 to reasonably ensure Y2K compliance.
The Company is not dependent upon a single source for any products or
services, except the federal funding discussed below. In the event a
significant supplier, bank or other business partner or vendor is unable to
provide products or services to the Company due to a Y2K failure, the Company
believes it has adequate alternate sources for such products or services. The
Company's operations and liquidity largely depend upon the federal student
funding provided by Title IV programs for students. Processing of applications
for this funding is handled by ED's computer systems. ED has stated that its
systems will be Y2K compliant in early calendar year 1999. ED has also stated
that various schools will be able to run tests of the systems during the first
half of calendar year 1999. The Company is currently unable to independently
assess ED's progress to date and no test dates have been announced. Any
prolonged interruption would have a material adverse impact on the education
industry and upon the Company's business, results of operations, liquidity and
financial condition.
11
<PAGE>
The Company is unable at this time to assess the possible impact on its
results of operations; liquidity or financial condition of any Y2K related
disruptions to its business. Whether these disruptions are caused by the
malfunctioning of any computer or non-computer systems and products that it uses
or systems used by material third parties.. The Company believes that the most
reasonably likely worse case scenario for the Y2K issue would be that the third
parties with whom it has relationships would cease or not successfully complete
their Y2K compliance efforts. If this were to occur, the Company would encounter
disruptions to its business that could have a material impact on its results of
operations. The Company could be severely impacted by widespread economic or
financial market disruption or by Y2K computer system failures at ED.
The Company is in the process of developing an appropriate contingency plan
in the event that a significant exposure is identified relative to the
dependencies on third-party systems.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT RISK - NOT REQUIRED
--------------------------------------------------
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
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 other cases
were filed seeking similar relief on behalf of a total of 95 plaintiffs.
Conversion of one of the three cases to a class action was attempted; however,
the plaintiff's motion for class certification was denied on April 18, 1997. On
May 19, 1997, the plaintiff appealed the order denying certification of the
class. On February 5, 1998, the appellate court issued a per curiam decision
without opinion affirming the trial court's denial of class certification. The
appellate opinion is now final, and no further appeal is available on the class
certification issue. During the appeal, all activity and progress in the other
cases was stayed. The plaintiffs have initiated efforts to begin to move the
cases forward; however, none are close to being ready for trial. The amount of
damages sought is not determinable. The Company believes these suits are without
merit, and will continue to defend 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 operation.
The Company has litigation pending which arose in the ordinary course of
business. Litigation is subject to many uncertainties and the outcome of the
individual matters is not presently determinable. It is management's opinion
that this litigation will not result in liabilities that would have a material
adverse effect on the Company's financial position or results of operations.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
ITEM 2. CHANGE IN SECURITIES -- NONE
----------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NONE
--------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- NONE
-----------------------------------------------------------
ITEM 5. OTHER INFORMATION -- NONE
-------------------------
12
<PAGE>
ITEM 6. EXHIBITS
--------
11 Computation of per share earnings
27 Financial Data Schedule
. No Reports on Form 8-K were filed during the period.
13
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORDE CAREER COLLEGES, INC.
DATED: APRIL 30, 1998
By: /s/ Jack L. Brozman
----------------------------------------
Jack L. Brozman, Chief Executive Officer
By: /s/ Paul R. Gardner
----------------------------------------
Paul R. Gardner, Chief Financial Officer
(The remainder of this page was left intentionally blank.)
14
<PAGE>
(EXHIBIT 11)
CONCORDE CAREER COLLEGES, INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
BASIC EPS DILUTED EPS
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding............. 7,632,000 7,124,000 7,632,000 7,124,000
Options......................................... 1,070,000
---------- ---------- ---------- ----------
Adjusted Weighted Average Shares................ 7,632,000 7,124,000 7,632,000 8,194,000
---------- ---------- ---------- ----------
Net Income (Loss)............................... $ (362,000) $ 89,000 $ (362,000) $ 89,000
Class B Preferred Dividends-Imputed............. (38,000) (33,000) (38,000) (33,000)
---------- ---------- ---------- ----------
Income (Loss) Available to Common Shareholders.. $ (400,000) $ 56,000 $ (400,000) $ 56,000
---------- ---------- ---------- ----------
Earnings (Loss) per Weighted Average Shares..... $ (0.05) $ 0.01 $ (0.05) $ 0.01
========== ========== ========== ==========
</TABLE>
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