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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, 1998
Commission file number 0-16992
CONCORDE CAREER COLLEGES, INC.
(Exact name of registrant as specified in its charter)
5800 Foxridge, Suite 500
Mission, Kansas 66202
Telephone: (913) 831-9977
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 24, 1999:
7,840,326 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 $1,945,000 as of March 24, 1999. Part III
incorporates information by reference to the Registrant's definitive proxy
statement for Annual Meeting of Stockholders to be held May 28, 1999.
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CONCORDE CAREER COLLEGES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Index
Item Page
- ---- ----
<S> <C>
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-8
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
7A. Quantitative and Qualitative Disclosures about Risk................. II-12
8. Financial Statements and Supplementary Data......................... II-13
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................... II-36
10. Exhibit 23 - Consent of Independent Accountants..................... II-37
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
</TABLE>
<PAGE>
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; 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 following
should be read in conjunction with Part II, Item 7 - Safe Harbor Statement.
Also see Part II 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, 1998, 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 Part II
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company was formed in 1988 as a Delaware corporation. Prior to March
31, 1988, the Company was the career college division of CenCor, Inc.
("CenCor"). The Company's principal office is located at 5800 Foxridge, Suite
500, Mission, Kansas 66202 (telephone: 913/831-9977). Unless otherwise
indicated, the term "Company" refers to Concorde Career Colleges, Inc. and its
direct and indirect wholly owned subsidiaries.
Recent Events
Dr. Robert Roehrich the Company's President, Chief Executive Officer and a
member of the Company's Board of Directors, resigned effective November 12,
1998. Jack L. Brozman, the Chairman of the Board was appointed President and
Chief Executive Officer.
On October 20, 1998 the Company announced that its Miami, Florida campus
would close during the second quarter of 1999. The Miami building lease expires
April 30, 1999 and the landlord was unwilling to renew the lease. The Miami
campus accounted for 2.9% of the Company's revenue and 2.4% of the student
population as of December 31, 1998.
During 1998 the Company signed agreements to enter into a lease for a new
building being constructed in Garden Grove, California. The Company will move
its existing Anaheim campus to the new facility when construction is completed
in 1999.
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.
Part I - Page 1
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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, Insurance Coding Specialist, Dental Assistant, Dental Lab
Technician and Patient Care Technician. 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/programs, including
Limited X-Ray, Expanded Duties for Dental Assistants, Insurance Coding, Clinical
Lab Assistant, Patient Care Assistant, Nurse 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 eighteen months and include from 720 to 2,265 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 18% 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 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 from the instruction provided by the Campus and the
student's level of motivation to complete the program.
The admissions criteria for the Campuses 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, 1998, the Company had approximately 2,800 students in
attendance at the Campuses.
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. The
Vocational Nursing Program is also offered on weekends at some Campuses.
If a student terminates prior to completing a program, federal and state
regulations 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 placement personnel at each Campus, provides job
placement assistance services for its graduates.
Part I - Page 2
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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' 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 Executive
Vice President, Chief Operating Officer (the "COO"); Vice President,
Compliance/Financial Aid; Vice President, Chief Financial Officer; Vice
President, Human Resources; Director, Information Technology; Director of
Curriculum Planning and Development; and National Education Specialist.
Each Campus is operated independently and is managed on site by a Campus
Director reporting to the COO. In addition, each Campus is staffed with a
Financial Aid Director, Director of Admissions, Academic Dean, Director of
Graduate Services, Director of Business Services, several other support staff
and a Director of Student Services at some locations. 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 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
("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."
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, Commission on Accreditation of
Health Education Programs, Committee on Accreditation for Respiratory Care, the
Commission on Dental Accreditation, the Committee on Dental Auxiliaries-
California Board of Dental Examiners, Accreditation Review Committee on
Education in Surgical Technology, 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, such as the Vocational or
Practical Nurse and Respiratory Therapy programs offered by certain of the
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 $17,000.
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. In October 1998, the U.S. Congress enacted
legislation extending the Act until September 30, 2004. Generally all of the
material program provisions and requirements remain in the same form and funding
was authorized at the same or higher levels. The legislation did make several
changes to Title IV programs including an increase in the amount of revenues an
institution may
Part I - Page 3
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derive from the Title IV programs. This regulation, generally referred to as the
85/15 rule, was modified to allow slightly higher reliance on Title IV funding
after October 1, 1998 (90%). In addition, revisions to the change of ownership
or control regulations now may allow an institution to continue uninterrupted
participation in the Title IV programs provided it meets certain substantive and
procedure requirements.
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 1998, 79% of Campus' 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 1998-99 award year is $3,000 ($3,125 for 1999-2000). 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 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. 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
Part I - Page 4
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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 an
institution to participate in the FFEL program 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 FFEL eligibility.
The following table sets forth the 1994, 1995, and 1996, 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 ED from using 1990 and 1991 Cohort Default Rates as grounds to
limit, suspend, or terminate the Campus' eligibility to participate in the FFEL
program. The Company has a pending suit against the ED challenging past cohort
default rates. See Item 3, "Legal Proceedings."
<TABLE>
<CAPTION>
Cohort Default Cohort Default
Rates Rates
Campus 1994 1995 1996 1994 1995 1996
---- ---- ---- ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Anaheim, CA 24.8 26.1 20.5 North Hollywood, CA 20.1 21.3 14.0
Denver, CO 18.7 18.2 16.4 Portland, OR 20.1 12.7 19.3
Jacksonville, FL 17.6 19.8 27.9 San Bernardino, CA 23.8 27.5 19.9
Kansas City, MO 14.7 18.2 19.6 San Diego, CA(2) 28.4 23.9 15.7
Lauderdale Lakes, FL 21.2 27.3 20.7 Tampa, FL 14.9 19.6 25.7
Miami, FL (1) 14.9 19.6 25.7
Memphis, TN 22.1 23.8 24.5
</TABLE>
(1) The Miami Campus is an additional location of the Tampa Campus.
(2) 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%. 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 185 and 200
at December 31, 1998 and 1997, respectively. The San Diego Campus accounted for
approximately 7 percent of the Company's total student population as of December
31, 1998.
The Company's Campuses received official 1996 Cohort Default Rates (the
"CDR") from ED during 1998. Three of the Company's Campuses have 1996 default
rates greater than 25%. 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. The Company appealed the 1996 CDR's for
erroneous data and servicing errors. The Company has not yet received responses
to several of the appeals including the erroneous data and servicing errors
appeals at Jacksonville and servicing errors appeals at Miami and Tampa. 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 loan programs. In addition,
each Campus contracts with a professional loan management company to provide
further assistance to former students upon graduation or withdrawal.
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
Part I - Page 5
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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 will 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 the zone requirements.
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 Company believes that the placement
statistics issue will 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 is not aware of any material violation by the Company of
applicable local, state and federal laws.
Tax Reform Act of 1997
In August 1997, Congress passed the Tax Reform Act of 1997 that added
several new tax credits and incentives for students and extended benefits
associated with educational assistance programs. The Hope Scholarship Credit
provides up to $1,500 tax credit per year per eligible student for tuition
expenses in the first two years of postsecondary education in a degree or
certificate program. The Lifetime Learning Credit provides up to $1,000 tax
credit per year per taxpayer return for tuition expenses for all postsecondary
education, including graduate studies. Both of these credits are phased out for
taxpayers with modified adjusted gross income between $40,000 and $50,000
($80,000 and $100,000 for joint returns) and are subject to other restrictions
and limitations. The Act also provides for the deduction of interest from gross
income on education loans and limited educational IRA's for children under the
age of 18. These deductions are also subject to adjusted gross income
limitations and other restrictions. These new provisions became effective for
the 1998 calendar year. The Company is unsure if these additional tax benefits
will have any effect on future enrollments.
Competition
Part I - Page 6
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The Campuses are subject to 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'
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' 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, 1998, the Company had approximately 619 full and part-
time employees, of which approximately 312 were faculty members at its Campuses.
The Company has 256 management and administrative staff members, of which 220
are employed at the Campuses, and 36 are employed at corporate headquarters. The
remaining 51 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 Mission, Kansas. All
Company facilities are leased.
The following table sets forth the location, approximate square footage and
expiration of lease terms for each of the Campuses as of December 31, 1998:
<TABLE>
<CAPTION>
Square
Locations Footage Expiration (1)
- ---------------------------------- ------- --------------
<S> <C> <C>
Anaheim, CA (2)................. 17,989 1-31-99
Garden Grove, CA (2) (3)........ 25,931 8-31-14
North Hollywood, CA............. 35,155 12-31-11
San Bernardino, CA.............. 16,950 6-30-00
San Diego, CA................... 12,244 10-31-00
Denver, CO...................... 17,329 1-31-03
Lauderdale Lakes, FL............ 14,016 5-31-00
Jacksonville, FL................ 12,305 7-31-03
Miami, FL....................... 8,767 4-30-99
Tampa, FL....................... 14,200 12-31-00
Kansas City, MO................. 18,097 2-28-01
Mission, KS (Corporate Office).. 14,384 7-31-03
Portland, OR.................... 15,246 10-31-99
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) The Anaheim Campus will be moved to the new Garden Grove facility in 1999.
The Company currently rents the Anaheim space on a monthly basis.
(3) The Garden Grove lease was effective September 1, 1998 however no lease
payments are due until a Certificate of Occupancy
Part I - Page 7
<PAGE>
is issued, therefore the lease expiration date is estimated. The Company
anticipates construction to be completed in summer or fall of 1999.
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, 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 ED challenging past cohort default
rates published for the Company's Campuses and the rate correction regulations,
which 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 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 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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Part I - Page 8
<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>
1998 High Low
---- ----- -----
<S> <C> <C>
First Quarter......................................... $2.44 $1.63
Second Quarter........................................ $2.13 $1.75
Third Quarter......................................... $1.94 $0.69
Fourth Quarter........................................ $1.06 $0.50
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
At December 31, 1998, there were 253 shareholders of record of the Common
Stock.
</TABLE>
On March 24, 1999, the bid and asked prices of the Company's Common Stock
on the OTCBB were $.56 and $.81 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 Part II Item 7, "Liquidity and Capital
Resources -- CenCor Agreement."
Item 6. Selected Financial Data
The following data should be read in conjunction with Part II Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Part II Item 8, "Financial Statements and Supplementary Data."
Change in Accounting Principle
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 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.
Part II - Page 1
<PAGE>
The following selected data has been derived from the Company's audited
financial statements for the years ended 1994 through 1998.
<TABLE>
<CAPTION>
Years Ended December 31/(5)/
----------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands, except for per share data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues............................................. $34,306 $37,715 $40,119 $39,274 $35,032
Operating expenses................................... 36,076 36,926 39,254 36,835 34,173
Operating income..................................... (1,770) 789 865 2,439 859
Interest expense..................................... 188 454 371 659 1,065
Gain (loss) on sale of assets........................ 313 (217)
Income (loss) before change in accounting principle.. (1,212) 936 549 1,599 (6)
Basic earnings (loss) per share before change in
accounting principle (1)............................ $ (.19) $ .28 $ .05 $ .19 $ (.00)
Diluted earnings (loss) per share before change in
accounting principle (1)............................ $ (.19) $ .20 $ .04 $ .18 $ (.00)
Net income (loss).................................... (1,212) 277 549 1,599 (6)
Basic earnings (loss) per share (1).................. $ (.19) $ .19 $ .05 $ .19 $ (.00)
Diluted earnings (loss) per share (1)................ $ (.19) $ .14 $ .04 $ .18 $ (.00)
Balance Sheet Data:
Total assets......................................... $21,235 $25,524 $24,282 $25,564 $26,238
Long-term debt (2)................................... 3,500 3,500 2,419 4,066 3,954
Stockholders' equity................................. 5,536 6,735 6,772 6,674 5,075
<CAPTION>
December 31
----------------------------------------------------
Other Data: 1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of locations (3)............................. 12 12 12 13 13
------- ------- ------- ------- -------
Net enrollments (4)................................. 4,823 6,367 6,855 7,121 6,701
</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.
(The remainder of this page was left blank intentionally.)
Part II - Page 2
<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,
-------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
(In thousands)
Health Vocational Programs.... $34,306 $37,638 $38,819
CPA Review Courses and other.. 0 77 1,300
------- ------- -------
Total......................... $34,306 $37,715 $40,119
======= ======= =======
</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,
------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Health Vocational Programs........................ 100.0% 99.8% 96.8%
CPA Review Courses and other...................... .0 .2 3.2
----- ----- -----
Total....................................... 100.0 100.0 100.0
Operating expenses:
Instruction costs and services.................. 37.3 35.1 32.9
Selling and promotional......................... 16.2 14.3 13.4
General and administrative...................... 47.8 44.7 43.5
Provision for uncollectable accounts............ 3.8 3.8 8.1
----- ----- -----
Total....................................... 105.1 97.9 97.9
Operating Income (Loss).......................... (5.1) 2.1 2.1
Interest expense.................................. .5 1.2 .9
----- ----- -----
Income (Loss) before income taxes and gain
on sale of assets................................ (5.6) 0.9 1.2
Gain (Loss) on sale of assets..................... 0.8 (.5)
----- ----- -----
Income (Loss) before income tax................... (5.6) 1.7 .7
Provision (benefit) for income tax................ (2.2) (.8) (.6)
----- ----- -----
Income (Loss) before cumulative effect of change
in accounting principle.......................... (3.4) 2.5 1.3
Cumulative effect of change in revenue
recognition method............................... (1.8)
----- ----- -----
Net income (Loss)................................. (3.4)% .7% 1.3%
===== ===== =====
</TABLE>
(The remainder of this page left intentionally blank.)
Part II - Page 3
<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 and 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
The Company's poor performance during 1998 was a result of decreased
student population. The average monthly student population decreased to
approximately 3,300 during 1998 from 4,100 in 1997. The student population was
2,800 at December 31, 1998. The student population decrease was primarily due to
a reduction in new students seeking admission into the Company's campuses. The
Company altered its' advertising program in late 1997 and early 1998. This
included hiring a full service advertising agency and adjusting the advertising
strategy. These changes resulted in additional advertising expense and
generated fewer student inquiries.
The Company has since taken the following steps in an effort to
increase enrollments; a new advertising program was implemented including new
television and print ads, a new National Director of Student Recruitment was
hired, a new student recruitment training program was implemented, and a
marketing consultant was retained to improve advertising results. In addition,
the Company hired a new advertising agency with proprietary school experience to
coordinate advertising for 1999. The Company continues to evaluate the
effectiveness of its advertising program and will make changes as necessary
during 1999.
Part II - Page 4
<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 administrative costs.
Dr. Robert Roehrich the Company's President, Chief Executive Officer and a
member of the Company's Board of Directors, resigned effective November 12,
1998. Jack L. Brozman, the Chairman of the Board was appointed President and
Chief Executive Officer.
On October 20, 1998 the Company announced that its Miami, Florida campus
would close during the second quarter of 1999. The Miami building lease expires
April 30, 1999 and the landlord was unwilling to renew the lease. The Miami
campus accounted for 2.9% of the Company's revenue and 2.4% of the student
population as of December 31, 1998. The Company reserved $180,000 in 1998 for
the closing.
During 1998 the Company signed agreements and entered into a lease for a
new building being constructed in Garden Grove, California. The Company will
move its existing Anaheim campus to the new facility when construction is
completed in 1999.
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 attain
profitability and maintain its 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 Part I Item 1, "Business -- Financing Student Education," and
"Business -- Regulation."
Operating Results
1998 compared to 1997
The Company recorded a net loss of $1,212,000 for the year ended December
31, 1998, compared to net income of $277,000 for the same period in 1997.
During 1997, the Company recorded a charge of $659,000, net of tax, for a
cumulative change in revenue recognition and a gain on sale of assets of
$313,000.
Total revenue decreased 9.0% or $3,409,000 to $34,306,000 from $37,715,000
in 1997. The revenue decrease was due to decreased starts and continuing
student population compared to 1997.
Total operating expenses decreased $850,000 or 2.3% to $36,076,000 compared
to $36,926,000 in 1997.
Instruction Costs and Services - decreased $430,000 to $12,801,000 compared
to $13,231,000 in 1997. The decrease was due to fewer students which resulted
in decreased textbook, uniform and classroom expenses compared to 1997.
Selling and Promotional - increased $148,000 to $5,554,000 compared to
$5,406,000 in 1997. The increase was due to increased advertising expense
compared to 1997.
General and Administrative - decreased $446,000 or 2.6% to $16,407,000
compared to $16,853,000 in 1997. The decrease is primarily due to reduced
professional fees compared to 1997.
Provision for Uncollectable Accounts - decreased $122,000 or 8.5% to
$1,314,000 from $1,436,000 in 1997. The Company recovered approximately
$433,000 in previously written off accounts during 1998. The offsetting
increase was due to additional bad debt accrual expense compared to 1997.
Approximately $95,000 of the bad debt accrual increase was due to additional
notes at the San Diego, Campus. See Part II, "Cash Flows and Other".
Interest Expense - decreased $266,000 to $188,000 compared to $454,000 in
1997. The majority of the decrease was due to the Company recording $175,000
of interest expense in 1997 related to state and local tax liabilities.
Part II - Page 5
<PAGE>
Gain from Sale - In 1997, the gain from the sale of the Company's Michigan
property was $313,000 before any tax effect.
Provision for Income Taxes - The Company recorded a tax benefit of $746,000
in 1998 compared to $288,000 in 1997. During 1997, as a result of settlement of
outstanding tax issues, the Company released book tax contingencies totaling
$650,000.
EPS and Weighted Average Common Shares - Weighted average common shares
increased to 7,181,000 in 1998 from 7,034,000 in 1997 for basic earnings per
share ("EPS") and decreased to 7,181,000 in 1998 from 11,115,000 in 1997 for
dilutive EPS. Basic loss per share before accounting change was $0.19 for the
year ended December 31, 1998. Basic EPS before accounting change was $0.28 for
the same period in 1997. Basic earnings (loss) per share is shown after a
reduction of preferred stock dividends of $142,000 in 1998 and 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. Diluted loss per share before
accounting change was $0.19 for the year ended December 31, 1998, and diluted
earnings per share before accounting change was $0.20 for the same period in
1997. Diluted earnings (loss) per share is shown after a reduction of preferred
stock dividends of $142,000 in 1998 and 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.
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.
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
Part II - Page 6
<PAGE>
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. 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.
Part II - Page 7
<PAGE>
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.
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, 1997 and 1998 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.
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. The commitment 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 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. No warrants were exercised as of December 31,
1998. Approximately $4.4 million of the Cahill-Warnock transaction funds were
Part II - Page 8
<PAGE>
used to satisfy CenCor obligations.
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 was $142,000 and
$105,000 for the years ended December 31, 1998 and 1997, respectively. Each
share of Voting Preferred Stock is convertible into 20 shares of common stock at
the election of the holder for no additional consideration. There is no
mandatory redemption date.
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 December 31, 1998.
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 replacement 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 flows used for operating activities was $1,446,000 in 1998
compared to $1,157,000 cash provided by operating activities in 1997. The
Company received income tax refunds of $991,000 in 1998. The decreased cash
flow is a result of less profitable operations due to decreased student
enrollment during 1998 compared to 1997.
Capital expenditures in 1998 were $1,527,000 compared to $1,417,000 in
1997. For both years, expenditures were primarily for additional computer
equipment, 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 $13,000 compared to a $367,000 increase in 1997. This
change 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.
The San Diego Campus lost eligibility to participate in the Family Federal
Education Loan (the "FFEL") program during 1997, see Part II, "Contingencies".
During 1998 the Campus offered financing directly to students. This financing
increased the Campus' notes receivable approximately $280,000. Cash collections
for the Campus will be deferred over the length of the notes receivable. The
average length of these notes is approximately 27 months.
Contingencies
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
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.
Part II - Page 9
<PAGE>
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 last 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 185 or
approximately 7 percent of the Company's total student population as of December
31, 1998.
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 Company believes that the
placement statistics issue will affect all companies operating in the
proprietary education industry. If the Company agreed to change its calculation
and disclosure of placement statistics, the changes would result in additional
costs and the Company would be placed in a competitive disadvantage. 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.
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 Part I Item 3, "Legal
Proceedings.")
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.
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.
Part II - Page 10
<PAGE>
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 currently assessing the readiness of its significant
suppliers, business partners, banking agencies and governmental agencies to
determine the extent to which the Company may be vulnerable in the event that
those parties fail to properly address Y2K issues. Although no method exists for
achieving certainty that any business' significant partners will function
without disruption in the year 2000, the Company's goal is to obtain as much
information as possible about its significant partners' Y2K plans. The Company
will identify those companies that appear to pose a significant risk of failure
to perform their obligations to the Company as a result of Y2K issues. The
Company expects to have compiled detailed information regarding all of its
significant business partners by fall 1999.
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.
The Company's non-computer equipment is primarily utilized for the
instruction of allied health curriculum and procedures. The majority of these
systems are used in the simulation of services, not the actual delivery of
health care services. The Company is beginning the process of taking inventory
of and will test significant non-computer equipment to determine if it is date
sensitive. Where appropriate the Company will seek contractual protections or
make contingency plans in an effort to minimize any adverse effect on such
equipment due to Y2K issues. The Company plans to have completed the inventory
of non-computer equipment by the summer of 1999.
Spending for modifications are being expensed as incurred and is not
expected to have a material impact on the Company's results of operations or
cash flows. The Company does not believe that any specific IT projects have been
deferred as a result of its Y2K efforts. As of December 31, 1998 the Company's
costs associated specifically with the Y2K problem have not been material, nor
does the Company expect to incur any material costs in the future with respect
to its own readiness.
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
Part II - Page 11
<PAGE>
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.
New Account 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.
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. FAS 131 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. FAS 131 did not have
any impact on the Company's financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Risk.
Not required.
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Part II - Page 12
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Concorde Career Colleges, Inc. and Subsidiaries:
Report of Independent Accountants......................................................................... II-14
Consolidated Balance Sheet--December 31, 1998 and 1997.................................................... II-15
Consolidated Statement of Operations--For the Three Years Ended December 31, 1998......................... II-17
Consolidated Statement of Cash Flows--For the Three Years Ended December 31, 1998......................... II-19
Consolidated Statement of Changes In Stockholders' Equity--For the Three Years Ended December 31, 1998.... II-20
Notes to Consolidated Financial Statements--For the Three Years Ended December 31, 1998................... II-21
</TABLE>
(The remainder of this page was left blank intentionally.)
Part II - Page 13
<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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, 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.
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 1, 1999
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Part II - Page 14
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998 and 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................... $ 2,433,000 $ 5,393,000
Net receivables (Note 4)
Accounts receivable......................... 9,198,000 10,523,000
Notes receivable............................ 4,071,000 3,758,000
Allowance for uncollectable accounts........ (1,696,000) (1,309,000)
----------- -----------
11,573,000 12,972,000
Recoverable income taxes.................... 799,000 340,000
Deferred income taxes (Note 8).............. 824,000 916,000
Supplies and prepaid expenses............... 784,000 794,000
----------- -----------
Total current assets............... 16,413,000 20,415,000
FIXED ASSETS, NET (Note 5)...................... 3,234,000 2,533,000
INTANGIBLE ASSETS, NET (Note 3).................. 435,000 594,000
----------- -----------
OTHER ASSETS:
Long-term notes receivable (Note 4)......... 996,000 1,992,000
Allowance for uncollectable notes (Note 4).. (183,000) (616,000)
Other....................................... 340,000 383,000
Deferred income taxes (Note 8).............. 223,000
-----------
Total other assets...................... 1,153,000 1,982,000
----------- -----------
$21,235,000 $25,524,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 15
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Deferred student tuition...................................................... $ 8,722,000 $10,878,000
Accrued salaries and wages.................................................... 680,000 821,000
Accrued interest.............................................................. 179,000 190,000
Accounts payable and other accrued liabilities (Note 6)....................... 2,147,000 3,040,000
----------- -----------
Total current liabilities........................................... 11,728,000 14,929,000
LONG-TERM LIABILITIES.............................................................. 332,000 360,000
DEFERRED INCOME TAXES (Note 8)..................................................... 139,000
SUBORDINATED DEBT DUE TO RELATED PARTY CAHILL-WARNOCK.............................. 3,500,000 3,500,000
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 5, 7, 9, and 11)
STOCKHOLDERS' EQUITY (Note 7):
Preferred Stock, ($.10 par value, 600,000 shares authorized)
Class B, 55,147 shares issued and outstanding............................ 6,000 6,000
Common stock, $.10 par value, 19,400,000 shares authorized,
7,254,626 shares issued and 7,227,826 shares outstanding
in 1998 (7,129,976 shares issued and 7,103,176 shares
outstanding in 1997)..................................................... 725,000 713,000
Capital in excess of par...................................................... 8,143,000 8,000,000
Accumulated deficit........................................................... (3,277,000) (1,923,000)
Less--treasury stock, 26,800 shares, at cost.................................. (61,000) (61,000)
----------- -----------
Total stockholders' equity.......................................... 5,536,000 6,735,000
----------- -----------
$21,235,000 $25,524,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 16
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET REVENUES...................................................... $34,306,000 $37,715,000 $40,119,000
COSTS AND EXPENSES:
Instruction costs and services.................................. 12,801,000 13,231,000 13,181,000
Selling and promotional......................................... 5,554,000 5,406,000 5,392,000
General and administrative...................................... 16,407,000 16,853,000 17,448,000
Provision for uncollectable accounts............................ 1,314,000 1,436,000 3,233,000
----------- ----------- -----------
Total Expenses.................................................. 36,076,000 36,926,000 39,254,000
----------- ----------- -----------
OPERATING INCOME (LOSS)........................................... (1,770,000) 789,000 865,000
INTEREST EXPENSE.................................................. 188,000 454,000 371,000
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND GAIN (LOSS) ON SALE......... (1,958,000) 335,000 494,000
GAIN (LOSS) ON SALE OF ASSETS..................................... 313,000 (217,000)
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................................. (1,958,000) 648,000 277,000
BENEFIT FOR INCOME TAXES.......................................... (746,000) (288,000) (272,000)
----------- ----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.............................................. (1,212,000) 936,000 549,000
CUMULATIVE EFFECT ON PRIOR YEARS (TO DECEMBER 31,
1996) OF CHANGE IN REVENUE RECOGNITION METHOD,
NET OF TAX........................................................ (659,000)
----------- ----------- -----------
NET INCOME (LOSS)................................................. $(1,212,000) $ 277,000 $ 549,000
=========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic........................................................... 7,181,000 7,034,000 6,967,000
Diluted......................................................... 7,181,000 11,115,000 7,829,000
BASIC EARNINGS (LOSS) PER SHARE: (Note 10)
Income (Loss) before cumulative effect of change in accounting
principle...................................................... $ (.19) $ .28 $ .05
Cumulative effect on prior years (to December 31, 1996) of
change in revenue recognition method........................... (.09)
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE....................................... $ (.19) $ .19 $ .05
=========== =========== ===========
(Continued)
</TABLE>
Part II - Page 17
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
DILUTED EARNINGS (LOSS) PER SHARE: (Note 10)
Income (Loss) before cumulative effect of change in accounting
principle..................................................... $ (.19) $ .20 $ .04
Cumulative effect on prior years (to December 31, 1996) of
change in revenue recognition method.......................... (.06)
----------- -------- --------
NET INCOME (LOSS) PER SHARE.......................................... $ (.19) $ .14 $ .04
=========== ======== ========
PRO FORMA AMOUNTS ASSUMING THE NEW METHOD OF
RECOGNIZING REVENUE IS APPLIED RETROACTIVELY (NOTE 2):
Net Income (Loss)............................................... $(1,212,000) $936,000 $546,000
Net Income (Loss) Per Common Share:
Basic.................................................... $ (.19) $ .28 $ .05
=========== ======== ========
Diluted.................................................. $ (.19) $ .20 $ .04
=========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
(The remainder of this page left intentionally blank.)
Part II - Page 18
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Years Ended December 31, 1998
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES:
Net income (Loss)........................................... $(1,212,000) $ 277,000 $ 549,000
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............................... 985,000 1,185,000 1,306,000
Provision for uncollectable accounts........................ 1,314,000 1,436,000 3,233,000
Cumulative effect of change in accounting principle......... 659,000
Deferred income taxes....................................... 454,000 (89,000) (1,149,000)
Change in assets and liabilities--
(Increase) decrease in receivables, net..................... 648,000 (1,408,000) (1,821,000)
Decrease in deferred student tuition........................ (2,156,000) (189,000) (5,000)
Other changes in assets and liabilities, net................ (1,020,000) 378,000 290,000
(Increase) decrease in income taxes payable/recoverable..... (459,000) (779,000) (32,000)
----------- ----------- -----------
Total adjustment.......................................... (234,000) 880,000 2,039,000
----------- ----------- -----------
Net operating activities............................... (1,446,000) 1,157,000 2,588,000
----------- ----------- -----------
CASH FLOWS -- INVESTING ACTIVITIES:
Proceeds from sale of assets................................ 1,025,000 929,000
Capital expenditures........................................ (1,527,000) (1,417,000) (547,000)
----------- ----------- -----------
Net investing activities................................ (1,527,000) (392,000) 382,000
----------- ----------- -----------
CASH FLOWS -- FINANCING ACTIVITIES:
Principal payments on debt.................................. (2,819,000) (1,552,000)
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..................................... 13,000 14,000
----------- ----------- -----------
Net financing activities................................ 13,000 367,000 (2,004,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH and
CASH EQUIVALENTS............................................ (2,960,000) 1,132,000 966,000
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............. 5,393,000 4,261,000 3,295,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................... $ 2,433,000 $ 5,393,000 $ 4,261,000
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
CASH PAID DURING THE YEAR FOR:
Interest.................................................... $ 177,000 $ 264,000 $ 230,000
Income taxes................................................ $ 249,000 $ 653,000 $ 901,000
CASH RECEIVED DURING THE YEAR FOR:
Interest.................................................... $ 336,000 $ 468,000 $ 427,000
Income tax refunds.......................................... $ 991,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 19
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Years Ended
December 31, 1998
<TABLE>
<CAPTION>
Capital
Preferred Common in Excess Accumulated Treasury
Stock Stock of Par Deficit Stock
--------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
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)
Net Income (Loss)................................ (1,212,000)
Class B Preferred Stock Accretion................ 142,000 (142,000)
Stock Options Exercised.......................... 12,000 1,000
--------- -------- ----------- ----------- --------
BALANCE, December 31, 1998......................... $ 6,000 $725,000 $ 8,143,000 $(3,277,000) $(61,000)
========= ======== =========== =========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 20
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 1998
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 Campuses 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% of
the Company's revenues for the year ended December 31, 1996. 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, President and Chief Executive Officer 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 fulfilled in January 1998.
The Company under an agreement effective October 1995 subleases space to
CenCor. The Company and CenCor do not allocate charges to each other, otherwise
share expenses, or have balances owing to each other.
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
three $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.
Part II - Page 21
<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.
During 1998 the Company announced plans to close the Miami, Florida Campus
during 1999. The Company reserved approximately $180,000 in 1998 for the
closing. The Miami Campus will close after the remaining students have completed
the in-school portion of their education.
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 the Company's Campuses utilize state and federal
government grants and/or guaranteed student loan programs to finance their
tuition. During 1998 management estimates that 79 percent of its cash receipts
were derived from funds obtained by students through federal Title IV student
aid programs and 21 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
Campus and/or ceases to make payments. Internal collection efforts, as well as
outside professional services, are used to pursue collection of delinquent
accounts.
Presentation
During 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 receivable 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 $3,619,000 and $4,890,000 at December
31, 1998, and 1997, respectively. This change has also been reflected in the
statement of cash flows for 1998 and 1997.
Cash and Cash Equivalents
Cash and cash equivalents are those items with a 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.
Part II - Page 22
<PAGE>
Accounts Receivable and Notes Receivable
Accounts receivable 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, 1998, 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 20 years. The total amount of amortization
charged to income was $159,000 in 1998, $174,000 in 1997 and $223,000 in 1996.
Part II - Page 23
<PAGE>
3. Intangible Assets:
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Goodwill............................... $ 913,000 $1,511,000
Other Intangible assets................ 222,000
---------- ----------
Total Intangible assets................ 913,000 1,733,000
Less accumulated amortization.......... 478,000 1,139,000
---------- ----------
Net intangibles...................... $ 435,000 $ 594,000
========== ==========
</TABLE>
4. Receivables:
Changes in the allowance for uncollectable accounts were as follows for the
year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning balance...................... $1,309,000 $ 1,645,000 $ 1,394,000
Provision for uncollectable accounts... 1,284,000 1,299,000 952,000
Charge-offs............................ (897,000) (1,635,000) (701,000)
---------- ----------- -----------
$1,696,000 $ 1,309,000 $ 1,645,000
========== =========== ===========
</TABLE>
Changes in the allowance for uncollectable notes were as follows for the year
ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning balance...................... $ 616,000 $ 1,243,000 $ 709,000
Provision for uncollectable notes...... 30,000 137,000 2,281,000
Charge-offs............................ (463,000) (764,000) (1,747,000)
---------- ----------- -----------
$ 183,000 $ 616,000 $ 1,243,000
========== =========== ===========
</TABLE>
5. Fixed Assets:
Fixed assets consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Furniture and equipment................ $5,583,000 $4,257,000
Leasehold improvements 2,535,000 2,437,000
---------- ----------
Gross fixed assets................... 8,118,000 6,694,000
Less Accumulated depreciation
and amortization...................... 4,884,000 4,161,000
---------- ----------
Net fixed assets..................... $3,234,000 $2,533,000
========== ==========
</TABLE>
Part II - Page 24
<PAGE>
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 $2,709,000 in 1998, $2,737,000 in 1997 and $2,640,000 in 1996. Aggregate
minimum future rentals payable under the operating leases at December 31, 1998,
were:
<TABLE>
<CAPTION>
<S> <C>
1999................................................................................... $2,515,000
2000................................................................................... $2,197,000
2001................................................................................... $1,653,000
2002................................................................................... $1,532,000
2003................................................................................... $1,028,000
2004 and thereafter.................................................................... $8,581,000
6. Accounts Payable and Other Accrued Liabilities:
Accounts Payable and Other Accrued Liabilities consist of the following at December 31:
1998 1997
---- ----
Accounts payable......................................................................... $ 696,000 $1,073,000
Accrued vacation......................................................................... 552,000 480,000
Other accrued liabilities................................................................ 476,000 429,000
Accrued compensation (other than salaries and wages)..................................... 227,000 227,000
Accrued other taxes...................................................................... 27,000 580,000
Accrued health expense................................................................... 169,000 251,000
---------- ----------
Accounts payable and accrued liabilities................................................. $2,147,000 $3,040,000
========== ==========
7. Long-Term Debt and Refinancing:
Long-term debt consists of the following at December 31: 1998 1997
---- ----
Secured debenture, five percent, due February 2003.......................................... 3,500,000 3,500,000
---------- ----------
Total long-term debt........................................................................ $3,500,000 $3,500,000
========== ==========
</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.
Part II - Page 25
<PAGE>
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 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. No warrants were exercised as of December 31,
1998.
Approximately $4.4 million of the Cahill-Warnock transaction funds were used to
satisfy CenCor obligations.
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 was $142,000 and $105,000
for the years ended December 31, 1998 and 1997, respectively. Each share of
Voting Preferred Stock is convertible into 20 shares of common stock at the
election of the holder for no additional consideration. There is no mandatory
redemption date.
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, 2000. 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 had not borrowed any funds under this
facility as of December 31, 1998. However, the available credit was reduced to
approximately $2,400,000 when the facility was amended on December 28, 1998. The
amendment reduced the maximum credit available by the stated amount of the
issued and outstanding letter of credit or replacement 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.
Based on the terms of the Company's debt, management estimates that the
carrying values of debt at December 31, 1998 and December 31, 1997 are not
materially different from their corresponding fair value.
The Company has a letter of credit outstanding in the amount of $30,000.
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
$30,000.
(The remainder of this page left intentionally blank.)
Part II - Page 26
<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, 1998,
consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- -----------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal...................... $(1,161,000) $(210,000) $ 769,000
State........................ (39,000) 11,000 108,000
----------- --------- -----------
(1,200,000) (199,000) 877,000
Deferred tax expense (benefit)
Federal................... 515,000 (134,000) (1,110,000)
State..................... (61,000) 45,000 (39,000)
----------- --------- -----------
454,000 (89,000) (1,149,000)
----------- --------- -----------
Tax provision (benefit)......... $ (746,000) $(288,000) $ (272,000)
=========== ========= ===========
</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, 1998, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Provision at federal statutory rate.. $(665,000) $ 220,000 $ 94,000
State taxes, net of federal benefit.. (120,000) 36,000 49,000
Goodwill amortization................ 52,000 39,000 59,000
Tax contingency release.............. (650,000)
Fixed assets basis adjustment........ 176,000
Valuation allowance release.......... (667,000)
Other, net........................... (13,000) 67,000 17,000
--------- --------- ---------
$(746,000) $(288,000) $(272,000)
========= ========= =========
</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.
(The remainder of this page left intentionally blank.)
Part II - Page 27
<PAGE>
Deferred tax assets and liabilities consisted of the following at December
31:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Credit losses............................................. $ 146,000 $ 693,000 $1,175,000
Deferred student tuition.................................. 297,000 396,000
AMT credit carryforward................................... 340,000
Depreciation and amortization............................. 150,000 90,000
Other expenses currently deductible for financial
reporting purposes but not for tax...................... 449,000 365,000 343,000
---------- ---------- ----------
Net assets.................................... 1,232,000 1,604,000 1,608,000
Depreciation and amortization............................... (248,000)
Other expenses currently deductible for tax but not for
financial reporting purposes............................ (299,000) (465,000) (979,000)
---------- ---------- ----------
Net........................................... $ 685,000 $1,139,000 $ 629,000
========== ========== ==========
</TABLE>
At December 31, 1998, deferred tax assets included $1,125,000 current
assets and $107,000 non-current assets and deferred tax liabilities included
$301,000 current liabilities and $246,000 non-current liabilities. Current
assets and current liabilities were combined as were non-current assets and non-
current liabilities for financial statement presentation.
9. Stock Option Plans:
During 1998 the Company's shareholders approved an employee stock purchase
plan (the "Purchase Plan"). The Purchase Plan allows employees of the Company to
purchase shares of the Company's common stock at periodic intervals, generally
quarterly, through payroll deductions. The purchase price per share is the lower
of 95% of the closing price on the offering commencement date or termination
date. The Purchase Plan expires in 2003 and permits a maximum of 50,000 shares
to be issued each year.
The Company has an incentive stock option plan (the "1998 Option Plan")
approved at the 1998 stockholders meeting authorizing issuance of 500,000 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. The 1998 Option Plan supplemented the previous plan (the "1988
Option Plan") which was authorized in 1988 and expired in 1998. On December 31,
1998 the Company had issued options for 445,100 shares from the 1988 Option Plan
of which 261,250 had been exercised. In addition, options for 154,900 unissued
shares expired with the plan.
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 exercise 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 following 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 officer
resigned during 1998. As a result, the option to purchase 345,000 of the shares
was cancelled during 1998. The remaining 230,000 shares expired in February
1999.
The Company applies Accounting Principles Board (APB) Opinion 25 and
related interpretations in accounting for its stock
Part II - Page 28
<PAGE>
option plans. Accordingly,no compensation expense has been recognized for the
1998 Option Plan or 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 1998, 1997,
and 1996 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 (loss) before cumulative
accounting change and basic and diluted earnings per share for the three years
ended December 31, 1998, 1997, and 1996 would have been as presented below:
<TABLE>
<CAPTION>
Pro forma EPS
Twelve Months Ended December 31,
----------------------------------------
1998 1997 1996
----------- -------- --------
<S> <C> <C> <C>
Pro forma income (loss) before
cumulative change in accounting
principle $(1,383,000) $355,000 $492,000
=========== ======== ========
Pro forma Basic Earnings Per Share $ (0.21) $ 0.20 $ 0.04
=========== ======== ========
Pro forma Diluted Earnings Per Share $ (0.21) $ 0.15 $ 0.04
=========== ======== ========
</TABLE>
The pro forma amounts were estimated using the Black-Scholes option-pricing
model with the following assumptions for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Weighted average expected life (years) 6 6 6
Expected Volatility 95% 98% 87%
Annual Dividend per share 0 0 0
Risk free interest rate 4.59% 5.74% 6.25%
Weighted average fair value of options granted $0.98 $0.98 $0.73
</TABLE>
The following table reflects activity in options for the three-year
period ended.
<TABLE>
<CAPTION>
Weighted-
Total average
(1) Number Exercise Option Price
1988 Plan 1994 Plan NQSO 1998 Plan of Shares Price per share
--------- ----------- -------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding December 31, 1995 458,000 600,000 1,058,000 $0.14 $0.10 to $0.28
Exercised 11,400 11,400 $0.10 $0.10
Canceled 50,000 50,000 $0.30 $0.10 to $0.59
Issued 84,500 84,500 $0.69 $0.55 to $1.06
------------------------------------------------------
Outstanding December 31, 1996 481,100 600,000 1,081,000 $0.17 $0.10 to $1.06
Exercised 136,600 136,600 $0.10 $0.10 to $0.13
Canceled 50,000 50,000 $0.34 $0.10 to $1.00
Issued 46,500 400,000 575,000 1,021,500 $1.24 $0.78 to $2.25
------------------------------------------------------
Outstanding December 31, 1997 341,000 1,000,000 575,000 1,916,000 $0.74 $0.10 to $2.25
Exercised 124,650 124,650 $0.11 $0.10 to $0.55
Canceled 41,500 345,000 386,500 $1.35 $0.10 to $2.06
Issued 176,500 176,500 $1.23 $0.84 to $1.81
------------------------------------------------------
Outstanding December 31, 1998 174,850 1,000,000 230,000 176,500 1,581,350 $0.56 $0.10 to $2.25
</TABLE>
(1) The 1988 Plan expired in 1998.
Part II - Page 29
<PAGE>
The following table reflects option information as of December 31, 1998.
<TABLE>
<CAPTION>
Shares Average Weighted Shares Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
(Years)
<S> <C> <C> <C> <C> <C>
$0.10 - $0.13 94,500 4.5 $0.11 94,500 $0.11
$0.15 600,000 0.1 $0.15 600,000 $0.15
$0.28 19,450 6.1 $0.28 13,615 $0.28
$0.55-$0.59 25,400 7.0 $0.58 15,860 $0.58
$0.78-$1.09 660,500 8.7 $1.04 169,400 $1.08
$1.15-$1.38 120,000 8.4 $1.37 -0- -0-
$1.62-$1.81 48,500 9.4 $1.81 -0- -0-
$2.06-$2.25 13,000 8.7 $2.22 -0- -0-
</TABLE>
(The remainder of this page left intentionally blank.)
Part II - Page 30
<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). The 1996 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, 1998, 1997, and 1996, is presented below:
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
Year Ended December 31, Year Ended December 31,
-------------------------------------- ---------------------------------------
1998 1997 1996 1998 1997 1996
----------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Shares Outstanding........ 7,181,000 7,034,000 6,967,000 7,181,000 7,034,000 6,967,000
Options.................................... 968,000 862,000
Debt/Non Detachable Warrants............... 2,179,000
Class B Preferred Stock.................... 934,000
----------- ---------- ---------- ----------- ----------- ----------
Adjusted Weighted Average Shares........... 7,181,000 7,034,000 6,967,000 7,181,000 11,115,000 7,829,000
----------- ---------- ---------- ----------- ----------- ----------
Income Before Accounting Change............ $(1,212,000) $ 936,000 $ 549,000 $(1,212,000) $ 936,000 $ 549,000
Class A Preferred Dividends................ (28,000) (216,000) (28,000) (216,000)
Class A Preferred Stock Redemption (1)..... 1,210,000 1,210,000
Class B Preferred Dividends Accretion...... (142,000) (105,000) (142,000)
Interest on Convertible Debt, net of tax... 92,000
----------- ---------- ---------- ----------- ----------- ----------
Income Available to Common Shareholders
Before Accounting Change.............. (1,354,000) 2,013,000 333,000 (1,354,000) 2,210,000 333,000
Cumulative Effect on Prior Years of
Accounting Change..................... 0 (659,000) 0 0 (659,000) 0
----------- ---------- ---------- ----------- ----------- ----------
Income Available to Common Shareholders.... $(1,354,000) $1,354,000 $ 333,000 $(1,354,000) $ 1,551,000 $ 333,000
=========== ========== ========== =========== =========== ==========
Income per share before accounting change.. (0.19) 0.28 0.05 (0.19) 0.20 0.04
Cumulative per share effect of accounting
change................................ 0.00 (0.09) 0.00 0.00 (0.06) 0.00
----------- ---------- ---------- ----------- ----------- ----------
Net income per share....................... $ (0.19) $ 0.19 $ 0.05 $ (0.19) $ 0.14 $ 0.04
=========== ========== ========== =========== =========== ==========
</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.
Part II - Page 31
<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. 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 Company believes that
the placement statistics issue will 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.
Department of Education Matters
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.
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 185 or approximately
7 percent as of December 31, 1998 and 200 or approximately 6 percent as of
December 31, 1997.
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
Part II - Page 32
<PAGE>
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.
The Company assessed each Campus' compliance with the regulatory provisions
contained in 34 CFR 600.5(d) - (e) for the year ended December 31, 1998. These
provisions state that the percentage of cash revenue derived by federal Title IV
student assistance program funds cannot exceed 85% of total cash revenues. This
is commonly referred to as the 85/15 Rule which was modified as part of the new
legislation extending the Higher Education Act of 1965, as amended. The
modifications, effective October 1, 1998, will allow slightly higher reliance on
Title IV funding, 90%. The following table sets forth the 1998 cash revenue
derived from federal Title IV student assistance 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 $2,779,000 $ 620,000 81.8%
Denver, CO 1,593,000 516,000 75.5
Jacksonville, FL 1,284,000 256,000 83.4
Kansas City, MO 1,629,000 402,000 80.2
Lauderdale Lakes, FL 2,176,000 558,000 79.6
Memphis, TN 2,889,000 610,000 82.6
North Hollywood, CA 4,212,000 1,084,000 79.5
Portland, OR 2,025,000 569,000 78.1
San Bernardino, CA 3,443,000 722,000 82.7
San Diego, CA 398,000 835,000 32.3
Tampa, FL (1) 2,320,000 487,000 82.7
</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. ("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
Part II - Page 33
<PAGE>
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.
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 will have a material
adverse effect on the Company's financial position or results of operation.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
(The remainder of this page left intentionally blank.)
Part II - Page 34
<PAGE>
12. Quarterly Financial Information (unaudited):
<TABLE>
<CAPTION>
1998 March 31 June 30 September 30 December 31
- ---- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenue......................................... $ 9,094,000 $8,339,000 $ 8,642,000 $ 8,231,000
=========== ========== =========== ===========
Income (loss) before income taxes......................... $ 145,000 $ (741,000) $ (355,000) $(1,007,000)
=========== ========== =========== ===========
Net income (loss)......................................... $ 89,000 $ (453,000) $ (216,000) $ (632,000)
=========== ========== =========== ===========
Basic Earnings (loss) per share........................... $ .01 $ (.07) $ (.04) $ (.09)
=========== ========== =========== ===========
Diluted Earnings (loss) per share......................... $ .01 $ (.07) $ (.04) $ (.09)
=========== ========== =========== ===========
1997
- ----
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)
=========== ========== =========== ===========
</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.
Part II - Page 35
<PAGE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
(The remainder of this page left intentionally blank.)
Part II - Page 36
<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.
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
1. Financial Statements:
Concorde Career Colleges, Inc. and Subsidiaries
Report of Independent Accountants................................. II-14
Consolidated Balance Sheet........................................ II-15
Consolidated Statement of Operations.............................. II-17
Consolidated Statement of Cash Flows.............................. II-19
Consolidated Statement of Changes In Stockholders' Equity......... II-20
Notes to Consolidated Financial Statements........................ II-21
2. Financial Statement Schedules:
</TABLE>
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:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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).
</TABLE>
Part IV - Page 1
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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.)
**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.)*
</TABLE>
Part IV - Page 2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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.)
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.)
</TABLE>
Part IV - Page 3
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S>
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).
</TABLE>
* Management contract or compensation plan.
**Previously filed.
b. Reports on Form 8-K
None.
Part IV - Page 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 26, 1999
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.
<TABLE>
<CAPTION>
Signature Date
--------- ----
<S> <C>
By /s/ JACK L. BROZMAN March 26, 1999
-----------------------------------------------------------------------------
Jack L. Brozman
(Chairman of the Board, Chief Executive Officer,
President, Treasurer and Director)
By /s/ PAUL R. GARDNER March 26, 1999
-----------------------------------------------------------------------------
Paul R. Gardner
(Vice President, Chief Financial Officer, and
Principal Accounting Officer)
By /s/ JAMES R. SEWARD March 26, 1999
-----------------------------------------------------------------------------
James R. Seward
(Director)
By /s/ THOMAS K. SIGHT March 26, 1999
-----------------------------------------------------------------------------
Thomas K. Sight
(Director)
By /s/ DAVID L. WARNOCK March 26, 1999
-----------------------------------------------------------------------------
David L. Warnock
(Director)
</TABLE>
Part IV - Page 5
<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 1, 1999, appearing in Part II, Page 14 in this Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 26, 1999
Part II - Page 37
<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>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 OCT-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 2,433,000 0
<SECURITIES> 0 0
<RECEIVABLES> 13,269,000 0
<ALLOWANCES> 1,696,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 16,413,000 0
<PP&E> 8,118,000 0
<DEPRECIATION> 4,884,000 0
<TOTAL-ASSETS> 21,235,000 0
<CURRENT-LIABILITIES> 11,728,000 0
<BONDS> 0 0
0 0
6,000 0
<COMMON> 725,000 0
<OTHER-SE> 4,805,000 0
<TOTAL-LIABILITY-AND-EQUITY> 21,235,000 0
<SALES> 34,306,000 8,231,000
<TOTAL-REVENUES> 34,306,000 8,231,000
<CGS> 0 0
<TOTAL-COSTS> 34,762,000 8,786,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 1,314,000 406,000
<INTEREST-EXPENSE> 188,000 46,000
<INCOME-PRETAX> (1,958,000) (1,007,000)
<INCOME-TAX> (746,000) (375,000)
<INCOME-CONTINUING> (1,212,000) (632,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,212,000) (632,000)
<EPS-PRIMARY> (0.19) (.09)
<EPS-DILUTED> (0.19) (.09)
</TABLE>
