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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 1999 Commission File No. 0-16992
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CONCORDE CAREER COLLEGES, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 43-1440321
- ------------------------ -----------------------------
(State of other jurisdiction of (I. R. S. Employer
Incorporation or Organization) Identification Number)
5800 Foxridge, Suite 500
Mission, Kansas 66202
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (913) 831-9977
-----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.10 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No _____ (2) Yes X No _____
----- -----
As of October 6, 1999 Concorde Career Colleges, Inc. had 7,878,526 shares of
Common Stock outstanding.
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CONCORDE CAREER COLLEGES, INC.
Form 10-Q
Three and Nine Months Ended September 30, 1999
INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
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<S> <C>
Item 1. Financial Statements
Notes to Condensed Consolidated Financial Statements
Note 1 and 2................................................................... 1
Condensed Consolidated Balance Sheets................................................. 2,3
Condensed Consolidated Statements of Operations....................................... 4
Condensed Consolidated Statements of Cash Flows....................................... 5
Consolidated Statement of Changes in Stockholders' Equity............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 7
Item 3. Qualitative and Quantitative Disclosure About Risk.................................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 13
Item 2. Change in Securities.................................................................. 14
Item 3. Defaults Upon Senior Securities....................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................... 14
Item 5. Other Information..................................................................... 14
Item 6. Exhibits and Reports on Form 8-K...................................................... 14
Signatures...................................................................................... 15
</TABLE>
<PAGE>
Part 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
Overview
The discussion set forth below, as well as other portions of this Form 10-Q
may be deemed to contain forward-looking statements under the Private Securities
Litigation Reform Act of 1995. The Company intends that such forward-looking
statements be subject to the ``safe-harbor'' provisions of that act. Such
comments are based upon information currently available to management and
management's perception thereof as of the date of this Form 10-Q. Forward-
looking statements regarding economic conditions, efforts of employees, year to
year improvements, effects of corporate initiatives, future profitability,
projections, future revenue opportunities, and their impact on 1999 are forward-
looking statements and not historical facts. These statements are estimates or
projections involving numerous risks or uncertainties, including but not limited
to, consumer demand, acceptance of services offered by the Company, the
Company's ability to maintain current expense and revenue levels, actions by
competitors, impairment of federal funding, legislative action, student default
rates, changes in federal or state authorization or accreditation, changes in
market needs and technology, political or regulatory matters, litigation,
general economic conditions, changes in management strategy and the Company's
ability to leverage its curriculum and management infrastructure to build its
student base. Actual results or events could differ materially from those
discussed in the forward-looking statements.
Notes to Financial Statements
Note 1:
- ------
The condensed interim consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared according to generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's 1998 Annual Report on Form 10-K that was filed by the Company with the
Commission on March 31, 1999 (the "1998 Form 10-K").
The information included in these interim financial statements reflects all
normal recurring adjustments that are, in the opinion of management, necessary
to fairly state the results of the periods presented. Annualization of amounts
in these interim financial statements may not necessarily be indicative of the
actual operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
has litigation pending which arose in the normal course of business. See further
discussion in Part I, Item 2 - "Contingencies", and Part II, Item 1 - "Legal
Proceedings".
Note 2:
- ------
Basic earnings per share is computed by deducting imputed preferred
dividends from net income or loss. This amount is then divided by weighted
average number of common shares outstanding.
Diluted earnings per share is computed by deducting imputed preferred
dividends from net income or loss. This amount is then divided by the weighted
average number of common shares outstanding during the year after giving effect
for common stock equivalents (if dilutive) arising from stock options and for
warrants and preferred stock assumed converted to common stock.
1
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................. $ 2,289,000 $ 2,433,000
Accounts receivable................................... 14,527,000 9,198,000
Notes receivable...................................... 2,693,000 4,071,000
Allowance for uncollectible accounts.................. (1,650,000) (1,696,000)
------------- ------------
Net receivables....................................... 15,570,000 11,573,000
Recoverable income taxes.............................. 619,000 799,000
Deferred income taxes................................. 824,000 824,000
Supplies and prepaid expenses......................... 873,000 784,000
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Total current assets 20,175,000 16,413,000
FIXED ASSETS, NET:...................................... 3,017,000 3,234,000
INTANGIBLE ASSETS, NET
less accumulated amortization of $523,000 at
September 30, 1999
and $478,000 at December 31, 1998, respectively....... 390,000 435,000
OTHER ASSETS:
Long-term notes receivable............................ 1,372,000 996,000
Allowance for uncollectible notes..................... (132,000) (183,000)
Deferred income taxes................................. 123,000
Other................................................. 334,000 340,000
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Total other assets................................. 1,697,000 1,153,000
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$ 25,279,000 $ 21,235,000
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
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<S> <C> <C>
CURRENT LIABILITIES:
Deferred student tuition......................................... $ 13,278,000 $ 8,722,000
Accrued salaries and wages....................................... 759,000 680,000
Accrued interest................................................. 15,000 179,000
Accounts payable and other accrued liabilities................... 1,950,000 2,147,000
------------- ------------
Total current liabilities...................................... 16,002,000 11,728,000
OTHER LONG-TERM LIABILITY......................................... 308,000 332,000
DEFERRED INCOME TAXES............................................. 139,000
SUBORDINATED DEBT DUE TO RELATED PARTY, CAHILL-WARNOCK 3,500,000 3,500,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, ($.10 par value, 600,000 shares authorized)
Class B, 55,147 shares issued and outstanding................... 6,000 6,000
Common stock, ($.10 par value, 19,400,000 shares authorized), 7,904,826
shares issued and 7,878,526 shares outstanding.................. 790,000 725,000
Capital in excess of par......................................... 8,539,000 8,143,000
Accumulated deficit.............................................. (3,806,000) (3,277,000)
Less-treasury stock, 26,300 shares, at cost...................... (60,000) (61,000)
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Total stockholders' equity...................................... 5,469,000 5,536,000
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$ 25,279,000 $ 21,235,000
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</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
--------------------------- ------------------------
1999 1998 1999 1998
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
NET REVENUE............................. $26,640,000 $26,075,000 $ 9,763,000 $8,642,000
COSTS AND EXPENSES:
Instruction costs and services........ 10,399,000 10,019,000 3,668,000 3,351,000
Selling and promotional............... 4,228,000 4,172,000 1,562,000 1,584,000
General and administrative............ 11,994,000 11,785,000 3,971,000 3,666,000
Provision for uncollectible accounts.. 562,000 908,000 301,000 348,000
----------- ----------- ----------- ----------
Total................................. 27,183,000 26,884,000 9,502,000 8,949,000
----------- ----------- ----------- ----------
OPERATING INCOME (LOSS)................. (543,000) (809,000) 261,000 (307,000)
INTEREST EXPENSE........................ 127,000 142,000 37,000 48,000
----------- ----------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES....... (670,000) (951,000) 224,000 (355,000)
PROVISION (BENEFIT) FOR INCOME TAXES.... (261,000) (371,000) 88,000 (139,000)
----------- ----------- ----------- ----------
NET INCOME (LOSS)....................... $ (409,000) $ (580,000) $ 136,000 $ (216,000)
=========== =========== =========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic............................. 7,784,000 7,168,000 7,867,000 7,191,000
=========== =========== =========== ==========
Diluted........................... 7,784,000 7,168,000 10,665,000 7,191,000
=========== =========== =========== ==========
BASIC INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE..... (.07) (.10) .01 (.04)
=========== =========== =========== ==========
DILUTED INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE..... (.07) (.10) .01 (.04)
=========== =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(unaudited)
<TABLE>
<CAPTION>
1999 1998
---- ----
CASH FLOWS --OPERATING ACTIVITIES:
<S> <C> <C>
Net loss................................................... $ (409,000) $ (580,000)
----------- -----------
Adjustments to reconcile net loss to net
cash provided (consumed) by operating activities -
Depreciation and amortization........................... 815,000 686,000
Provision for losses on accounts and notes receivable... 562,000 908,000
Change in assets and liabilities, net -
Change in receivables................................ (4,986,000) (1,140,000)
Change in deferred student tuition................... 4,556,000 68,000
Change in deferred income taxes...................... (262,000) 106,000
Change in recoverable income taxes................... 180,000 (591,000)
Other changes in assets and liabilities, net......... (120,000) (738,000)
----------- -----------
Total adjustments.................................. 745,000 (701,000)
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Net operating activities........................... 336,000 (1,281,000)
----------- -----------
CASH FLOWS --INVESTING ACTIVITIES:
Capital expenditures...................................... (593,000) (952,000)
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Net investing activities........................... (593,000) (952,000)
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CASH FLOWS --FINANCING ACTIVITIES:
Stock options exercised................................... 113,000 10,000
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Net financing activities............................ 113,000 10,000
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Net decrease in cash and cash equivalents........... (144,000) (2,223,000)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD.................................... 2,433,000 5,393,000
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD.......................................... $ 2,289,000 $ 3,170,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 291,000 $ 153,000
Income taxes............................................ 16,000 244,000
Cash received during the period for:
Interest................................................ 186,000 246,000
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(unaudited)
<TABLE>
<CAPTION>
Capital
Preferred Common in Excess Accumulated Treasury
Stock Stock of Par Deficit Stock
--------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998.............. $6,000 $725,000 $8,143,000 $(3,277,000) $(61,000)
Net Loss.............................. (409,000)
Class B Preferred Stock Accretion..... 120,000 (120,000)
Stock Options Exercised............... 61,000 261,000
Employee Stock Purchase Plan.......... 4,000 16,000
Treasury Stock Issued................. (1,000) 1,000
------ -------- ---------- ----------- --------
BALANCE, September 30, 1999............. $6,000 $790,000 $8,539,000 $(3,806,000) $(60,000)
====== ======== ========== =========== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(The remainder of this page was left intentionally blank.)
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
- ---------------------
The Company owns and operates proprietary postsecondary campuses that offer
career vocational education, primarily in the allied health field (the
"Campuses").
The following table presents the relative percentage of revenues of certain
consolidated statement of operations items as a percentage of total revenue for
periods indicated.
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue................................. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Instruction costs and services........ 39.0 38.4 37.6 38.8
Selling and Promotional............... 15.9 16.0 16.0 18.3
General and administrative............ 45.0 45.2 40.7 42.4
Provision for uncollectible accounts.. 2.1 3.5 3.1 4.0
----- ----- ----- -----
Total................................. 102.0 103.1 97.4 103.5
Operating Income (Loss)................. (2.0) (3.1) 2.6 (3.5)
Interest expense........................ .5 .5 .4 .6
----- ----- ----- -----
Income (Loss) before income taxes....... (2.5) (3.6) 2.2 (4.1)
Provision (Benefit) for income taxes.... (1.0) (1.4) .9 (1.6)
----- ----- ----- -----
Net Income (Loss)....................... (1.5)% (2.2)% 1.3% (2.5)%
===== ===== ===== =====
</TABLE>
(The remainder of this page was left intentionally blank.)
7
<PAGE>
Results of Operations
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1998
Concorde experienced additional prospective student contacts during 1999
compared to 1998 as a result of advertising strategy changes. In addition,
student enrollments, excluding the Miami campus that closed in June 1999,
increased 21.8% for the nine months ended September 30, 1999 compared to the
same period in 1998. Student population increased to approximately 3,700 at
September 30, 1999 compared to 2,800 at December 31, 1998. The population was
approximately 3,200 at September 30, 1998.
A net loss of $409,000 and $580,000 were recorded for the nine months ended
September 30, 1999 and September 30, 1998, respectively. The $171,000 decrease
in net loss was primarily due to increased revenue. Revenue increased 2.2% or
$565,000 to $26,640,000 for the nine months ended September 30, 1999 compared to
$26,075,000 for the same period in 1998. The Miami Campus accounted for reduced
revenue of $805,000 in 1999 compared to 1998. The $1,370,000 revenue increase,
excluding Miami, is a result of enrollments increasing 21.8% for the nine months
ended September 30, 1999 compared to the same period in 1998. Total operating
expenses increased $299,000 to $27,183,000 compared to $26,884,000 for the nine
months ended September 30, 1998. The Miami Campus accounted for a $1,028,000
decrease in operating expenses in 1999. The provision for uncollectible
accounts accounted for a $346,000 decrease in operating expenses due to improved
collection efforts and additional recoveries from previously written off
accounts in 1999. The offsetting increase was a result of additional
instruction costs and services, selling and promotional, and general and
administrative expenses.
Instruction costs and services - increased $380,000 to $10,399,000 compared
to $10,019,000 in 1998. The Miami Campus accounted for a $312,000 decrease.
The offsetting $692,000 increase was primarily a result of increased textbook
expenses due to additional enrollments compared to 1998.
Selling and promotional - increased $56,000 to $4,228,000 compared to
$4,172,000 in 1998. The Miami Campus accounted for a $237,000 decrease. The
offsetting $293,000 increase was primarily due to additional wages compared to
1998.
General and administrative - increased $209,000 to $11,994,000 compared to
$11,785,000 in 1998. The Miami Campus accounted for a $455,000 decrease. The
offsetting $664,000 increase was primarily a result of additional wages and
depreciation compared to 1998.
Provision for uncollectible accounts - decreased $346,000 or 38.1% to
$562,000 compared to $908,000 in 1998. This decrease was primarily a result of
improved collection efforts for student accounts and additional recoveries from
previously written off accounts.
Interest expense - decreased $15,000 to $127,000 compared to $142,000 in
1998.
Income taxes - In 1999, a tax benefit of $261,000 or 39% was recorded
compared to a tax benefit of $371,000 or 39% in 1998.
EPS and Weighted Average Common Shares - Basic and diluted weighted average
common shares increased to 7,784,000 in 1999 from 7,168,000 in 1998. Basic and
diluted loss per share was $.07 and $.10 for the nine months ended September 30,
1999 and 1998, respectively. Basic and diluted loss per share is shown after a
reduction for preferred stock dividends of $120,000 in 1999 and $104,000 in
1998.
8
<PAGE>
Results of Operations
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net income of $136,000 was recorded for the three months ended September
30, 1999 compared to a net loss of $216,000 for the same period in 1998. Total
revenue increased 13.0% or $1,121,000 to $9,763,000 for the three months ended
September 30, 1999 compared to $8,642,000 for the same period in 1998. The
Miami Campus accounted for reduced revenue of $268,000 in 1999 compared to 1998.
The offsetting $1,389,000 revenue increase was a result of increased enrollments
compared to 1998. Excluding Miami, student enrollments increased 23.2% for the
three months ended September 30, 1999 compared to the same period in 1998. Total
operating expenses increased $553,000 to $9,502,000 compared to $8,949,000 for
the three months ended September 30, 1998. The Miami Campus accounted for a
$373,000 decrease in operating expenses in 1999. The offsetting $926,000
increase was primarily a result of additional instruction costs and services and
general and administrative expenses.
Instruction costs and services - increased $317,000 to $3,668,000 compared
to $3,351,000 in 1998. The Miami Campus accounted for a $105,000 decrease. The
offsetting $422,000 increase was primarily a result of increased textbook
expenses due to additional enrollments compared to 1998.
Selling and promotional - decreased $22,000 to $1,562,000 compared to
$1,584,000 in 1998. The Miami Campus accounted for a $91,000 decrease. The
offsetting $69,000 increase was primarily due to additional wages compared to
1998.
General and administrative - increased $305,000 to $3,971,000 compared to
$3,666,000 in 1998. The Miami Campus accounted for a $149,000 decrease. The
offsetting $454,000 increase was primarily due to additional wages and
depreciation compared to 1998.
Provision for uncollectible accounts - decreased $47,000 or 13.5% to
$301,000 compared to $348,000 in 1998. The decrease is a result of improved
collection efforts.
Interest expense - decreased $11,000 to $37,000 compared to $48,000 in
1998.
Income taxes - In 1999, a tax provision of $88,000 or 39% was recorded
compared to a tax benefit of $139,000 or 39% in 1998.
EPS and Weighted Average Common Shares - Basic weighted average common
shares increased to 7,867,000 in 1999 from 7,191,000 in 1998. Basic earnings per
share was $.01 and basic loss per share was $.04 for the three months ended
September 30, 1999 and 1998, respectively. Diluted weighted average common
shares increased to 10,665,000 in 1999 from 7,191,000 in 1998. Diluted earnings
per share was $.01 and diluted loss per share was $.04 for the three months
ended September 30, 1999 and 1998, respectively. Basic earnings (loss) per
share is shown after a reduction for preferred stock dividends of $41,000 in
1999 and $37,000 in 1998. Diluted earnings (loss) per share is shown after a
reduction of preferred stock dividends of $41,000 and an addition of $27,000 for
convertible debt interest in 1999 and a reduction of preferred stock dividends
of $37,000 in 1998.
Recent Events
The Company moved its existing Anaheim, California Campus to a newly
constructed building in Garden Grove, California during October 1999.
The Company's Miami, Florida Campus was closed in June 1999. All the Miami
students have completed the in-school portion of their education. The Company
accrued approximately $180,000 in 1998 for the Miami closing.
9
<PAGE>
Liquidity and Capital Resources
Bank Financing
The Company negotiated a $3,000,000 secured revolving credit facility on
March 13, 1997, with Security Bank of Kansas City. This facility expires on
April 30, 2000. Funds borrowed under this facility will be used for working
capital purposes. This facility has a variable interest rate of prime plus one
percent, and no commitment fee. It is secured by all cash, accounts and notes
receivable, furniture and equipment, and capital stock of the subsidiaries. The
available credit, which the Company may borrow against for working capital
purposes, 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 replaced letter
of credit discussed below. The Company had not borrowed any funds under this
facility as of September 30, 1999.
On December 30, 1998 Security Bank of Kansas City issued a $589,000 letter
of credit as security for a lease on the Company's new Garden Grove, California
location. The letter of credit expires April 19, 2000 and will be replaced by
replacement letters of credit expiring annually through April 19, 2004. The
replacement letters of credit will be issued at amounts decreasing 20% annually
from the original issue amount. The letter can only be drawn upon if there is a
default under the lease agreement.
Cash Flows and Other
Net cash provided by operating activities was $336,000 for the nine months
ended September 30, 1999 compared to cash consumed by operating activities of
$1,281,000 for the nine months ended September 30, 1998. Net receivables after
provision for losses on receivables less deferred student tuition decreased cash
$430,000 in 1999 compared to a decrease of $1,072,000 in 1998. This change
resulted in a $642,000 net cash flow increase due to increased enrollments in
1999. Deferred and recoverable income taxes decreased cash $82,000 in 1999
compared to a decrease of $485,000 in 1998. Other assets and liabilities
decreased cash $120,000 in 1999 compared to a decrease of $738,000 in 1998.
Capital expenditures for the nine months ended September 30, 1999 were
$593,000 compared to $952,000 in 1998. Capital expenditures were primarily for
leasehold improvements and computer equipment.
Financing activities increased cash $113,000 in 1999 compared to $10,000 in
1998. The increase in 1999 was a result of exercised stock options and the
employee stock purchase plan. The increase in 1998 was a result of exercised
stock options.
Contingencies
In September 1999, the United States Internal Revenue Service (the "IRS")
notified the Company that its Federal tax return was being examined for the year
ended December 31, 1996. The Company has met with an IRS agent concerning the
examination and believes the examination is routine in nature and will not
result in any material tax liabilities.
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 issue involved
disclosure and calculation of placement statistics. The FTC notified the Company
in June 1999 that it had closed its inquiry with no findings. The Company had no
financial liability and was not required to change any procedures or
calculations of placement statistics.
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.
10
<PAGE>
After January 1, 1991, the Secretary of Education was authorized to
initiate proceedings to limit, suspend or terminate the eligibility of a Campus
to participate in the Federal Loan Programs if the Cohort Default Rate for three
consecutive years exceeds the prescribed threshold. Beginning with the release
of 1992 Cohort Default Rates in the summer of 1994, a Cohort Default Rate equal
to or exceeding 25% for each of the three most recent fiscal years may be used
as grounds for terminating Family Federal Education Loan ("FFEL") eligibility.
The Company has a pending suit against the United States Department of
Education (ED) challenging past Cohort Default Rates published for the Company's
Campuses and the rate correction regulations, which ED adopted in 1994. ED's
rate correction regulations contain a very restrictive standard for removal of
defaulted loans from a Campus Cohort Default Rate due to improper servicing and
collection, and the Company's suit contends that the regulations are unlawful
because they contravene provisions of the Higher Education Act of 1965 (as
amended) and are arbitrary and capricious. All of the Company's Campuses, with
the exception of San Diego, currently have one or more of their three most
recent default rates below 25%, following administrative appeal rulings and
continuing aggressive default management efforts by the Company, and as a
result, proceedings in the suit are inactive.
The San Diego Campus was notified in September 1997 that it was no longer
eligible to participate in the FFEL program and that it could not apply to
regain eligibility until at least October of 1999. The Campus has reapplied for
eligibility and has not yet received notification of the results of its
application. 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 277 or approximately 8 percent of the Company's total
population as of September 30, 1999 compared to 195 or approximately 6 percent
of the Company's total population as of September 30, 1998.
In 1994, ED established a policy of recertifying all institutions
participating in Title IV programs every five years. Three of the Company's
Campuses, Denver, Colorado, Jacksonville and Lauderdale Lakes, Florida received
provisional certification during 1996. The remaining Campuses received full
certification. Provisional certification limits the Campus' ability to add
programs and change the level of educational award. In addition, the Campus is
required to accept certain restrictions on due process procedures under ED
guidelines. The provisional certifications expired during 1998. ED notified
the Company that the Denver Campus is now fully certified. The Jacksonville and
Lauderdale Lakes Campuses received provisional certification due to default
rates. Both Campuses had a default rate greater than 25% for one of the three
previous years. The remaining campuses are in the process of being certified
during 1999. The Company recently received notification that the North
Hollywood, Anaheim and Portland campuses received provisional certification. The
Company does not believe provisional certification would have a material impact
on its liquidity, results of operations or financial position.
ED also has established certain "Factors of Financial Responsibility" which
institutions are required to meet to be eligible to participate in Title IV
programs. The three principal standards of financial responsibility applicable
prior to July 1, 1998 were (i) satisfy an acid test ratio of at least 1:1 at the
end of each fiscal year, (ii) have a positive tangible net worth at the end of
each fiscal year, and (iii) not have a cumulative net operating loss during its
two most recent fiscal years that results in a decline of more than 10% of the
institution's tangible net worth at the beginning of that two-year period. An
institution that is determined by the DOE not to meet any one of the standards
of financial responsibility would be entitled to participate in the Title IV
programs if it can demonstrate financially responsibility on an alternative
basis. ED issued a new financial responsibility regulation that became
effective July 1, 1998. ED instituted a transitional period which allows an
institution to use either the old or new regulations for a fiscal year that
begins between July 1, 1997 and June 30, 1998. This transition period applies
to the Company's 1998 fiscal year. The new regulation uses a composite score
based upon three financial ratios. An institution demonstrates that it is
financially responsible by achieving a composite score of at least 1.5, or by
achieving a composite score in the zone from 1.0 to 1.4 and meeting certain
provisions.
ED also allows institutions in the zone up to three consecutive years to
improve their financial condition without requiring surety. An institution in
the zone may need to provide to ED timely information regarding certain
accrediting agency actions and certain financial events that may cause or lead
to a deterioration of the institution's financial condition. In addition,
financial and compliance audits may have to be submitted soon after the end of
the institution's fiscal year. Title IV HEA funds may be subject to cash
monitoring for institutions in the zone. The Company believes that on a
consolidated basis, it met the three principal financial responsibility
standards: profitability, acid test, and tangible net worth for the year ended
December 31, 1998. The Company believed that because of the transitional period
it would not be subject to zone requirements.
11
<PAGE>
The Company was recently notified by the ED that ED does not believe the
Company met the factors of financial responsibility for the year ended December
31, 1998. ED is requiring the Company to comply with the zone regulation,
which requires the Company to make disbursements to students under the cash
monitoring method and to provide timely notification to ED regarding several
oversight and financial events. The Company's financial responsibility ratio was
1.2, which was below the 1.5 level required to avoid cash monitoring and
additional reporting. However, the Company believes that financial
responsibility standards were met because of the transition year regulations.
ED believes the Company failed the transition year regulations. The Company is
unable at this time to determine the financial impact, if any due to cash
monitoring. However, the Company believes that there will not be a material
impact to its balance sheet, cash flows or results of operations. The Company
also believes that based upon its current performance the financial
responsibility ratio for the year ending December 31, 1999 will be 1.5 or
greater.
During July 1993, nine former students of the Jacksonville, Florida School
filed individual lawsuits against the School, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. These cases
were dismissed by the plaintiffs; however, over time three others were filed
seeking similar relief on behalf of a total of 95 plaintiffs. See Part II, Item
1 - "Legal Proceedings".
On May 31, 1990, a wholly-owned subsidiary of the Company, Concorde Career
Institute, Inc., a Florida corporation, acquired substantially all the assets of
Southern Career Institute, Inc. ("SCI"), a proprietary, postsecondary vocational
home-study school specializing in paralegal education. In 1991, an accrediting
commission failed to reaffirm accreditation of SCI under the ownership of
Concorde Career Institute, Inc. Also in 1991, SCI received notice from the ED
alleging that commencing June 1, 1990, SCI was ineligible to participate in
federal student financial assistance programs.
The ED gave notice that it intends to require SCI to repay all student
financial assistance funds disbursed from June 1, 1990, to November 7, 1990, the
effective date upon which ED discontinued disbursing student financial
assistance funds. The amount being claimed by ED is not determinable, but the
total of the amounts shown on six separate notices dated January 13, 1994, is
approximately $2.7 million. By letter dated February 24, 1994, counsel for SCI
provided certain information to the collection agency for ED and offered to
settle all claims of ED for the amount on deposit in the SCI bank account. In
December 1996, SCI was informed verbally that the matter had been referred to
ED's General Counsel. In March of 1999, SCI received correspondence from ED's
Financial Improvement and Receivables Group requesting that SCI pay amounts
totaling $2,901,497. In May 1999, SCI received a billing requesting $4,614,245.
The 1999 correspondence was similar to correspondence received in 1997. SCI has
notified ED that it disputes these claims.
In light of applicable corporate law, which limits the liability of
stockholders and the manner in which SCI was operated by Concorde Career
Institute, Inc. as a subsidiary of the Company, management believes that the
Company is not liable for debts of SCI. Therefore, if SCI is required to pay
ED's claims it is the opinion of management it will not have a material adverse
impact on the Company's financial condition or its results of operations. In
addition, in light of applicable statutory and regulatory provisions existing in
1991 and ED's interpretation of those provisions, it is the opinion of
management that any debt SCI might be determined to owe to ED should have no
impact on the existing participation of the Campuses in federal financial aid
programs.
Year 2000 Disclosure
The Year 2000 computer issue (commonly referred to as "Y2K") refers to a
condition in computer software where a two-digit field rather than a four-digit
field is used to distinguish a calendar year. Some computer programs and
hardware ("computer systems") and non-information technology systems ("non-
computer systems') could be unable to process information containing dates
subsequent to December 31, 1999 unless corrected. As a result, such programs and
systems could experience errors in calculations, malfunctions or disruptions.
The Company has 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 updated much of its existing software for Y2K compliance
by acquiring a new third-party software package to replace previous
administrative software. The Company completed the installation of the
administrative software in June 1999. The administrative system was not
replaced solely because of Y2K issues. After conducting vendor research and in-
house testing, management believes the Company's computer systems are reasonably
Y2K compliant. Additional testing will take place during the fourth quarter
1999 to ensure continued readiness.
12
<PAGE>
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 are
Y2K compliant. The Company has successfully participated in Y2K testing with the
department. 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 expectation regarding the possible impact on it's results of
operations; liquidity or financial condition of any Y2K related disruptions to
its business are minimal. Whether these disruptions are caused by the
malfunctioning of any computer or non-computer systems and products that it uses
or systems used by material third parties. The Company believes that the most
reasonably likely worse case scenario for the Y2K issue would be that the third
parties with whom it has relationships would cease or not successfully complete
their Y2K compliance efforts. If this were to occur, the Company could 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 has begun to develop an appropriate contingency plan in the
event that a significant exposure occurs relative to the dependencies on third-
party systems.
Item 3. Qualitative and Quantitative Disclosure About Risk - Not Applicable
--------------------------------------------------
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Other
During July 1993, nine former students of the Jacksonville, Florida Campus
filed individual lawsuits against the Campus, alleging deceptive trade
practices, breach of contract, and fraud and misrepresentation. These suits
have since been dismissed by the plaintiffs; however, over time, three other
cases were filed seeking similar relief on behalf of a total of 95 plaintiffs.
Conversion of one of the three cases to a class action was attempted; however,
the plaintiff's motion for class certification was denied on April 18, 1997. On
May 19, 1997, the plaintiff appealed the order denying certification of the
class. On February 5, 1998, the appellate court issued a per curiam decision
without opinion affirming the trial court's denial of class certification. The
appellate opinion is now final, and no further appeal is available on the class
certification issue. During the appeal, all activity and progress in the other
cases was stayed. The plaintiffs have initiated efforts to begin to move the
cases forward; however, pleadings are not resolved and none are close to being
ready for trial. Several plaintiffs have recently dropped from the case. The
total number of plaintiffs is currently 82. The amount of damages sought is not
determinable. The Company believes these suits are without merit, and will
continue to defend them vigorously.
The Company's Campuses are sued from time to time by a student or students
who claim to be dissatisfied with the results of their program of study.
Typically, the claims allege a breach of contract, deceptive advertising and
misrepresentation and the student or students seek reimbursement of tuition.
Punitive damages sometimes are also sought. In addition, ED may allege
regulatory violations found during routine program reviews. The Company has,
and will continue to dispute these findings as appropriate in the normal course
of business. In the opinion of the Company's management such pending litigation
and disputed findings are not material to the Company's financial condition or
its results of operation.
The Company has litigation pending which arose in the ordinary course of
business. Litigation is subject to many uncertainties and the outcome of the
individual matters is not presently determinable. It is management's opinion
that this litigation will not result in liabilities that would have a material
adverse effect on the Company's financial position or results of operations.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
13
<PAGE>
Item 2. Change in Securities -- None
----------------------------
Item 3. Defaults upon Senior Securities - None
--------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders -- None
-----------------------------------------------------------
Item 5. Other Information -- None
-------------------------
Item 6. Exhibits
--------
11 Computation of per share earnings
27 Financial Data Schedule
. No Reports on Form 8-K were filed during the period.
(The remainder of this page was left intentionally blank.)
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORDE CAREER COLLEGES, INC.
DATED: October 20, 1999
By: /s/ Jack L. Brozman
-----------------------------------------
Jack L. Brozman, Chief Executive Officer
By: /s/ Paul R. Gardner
-----------------------------------------
Paul R. Gardner, Chief Financial Officer
(The remainder of this page was left intentionally blank.)
15
<PAGE>
(EXHIBIT 11)
CONCORDE CAREER COLLEGES, INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
Nine Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding............. 7,784,000 7,168,000 7,784,000 7,168,000
---------- ---------- ---------- ----------
Net Loss........................................ $ (409,000) $ (580,000) $ (409,000) $ (580,000)
Class B Preferred Dividends-Imputed............. (120,000) (104,000) (120,000) (104,000)
---------- ---------- ----------- ----------
Loss Available to Common Shareholders........... $ (529,000) $ (684,000) $ (529,000) $ (684,000)
---------- ---------- ----------- ----------
Loss per Weighted Average Shares................ $ (.07) $ (.10) $ (.07) $ (.10)
========== ========== =========== ==========
Three Months Three Months
Ended September 30, Ended September 30,
------------------ -------------------
1999 1998 1999 1998
---- ---- ---- ----
Weighted Average Shares Outstanding............. 7,867,000 7,191,000 7,867,000 7,191,000
Options......................................... 224,000
Debt/NonDetachable Warrants..................... 2,574,000
---------- ---------- ------------ ----------
Adjusted Weighted Average Shares................ 7,867,000 7,191,000 10,665,000 7,191,000
---------- ---------- ------------ ----------
Net Income (Loss)............................... $ 136,000 $ (216,000) $ 136,000 $ (216,000)
Class B Preferred Dividends-Imputed............. (41,000) (37,000) (41,000) (37,000)
Interest on Convertible Debt, net of tax........ 27,000
---------- ---------- ------------ ----------
Income (Loss) Available to Common Shareholders.. $ 95,000 $ (253,000) $ 122,000 $ (253,000)
---------- ---------- ------------ ----------
Income (Loss) per Weighted Average Shares....... $ 0.01 $ (0.04) $ 0.01 $ (0.04)
========== ========== ============ ==========
</TABLE>
(The remainder of this page was left intentionally blank.)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Form 10-Q and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 JUL-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 2,289,000 0
<SECURITIES> 0 0
<RECEIVABLES> 17,220,000 0
<ALLOWANCES> 1,650,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 20,175,000 0
<PP&E> 8,652,000 0
<DEPRECIATION> 5,635,000 0
<TOTAL-ASSETS> 25,279,000 0
<CURRENT-LIABILITIES> 16,002,000 0
<BONDS> 3,500,000 0
0 0
6,000 0
<COMMON> 790,000 0
<OTHER-SE> 4,673,000 0
<TOTAL-LIABILITY-AND-EQUITY> 25,279,000 0
<SALES> 26,640,000 9,763,000
<TOTAL-REVENUES> 26,640,000 9,763,000
<CGS> 0 0
<TOTAL-COSTS> 26,621,000 9,201,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 562,000 301,000
<INTEREST-EXPENSE> 127,000 37,000
<INCOME-PRETAX> (670,000) 224,000
<INCOME-TAX> (261,000) 88,000
<INCOME-CONTINUING> (409,000) 136,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (409,000) 136,000
<EPS-BASIC> (.07) .01
<EPS-DILUTED> (.07) .01
</TABLE>
