<PAGE>
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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, 2000 Commission File No. 0-16992
------------------ -------
CONCORDE CAREER COLLEGES, INC.
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(exact name of registrant as specified in its charter)
Delaware 43-1440321
------------------------------- ---------------------------------
(State of other jurisdiction of (I. R. S. Employer Identification
Incorporation or Organization) Number)
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 _____
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As of November 9, 2000 Concorde Career Colleges, Inc. had 7,975,641 shares of
Common Stock outstanding.
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<PAGE>
CONCORDE CAREER COLLEGES, INC.
Form 10-Q
Three and Nine Months Ended September 30, 2000
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Notes to Condensed Consolidated Financial Statements
Note 1, 2 and 3............................................. 1
Condensed Consolidated Balance Sheets.............................. 3,4
Condensed Consolidated Statements of Operations.................... 5
Condensed Consolidated Statements of Cash Flows.................... 6
Consolidated Statement of Changes in Stockholders' Equity.......... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 14
Item 2. Change in Securities............................................... 15
Item 3. Defaults Upon Senior Securities.................................... 15
Item 4. Submission of Matters to a Vote of Security Holders................ 15
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8-K................................... 15
Signatures................................................................. 16
<PAGE>
PART I -- 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, 2000
Overview
The discussion set forth below, as well as other portions of this Form 10-
Q, may contain forward-looking comments. Such comments are based upon
information currently available to management and management's perception
thereof as of the date of this Form 10-Q. Actual results of the Company's
operations could materially differ from those forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, potential adverse effects of regulations;
impairment of federal funding; adverse legislative action; student loan default
rates; changes in federal or state authorization or accreditation; changes in
market needs and technology; changes in competition and the effects of such
changes; changes in the economic, political or regulatory environments;
litigation involving the Company; changes in the availability of a stable labor
force; or changes in management strategies. Readers should take these factors
into account in evaluating any such forward-looking comments.
Notes to Financial Statements
Note 1:
-------
The condensed interim consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared according to generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read
in conjunction with the financial statements and the notes thereto included in
the Company's 1999 Annual Report on Form 10-K that was filed by the Company with
the Commission on March 30, 2000 (the "1999 Form 10-K") incorporated herein by
reference.
The information included in these interim financial statements reflects all
normal recurring adjustments that are, in the opinion of management, necessary
to fairly state the results of the periods presented. Annualization of amounts
in these interim financial statements may not necessarily be indicative of the
actual operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
Company has litigation pending which arose in the normal course of business.
See further discussion in Part I, Item 2 - "Contingencies", and Part II, Item 1
- "Legal Proceedings".
Note 2:
------
Basic earnings per share is computed by deducting imputed preferred
dividends from net income or loss. This amount is then divided by weighted
average number of common shares outstanding.
Diluted earnings per share is computed by deducting imputed preferred
dividends from net income. This amount is then divided by the weighted average
number of common shares outstanding during the year after giving effect for
common stock equivalents (if dilutive) arising from stock options and for
warrants and preferred stock assumed converted to common stock.
Note 3:
------
On January 1, 2000, the Company adopted Securites and Exchange Commission
"SEC" Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 contains guidance for the recognition,
1
<PAGE>
presentation and disclosure of revenue in financial statements filed with the
SEC. As it relates to the Company, SAB101 requires course registration fees to
be recognized ratably over the life of the course rather than in the month the
student starts the program. Previously, the registration fees were recognized
the month the student started the program. The Company reported an $86,000, or
.01 per share, cumulative effect of change in accounting principle, net of tax
in the first quarter 2000. As a result of the deferral of new student
registration fees, revenue decreased $66,000 and $96,000 for the nine months and
quarter ended September 30, 2000 respectively.
Consistent with the guidance in SAB 101, the Company now reports revenue
from health screens net of the related costs provided by the companies
administering health screens. Prior year information has been reclassified for
comparative purposes.
The pro forma effect of adopting SAB101 for the third quarter of 1999 would
have resulted in a revenue reduction of $42,000 and net income reduction of
$25,000 from the previously reported results. The pro forma effect for the nine
months ended September 30, 1999 would have resulted in a revenue reduction of
$60,000 and net income reduction of $37,000 from the previously reported
results. The pro forma effect of this change in accounting principle had no
effect on the earnings per share for the quarter or nine months ended September
30, 1999.
2
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---------- ----------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents............................. $ 5,080,000 $ 2,229,000
Accounts receivable................................ 14,446,000 10,927,000
Notes receivable................................... 2,629,000 2,531,000
Allowance for uncollectible accounts............... (713,000) (1,234,000)
----------- -----------
Net receivables.................................... 16,362,000 12,224,000
Recoverable income taxes.............................. 422,000
Deferred income taxes................................. 417,000 287,000
Supplies and prepaid expenses......................... 1,022,000 766,000
----------- -----------
Total current assets.......................... 22,881,000 15,928,000
FIXED ASSETS, NET....................................... 2,836,000 3,033,000
INTANGIBLE ASSETS, NET
less accumulated amortization of $582,000 at
September 30, 2000 and $538,000 at December 31,
1999, respectively................................... 331,000 375,000
OTHER ASSETS:
Long-term notes receivable............................ 1,000,000 1,173,000
Allowance for uncollectible notes..................... (42,000) (186,000)
Deferred income taxes................................. 834,000 832,000
Other................................................. 24,000 295,000
----------- -----------
Total other assets................................. 1,816,000 2,114,000
----------- -----------
$27,864,000 $21,450,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
CURRENT LIABILITIES:
<S> <C> <C>
Deferred revenue.............................................. $15,821,000 $10,249,000
Accrued salaries and wages.................................... 846,000 410,000
Accounts payable and other accrued liabilities................ 2,310,000 1,580,000
Current income taxes payable.................................. 6,000
----------- -----------
Total current liabilities................................... 18,983,000 12,239,000
OTHER LONG-TERM LIABILITIES.................................... 150,000 300,000
SUBORDINATED DEBT DUE TO RELATED PARTY, CAHILL-WARNOCK......... 3,500,000 3,500,000
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred Stock, ($.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)
7,993,929 and 7,941,923 shares issued and 7,964,629 and
7,916,123 outstanding at September 30, 2000 and December 31,
1999, respectively........................................... 799,000 794,000
Capital in excess of par...................................... 8,749,000 8,589,000
Accumulated deficit........................................... (4,262,000) (3,919,000)
Less-treasury stock, 29,300 and 25,800 shares at cost at
September 30, 2000 and December 31, 1999, respectively ...... (61,000) (59,000)
----------- -----------
Total stockholders' equity................................... 5,231,000 5,411,000
----------- -----------
$27,864,000 $21,450,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
Nine Months Three Months
Ended September 30, Ended September 30,
--------------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenue..................................................... $28,937,000 $26,191,000 $10,092,000 $ 9,622,000
Costs and expenses:
Instruction costs and services................................ 11,609,000 10,399,000 3,909,000 3,668,000
Selling and promotional....................................... 4,941,000 4,228,000 1,653,000 1,562,000
General and administrative.................................... 12,305,000 11,545,000 4,164,000 3,830,000
Provision for uncollectible accounts.......................... 132,000 562,000 26,000 301,000
----------- ----------- ----------- -----------
Total......................................................... 28,987,000 26,734,000 9,752,000 9,361,000
----------- ----------- ----------- -----------
Operating income (loss)......................................... (50,000) (543,000) 340,000 261,000
Interest expense................................................ 141,000 127,000 50,000 37,000
----------- ----------- ----------- -----------
Income (loss) before provision for (benefit from) income taxes
and cumulative effect of change in accounting principle........ (191,000) (670,000) 290,000 224,000
Provision for (benefit from) income taxes....................... (75,000) (261,000) 114,000 88,000
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of change in accounting
principle....................................................... (116,000) (409,000) 176,000 136,000
----------- ----------- ----------- -----------
Cumulative effect of change in accounting principle, net
of tax.......................................................... (86,000)
----------- ----------- ----------- -----------
Net income (loss)............................................... $ (202,000) $ (409,000) $ 176,000 $ 136,000
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic..................................................... 7,949,000 7,784,000 7,965,000 7,867,000
=========== =========== =========== ===========
Diluted................................................... 7,949,000 7,784,000 10,665,000 10,665,000
=========== =========== =========== ===========
Basic income (loss) per share:
Income (loss) before cumulative effect of change in accounting
principle....................................................... (.03) (.07) .02 .01
Cumulative effect of change in accounting principle, net
of tax.......................................................... (.01)
----------- ----------- ----------- -----------
Net income (loss) per share................................... (.04) (.07) .02 .01
=========== =========== =========== ===========
Diluted income (loss) per share:
Income (loss) before cumulative effect of change in accounting
principle....................................................... (.03) (.07) .01 .01
Cumulative effect of change in accounting principle, net
of tax.......................................................... (.01)
----------- ----------- ----------- -----------
Net income (loss) per share................................... (.04) (.07) .01 .01
=========== =========== =========== ===========
</TABLE>
5
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(unaudited)
<TABLE>
<CAPTION>
Cash Flows--Operating Activities: 2000 1999
----------- -----------
<S> <C> <C>
Net loss................................................................ $ (202,000) $ (409,000)
Adjustments to reconcile net loss to net cash provided by
operating activities - Cumulative effect of change in
accounting principle................................................ 86,000
Depreciation and amortization........................................ 892,000 815,000
Provision for uncollectible accounts................................. 132,000 562,000
Deferred income taxes................................................ (132,000) (262,000)
Change in assets and liabilities - Increase in receivables, net...... (4,241,000) (4,986,000)
Increase in deferred student tuition................................. 5,486,000 4,556,000
Decrease in income taxes recoverable................................. 428,000 180,000
Other changes in assets and liabilities, net......................... 1,030,000 (120,000)
------------ -----------
Total adjustments................................................ 3,681,000 745,000
------------ -----------
Net operating activities............................................. 3,479,000 336,000
------------ -----------
Cash Flows--Investing Activities:
Capital expenditures................................................... (650,000) (593,000)
------------ -----------
Net investing activities......................................... (650,000) (593,000)
------------ -----------
Cash Flows--Financing Activities:
Stock options exercised................................................ 2,000 94,000
Stock purchase plan.................................................... 20,000 19,000
------------ -----------
Net financing activities......................................... 22,000 113,000
------------ -----------
Net Increase In Cash and Cash
Equivalents............................................................ $ 2,851,000 (144,000)
Cash and Cash Equivalents at Beginning of Period........................ 2,229,000 2,433,000
------------ ------------
Cash and Cash Equivalents at End of Period.............................. $ 5,080,000 $2,289,000
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the period for:
Interest.............................................................. $ 141,000 $ 291,000
Income taxes.......................................................... 42,000 16,000
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
CONCORDE CAREER COLLEGES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY'
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(unaudited)
<TABLE>
<CAPTION>
Capital
Preferred Common in Excess Accumulated Treasury
Stock Stock of Par Deficit Stock Total
--------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999.......... $6,000 $794,000 $8,589,000 $(3,919,000) $(59,000) $5,411,000
Net Loss........................... (202,000) (202,000)
Class B Preferred Stock Accretion.. 141,000 (141,000)
Stock Options Exercised............ 1,000 1,000 2,000
Employee Stock Purchase Plan....... 4,000 18,000 22,000
Treasury Stock Purchased........... (2,000) (2,000)
------ -------- ---------- ----------- --------- ----------
BALANCE, September 30, 2000......... $6,000 $799,000 $8,749,000 $(4,262,000) $(61,000) $5,231,000
====== ======== ========== =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(The remainder of this page was left intentionally blank.)
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
The Company owns and operates eleven 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,
-------------------- -------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenue...................................................... 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Instruction costs and services............................. 40.1 39.7 38.7 38.1
Selling and Promotional.................................... 17.1 16.1 16.4 16.2
General and administrative................................. 42.5 44.1 41.3 39.8
Provision for uncollectible accounts....................... .5 2.1 .3 3.1
----- ----- ----- -----
Total operating expenses................................... 100.2 102.1 96.6 97.3
Operating income (loss)...................................... (.2) (2.1) 3.4 2.7
Interest expense............................................. .5 .5 .5 .4
----- ----- ----- -----
Income (Loss) Before Provision for (Benefit from) Income
Taxes and Cumulative Effect of Change in Accounting
Principle.................................................... (.7) (2.6) 2.9 2.3
Provision for (Benefit from) Income Taxes.................... (.3) (1.0) 1.1 .9
----- ----- ----- -----
Income (Loss) Before Cumulative Effect of Change in
Accounting Principle......................................... (.4) (1.6) 1.8 1.4
Cumulative Effect of Change in Accounting Principle, Net
Of Tax....................................................... (.3)
----- ----- ----- -----
Net income (loss)............................................ (.7)% (1.6)% 1.8% 1.4%
===== ===== ===== =====
</TABLE>
8
<PAGE>
Results of Operations
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 1999
A net loss of $202,000 was recorded for the nine months ended September 30,
2000 compared to $409,000 for the same period in 1999. The $207,000 net loss
improvement was primarily due to increased revenue compared to 1999. Revenue
increased 10.5% or $2,746,000 to $28,937,000 for the nine months ended September
30, 2000 compared to $26,191,000 for the same period in 1999. The increased
revenue was the result of increased enrollments and additional average student
population compared to 1999. Student enrollments increased 6.0% for the nine
months ended September 30, 2000 compared to the same period in 1999. The
average student population increased 10.8% to 3,574 at September 30, 2000
compared to 3,227 at September 30, 1999. Total operating expenses increased
$2,253,000 to $28,987,000 compared to $26,734,000 for the nine months ended
September 30, 1999. The operating expense increase was due to increased
instruction costs, selling expenses and general and administrative expenses. The
operating expense increase was offset by a decrease in the provision for
uncollectible accounts.
Instruction costs and services - increased $1,210,000 or 11.6% to
$11,609,000 compared to $10,399,000 in 1999. Salary and textbook expenses
increased due to additional enrollments and student population. Average student
population increased 10.8% to 3,574 compared to 3,227 at September 30, 1999
which resulted in the additional expenses.
Selling and promotional - increased $713,000 or 16.9% to $4,941,000
compared to $4,228,000 in 1999. The increase was the result of additional
admissions staff and more frequent advertising placements to increase
enrollments.
General and administrative - increased $760,000 or 6.2% to $12,305,000
compared to $11,545,000 in 1999. The majority of the increase was a result of
health insurance, collection agency and rent expense. The largest increase was
health insurance expense which increased $197,000. This increase was due to both
higher administrative costs and claims filed in the third quarter.
Provision for uncollectible accounts - decreased $430,000 or 76.5% to
$132,000 compared to $562,000 in 1999. The decrease was a result of improved
collection efforts and fewer notes receivables compared to 1999. The 1998
Higher Education Act ("HEA") reauthorization increased Title IV Programs cash
basis revenue from 85 percent to 90 percent which resulted in the Company
financing fewer students compared to 1999. The Company's cash collections
increased $5,094,000 in 2000 compared to 1999.
Interest expense - increased $14,000 or 11.0% to $141,000 compared to
$127,000 in 1999. The increase was a result of interest expense for the Garden
Grove Letter of Credit discussed below.
Income taxes - In 2000, a tax benefit of $75,000 or 39% was recorded
compared to a tax benefit of $261,000 or 39% in 1999.
EPS and Weighted Average Common Shares - Basic and diluted weighted average
common shares increased to 7,949,000 in 2000 from 7,784,000 in 1999. Basic and
diluted loss per share was $.04 for the nine months ended September 30, 2000
compared to $.07 for the same period in 1999. Basic and diluted loss per share
is shown after a reduction for preferred stock dividends of $141,000 in 2000 and
$120,000 in 1999.
Cumulative Effect of Change in Accounting Principle - On January 1, 2000,
the Company adopted Securities and Exchange Commission "SEC" Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB No.
101 contains guidance for the recognition, presentation and disclosure of
revenue in financial statements filed with the SEC. As it relates to the
Company, SAB101 requires course registration fees to be recognized ratably over
the life of the course rather than in the month the student starts the program.
Previously, the registration fees were recognized the month the student started
the program. The Company reported an $86,000, or $.01 per share, cumulative
effect of change in accounting principle, net of tax in the first quarter 2000.
9
<PAGE>
Results of Operations
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO
QUARTER ENDED SEPTEMBER 30, 1999
Net income of $176,000 was recorded for the three months ended September
30, 2000 compared to $136,000 for the same period in 1999. Revenue increased
4.9% or $470,000 to $10,092,000 for the three months ended September 30, 2000
compared to $9,622,000 for the same period in 1999. The increase was due to
increased enrollments and additional average student population compared to
1999. Student enrollments increased 5.9% for the three months ended September
30, 2000 compared to the same period in 1999. The average student population
increased 9.4% to 3,767 at September 30, 2000 compared to 3,443 at September 30,
1999. Total operating expenses increased $391,000 to $9,752,000 compared to
$9,361,000 for the three months ended September 30, 1999. The increase was due
to increased instruction costs, selling expenses and general and administrative
expenses. The operating expense increase was offset by a decrease in the
provision for uncollectible accounts.
Instruction costs and services - increased $241,000 or 6.6% to $3,909,000
compared to $3,668,000 in 1999. Salary and textbook expenses increased as a
result of the 5.9% enrollments increase and the 9.4% average student population
increase.
Selling and promotional - increased $91,000 or 5.8% to $1,653,000 compared
to $1,562,000 in 1999. The increase was the result of additional admissions
staff.
General and administrative - increased $334,000 or 8.7% to $4,164,000
compared to $3,830,000 in 1999. The increase was a result of increased health
insurance, travel and employee procurement expense compared to 1999. The largest
increase was health insurance expense, which increased $152,000. This increase
was due to both higher administrative costs and claims filed in the third
quarter.
Provision for uncollectible accounts - decreased $275,000 or 91% to $26,000
compared to a $301,000 increase in 1999. The decrease was a result of improved
cash collections. The Company's cash collections increased $2,045,000 for the
quarter compared to 1999.
Interest expense - increased $13,000 or 35% to $50,000 compared to $37,000
in 1999. The increase was a result of interest expense for the Garden Grove
Letter of Credit discussed below.
Income taxes - In 2000, a tax provision of $114,000 or 39% was recorded
compared to $88,000 or 39% in 1999.
EPS and Weighted Average Common Shares - Basic weighted average common
shares increased to 7,965,000 in 2000 from 7,867,000 in 1999. Basic earnings
per share was $.02 and $.01 for the three months ended September 30, 2000 and
1999, respectively. Diluted weighted average common shares were 10,665,000 in
2000 and 1999. Diluted earnings per share was $.01 for the three months ended
September 30, 2000 and 1999. Basic and diluted earnings per share are shown
after a reduction for preferred stock dividends of $50,000 in 2000 and $41,000
in 1999. In addition, diluted earnings per share is shown after convertible debt
interest of $27,000 in 2000 and 1999.
Liquidity and Capital Resources
Asset Sales
On August 2, 1996, the assets of Person/Wolinsky Associates, a wholly owned
subsidiary of the Company, which taught the CPA review course, were sold. As a
result of the sale the Company received proceeds of $879,000. In addition,
a $750,000 non-compete agreement was payable to the Company in ten equal annual
installments commencing December 15, 1996. The income from the non-compete
agreement was being recognized as the payments were earned over the legally
enforceable period. The Company received $300,000 through December 31, 1999.
The Company entered into an agreement with Person/Wolinsky, Inc. to satisfy
certain contractual obligations between Person/Wolinsky, Inc. and the Company
for a cash payment of $200,000, which was received during March 2000. The
$200,000 is being recognized ratably over the remaining life of the non-compete
agreement which expires August 2006.
10
<PAGE>
Bank Financing
During October, 2000 Security Bank of Kansas City issued a $471,000
substitute letter of credit as security for a lease on the Company's Garden
Grove, California location. The letter of credit expires October 2001 and will
be replaced by replacement letters of credit expiring annually through October
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.
The Company negotiated a $3,000,000 secured revolving credit facility with
Security Bank of Kansas City. This facility expires on April 30, 2001. 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 may
borrow approximately $2,500,000 for working capital purposes. The original
amount was reduced by the Garden Grove letter of credit. The Company had not
borrowed any funds under this facility as of September 30, 2000.
Cash Flows and Other
Net cash flows provided by operating activities were $3,479,000 in 2000
compared to $336,000 in 1999. The increased cash flows are primarily a result of
improved operating results and cash collections. In March 2000, the Company
received $200,000 as an early payoff for the non-compete agreement with Person
Wolinsky. Net receivables increased $4,241,000 during 2000. This was offset by
a $5,486,000 increase in deferred revenue as the company increased enrollments.
In addition, other changes in assets and liabilities increased $1,030,000 during
2000 primarily due to increased liabilities.
Investing activities decreased cash $650,000 in 2000 compared to $593,000
in 1999. For both years, capital expenditures were primarily for additional
computer equipment, classroom equipment and leasehold improvements.
Financing activities increased cash $22,000 in 2000 compared to $113,000 in
1999. The change is due to a greater number of stock options exercised in 1999.
The Company meets its working capital, capital equipment purchase and cash
requirements with funds generated internally. Management currently expects its
cash on hand, funds from operations and borrowings available under existing
credit facilities to be sufficient to cover both short-term and long-term
operating requirements. However, the Company may experience a reduction in cash
receipts due to the federal refund revision discussed below.
The Company believes that by leveraging faculty and administration wages it
will be able to control payroll expense as enrollments and student population
increase. The Company should be profitable for the year as long as the current
enrollments and retention trends continue and no unforeseen events occur.
The Company signed an agreement to license programming curriculum from a
company currently providing IT training. The Company will not incur any
licensing costs until the class begins in 2001. The Company believes the first
IT programming class will begin at one campus in early 2001 subject to
appropriate state and regulatory approvals.
The Company updated its website and began an internet marketing campaign in
the third quarter of 2000.
Contingencies
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.
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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 eligibility. The
Company recently received the final published Cohort Default Rates for 1998. The
rates ranged from 6.2% to 18.6% with an average of 13.0%.
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) (the "HEA") 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.
In 1994, ED established a policy of recertifying all institutions
participating in Title IV programs every five years. Several of the Company's
campuses received provisional certification during 1999. 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 Campuses that
received provisional certification in 1999 are: Anaheim, Jacksonville,
Lauderdale Lakes, Memphis, North Hollywood, Portland, San Bernardino and San
Diego. The provisional certifications expire during 2001. Provisional
certification was received due to default rates and financial responsibility
described below. The Company does not believe provisional certification would
have a material impact on its liquidity, results of operations or financial
position.
The Company is subject to extensive regulation by federal and state
governmental agencies and accrediting bodies. In particular, the HEA of 1965,
and the regulations promulgated thereunder by ED subject the Campuses to
significant regulatory scrutiny on the basis of numerous standards that Campuses
must satisfy in order to participate in the various federal student financial
assistance programs under Title IV of the HEA.
To participate in the Title IV Programs, an institution must be accredited
by an association recognized by ED. ED will certify an institution to
participate in the Title IV Programs only after an institution has demonstrated
compliance with the HEA and the ED's extensive regulations regarding
institutional eligibility. Under the HEA, accrediting associations are required
to include the monitoring of certain aspects of Title IV Program compliance as
part of their accreditation evaluations.
Congress must reauthorize the HEA approximately every six years. The most
recent reauthorization in October 1998 reauthorized the HEA until September 30,
2004. Changes made by the 1998 HEA reauthorization include (i) expanding the
adverse effects on Campuses with high student loan default rates, (ii)
increasing from 85 percent to 90 percent the portion of cash basis revenue that
may be derived each year from the Title IV Programs, (iii) revising the refund
standards that require an institution and the student to return a portion of the
Title IV Program funds for students who withdraw from the Campus and (iv) giving
the ED flexibility to continue an institution's Title IV participation without
interruption in some circumstances following a change of ownership or control.
The Company believes the majority of changes made by the 1998 HEA
reauthorization will have no material impact on its operations. However, the
Company believes the refund revision may have a material impact on the Company's
results of operations, financial condition and cash flows due to higher student
receivables which could increase bad debt.
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The 1998 HEA reauthorization imposes a limit on the amount of Title IV
funds a withdrawing student can use to pay their education costs. This
limitation permits a student to use only a pro rata portion of the Title IV
Program funds that the student would otherwise be eligible to use, if the
student withdraws during the first 60% of any period of enrollment. The
institution must refund to the appropriate lenders or Title IV Programs any
Title IV funds that the institution receives on behalf of a withdrawing student
in excess of the amount the student can use for such period of enrollment. Under
the new HEA requirements, students will be obligated to the Company for
education costs that the students can no longer pay with Title IV funds. The
Company expects that many withdrawing students will be unable to pay such costs
and that the Company may be unable to collect a significant portion of such
costs. Title IV Program funds are generally paid sooner and are more collectible
than tuition payments from other sources. The Company implemented this
requirement October 7, 2000. The Company has implemented a strategy to minimize
the impact of this requirement on the Company's bad debt. As of November 2000,
there has been no material impact on the Company's results of operations,
financial condition or cash flows. The Company is unable to determine the impact
of this revision for the future, however cash collections could be delayed
depending on the Company's success in collecting student receivables.
ED also 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 ED 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 applied 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.
ED notified the Company during the fourth quarter of 2000 that it had met
the factors of financial responsibility for the year ended December 31, 1999.
The Company calculated its' consolidated composite score under the financial
responsibility regulations as 1.5 for the year ended December 31, 1999.
Therefore, the Company is no longer required to comply with the zone
requirements, which it previously had to follow.
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 which
was $29,452 at March 31, 2000. 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
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$4,614,245. The 1999 correspondence was similar to correspondence received in
1997. The Company has not received any further correspondence since May 1999.
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 January 2000, the Company experienced water damage at one of its
locations due to the negligence of work performed by persons employed by the
building owner. A claim has been filed with the appropriate insurance agencies
representing those involved for damage to furniture, equipment, supplies, salary
and wage expense, and lost revenue. The Company has expensed all related costs
as incurred. The Company is unable to determine the likelihood of realization of
the claim.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
----------------------------------------------------------
The Company's exposure to market risk for changes in interest rates relate
to the increase or decrease in the amount of interest income the Company can
earn on short-term investments in certificate of deposits and cash balances.
Because the Company's investments are in short-term, investment-grade, interest-
bearing securities, the Company is exposed to minimum risk on the principal of
those investments. The Company ensures the safety and preservation of its
invested principal funds by limiting default risks, market risk and investment
risk. The Company does not use derivative financial instruments.
PART II -- OTHER INFORMATION
Item 1. 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 management, the Company's pending litigation and
disputed findings are not material to the Company's financial condition or its
results of operation.
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. Additional cases
were filed seeking similar relief on behalf of a total of 95 plaintiffs. Several
plaintiffs dropped from the case over time. The Company settled thirty-nine of
the cases during 1999. The Company settled one case with mediation during the
third quarter of 2000 for a minimal amount. The remaining plaintiffs currently
number 40. The Company anticipates the mediation of additional cases in the
fourth quarter of 2000 and first quarter of 2001. If a reasonable settlement is
not reached, the cases may begin to go to trial in 2001. The amount of damages
sought is not determinable. The Company believes these suits are without merit,
and will continue to defend them vigorously.
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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,
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 Company is not aware of any material violation by the Company of applicable
local, state and federal laws.
Item 2. Change in Securities -- None
----------------------------
Item 3. Defaults upon Senior Securities -- None
--------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders -- None
-----------------------------------------------------------
Item 5. Other Information -- None
------------------------
Item 6. Exhibits
--------
11 Computation of per share earnings
27 Financial Data Schedule
* No Reports on Form 8-K were filed during the period.
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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: November 9, 2000
By: /s/ Jack L. Brozman
--------------------------------------------
Jack L.Brozman, Chief Executive Officer
By: /s/ Paul R. Gardner
--------------------------------------------
Paul R. Gardner, Chief Financial Officer
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