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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission file number 0-16992
CONCORDE CAREER COLLEGES, INC.
(Exact name of registrant as specified in its charter)
5800 Foxridge, Suite 500
Mission, Kansas 66202
Telephone: (913) 831-9977
Incorporated in the State of Delaware
43-1440321
(I.R.S. Employer Identification No.)
Securities registered pursuant to Section 12(g) of the Act:
Title of Class
Common Stock, $.10 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate the number of outstanding shares of the Registrant's Common Stock, as
of March 28, 2000:
7,940,629 Shares of Common Stock, $.10 par value
The aggregate market value of Voting Securities (including Common Stock and
Class B Voting Convertible Preferred Stock), held by non-affiliates of the
Registrant was approximately $5,147,955 as of March 8, 2000. Part III
incorporates information by reference to the Registrant's definitive proxy
statement for Annual Meeting of Stockholders to be held May 27, 2000.
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CONCORDE CAREER COLLEGES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
Index
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Item Page
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PART I
<S> <C>
1.Business.............................................................. I-1
2.Properties............................................................ I-8
3.Legal Proceedings..................................................... I-9
4.Submission of Matters to a Vote of Security Holders................... I-9
PART II
5.Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................ II-10
6.Selected Financial Data............................................... II-10
7.Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. II-11
7A.Quantitative and Qualitative Disclosures about Market Risk........... II-13
8.Financial Statements and Supplementary Data........................... II-14
9.Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... II-40
10.Exhibit 23--Consent of Independent Accountants....................... II-45
PART III
11.Directors, Executive Officers, Promoters and Control Persons of the
Registrant (Incorporated by Reference)............................. III-46
12.Executive Compensation (Incorporated by Reference)................... III-46
13.Security Ownership of Certain Beneficial Owners and Management
(Incorporated by Reference)............................................ III-46
14.Certain Relationships and Related Transactions (Incorporated by
Reference)............................................................. III-46
PART IV
15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K..... IV-46
Signatures.............................................................. IV-50
</TABLE>
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PART I
Item 1. Business
Overview
The discussion set forth below, as well as other portions of this Form 10-K,
may contain forward-looking comments. Such comments are based upon information
currently available to management and management's perception thereof as of the
date of this Form 10-K and may relate to: (i) the ability of the Company to
realize increased enrollments from investments in infrastructure made over the
past year; (ii) the U.S. Department of Education's ("ED's") enforcement or
interpretation of existing statutes and regulations affecting the Company's
operations; and (iii) the sufficiency of the Company's working capital,
financings and cash flow from operating activities for the Company's future
operating and capital requirements. Actual results of the Company's operations
could materially differ from those forward-looking comments. The differences
could be caused by a number of factors or combination of factors including, but
not limited to, potential adverse effects of regulations; impairment of federal
funding; adverse legislative action; student loan defaults; changes in federal
or state authorization or accreditation; changes in market needs and
technology; changes in competition and the effects of such changes; changes in
the economic, political or regulatory environments; litigation involving the
Company; changes in the availability of a stable labor force; or changes in
management strategies. Readers should take these factors into account in
evaluating any such forward-looking comments. The following should be read in
conjunction with Part II, Item 7--Safe Harbor Statement.
Also see Part II Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Current Trends and Recent Events, and
Liquidity and Capital Resources."
The Company
The Company owns and operates proprietary, postsecondary institutions that
offer career vocational training programs primarily in the allied health field.
As of December 31, 1999, the Company operated Campuses at 11 locations in six
states (the "Campuses").
The Company was formed in 1988 as a Delaware corporation. Prior to March 31,
1988, the Company was the career college division of CenCor, Inc. ("CenCor").
The Company's principal office is located at 5800 Foxridge, Suite 500, Mission,
Kansas 66202 (telephone: 913/831-9977). Unless otherwise indicated, the term
"Company" refers to Concorde Career Colleges, Inc. and its direct and indirect
wholly owned subsidiaries.
The Campuses
The Company operates Campuses located in the following cities: North
Hollywood, Garden Grove, San Bernardino, and San Diego, California; Denver,
Colorado; Lauderdale Lakes, Jacksonville, and Tampa, Florida; Kansas City,
Missouri; Portland, Oregon; and Memphis, Tennessee. The Company has designated
each Campus as a "Concorde Career Institute," to increase name recognition.
Allied Health Curriculum
The Company's allied health programs of study are Vocational/Practical
Nursing, Respiratory Therapist, Respiratory Therapy Technician, Surgical
Technician, Pharmacy Technician, Radiology Technician, Medical Office
Assistant, Medical Secretary, Medical Assistant, Insurance Coding Specialist,
Dental Assistant, Dental Lab Technician and Patient Care Technician. Not all
programs are offered at all Campuses. The Kansas City, North Hollywood and
Memphis Campuses offer selected associate degree programs. Some Campuses
utilize different program titles pursuant to state regulations. In addition,
certain Campuses offer selected short term courses/programs, including Limited
X-Ray, Expanded Duties for Dental Assistants, Insurance Coding, Clinical Lab
Assistant, Patient Care Assistant, Nurse Assistant and various certification
test preparations in allied health occupations.
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The Campuses are on a non-traditional academic calendar with starting dates
for programs varying by location and type of program. Programs typically
commence monthly at each Campus. The Campus' programs of study range from five
to eighteen months and include from 400 to 2,985 hours of instruction. While
most programs are taught in a classroom atmosphere, hands-on
clinical/laboratory experience is an integral part of the curriculum. Most
programs of study include an externship immediately prior to graduation,
varying in duration from four to twelve weeks, depending on the particular
program.
Recruitment and Admissions
A typical student is either: (i) unemployed and enrolls in order to learn
new skills and obtain employment, or (ii) underemployed and enrolls in order to
acquire new skills or to update existing skills to increase his/her earning
capacity. The Company recruits students through advertising in various media,
including television, newspapers and direct mail. Students at some campuses are
also recruited through seminars and lectures presented to graduating seniors at
local high schools. Management estimates that approximately 35% of all
enrollments are the result of referrals from the Campus' students and
graduates.
Each Campus maintains an Admissions Department that is responsible for
conducting admissions interviews with potential applicants to provide
information regarding the Campus' programs and to assist with the application
process. In addition, each applicant for enrollment must take and pass an
entrance examination administered by persons other than admissions
representatives. The entrance examination and interview are designed to
determine the student's ability to benefit from the instruction provided by the
Campus and the student's level of motivation to complete the program.
The admissions criteria for the Campuses vary according to the program of
study. Each applicant for enrollment must have a high school diploma; the
equivalent of a high school diploma; or, at some campuses, must demonstrate the
ability to benefit from the program before admission is granted. All students
must be beyond the age of compulsory high school attendance. The Company
performs credit checks and/or utilizes a database maintained by the United
States Department of Education ("ED") to identify applicants who may be in
default on a prior student loan.
At December 31, 1999, the Company had approximately 3,300 students in
attendance at the Campuses.
Student Retention
The Company strives to help students complete their program of study through
admissions screening, financial aid planning and student services. Each Campus
has a staff member whose function is to provide student services concerning
academic and personal problems that might disrupt or result in a premature end
to a student's studies. Programs of study are offered in the morning,
afternoon, and evening to meet the students' scheduling needs. The Vocational
Nursing Program is also offered on weekends at some Campuses.
If a student terminates enrollment prior to completing a program, federal
and state regulations permit the Company to retain only a certain percentage of
the total tuition, which varies with, but equals or exceeds, the percentage of
the program completed. Amounts received by the Company in excess of such set
percentage of tuition are refunded to the student or the appropriate funding
source. See "Financing Student Education," and "Regulation" below.
Student Placement
The Company, through placement personnel at each Campus, provides job
placement assistance services for its graduates. The placement personnel
establish and maintain contact with local employers and other sources of
information on positions available in the local area. Additionally, the Campus'
Director of Graduate Services works with students on preparing resumes and
interviewing techniques. Postgraduate placement assistance is also provided,
including referral to other cities in which the Campuses are located. A number
of graduates do not
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require placement services. Frequently, the externship programs at the Campuses
result in placement of students with the practitioners participating in the
externship.
Campus Administration
The President and Chief Executive Officer (the "CEO") is responsible for the
overall performance of the Campuses. Reporting to him are: the Executive Vice
President, Chief Operating Officer (the "COO"); Vice President, Chief Financial
Officer; Vice President, Human Resources; Vice President, Academics; and the
Director of Information Technology.
Each Campus is operated independently and is managed on site by a Campus
Director reporting to the COO. In addition, most Campuses are staffed with a
Financial Aid Director, Director of Admissions, Academic Dean, Director of
Graduate Services, Director of Business Services, several other support staff
and a Director of Finance and Director of Student Services at some locations.
Instruction at each Campus is conducted by professional educators in the field
or by former and current members of the medical community on a full-time or
part-time basis. Instructional staff are selected based upon academic and
professional qualifications, and experience level.
Accreditation and Licensing
The Campuses are accredited through accrediting associations recognized by
ED. These associations are the Accrediting Commission of Career Schools and
Colleges of Technology ("ACCSCT") or the Council on Occupational Education
("COE"). Accreditation by a nationally recognized accrediting body is necessary
in order for a Campus to be eligible to participate in federally sponsored
financial aid programs for students. See "Financing Student Education."
Additionally, Campuses have received accreditation or approval for specific
programs from the following accrediting agencies: The American Society of
Health Systems Pharmacists, Commission on Accreditation of Health Education
Programs, Committee on Accreditation for Respiratory Care, the Commission on
Dental Accreditation, the Committee on Dental Auxiliaries-California Board of
Dental Examiners, Accreditation Review Committee on Education in Surgical
Technology, California Board of Vocational Nurse and Psychiatric Technician
Examiners, Bureau for Private Postsecondary and Vocational Education (BPPVE),
Colorado State Board of Nursing, State Board of Non-Public Career Education,
and the Department of Education. While such programmatic
accreditation/approvals are not necessary for participation in federally
sponsored financial aid programs, they are required for certification and/or
licensure of graduates from some of the programs, such as the Vocational or
Practical Nurse and Respiratory Therapy programs offered by particular
Campuses. Additionally, such accreditation or approvals have been obtained
because management believes they enhance the students' employment opportunities
in those states that recognize these accrediting agencies.
The qualifications of faculty members are regulated by applicable
accrediting bodies. These accrediting bodies have faculty standards that must
be met before the Campuses are given an accreditation renewal. In addition,
depending upon the curriculum being taught, faculty members must meet standards
set by applicable state licensing laws before annual licensing of the Campuses.
Each Campus is also licensed as an educational institution under applicable
state and local licensing laws, and is subject to a variety of state and local
regulations. Such regulations may include approval of the curriculum, faculty
and general operations.
Financing Student Education
Tuition and other ancillary fees at the Campuses vary from program to
program, depending on the subject matter and length of the program. The total
cost per program ranges from approximately $3,000 to $20,000.
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Most students attending the Campuses utilize federal government grants
and/or the Federal Family Education Loan programs available under the Higher
Education Act of 1965 ("HEA"), and various programs administered thereunder to
finance their tuition. In October 1998, the U.S. Congress enacted legislation
extending the HEA until September 30, 2004. Generally all of the material
program provisions and requirements remain in the same form and funding was
authorized at the same or higher levels. The legislation did make several
changes to Title IV programs including an increase in the amount of revenues
an institution may derive from the Title IV programs. This regulation,
generally referred to as the 85/15 rule, was modified to allow slightly higher
reliance on Title IV funding after October 1, 1998 (90%). In addition,
revisions to the change of ownership or control regulations now may allow an
institution to continue uninterrupted participation in the Title IV programs
provided it meets certain substantive and procedure requirements. See further
discussion below under "Regulation".
Each Campus has at least one financial aid officer to assist students in
preparing applications for federal grants and federal loans. Management
estimates that during 1999, 80% of Campus' cash receipts were derived from
funds obtained by students through these programs.
Currently, each Campus is an eligible institution for some or all of the
following federally funded programs: Federal Pell Grant (Pell), Federal
Supplemental Education Opportunity Grant (SEOG), Federal Perkins Loan, Federal
Parent Loan for Undergraduate Students (PLUS), Federal Stafford Loan, Federal
Unsubsidized Stafford Loan, and Veterans Administration Assistance. Also, some
students are eligible for assistance under the Department of Labor's Job
Training Partnership Act.
The states of California, Colorado, Tennessee, Florida, and Oregon each
offer state grants to students enrolled in educational programs of the type
offered by the Campuses. Typically, many restrictions apply in qualifying and
maintaining eligibility for participation in these state programs.
Students at the Campuses principally rely on a combination of two Federal
programs: Federal Pell Grants and Federal Family Education Loans (FFELs) also
referred to as Federal Subsidized Stafford, Unsubsidized Stafford, and PLUS
loans. FFELs are awarded annually to needy students studying at least half
time at an approved postsecondary educational institution. Federal Pell Grants
need not be repaid by the student. The maximum Pell Grant a student may
receive for the 1999-00 award year is $3,125 ($3,300 for 2000-2001). The
amount a student actually receives is based on a federal regulatory formula
devised by ED.
FFELs are low interest federal student loans provided by banks and other
lending institutions, the repayment of which is fully guaranteed as to
principal and interest by the federal government through a guarantee agency.
The student pays no interest on a Subsidized Stafford Loan while in school and
for a grace period (up to six months) thereafter; on unsubsidized loans,
interest accrues but is capitalized and added to the principal. Parents of
dependent students can receive PLUS loans. There is no interest subsidy for
PLUS loans. The borrower is responsible for all interest that accrues on the
loan while the student is in school. For both subsidized and unsubsidized
loans, students do not need to begin payment until expiration of a six-month
grace period following last day of attendance. After such time, repayment is
required in monthly installments, including a variable interest rate. Lenders
making subsidized FFELs receive interest subsidies during the term of the loan
from the federal government, which also pays all interest on these FFELs while
the student attends school and during the grace period. In the event of
default, all FFELs are fully guaranteed as to principal and interest by state
or private guarantee agencies which, in turn, are reimbursed by the federal
government according to the guarantee agency reinsurance provisions contained
in the Act.
State and federal student financial aid programs are subject to the effects
of state and federal budgetary processes. There can be no assurance that
government funding for the financial aid programs in which the Company's
students participate will continue to be available or maintained at current
levels. The loss or reduction in funding levels for state and federal student
financial aid programs could have a material adverse effect on the Company.
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Regulation
Both federal and state financial aid programs contain numerous and complex
regulations which require compliance not only by the recipient student but
also by the institution which the student attends. Because of the importance
of compliance with these regulations, the Company monitors the Campuses'
compliance through periodic visits to the individual Campuses by Corporate
Staff. If the Company should fail to materially comply with such regulations
at any of the Campuses, such failure could have serious consequences,
including limitation, suspension, or termination of the eligibility of that
Campus to participate in the funding programs. Audits by independent certified
public accountants of the Campus' administration of federal funds are mandated
by federal regulations. Additionally, these aid programs require maintaining
certain accreditation by the Campuses. See "Accreditation and Licensing" and
"Financing Student Education."
One of ED's principal criteria for assessing a Campus's eligibility to
participate in student loan programs is the cohort default rate threshold
percentage requirements (the "Cohort Default Rate") enacted in the Student
Loan Default Prevention Initiative Act of 1990. Due to concerns about default
rates, the ED has promulgated regulations affecting FFEL, and Federal Perkins
Loan Program loans. Cohort Default Rates are calculated by the Secretary of
Education and are designed to reflect the percentage of current and former
students entering repayment in the cohort year, the fiscal year of the federal
government--October 1 to September 30, who default on their loans during that
year or the following cohort year. This calculation includes only those
defaulted loans on which federal guaranty claims have been paid. A Campus may
request that a defaulted loan be removed from the calculation if the Campus
can demonstrate that the loan was improperly serviced and collected under
guidelines established in ED's regulations. A loan that is included in the
default rate calculation may be subsequently paid by the student, but is not
removed from the cohort calculation.
After January 1, 1991, the Secretary of Education was authorized to
initiate proceedings to limit, suspend or terminate the eligibility of an
institution to participate in the FFEL program if the Cohort Default Rate for
three consecutive years exceeds the prescribed threshold. Beginning with the
release of 1992 Cohort Default Rates in the summer of 1994, a Cohort Default
Rate equal to or exceeding 25% for each of the three most recent fiscal years
may be used as grounds for terminating FFEL eligibility.
The following table sets forth the 1995, 1996, 1997, and 1998 cohort
default rates for each of the Campuses. Publication of the Cohort Default
Rates for 1990 and 1991 has been suspended due to two injunctions obtained by
the Company to preclude ED from using 1990 and 1991 Cohort Default Rates as
grounds to limit, suspend, or terminate the Campus' eligibility to participate
in the FFEL program. The Company has a pending suit against the ED challenging
past cohort default rates. See Item 3, "Legal Proceedings."
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<CAPTION>
Cohort Default
Rates
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Campus 1995 1996 1997 1998(1)
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Anaheim, CA..... 26.1 20.5 19.8 14.0
Denver, CO...... 17.9 16.3 18.9 15.3
Jacksonville,
FL............. 19.8 26.3 21.8 6.0
Kansas City, MO. 18.2 19.6 19.0 12.8
Lauderdale
Lakes, FL...... 27.3 20.1 18.7 11.9
Memphis, TN..... 23.8 24.5 25.6 19.3
</TABLE>
<TABLE>
<CAPTION>
Cohort Default
Rates
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1995 1996 1997 1998(1)
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<S> <C> <C> <C> <C>
North Hollywood,
CA............. 21.3 14.0 18.0 13.1
Portland, OR.... 12.7 19.3 17.8 8.3
San Bernardino,
CA............. 27.5 19.9 28.1 14.7
San Diego, CA... 23.9 15.3 17.0 10.3
Tampa, FL....... 19.8 24.1 17.6 17.0
</TABLE>
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(1) Preliminary rates received February 2000. These rates are subject to
change and may not be reflective of the final rates for 1998.
The San Diego Campus regained its eligibility to participate in the FFEL
program in December 1999. Previously, the Campus did not maintain loan
eligibility because its' Cohort Default Rates for one of the three consecutive
published years, 1992, 1993, and 1994, was not below 25%. The Campus continued
to operate without FFEL eligibility providing qualified students with access
to Federal Pell grants and other sources of student financing, including loans
made by the Campus.
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All of the Company's Campuses have at least one of their three most recent
rates below 25% and are, therefore, eligible to continue participating in the
FFEL program. To help control default rates, the Company has instituted
aggressive default management at each Campus and monitors activity monthly.
Staff at each Campus assist and educate student borrowers in understanding
their rights and responsibilities as borrowers under these student loan
programs. In addition, each Campus contracts with a professional loan
management company to provide further assistance to former students upon
graduation or withdrawal. The aggressive default management the Company
established has positively effected the Cohort Default Rates.
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 a proprietary Campuses
cash basis revenue that may be derived each year from the Title IV Programs,
(iii) revising the refund standards that require an institution 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 could have a material impact
on the Company's results of operations, financial condition and cash flows.
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 will 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. As a result, the new HEA requirements could have a
material adverse effect on the Company's results of operations, financial
condition and cash flows beginning with the 2001 fiscal year. These new
requirements contained in the 1998 HEA reauthorization must be implemented by
all institutions no
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later than October 7, 2000, but an institution may elect to begin complying
with these new standards at an earlier date. The Company does not plan to elect
to comply with these new standards prior to October 7, 2000.
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.
The Company was notified by the ED, during 1999, that ED did not believe the
Company met the factors of financial responsibility for the year ended December
31, 1998. ED required 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. Cash monitoring requires the Company to credit
student accounts for Title IV disbursements before funds are requested from ED.
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 has not incurred any financial impact, due to
cash monitoring. There has not been a material impact to its balance sheet,
cash flows or results of operations. The Company's consolidated composite score
under the new financial responsibility regulations was 1.5 for the year ending
December 31, 1999. The Company believes it will no longer be required to make
disbursements to students under the cash monitoring method since its
consolidated corporate score is 1.5.
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.
Tax Reform Act of 1997
In August 1997, Congress passed the Tax Reform Act of 1997 that added
several new tax credits and incentives for students and extended benefits
associated with educational assistance programs. The Hope Scholarship Credit
provides up to $1,500 tax credit per year per eligible student for tuition
expenses in the first two years of postsecondary education in a degree or
certificate program. The Lifetime Learning Credit provides
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up to $1,000 tax credit per year per taxpayer return for tuition expenses for
all postsecondary education, including graduate studies. Both of these credits
are phased out for taxpayers with modified adjusted gross income between
$40,000 and $50,000 ($80,000 and $100,000 for joint returns) and are subject
to other restrictions and limitations. The Act also provides for the deduction
of interest from gross income on education loans and limited educational IRA's
for children under the age of 18. These deductions are also subject to
adjusted gross income limitations and other restrictions. These new provisions
became effective for the 1998 calendar year.
Competition
The Campuses are subject to competition from public educational
institutions in addition to a large number of other public and private
companies providing postsecondary education, many of which are older, larger
and have greater financial resources than the Company.
Management believes that the educational programs offered, the Campus'
reputation, and marketing efforts are the principal factors in a student's
choice to enroll at a Campus. Additionally, the cost of tuition and
availability of financing, the location and quality of the Campus' facilities,
and job placement assistance offered are important. The specific nature and
extent of competition varies from Campus to Campus, depending on the location
and type of curriculum offered. The Company competes principally through
advertising and other forms of marketing, coupled with specialized curricula
offered at competitive prices.
Employees
As of December 31, 1999, the Company had approximately 665 full and part-
time employees, of which approximately 339 were faculty members. The Company
has 205 management and administrative staff members employed at the Campuses,
and 40 employed at corporate headquarters. The remaining 81 employees are
admissions personnel.
Management and supervisory members of the administrative staff and
administrative faculty are salaried. All other faculty and employees are paid
on an hourly basis. The Company employs on both a full-time and part-time
basis, as well as on a substitute/on-call basis. The Company does not have an
agreement with any labor union representing its employees and has not been the
subject of any union organization efforts.
Item 2. Properties
The Company's corporate office is located in Mission, Kansas. All Company
facilities are leased.
The following table sets forth the location, approximate square footage and
expiration of lease terms for each of the Campuses as of December 31, 1999:
<TABLE>
<CAPTION>
Square
Locations Footage Expiration (1)
--------- ------- --------------
<S> <C> <C>
Garden Grove, CA...................................... 25,931 9-30-14
North Hollywood, CA................................... 35,155 12-31-11
San Bernardino, CA.................................... 20,933 6-30-00
San Diego, CA......................................... 12,244 10-31-00
Denver, CO............................................ 17,329 1-31-03
Lauderdale Lakes, FL.................................. 15,288 5-31-00
Jacksonville, FL...................................... 12,305 7-31-03
Tampa, FL............................................. 14,200 12-31-01
Kansas City, MO....................................... 18,097 2-28-01
Mission, KS (Corporate Office)........................ 14,384 7-31-03
Portland, OR.......................................... 16,232 10-31-04
Memphis, TN........................................... 21,933 7-31-02
</TABLE>
- --------
(1) Several of the leases provide renewal options, although renewals may be at
increased rental rates.
The Company also rents various equipment under leases that are generally
cancelable within 30 days.
8
<PAGE>
Item 3. Legal Proceedings
The Company's Campuses are sued from time to time by a student or students
who claim to be dissatisfied with the results of their program of study.
Typically, the claims allege a breach of contract, deceptive advertising and
misrepresentation and the student or students seek reimbursement of tuition.
Punitive damages sometimes are also sought. In addition, ED may allege
regulatory violations found during routine program reviews. The Company has,
and will continue to dispute these findings as appropriate in the normal
course of business. In the opinion of 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. 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 dropped from the case over time. The
Company made offers in 1999 to the remaining plaintiffs to settle all claims
for $750 per plaintiff (which included all attorneys' fees and costs) and
forgiveness of any debt due the Company from that plaintiff. Thirty nine of
the plaintiffs accepted the offer. The remaining plaintiffs currently number
43. On February 11, 2000 the court issued a decision dismissing the
plaintiff's fraud and misrepresentation allegations against the Company in one
of the cases. 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 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 4. Submission of Matters to a Vote of Security Holders.
None.
9
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's common stock ("Common Stock") is currently traded under the
symbol "CCDC" on the over-the-counter bulletin board (the "OTCBB"). The
following table sets forth the high and low bid information, for the periods
indicated as reported by the OTCBB.
<TABLE>
<CAPTION>
1999 High Low
---- ----- -----
<S> <C> <C>
First Quarter................................................ $0.66 $0.50
Second Quarter............................................... $0.81 $0.50
Third Quarter................................................ $1.75 $0.56
Fourth Quarter............................................... $1.69 $0.81
<CAPTION>
1998
----
<S> <C> <C>
First Quarter................................................ $2.44 $1.63
Second Quarter............................................... $2.13 $1.75
Third Quarter................................................ $1.94 $0.69
Fourth Quarter............................................... $1.06 $0.50
</TABLE>
At December 31, 1999, there were 253 shareholders of record of the Common
Stock.
On March 27, 2000, the bid and asked prices of the Company's Common Stock
on the OTCBB were $.50 and $.75 per share, respectively.
No cash dividends have been paid on the Common Stock and the Company does
not presently intend to pay cash dividends on Common Stock in the foreseeable
future. Class A Preferred Stock dividends of $467,000 were paid in 1997
pursuant to the Restructuring, Security and Guaranty Agreement, as amended
with CenCor.
Item 6. Selected Financial Data
The following data should be read in conjunction with Part II Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and Part II Item 8, "Financial Statements and Supplementary
Data."
Change in Accounting Principle
During the third quarter of 1997 the Company changed its method of
recognizing tuition revenue. Under the new method, tuition revenue is deferred
and recognized ratably over the period of the program. The Company previously
used a method in which a portion of tuition revenue was recognized in the
month a student began attending classes to offset the costs incurred in
obtaining the new student. The remaining tuition revenue was deferred and
recognized over the term of the program. The Company believes the new method
of revenue recognition is more representative of current industry practice and
is a preferable accounting method.
The effect of both the cumulative change for prior years and the change for
the year ended December 31, 1997, was to decrease net income by $670,000
($0.09 per basic share, $0.06 per diluted share). The cumulative effect on
income of the change on prior years (after reduction for income taxes of
$421,000) was a reduction of $659,000. The effect of the change on the year
ended December 31, 1997, was to decrease income before cumulative effect of a
change in accounting principle by $11,000.
10
<PAGE>
The following selected data has been derived from the Company's audited
financial statements for the years ended 1995 through 1999.
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands, except for per share
data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues.......................... $35,948 $34,306 $37,715 $40,119 $39,274
Operating expenses................ 36,490 36,076 36,926 39,254 36,835
Operating income (loss)........... (542) (1,770) 789 865 2,439
Interest expense.................. 172 188 454 371 659
Gain (loss) on sale of assets..... 313 (217)
Income (loss) before change in
accounting principle............. (477) (1,212) 936 549 1,599
Basic earnings (loss) per share
before change in accounting
principle (1).................... $ (.08) $ (.19) $ .28 $ .05 $ .19
Diluted earnings (loss) per share
before change in accounting
principle (1).................... $ (.08) $ (.19) $ .20 $ .04 $ .18
Net income (loss)................. (477) (1,212) 277 549 1,599
Basic earnings (loss) per share
(1).............................. $ (.08) $ (.19) $ .19 $ .05 $ .19
Diluted earnings (loss) per share
(1).............................. $ (.08) $ (.19) $ .14 $ .04 $ .18
Balance Sheet Data:
Total assets...................... $21,450 $21,235 $25,524 $24,282 $25,564
Long-term debt (2)................ 3,500 3,500 3,500 2,419 4,066
Stockholders' equity.............. 5,411 5,536 6,735 6,772 6,674
<CAPTION>
December 31
------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Other Data:
Number of locations (3)........... 11 12 12 12 13
------- ------- ------- ------- -------
Net enrollments (4)............... 5,633 4,823 6,367 6,855 7,121
</TABLE>
- --------
(1) See Note 10 of Notes to Consolidated Financial Statements for the basis of
presentation of earnings per share.
(2) Consists of long term debt and debt due to related party--see Note 7 of
Notes to Consolidated Financial Statements.
(3) Includes only Campuses open at December 31.
(4) Net enrollments" are students who begin a program of study, net of
cancellations. The table does not include data for the CPA Review Courses.
The table does include net enrollments for Campuses sold or closed during
the year.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table presents the revenue for the Campuses and CPA Review
Courses for the periods indicated.
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1999 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Health Vocational Programs.......................... $35,948 $34,306 $37,638
CPA Review Courses and other........................ 0 0 77
------- ------- -------
Total............................................... $35,948 $34,306 $37,715
======= ======= =======
</TABLE>
11
<PAGE>
The following table presents the relative percentage of revenues derived
from the Campuses and CPA Review Courses and certain consolidated statement of
operations items as a percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Health Vocational Programs........................... 100.0% 100.0% 99.8%
CPA Review Courses and other......................... 0 0 2
----- ----- -----
Total............................................ 100.0 100.0 100.0
Operating expenses:
Instruction costs and services..................... 38.9 37.3 35.1
Selling and promotional............................ 15.8 16.2 14.3
General and administrative......................... 44.5 47.8 44.7
Provision for uncollectible accounts............... 2.3 3.8 3.8
----- ----- -----
Total............................................ 101.5 105.1 97.9
Operating Income (Loss).............................. (1.5) (5.1) 2.1
Interest expense..................................... .5 .5 1.2
----- ----- -----
Income (Loss) before income taxes and gain on sale of
assets.............................................. (2.0) (5.6) 0.9
Gain (Loss) on sale of assets........................ 0.8
----- ----- -----
Income (Loss) before income tax...................... (2.0) (5.6) 1.7
Provision (Benefit) for income tax................... (0.7) (2.2) (.8)
----- ----- -----
Income (Loss) before cumulative effect of change in
accounting principle................................ (1.3) (3.4) 2.5
Cumulative effect of change in revenue recognition
method.............................................. (1.8)
----- ----- -----
Net income (Loss).................................... (1.3)% (3.4)% .7%
===== ===== =====
</TABLE>
Safe Harbor Statement
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"), and the
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. Statements in this Form 10-K containing the words
"estimate," "project," "anticipate," "expect," "intend," "believe," and
similar expressions may be deemed to create forward-looking statements which,
if so deemed, speak only as of the date the statement was made. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.
This Form 10-K, may contain forward-looking comments. Such comments are
based upon information currently available to management and management's
perception thereof as of the date of this Form 10-K and may relate to: (i) the
ability of the company to realize increased enrollments from investments in
infrastructure made over the past year; (ii) ED's enforcement or
interpretation of existing statutes and regulations affecting the Company's
operations; and (iii) the sufficiency of the Company's working capital,
financings and cash flow from operating activities for the Company's future
operating and capital requirements. Actual results of the Company's operations
could materially differ from those forward-looking comments. The differences
could be caused by a number of factors or combination of factors including,
but not limited to, potential adverse effects of regulations; impairment of
federal funding; adverse legislative action; student loan defaults; changes in
federal or state authorization or accreditation; 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.
12
<PAGE>
The forward-looking statements are qualified by important factors that
could cause actual results to differ materially from those in the forward-
looking statements, including, without limitation, the following: (i) the
Company's plans, strategies, objectives, expectations and intentions are
subject to change at anytime at the discretion of the Company; (ii) the effect
of economic conditions in the postsecondary education industry and in the
nation as a whole; (iii) the effect of the competitive pressures from other
educational institutions; (iv) the Company's ability to reduce staff turnover
and the attendant operating inefficiencies; (v) the effect of government
statutes and regulations regarding education and accreditation standards, or
the interpretation or application thereof, including the level of government
funding for, and the Company's eligibility to participate in, student
financial aid programs; and (vi) the role of ED and Congress, and the public's
perception of for-profit education as it relates to changes in education
regulations in connection with the reauthorization or the interpretation or
enforcement of existing regulations.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates by management
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period, primarily in the areas of provisions for uncollectible
accounts, useful lives of intangible assets, and deferred income taxes. Actual
results could differ from these estimates.
Current Trends and Recent Events
The student population was approximately 3,300 at December 31, 1999
compared to 2,800 at December 31, 1998. The student population increase was
primarily due to an increase in new students seeking admission into the
Company's campuses.
In 1999, the Company benefited from the following strategy to increase
enrollments; an advertising program was implemented including new television
and print ads, a student recruitment training program was completed and the
Company hired an advertising agency with proprietary school experience to
coordinate advertising for 1999. This strategy was effective and the Company
had approximately 800 more enrollments in 1999 compared to 1998. The Company
continually evaluates the effectiveness of its advertising program and will
make changes as necessary during 2000.
The Company believes that as a result of increased enrollments and student
population it will become profitable in 2000.
Payroll cost is the Company's primary expense. As the Company continues to
strengthen its staff and increase program offerings in the future, especially
more technical programs, this expense may continue to increase and is
reflected in instruction and general administrative costs.
The San Diego Campus regained its eligibility to participate in the FFEL
program in December 1999. The Company moved its Anaheim, California Campus to
a newly constructed building in Garden Grove, California during October 1999.
The Company's Miami, Florida Campus was merged with the Lauderdale Campus in
June 1999. During 1997, the North Hollywood Campus was moved to a new
location.
During March 2000, the Company entered into negotiations with
Person/Wolinsky, Inc. to satisfy all contractual obligations between
Person/Wolinsky, Inc. and the Company for a cash payment of $200,000 payable
during March 2000. The non-compete agreement will remain in effect as part of
this settlement.
Management of the Company currently believes that it can attain
profitability and maintain its cash position as long as there is no disruption
in the Company's current participation in the Title IV student financial
assistance programs or other unanticipated set-backs. However, the Company
cannot predict the activities that may or may not occur in the uncertain
regulatory environment in which the proprietary vocational training industry
operates. See Part I Item 1, "Business--Financing Student Education," and
"Business--Regulation."
13
<PAGE>
Operating Results
1999 compared to 1998
The Company experienced additional prospective student contacts during 1999
compared to 1998 as a result of advertising strategy changes. In addition,
student enrollments increased 16.8% to 5,633 for the year ended December 31,
1999 compared to 4,823 in 1998. Student population increased to approximately
3,300 at December 31, 1999 compared to 2,800 at December 31, 1998.
A net loss of $477,000 and $1,212,000 were recorded for the years ended
December 31, 1999 and 1998, respectively. The $735,000 decrease in net loss was
primarily due to additional revenue.
Revenue increased 4.8% or $1,642,000 to $35,948,000 for the year ended
December 31, 1999 compared to $34,306,000 for the same period in 1998. The
increased revenue is primarily a result of student enrollments increasing 16.8%
to 5,633 compared to 4,823 in 1998. Enrollment increased every quarter of 1999
compared to 1998. The increases were: 4.7% in the first quarter, 32.7% in the
second quarter, 17.9% in the third quarter and 14.7% in the fourth quarter. The
majority of the revenue increase was for non-tuition items charged to students
in the first month of their program. The average monthly student population for
both years was constant at approximately 3,300 students. The Miami Campus
accounted for a $995,000 decrease in revenue.
Total operating expenses increased 414,000 to $36,490,000 compared to
$36,076,000 for the year ended December 31, 1998. The Miami Campus accounted
for a $1,531,000 decrease in operating expenses in 1999.
Instruction Costs and Services--increased $1,187,000 to $13,988,000 compared
to $12,801,000 in 1998. The Miami Campus accounted for a $419,000 decrease. The
offsetting $1,606,000 increase was primarily a result of increased salaries,
textbook and uniform expenses due to additional enrollments compared to 1998.
Selling and Promotional--increased $129,000 to $5,683,000 compared to
$5,554,000 in 1998. The Miami Campus accounted for a $320,000 decrease. The
offsetting $449,000 increase was primarily due to additional wages compared to
1998. The additional wages resulted from an increase in admission employees
compared to 1998.
General and Administrative--decreased $400,000 to $16,007,000 compared to
$16,407,000 in 1998. The Miami Campus accounted for a $764,000 decrease. The
offsetting $364,000 increase was primarily a result of additional rent and
depreciation compared to 1998. In 1999, rent expense increased due to the
Company leasing more space and moving the Anaheim Campus to Garden Grove.
Depreciation expense increased in 1999 compared to 1998 due to a large number
of computers purchased in the second half of 1998 and first half of 1999 that
are depreciated over three years.
Provision for Uncollectible Accounts--decreased $502,000 or 38.2% to
$812,000 compared to $1,314,000 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 $17,000 to $171,000 compared to $188,000 in
1998. The decrease was primarily a result of the Company reversing estimated
interest associated with prior tax returns.
Provision for Income Taxes--In 1999, a tax benefit of $236,000 or 33% was
recorded compared to a tax benefit of $746,000 or 38% in 1998.
EPS and Weighted Average Common Shares--Basic and diluted weighted average
common shares increased to 7,815,000 in 1999 from 7,181,000 in 1998. Basic and
diluted loss per share was $.08 and $.19 for the year ended December 31, 1999
and 1998, respectively. Basic and diluted loss per share is shown after a
reduction for preferred stock dividend accretion of $165,000 in 1999 and
$142,000 in 1998.
14
<PAGE>
1998 compared to 1997
The Company recorded a net loss of $1,212,000 for the year ended December
31, 1998, compared to net income of $277,000 for the same period in 1997.
During 1997, the Company recorded a charge of $659,000, net of tax, for a
cumulative change in revenue recognition and a gain on sale of assets of
$313,000.
Total revenue decreased 9.0% or $3,409,000 to $34,306,000 from $37,715,000
in 1997. Enrollments decreased approximately 24.3% to 4,823 compared to 6,367
in 1997. The average monthly student population decreased from approximately
4,100 in 1997 to 3,300 in 1998. The 1998 revenue decrease was a result of
decreased enrollments and average monthly student population compared to 1997.
Total operating expenses decreased $850,000 or 2.3% to $36,076,000 compared
to $36,926,000 in 1997.
Instruction Costs and Services--decreased $430,000 to $12,801,000 compared
to $13,231,000 in 1997. The decrease was due to fewer students which resulted
in decreased textbook, uniform and classroom expenses compared to 1997.
Selling and Promotional--increased $148,000 to $5,554,000 compared to
$5,406,000 in 1997. The increase was due to increased advertising expense
compared to 1997.
General and Administrative--decreased $446,000 or 2.6% to $16,407,000
compared to $16,853,000 in 1997. The decrease is primarily due to reduced
professional fees compared to 1997.
Provision for Uncollectible Accounts--decreased $122,000 or 8.5% to
$1,314,000 from $1,436,000 in 1997. The Company recovered approximately
$433,000 in previously written off accounts during 1998. The offsetting
increase was due to additional bad debt accrual expense compared to 1997.
Approximately $95,000 of the bad debt accrual increase was due to additional
notes at the San Diego, Campus. See Part II, "Cash Flows and Other".
Interest Expense--decreased $266,000 to $188,000 compared to $454,000 in
1997. The majority of the decrease was due to the Company recording $175,000 of
interest expense in 1997 related to state and local tax liabilities.
Gain from Sale--In 1997, the gain from the sale of the Company's Michigan
property was $313,000 before any tax effect.
Provision for Income Taxes--The Company recorded a tax benefit of $746,000
in 1998 compared to $288,000 in 1997. During 1997, as a result of settlement of
outstanding tax issues, the Company released book tax contingencies totaling
$650,000.
EPS and Weighted Average Common Shares--Weighted average common shares
increased to 7,181,000 in 1998 from 7,034,000 in 1997 for basic earnings per
share ("EPS") and decreased to 7,181,000 in 1998 from 11,115,000 in 1997 for
dilutive EPS. Basic loss per share before accounting change was $0.19 for the
year ended December 31, 1998. Basic EPS before accounting change was $0.28 for
the same period in 1997. Basic earnings (loss) per share is shown after a
reduction of preferred stock dividends of $142,000 in 1998 and a reduction for
preferred stock dividends of $133,000 and an addition of $1,210,000 for the
Class A preferred stock redemption in 1997. Diluted loss per share before
accounting change was $0.19 for the year ended December 31, 1998, and diluted
earnings per share before accounting change was $0.20 for the same period in
1997. Diluted earnings (loss) per share is shown after a reduction of preferred
stock dividends of $142,000 in 1998 and a reduction for preferred stock
dividends of $28,000 and additions of $92,000 for convertible debt interest and
$1,210,000 for the gain on the Class A preferred stock redemption in 1997.
15
<PAGE>
1997 compared to 1996
Net income of the Company decreased $272,000 to $277,000 for the year ended
December 31, 1997, compared to $549,000 for the same period in 1996. During
1997, the Company recorded a charge of $659,000, net of tax, for a cumulative
change in revenue recognition.
Total revenue decreased 6.0% or $2,404,000 to $37,715,000 from $40,119,000
in 1996. The assets of the CPA Review Courses and the San Jose Campus were sold
in 1996 (the "Asset Sales") and accounted for $2,337,000 of the revenue
decrease. Revenue from the twelve remaining Campuses decreased $67,000 as a
result of a decrease in continuing student population.
Total operating expenses decreased $2,328,000 or 5.9% to $36,926,000
compared to $39,254,000 in 1996. The Asset Sales resulted in a decrease of
$2,414,000 in operating expenses.
Instruction Costs and Services--increased $50,000 to $13,231,000 compared to
$13,181,000 in 1996. The Asset Sales resulted in a decrease of $706,000 in
1997. The offsetting increase was primarily a result of increased faculty
wages.
Selling and Promotional--increased $14,000 to $5,406,000 compared to
$5,392,000 in 1996. The Asset Sales resulted in a decrease of $299,000 in 1997.
The remaining $313,000 increase is primarily due to additional advertising and
payroll expenses compared to 1996.
General and Administrative--decreased $595,000 or 3.4% to $16,853,000
compared to $17,448,000 in 1996. The Asset Sales resulted in a decrease of
$1,284,000 in 1997. The offsetting increase is primarily due to increased
occupancy expenses and additional payroll expense.
Provision for Uncollectible Accounts--decreased $1,797,000 or 55.6% to
$1,436,000 from $3,233,000 in 1996. The Asset Sales resulted in a decrease of
$125,000 in 1997. The remaining decrease is due to improved collection of
student notes and policy changes. The Company instituted a policy during 1996
that resulted in most students paying a portion of their tuition while they
attend school. In addition, during 1997 the Company reduced the length of time
students are allowed to repay the tuition not covered by student financial aid
programs. These policy changes in 1997 decreased the amount of at risk money
due the Company and the related write off of notes. The balance of notes
receivable decreased $1,643,000 from the same period in 1996.
Interest Expense--increased $83,000 to $454,000 compared to $371,000 in
1996. The increase was due to the Company recording $175,000 of interest
expense related to state and local tax liabilities.
Gain from Sale--In 1997, the gain from the sale of the Company's Michigan
property was $313,000 before any tax effect compared to a loss of $214,000 from
asset sales in 1996.
Provision for Income Taxes--The Company recorded a tax benefit of $288,000
in 1997 compared to a tax benefit of $272,000 in 1996. During 1997, as a result
of settlement of outstanding tax issues, the Company released book tax
contingencies totaling $650,000, compared to a reduction of $667,000 in the
valuation allowance recorded during 1996.
EPS and Weighted Average Common Shares--Weighted average common shares
increased to 7,034,000 in 1997 from 6,967,000 in 1996 for basic earnings per
share and increased to 11,115,000 in 1997 from 7,829,000 in 1996 for dilutive
earnings per share. Basic EPS before accounting change was $0.28 for the year
ended December 31, 1997, and $0.05 for the same period in 1996. Basic EPS is
shown after a reduction for preferred stock dividends of $133,000 and an
addition of $1,210,000 for the Class A preferred stock redemption in 1997 and a
reduction of $216,000 for preferred stock dividends in 1996. Diluted EPS before
accounting change was $0.20 for the year ended December 31, 1997, and $0.04 for
the same period in 1996. Diluted EPS is shown after
16
<PAGE>
a reduction for preferred stock dividends of $28,000 and additions of $92,000
for convertible debt interest and $1,210,000 for the gain on the Class A
preferred stock redemption in 1997 and a reduction of $216,000 for preferred
stock dividends in 1996.
Cumulative Effect of Accounting Change--The effect of both the cumulative
change for prior years and the change for the twelve months ended December 31,
1997, was to decrease net income after cumulative change in accounting
principle by $670,000 ($0.09 per basic share, $0.06 per diluted share). The
effect of the change on the year ended December 31, 1997, was to decrease
income before cumulative effect of a change in accounting principle by
$11,000. See discussion in Part II, Item 5.
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.
During March 2000, the Company entered into negotiations with
Person/Wolinsky, Inc. to satisfy all contractual obligations between
Person/Wolinsky, Inc. and the Company for a cash payment of $200,000 payable
during March 2000. The non-compete agreement will remain in effect as part of
this settlement.
On January 31, 1997, the Company sold its Warren, Michigan building for
approximately $725,000 (the "Warren Sale"). Proceeds of $310,000 were paid to
CenCor for redemption of approximately 27,000 shares of Class A Preferred
Stock then held by CenCor and $45,000 of accumulated preferred dividends on
the Class A Preferred Stock. The Company realized a gain of $313,000 before
income taxes in 1997 as a result of the Warren Sale.
Cahill, Warnock Transactions
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, LP and
Strategic Associates, LP, affiliated Baltimore-based venture capital funds
("Cahill-Warnock"), for the issuance by the Company and purchase by Cahill-
Warnock of: (i) 55,147 shares of the Company's new Class B Voting Convertible
Preferred Stock ("Voting Preferred Stock") for $1.5 million, and (ii) 5%
Debentures due 2003 ("New Debentures") for $3.5 million (collectively, the
"Cahill Transaction"). Cahill-Warnock subsequently assigned (with the
Company's consent) its rights and obligations to acquire 1,838 shares of
Voting Preferred Stock to James Seward, a Director of the Company, and Mr.
Seward purchased such shares for their purchase price of approximately
$50,000. The New Debentures have nondetachable warrants ("Warrants") for
approximately 2,573,529 shares of Common Stock, exercisable beginning August
25, 1998, at an exercise price of $1.36 per share of Common Stock. No warrants
were exercised as of December 31, 1999. Approximately $4.4 million of the
Cahill-Warnock transaction funds were used to satisfy CenCor obligations and
all obligations due Cencor were paid, redeemed, or otherwise satisfied on that
date, except for a continuing obligation to convey written-off receivables
which was fulfilled in January 1998.
The Voting Preferred Stock has an increasing dividend rate, therefore the
Voting Preferred Stock's carrying value has been discounted. This discount is
being amortized over the period from issuance until the perpetual dividends
are payable in 2003 to yield a constant dividend rate of 15%. The amortization
is recorded as a charge against retained earnings and as a credit to the
carrying amount of the Voting Preferred Stock. The amortization was $165,000
and $142,000 for the years ended December 31, 1999 and 1998, respectively.
Each share of Voting Preferred Stock is convertible into 20 shares of common
stock at the election of the holder for no additional consideration. There is
no mandatory redemption date.
17
<PAGE>
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 and the Company expects to renew or replace the facility. 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 replacement letter of
credit discussed below. The Company had not borrowed any funds under this
facility as of December 31, 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 flows provided by operating activities were $560,000 in 1999
compared to cash consumed of $1,446,000 by operating activities in 1998. The
Company received income tax refunds of $184,000 and $991,000 in 1999 and 1998,
respectively. The increased cash flow is a result of effective cash collections
and reduced net loss due to increased student enrollments during 1999 compared
to 1998.
The cash flows were positively effected by the increase in enrollments in
1999. The Company derives 80% of its cash from students who are eligible for
federally funded programs. Partial disbursements of these funds are usually
made within forty-five days of a students start date.
Capital expenditures in 1999 were $889,000 compared to $1,527,000 in 1998.
For both years, expenditures were primarily for additional computer equipment,
classroom equipment and leasehold improvements. The Company received
approximately $725,000 from the sale of the Michigan property during 1997. In
addition, in 1997 the Company received $300,000 for payment of a promissory
note due from the sale of the San Jose, California assets. Financing activities
increased cash flows $125,000 in 1999 compared to a $13,000 increase in 1998.
The change is due to stock options exercised. The Company believes that
existing future payables will be paid from cash provided by operating
activities, cash on hand, and if necessary, the existing credit facility.
The San Diego Campus regained eligibility to participate in the Family
Federal Education Loan (the "FFEL") program during 1999. During 1999 the Campus
offered financing directly to students. This financing increased the Campus'
notes receivable approximately $711,000.
Currently, each Campus is an eligible institution for some or all of the
following federally funded programs: Federal Pell Grant (Pell), Federal
Supplemental Education Opportunity Grant (SEOG), Federal Perkins Loan, Federal
Parent Loan for Undergraduate Students (PLUS), Federal Stafford Loan, Federal
Unsubsidized Stafford Loan, and Veterans Administration Assistance. Also, some
students are eligible for assistance under the Department of Labor's Job
Training Partnership Act.
The 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
18
<PAGE>
many withdrawing students will be unable to pay such costs and that the
Company will 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. As a result, the new HEA requirements
could have a material adverse effect on the Company's results of operations,
financial condition and cash flows beginning with the 2001 fiscal year. These
new requirements contained in the 1998 HEA reauthorization must be implemented
by all institutions no later than October 7, 2000, but an institution may
elect to begin complying with these new standards at an earlier date. The
Company does not plan to elect to comply with these new standards prior to
October 7, 2000.
Contingencies
In September 1999, the Internal Revenue Service (the "IRS") notified the
Company that its Federal tax return was being examined for the years ended
December 31, 1996, 1997 and 1998. The Company recently completed the audit and
no material changes or liabilities were incurred.
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.
Department of Education Matters
The Company generally relies on the availability of various federal and
state student financial assistance programs to provide funding for students
attending the Campuses. The Company also relies on the availability of lending
institutions willing to participate in these programs and to approve loans to
these students. Both federal and state financial aid programs contain numerous
and complex regulations which require compliance not only by the recipient
student but also by the institution which the student attends. If the Company
should fail to materially comply with such regulations at any of the Campuses,
such failure could have serious consequences, including limitation,
suspension, or termination of the eligibility of that Campus to participate in
the funding programs. The Company is not aware of any material violation of
these regulations.
After January 1, 1991, the Secretary of Education was authorized to
initiate proceedings to limit, suspend or terminate the eligibility of a
Campus to participate in the Federal Loan Programs if the Cohort Default Rate
for three consecutive years exceeds the prescribed threshold. Beginning with
the release of 1992 Cohort Default Rates in the summer of 1994, a Cohort
Default Rate equal to or exceeding 25% for each of the three most recent
fiscal years may be used as grounds for terminating Family Federal Education
Loan ("FFEL") eligibility.
The Company has a pending suit against the United States Department of
Education (ED) challenging past Cohort Default Rates published for the
Company's Campuses and the rate correction regulations, which ED adopted in
1994. ED's rate correction regulations contain a very restrictive standard for
removal of defaulted loans from a Campus Cohort Default Rate due to improper
servicing and collection, and the Company's suit contends that the regulations
are unlawful because they contravene provisions of the Higher Education Act of
1965 (as amended) and are arbitrary and capricious. All of the Company's
Campuses, 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 regained its eligibility to participate in the FFEL
program in December 1999. Previously, the Campus did not maintain loan
eligibility because it's Cohort Default Rates for one of the three consecutive
published years, 1992, 1993, and 1994, was not below 25%. The Campus continued
to operate without FFEL eligibility providing qualified students with access
to Federal Pell grants and other sources of student financing, including loans
made by the Campus.
19
<PAGE>
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 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 a proprietary Campuses
cash basis revenue that may be derived each year from the Title IV Programs,
(iii) revising the refund standards that require an institution 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.
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 will 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. As a result, the new HEA requirements could have a
material adverse effect on the Company's results of operations, financial
condition and cash flows beginning with the 2001 fiscal year. These new
requirements contained in the 1998 HEA reauthorization must be implemented by
all institutions no later than October 7, 2000, but an institution may elect to
begin complying with these new standards at an earlier date. The Company does
not plan to elect to comply with these new standards prior to October 7, 2000.
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
20
<PAGE>
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. 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.
The Company was notified by the ED, during 1999, 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
has not incurred any financial impact, due to cash monitoring. There has not
been a material impact to its balance sheet, cash flows or results of
operations. The Company's consolidated composite score under the new financial
responsibility regulations was 1.5 for the year ending December 31, 1999. The
Company believes it will no longer be required to make disbursements to
students under the cash monitoring method since its consolidated corporate
score is 1.5.
The Company assessed each Campus' compliance with the regulatory provisions
contained in 34 CFR 600.5(d)-(e) for the year ended December 31, 1999. These
provisions state that the percentage of cash revenue derived by federal Title
IV student assistance program funds cannot exceed 90% of total cash revenues.
This is commonly referred to as the 90/10 Rule which was modified as part of
the new legislation extending the Higher Education Act of 1965, as amended.
The Company's Campus percentage of Title IV Funds ranged from 34.8% to 85.7%.
Southern Career Institute
On May 31, 1990, a wholly-owned subsidiary of the Company, Concorde Career
Institute, Inc., a Florida corporation, acquired substantially all the assets
of Southern Career Institute, Inc. ("SCI"), a proprietary, postsecondary
vocational home-study school specializing in paralegal education. In 1991, an
accrediting commission failed to reaffirm accreditation of SCI under the
ownership of Concorde Career Institute, Inc. Also in 1991, SCI received notice
from the ED alleging that commencing June 1, 1990, SCI was ineligible to
participate in federal student financial assistance programs.
The ED gave notice that it intends to require SCI to repay all student
financial assistance funds disbursed from June 1, 1990, to November 7, 1990,
the effective date upon which ED discontinued disbursing student financial
assistance funds. The amount being claimed by ED is not determinable, but the
total of the amounts shown on six separate notices dated January 13, 1994, is
approximately $2.7 million. By letter dated February 24, 1994, counsel for SCI
provided certain information to the collection agency for ED and offered to
settle all claims of ED for the amount on deposit in the SCI bank account. In
December 1996, SCI was informed verbally
21
<PAGE>
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.
Other
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. 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 dropped from the case over time. The
Company made offers in 1999 to the remaining plaintiffs to settle all claims
for $750 per plaintiff (which included all attorneys' fees and costs) and
forgiveness of any debt due the Company from that plaintiff. Thirty nine of the
plaintiffs accepted the offer. The remaining plaintiffs currently number 43. On
February 11, 2000 the court issued a decision dismissing the plaintiffs fraud
and misrepresentation allegations against the Company in one of the cases. 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 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.
22
<PAGE>
Deferred Tax Assets
Readers are cautioned that forward looking statements contained in this
section should be read in conjunction with the Company's disclosures under the
heading "safe harbor statement". The following special factors could
particularly affect the Company's ability to achieve the required level of
future taxable income to enable it to realize its deferred tax assets: (i) the
ability of the Company to realize increased enrollments from investments in
infrastructure made over the past year; (ii) ED's enforcement or
interpretation of existing statutes and regulations affecting the Company's
operations; and (iii) the sufficiency of the Company's working capital,
financing and cash flow from operating activities for the Company's future
operating and capital requirements.
The Company has recorded net current and non-current deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, of $1,119,000 as of December 31, 1999 and
estimates that it must generate at least $3,024,000 of future taxable income
to realize those deferred tax assets. To achieve this level of future taxable
income, the Company intends to strive to increase it's enrollments in current
programs and add new programs at existing locations.
The table below reconciles earnings (loss) before income taxes for
financial statement purposes with taxable loss for income tax purposes:
<TABLE>
<CAPTION>
(Estimated)
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Earnings (loss) before income
taxes........................... $ (713,000) $(1,958,000) $ 648,000
Depreciation and Amortization.... 63,000 706,000 723,000
Bad Debts........................ (35,000) 440,000 (2,930,000)
Loss on disposal of assets....... (1,827,000)
Change in accounting method...... (275,000) (275,000) 793,000
Other............................ (172,000) (176,000) (1,429,000)
----------- ----------- -----------
Taxable Loss..................... $(1,132,000) $(1,263,000) $(4,022,000)
=========== =========== ===========
</TABLE>
The 1997 and 1998 taxable losses were carried back to the years 1994
through 1996, and all of the losses were absorbed in those years, with the
exception of $58,000 which is carried forward to 1999. The 1999 net operating
loss of $1,132,000 is carried forward to the year 2000, and is expected to be
absorbed in the years 2000 and 2001. The net operating losses for 1998 and
1999 expire in 2018 and 2019, respectively.
The Company has a state net operating loss carryforward of approximately
$5,300,000 expiring in 2003 through 2019. The state net operating loss
carryforward resulted in a deferred tax asset of $159,000.
Net deferred tax timing differences are estimated to reverse and become
available as tax deductions as follows:
<TABLE>
<S> <C>
2000.......................... $ 594,600
2001.......................... 358,600
2002.......................... 600
2003.......................... 67,600
2004.......................... 8,600
Thereafter.................... 89,000
----------
Total......................... $1,119,000
==========
</TABLE>
Year 2000 Disclosure
During 1999, the Company completed the process of preparing for the Year
2000 date change. This process involved identifying and remediating date
recognition issues in the Company's computer systems, working with
23
<PAGE>
third parties to address their Year 2000 issues, and developing contingency
plans to address potential risks in the event of Year 2000 failures. To date,
the Company has successfully managed the transition.
Although considered unlikely, unanticipated issues in the Company's
operations, including problems associated with its major vendors and suppliers
and disruptions to the economy in general, could still occur despite efforts to
date to achieve Year 2000 readiness. The Company will continue to monitor its
computer systems throughout 2000 to address Year 2000 issues.
The costs to address the Year 2000 related issues to date were immaterial
and funded through current operations. The Company does not anticipate such
costs to become material in the future. Although the Company is not aware of
any material operational or financial Year 2000 related issues not being
addressed, the Company cannot assure that its computer systems or the computers
and other systems of others upon which the Company depends will not incur Year
2000 issues, that the costs of its Year 2000 program will not become material
or that the Company's alternative plans will be adequate. If any such risks
(either with respect to the Company or its business partners materialize, the
Company could experience material adverse consequences to its business.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires that a Company recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Pursuant to an amendment
by the FSAB, SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and should not be retroactively applied to
financial statements of periods prior to adoption. The adoption of SFAS 133
will not impact the Company's consolidated financial position, results of
operations or cash flows.
Securities and Exchange Commission "SEC" Staff Accounting Bulletin No. 101
"SAB No. 101". In December 1999, the SEC issued SAB No. 101 "Revenue
Recognition in Financial Statements". SAB 101 contains guidance for the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The Company will adopt SAB 101 and report a change in
accounting principle in the first quarter of 2000. Under SAB 101, registration
fees will be recognized ratably over the life of the course rather than in the
month the student starts the program. In addition, the Company will estimate
refunds on tuition and textbook sales and recognize the refunds ratably over
the life of the course. Also, health screen revenues will be reduced by the
related health screen expenses for presentation purposes in 2000.
The Company estimates the cumulative effect this accounting principle change
will have in the first quarter of 2000 with respect to the recognition of
revenue is $185,000 or $0.02 a share after tax. The accounting principle change
will be recorded as a one-time charge in the first quarter of 2000. The Company
estimates that the registration fee change and the allowance for tuition and
textbook returns will reduce revenue by approximately $30,000 in 2000. The
change in the health screen presentation in 2000 will not affect net income but
will reduce revenue and the related expense by approximately the same amount in
2000. The Company estimates the total effect of the change will be
approximately a $200,000 reduction of net income or $.03 a share after tax in
2000.
Item 7A. 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 statements.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Concorde Career Colleges, Inc. and Subsidiaries:
Report of Independent Accountants........................................ II-26
Consolidated Balance Sheet--December 31, 1999 and 1998................... II-27
Consolidated Statement of Operations--For the Three Years Ended December
31, 1999................................................................ II-28
Consolidated Statement of Cash Flows--For the Three Years Ended December
31, 1999................................................................ II-29
Consolidated Statement of Changes In Stockholders' Equity--For the Three
Years Ended December 31, 1999........................................... II-30
Notes to Consolidated Financial Statements--For the Three Years Ended
December 31, 1999....................................................... II-31
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Concorde Career Colleges, Inc., and Subsidiaries:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' equity present fairly, in all material respects, the financial
position of Concorde Career Colleges, Inc. and its subsidiaries at December 31,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 2, the Company changed its method of recognizing
tuition revenue in 1997.
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 10, 2000
26
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 2,229,000 $ 2,433,000
Net receivables (Note 4)
Accounts receivable.............................. 10,927,000 9,198,000
Notes receivable................................. 2,531,000 4,071,000
Allowance for uncollectible accounts............. (1,234,000) (1,696,000)
----------- -----------
12,224,000 11,573,000
Recoverable income taxes........................... 422,000 799,000
Deferred income taxes (Note 8)..................... 287,000 824,000
Supplies and prepaid expenses...................... 766,000 784,000
----------- -----------
Total current assets........................... 15,928,000 16,413,000
Fixed Assets, Net (Note 5)........................... 3,033,000 3,234,000
Intangible Assets, Net (Note 3)...................... 375,000 435,000
----------- -----------
Other Assets:
Long-term notes receivable (Note 4)................ 1,173,000 996,000
Allowance for uncollectible notes (Note 4)......... (186,000) (183,000)
Other.............................................. 295,000 340,000
Deferred income taxes (Note 8)..................... 832,000
----------- -----------
Total other assets............................. 2,114,000 1,153,000
----------- -----------
$21,450,000 $21,235,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Deferred student tuition........................... $10,249,000 $ 8,722,000
Accrued salaries and wages......................... 410,000 680,000
Accrued interest................................... 15,000 179,000
Accounts payable and other accrued liabilities
(Note 6).......................................... 1,565,000 2,147,000
----------- -----------
Total current liabilities...................... 12,239,000 11,728,000
Long-Term Liabilities................................ 300,000 332,000
Deferred Income Taxes (Note 8)....................... 139,000
Subordinated Debt Due to Related Party Cahill-
Warnock............................................. 3,500,000 3,500,000
----------- -----------
Commitments and Contingencies (Notes 5, 7, 9, and 11)
Stockholders' Equity:
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, 7,941,923 shares issued and 7,916,123
shares outstanding in 1999 (7,254,626
shares issued and 7,227,826 shares outstanding in
1998)............................................. 794,000 725,000
Capital in excess of par........................... 8,589,000 8,143,000
Accumulated deficit................................ (3,919,000) (3,277,000)
Less-treasury stock, 25,800 shares in 1999 and
26,800 in 1998, at cost........................... (59,000) (61,000)
----------- -----------
Total stockholders' equity..................... 5,411,000 5,536,000
----------- -----------
$21,450,000 $21,235,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Years Ended December 31, 1999
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Revenues............................ $35,948,000 $34,306,000 $37,715,000
Costs and Expenses:
Instruction costs and services........ 13,988,000 12,801,000 13,231,000
Selling and promotional............... 5,683,000 5,554,000 5,406,000
General and administrative............ 16,007,000 16,407,000 16,853,000
Provision for uncollectible accounts.. 812,000 1,314,000 1,436,000
----------- ----------- -----------
Total Expenses...................... 36,490,000 36,076,000 36,926,000
----------- ----------- -----------
Operating Income (Loss)................. (542,000) (1,770,000) 789,000
Interest Expense........................ 171,000 188,000 454,000
----------- ----------- -----------
Income (Loss) Before Income Taxes and
Gain on Sale of Assets................. (713,000) (1,958,000) 335,000
Gain on Sale of Assets.................. 313,000
----------- ----------- -----------
Income (Loss) Before Income Taxes....... (713,000) (1,958,000) 648,000
Benefit for Income Taxes................ (236,000) (746,000) (288,000)
----------- ----------- -----------
Income (Loss) Before Cumulative Effect
of Change in Accounting Principle...... (477,000) (1,212,000) 936,000
Cumulative Effect on Prior Years (to
December 31, 1996) of Change in Revenue
Recognition Method, Net of Tax......... (659,000)
----------- ----------- -----------
Net Income (Loss)....................... $ (477,000) $(1,212,000) $ 277,000
=========== =========== ===========
Weighted Average Shares Outstanding:
Basic................................. 7,815,000 7,181,000 7,034,000
Diluted............................... 7,815,000 7,181,000 11,115,000
Basic Earnings (Loss) Per Share: (Note
10)
Income (Loss) before cumulative effect
of change in accounting principle.... $ (.08) $ (.19) $ .28
Cumulative effect on prior years (to
December 31, 1996) of change in
revenue recognition method........... (.09)
----------- ----------- -----------
Net Income (Loss) Per Share............. $ (.08) $ (.19) $ .19
=========== =========== ===========
Diluted Earnings (Loss) Per Share: (Note
10)
Income (Loss) before cumulative effect
of change in accounting principle.... $ (.08) $ (.19) $ .20
Cumulative effect on prior years (to
December 31, 1996) of change in
revenue recognition method........... (.06)
----------- ----------- -----------
Net Income (Loss) Per Share............. $ (.08) $ (.19) $ .14
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
28
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Years Ended December 31, 1999
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows--operating activities:
Net income (Loss)...................... $ (477,000) $(1,212,000) $ 277,000
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities--
Gain on sale of assets................. (313,000)
Depreciation and amortization.......... 1,109,000 985,000 1,185,000
Provision for uncollectible accounts... 812,000 1,314,000 1,436,000
Cumulative effect of change in
accounting principle.................. 659,000
Deferred income taxes.................. (434,000) 454,000 (89,000)
Change in assets and liabilities--
(Increase) decrease in receivables,
net................................... (1,637,000) 648,000 (1,408,000)
Increase (decrease) in deferred student
tuition............................... 1,527,000 (2,156,000) (189,000)
(Increase) decrease in income taxes
payable/recoverable................... 377,000 (459,000) (779,000)
Other changes in assets and
liabilities, net...................... (717,000) (1,020,000) 378,000
----------- ----------- ----------
Total adjustments.................... 1,037,000 (234,000) 880,000
----------- ----------- ----------
Net operating activities............... 560,000 (1,446,000) 1,157,000
----------- ----------- ----------
Cash Flows--Investing Activities:
Proceeds from sale of assets........... 1,025,000
Capital expenditures................... (889,000) (1,527,000) (1,417,000)
----------- ----------- ----------
Net investing activities............. (889,000) (1,527,000) (392,000)
----------- ----------- ----------
Cash flows--Financing Activities:
Principal payments on debt............. (2,819,000)
Preferred stock redemption............. (1,769,000)
Class B preferred stock issued, net.... 1,441,000
Subordinated debt issued to
Cahill/Warnock........................ 3,500,000
Stock options exercised................ 98,000 13,000 14,000
Stock purchase plan.................... 27,000
----------- ----------- ----------
Net financing activities............. 125,000 13,000 367,000
----------- ----------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................. (204,000) (2,960,000) 1,132,000
Cash and Cash Equivalents at Beginning of
Period.................................. 2,433,000 5,393,000 4,261,000
----------- ----------- ----------
Cash and Cash Equivalents at End of
Period.................................. $ 2,229,000 $ 2,433,000 $5,393,000
=========== =========== ==========
Supplemental Disclosures of Cash Flow
Information.............................
Cash Paid During the Year for:
Interest............................... $ 335,000 $ 177,000 $ 264,000
Income taxes........................... $ 19,000 $ 249,000 $ 653,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1999
<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,
1996................... $26,000 $699,000 $7,736,000 $(1,628,000) $(61,000) $ 6,772,000
Net Income............ 277,000 277,000
Class A Preferred
Stock Redemption..... (26,000) (1,276,000) (1,302,000)
Class A Preferred
Dividend Payments.... (467,000) (467,000)
Class B Preferred
Stock Issuance....... 6,000 1,435,000 1,441,000
Class B Preferred
Stock Accretion...... 105,000 (105,000)
Stock Options
Exercised............ 14,000 14,000
------- -------- ---------- ----------- -------- -----------
Balance, December 31,
1997................... 6,000 713,000 8,000,000 (1,923,000) (61,000) 6,735,000
Net Loss.............. (1,212,000) (1,212,000)
Class B Preferred
Stock Accretion...... 142,000 (142,000)
Stock Options
Exercised............ 12,000 1,000 13,000
------- -------- ---------- ----------- -------- -----------
Balance, December 31,
1998................... 6,000 725,000 8,143,000 (3,277,000) (61,000) 5,536,000
Net Loss.............. (477,000) (477,000)
Class B Preferred
Stock Accretion...... 165,000 (165,000)
Stock Options
Exercised............ 64,000 260,000 324,000
Employee Stock
Purchase Plan........ 5,000 22,000 27,000
Treasury Stock Issued. (1,000) 2,000 1,000
------- -------- ---------- ----------- -------- -----------
Balance, December 31,
1999................... $ 6,000 $794,000 $8,589,000 $(3,919,000) $(59,000) $ 5,411,000
======= ======== ========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three Years Ended December 31, 1999
1. Basis of Presentation and Transactions with CenCor, Inc.:
Basis of Presentation
Concorde Career Colleges, Inc. ("Concorde") and Subsidiaries (the
"Company") owns and operates proprietary, post-secondary Campuses which offer
career training designed to provide primarily entry-level skills readily
needed in the allied health field. The Company's Campuses offer vocational
training programs in six states, California, Colorado, Florida, Missouri,
Oregon, and Tennessee (the "Campuses"). The Company previously offered review
courses for the Certified Public Accountants ("CPA").
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Concorde and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Transactions with CenCor, Inc.
The Chairman of the Board, President and Chief Executive Officer of the
Company was also the Chairman of the Board, President and Treasurer of CenCor.
The Company was previously a division of Cencor. As a result of a refinancing
on February 25, 1997, the Company paid approximately $4,409,000 to CenCor.
This payment satisfied all debts and obligations owned by the Company to
CenCor except for an obligation to convey "written-off" receivables which was
fulfilled in January 1998.
The Company under an agreement effective October 1995 subleased space to
CenCor. The Company and CenCor do not allocate charges to each other,
otherwise share expenses, or have balances owing to each other. CenCor was
dissolved in December 1999.
Asset Dispositions
On August 2, 1996, the Company sold the assets of Person/Wolinsky
Associates, a wholly owned subsidiary. As a result of the sale the Company
received cash proceeds of $879,000. The loss from the sale was $124,000 before
income taxes. In addition, a $750,000 non-compete agreement was payable to the
Company in ten equal annual installments commencing December 15, 1996. The
first four $75,000 payments were received as scheduled. The income from the
non-compete agreement was being recognized as the payments were earned over
the legally enforceable period.
During March 2000, the Company entered into negotiations with
Person/Wolinsky, Inc. to satisfy all contractual obligations between
Person/Wolinsky, Inc. and the Company for a cash payment of $200,000 payable
during March 2000. The non-compete agreement will remain in effect as part of
this settlement.
On January 31, 1997, the Company sold its Warren, Michigan building for
approximately $725,000 (the "Warren Sale"). Proceeds of $310,000 were paid to
CenCor for redemption of approximately 27,000 shares of Class A Preferred
Stock then held by CenCor and $45,000 of accumulated preferred dividends on
the Class A Preferred Stock. The Company realized a gain of $313,000 before
income taxes in 1997 as a result of the Warren Sale.
31
<PAGE>
2. Summary of Accounting Policies:
Recognition of Revenue
During the third quarter of 1997 the Company changed its method of
recognizing tuition revenue. Under the new method, tuition revenue is deferred
and recognized ratably over the period of the program. The Company previously
used a method in which a portion of tuition revenue was recognized in the
month a student began attending classes to offset the costs incurred in
obtaining the new student. The remaining tuition revenue was deferred and
recognized over the term of the program. The Company believes the new method
of revenue recognition is more representative of current industry practice and
is a preferable accounting method.
The effect of both the cumulative change for prior years and the change for
the year ended December 31, 1997, was to decrease net income after cumulative
change in accounting principle by $670,000 ($0.09 per basic share and $0.06
per diluted share). The cumulative effect on income of the change on prior
years (after reduction for income taxes of $421,000) was a reduction of
$659,000. The effect of the change on the year ended December 31, 1997, was to
decrease income before cumulative effect of a change in accounting principle
by $11,000.
Most students enrolled at the Company's Campuses utilize state and federal
government grants and/or guaranteed student loan programs to finance their
tuition. During 1999 management estimates that 80 percent of its cash receipts
were derived from funds obtained by students through federal Title IV student
aid programs and 20 percent were derived from state sponsored student
education and training programs and cash received from students and other
sources.
The Company charges earnings for the amount of estimated uncollectible
accounts based upon current collection trends. However, unpaid balances are
usually written-off 180 days after the student withdraws or graduates from the
Campus and/or ceases to make payments. Internal collection efforts, as well as
outside professional services, are used to pursue collection of delinquent
accounts.
Cash and Cash Equivalents
Cash and cash equivalents are those items with a maturity of three months
or less. Generally cash equivalents are represented by money market funds or
treasury bills that are carried at cost, which approximates fair value, on the
Company's balance sheet.
Accounts Receivable and Notes Receivable
Accounts receivable are amounts due from students that are expected to be
paid through the use of federal and state sources of funds.
Notes receivable are promissory notes due the Company from current and
former students. The notes are not secured by collateral and have differing
interest rates. It is not practicable to determine the fair value of notes
receivables without incurring excessive costs. The Company has no quoted
market prices or dealer quotes to compare similar loans made to borrowers with
similar credit ratings. In addition, the Company cannot readily establish a
pattern of future cash flows to estimate fair value. However, management
believes that the carrying amounts (net of allowance for doubtful accounts)
recorded at December 31, 1999, are not impaired and are not materially
different from their corresponding fair values.
Depreciation and Amortization
Furniture and equipment is depreciated over the estimated useful lives of
the assets (3 to 10 years) using the straight-line method. Leasehold
improvements are amortized over the shorter of their estimated useful life or
terms of the related leases.
32
<PAGE>
Maintenance and repairs are charged to expense as incurred. The costs of
additions and improvements are capitalized and depreciated over the remaining
useful lives of the assets. The costs and accumulated depreciation of assets
sold or retired are removed from the accounts and any gain or loss is
recognized in the year of disposal.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
that requires the recognition of deferred tax assets and liabilities based on
the difference between the financial statement and income tax basis of assets
and liabilities as measured by the enacted tax rates which will be in effect
when the differences reverse. Deferred tax expense (benefit) is generally the
result of changes in the deferred tax assets and liabilities.
Acquisitions
All prior period acquisitions have been accounted for by the purchase
method, under which a portion of the purchase price is assigned to net
tangible assets acquired to the extent of their estimated values. The Company
periodically reviews goodwill to assess recoverability, and impairments would
be recognized in operating results if a permanent diminution in value were to
occur. The excess of the purchase price over net tangible assets acquired is
amortized over 5 to 20 years. The total amount of amortization expense was
$60,000 in 1999, $159,000 in 1998 and $174,000 in 1997.
3. Intangible Assets:
Intangible assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- ---------
<S> <C> <C>
Goodwill.............................................. $913,000 $ 913,000
Less accumulated amortization......................... 538,000 478,000
-------- ---------
Net intangibles..................................... $375,000 $ 435,000
======== =========
</TABLE>
4. Receivables:
Changes in the allowance for uncollectible accounts were as follows for the
year ended December 31:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Beginning balance................................ $ 1,696,000 $1,309,000
Provision for uncollectible accounts............. 747,000 1,284,000
Charge-offs...................................... (1,209,000) (897,000)
----------- ----------
$1,234,000 $1,696,000
=========== ==========
</TABLE>
Changes in the allowance for uncollectible notes were as follows for the
year ended December 31:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Beginning balance................................... $ 183,000 $ 616,000
Provision for uncollectible notes................... 65,000 30,000
Charge-offs......................................... (62,000) (463,000)
--------- ---------
$ 186,000 $ 183,000
========= =========
</TABLE>
5. Fixed Assets:
Fixed assets consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Furniture and equipment............................. $6,094,000 $5,583,000
Leasehold improvements.............................. 2,682,000 2,535,000
---------- ----------
Gross fixed assets................................ 8,776,000 8,118,000
Less accumulated depreciation and amortization...... 5,743,000 4,884,000
---------- ----------
Net fixed assets.................................. $3,033,000 $3,234,000
========== ==========
</TABLE>
33
<PAGE>
The Company rents office space and buildings under operating leases
generally ranging in terms from 5 to 15 years. The leases provide renewal
options and require the Company to pay utilities, maintenance, insurance and
property taxes. The Company also rents various equipment under operating
leases that are generally cancelable within 30 days. Rental expense for these
leases was $2,876,000 in 1999, $2,709,000 in 1998 and $2,737,000 in 1997.
Aggregate minimum future rentals payable under the operating leases at
December 31, 1999, were:
<TABLE>
<S> <C>
2000........................................................... $2,426,000
2001........................................................... 2,081,000
2002........................................................... 1,777,000
2003........................................................... 1,261,000
2004........................................................... 1,022,000
2005 and thereafter............................................ 7,798,000
</TABLE>
6. Accounts Payable and Other Accrued Liabilities:
Accounts Payable and Other Accrued Liabilities consist of the following at
December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Accounts payable................................... $ 565,000 $ 696,000
Accrued vacation................................... 621,000 552,000
Other accrued liabilities.......................... 215,000 703,000
Accrued other taxes................................ 23,000 27,000
Accrued health expense............................. 141,000 169,000
---------- ----------
Accounts payable and accrued liabilities........... $1,565,000 $2,147,000
========== ==========
</TABLE>
7. Long-Term Debt and Refinancing:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Subordinated debenture, five percent, due February
2003............................................. $3,500,000 $3,500,000
========== ==========
</TABLE>
Cahill, Warnock Transactions
On February 25, 1997, the Company entered into agreements, which soon
thereafter closed, with Cahill, Warnock Strategic Partners Fund, LP and
Strategic Associates, LP, affiliated Baltimore-based venture capital funds
("Cahill-Warnock"), for the issuance by the Company and purchase by Cahill-
Warnock of: (i) 55,147 shares of the Company's new Class B Voting Convertible
Preferred Stock ("Voting Preferred Stock") for $1.5 million, and (ii) 5%
Debentures due 2003 ("New Debentures") for $3.5 million (collectively, the
"Cahill Transaction"). Cahill-Warnock subsequently assigned (with the
Company's consent) its rights and obligations to acquire 1,838 shares of
Voting Preferred Stock to James Seward, a Director of the Company, and Mr.
Seward purchased such shares for their purchase price of approximately
$50,000. Approximately $4.4 million of the Cahill-Warnock transaction funds
were used to satisfy Cencor obligations. The New Debentures have nondetachable
warrants ("Warrants") for approximately 2,573,529 shares of Common Stock,
exercisable beginning August 25, 1998, at an exercise price of $1.36 per share
of Common Stock. No warrants were exercised as of December 31, 1999.
The Voting Preferred Stock has an increasing dividend rate, therefore the
Voting Preferred Stock's carrying value has been discounted. This discount is
being amortized over the period from issuance until the perpetual dividends
are payable in 2003 to yield a constant dividend rate of 15%. The amortization
is recorded as a charge against retained earnings and as a credit to the
carrying amount of the Voting Preferred Stock. The amortization
34
<PAGE>
was $165,000 and $142,000 for the years ended December 31, 1999 and 1998,
respectively. Each share of Voting Preferred Stock is convertible into 20
shares of common stock at the election of the holder for no additional
consideration. There is no mandatory redemption date.
Other
In conjunction with the refinancing, the Company negotiated a $3,000,000
secured revolving credit facility on March 13, 1997, with Security Bank of
Kansas City. This facility expires on April 30, 2000 and the Company expects
to renew or replace the facility. Funds borrowed under this facility will be
used for working capital purposes. This facility has an interest rate of prime
plus one percent and no commitment fee. It is secured by all cash, accounts
and notes receivable, furniture and equipment, and capital stock of
subsidiaries. The Company had not borrowed any funds under this facility as of
December 31, 1999. However, the available credit was reduced to approximately
$2,400,000 when the facility was amended on December 28, 1998. The amendment
reduced the maximum credit available by the stated amount of the issued and
outstanding letter of credit or replacement letter of credit discussed below.
On December 30, 1998 Security Bank of Kansas City issued a $589,000 letter
of credit as security for a lease on the Company's new Garden Grove,
California location. The letter of credit expires April 19, 2000 and will be
replaced by replacement letters of credit expiring annually through April 19,
2004. The replacement letters of credit will be issued at amounts decreasing
20% annually from the original issue amount. The letter can only be drawn upon
if there is a default under the lease agreement.
8. Income Taxes:
The income tax benefit, excluding the cumulative effect of a change in
accounting method, for the three years ended December 31, 1999, consist of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ----------- ---------
<S> <C> <C> <C>
Current tax expense (benefit)
Federal................................ $ 165,000 $(1,161,000) $(210,000)
State.................................. 33,000 (39,000) 11,000
--------- ----------- ---------
198,000 (1,200,000) (199,000)
Deferred tax expense (benefit)
Federal................................ (367,000) 515,000 (134,000)
State.................................. (67,000) (61,000) 45,000
--------- ----------- ---------
(434,000) 454,000 (89,000)
--------- ----------- ---------
Tax provision (benefit).................. $(236,000) $ (746,000) $(288,000)
========= =========== =========
</TABLE>
The Company's effective income tax expense (benefit) rate, excluding the
cumulative effect of a change in accounting method, differs from the federal
statutory rate of 34% for the three years ended December 31, 1999, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Provision at federal statutory rate....... $ (243,000) $(665,000) $ 220,000
State taxes, net of federal benefit....... (55,000) (120,000) 36,000
Goodwill amortization..................... 52,000 52,000 39,000
Tax contingency release................... (650,000)
Other, net................................ 10,000 (13,000) 67,000
---------- --------- ---------
$(236,000) $(746,000) $(288,000)
========== ========= =========
</TABLE>
During the third quarter of 1997, the Company and the Internal Revenue
Service ("IRS") signed agreements relating to outstanding tax issues for tax
years 1988 through 1992. During the course of this examination, which
35
<PAGE>
was initiated in 1992, the Company recorded loss contingencies for additional
interest and income taxes. As a result of the final agreement, the Company
released tax contingencies during 1997 of $650,000.
In September 1999, the IRS notified the Company that its Federal tax return
was being examined for the years ended December 31, 1996, 1997 and 1998. The
Company recently completed the audit and no material changes or liabilities
were incurred.
Deferred tax assets and liabilities consisted of the following at December
31:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Credit losses......................... $ 98,000 $ 146,000 $ 693,000
Deferred student tuition.............. 198,000 297,000 396,000
AMT credit carryforward............... 331,000 340,000
Depreciation and amortization......... 150,000
NOL carryforward...................... 600,000
Other expenses currently deductible
for financial reporting purposes but
not for tax.......................... 268,000 449,000 365,000
---------- ---------- ----------
Net assets.......................... 1,495,000 1,232,000 1,604,000
Depreciation and amortization........... (232,000) (248,000)
Other expenses currently deductible
for tax but not for financial
reporting purposes................... (144,000) (299,000) (465,000)
---------- ---------- ----------
Net................................. $1,119,000 $ 685,000 $1,139,000
========== ========== ==========
</TABLE>
At December 31, 1999, deferred tax assets included $287,000 current assets
and $832,000 non-current assets.
The Company provided no valuation allowance against deferred tax assets
recorded as of December 31, 1999, as management believes that it is more
likely than not that all deferred assets will be fully realizable in future
tax periods.
At December 31, 1999, the Company had various federal and state net
operating loss ("NOL") carryforwards available to offset future taxable
income. The Company has approximately $1,200,000 of NOL carryforwards for
federal purposes. Portions of the federal NOL are subject to utilization
limitations. However, the deferred tax asset related to the federal NOL is
expected to be fully realized as such losses do not begin expiring until the
2018 tax year. The majority of the federal NOL does not expire until the 2019
tax year.
The Company also has NOL carryforwards for state purposes. The deferred tax
asset related to the state NOL is expected to be fully realized as well. At
December 31, 1999, the Company had approximately $331,000 alternative minimum
tax credit carryforwards available to reduce future federal income tax
liabilities. Under current Federal income tax law, the alternative minimum tax
credit can be carried forward indefinitely.
9. Stock Option Plans:
During 1998 the Company's shareholders approved an employee stock purchase
plan (the "Purchase Plan"). The Purchase Plan allows employees of the Company
to purchase shares of the Company's common stock at periodic intervals,
generally quarterly, through payroll deductions. The purchase price per share
is the lower of 95% of the closing price on the offering commencement date or
termination date. The Purchase Plan expires in 2003 and permits a maximum of
50,000 shares to be issued each year. In 1998, no shares were issued. In 1999,
49,647 shares of stock were issued under this plan at exercise prices between
$.48 and $.60.
The Company has an incentive stock option plan (the "1998 Option Plan")
approved at the 1998 stockholders meeting authorizing issuance of 500,000
shares of its common stock to certain officers and employees of the Company.
Options are granted at fair market value on the date of grant for a term of
not more than ten years. The 1998 Option Plan supplemented the previous plan
(the "1988 Option Plan") which was
36
<PAGE>
authorized in 1988 and expired in 1998. On December 31, 1998 the Company had
issued options for 445,100 shares from the 1988 Option Plan of which 261,250
had been exercised. In addition, options for 154,900 unissued shares expired
with the plan.
In 1994, the Company's Compensation Committee (the "Compensation
Committee") awarded to an officer of the Company the option to purchase
750,000 shares pursuant to a stock option plan (the "1994 Option Plan") which
was approved at the 1994 stockholders meeting. Under the option's terms, the
officer was granted the right to immediately exercise a portion of the option
to purchase 300,000 shares (granted at 110% of fair market value). Vesting of
the right to purchase the remaining 450,000 shares was based on performance of
the Company through 1996. Of the shares subject to annual performance vesting,
150,000 shares failed to vest and lapsed in 1994, as the Company did not
attain required performance objectives. These shares were returned to the plan
for future issuance. The Company met the performance criteria during 1995 and
1996. As a result 150,000 shares were vested in each year and the Company
recognized additional compensation expense of $113,000 in 1996 and $71,000 in
1995. The officer exercised the right to purchase these 600,000 shares of
stock at an exercise price of $.15 in 1999. In 1997, the Compensation
Committee awarded the same officer the option to purchase an additional
400,000 shares at an exercise price of $1.09. The market value on the date of
grant was $0.99. Under the terms of the option, the officer was granted the
right to immediately exercise a portion of the option (80,000 shares). Vesting
of the right to purchase the remaining 320,000 shares is based upon lapse of
time through the following four years.
During 1999, the Company awarded the three non-officer Directors the option
to purchase 8,333 shares each pursuant to a non-qualified stock option
agreement. Under the agreement the three Director's were granted the right to
immediately exercise 8,333 shares each at an exercise price of $0.56. The
market value on the date of grant equaled the exercise price.
Also during 1997, the Compensation Committee awarded another officer of the
Company the option to purchase 575,000 shares pursuant to a non-qualified
stock option agreement. Under the agreement the officer was granted the right
to immediately exercise 115,000 shares at an exercise price of $1.00. The
right to exercise the remaining shares vests ratably over the next four years
at an exercise price of $1.375. The market value on the date of grant was
$1.375. The Company recognized $43,000 of compensation expense in 1997. The
officer resigned during 1998. As a result, the option to purchase 345,000 of
the shares was cancelled during 1998. The remaining 230,000 shares expired in
February 1999.
The Company applies Accounting Principles Board ("APB") Opinion 25 and
related interpretations in accounting for its stock option plans and employee
stock purchase plan. Accordingly, no compensation expense has been recognized
for the 1998 Option Plan or 1988 Option Plan as the exercise price equals the
stock price on the date of grant. Also, no compensation expense has been
recognized for the employee stock purchase plan because the purchase plan
qualifies as a non-compensatory plan. Compensation expense has been recorded
for the 1994 Option Plan performance based options and the 1997 non-qualified
options as noted above. Had compensation expense been determined for stock
options granted in 1999, 1998, and 1997 and the employee stock purchase plan
based on the fair value at grant dates consistent with Statement of Financial
Accounting Standards ("SFAS 123") "Accounting for Stock Based Compensation,"
the Company's pro forma net income (loss) before cumulative effect of change
in accounting principle and basic and diluted earnings per share for the three
years ended December 31, 1999, 1998, and 1997 would have been as presented
below:
<TABLE>
<CAPTION>
Pro forma EPS
Twelve Months Ended December
31,
--------------------------------
1999 1998 1997
--------- ----------- --------
<S> <C> <C> <C>
Pro forma income (loss) before
cumulative effect of change in
accounting principle.................. $(570,000) $(1,284,000) $482,000
========= =========== ========
Pro forma Basic Earnings Per Share..... $ (0.09) $ (0.20) $ 0.22
========= =========== ========
Pro forma Diluted Earnings Per Share... $ (0.09) $ (0.20) $ 0.16
========= =========== ========
</TABLE>
37
<PAGE>
The pro forma amounts were estimated for common stock options using the Black-
Scholes option-pricing model with the following assumptions for 1999, 1998,
and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Weighted average expected life (years)............... 6 6 6
Expected Volatility.................................. 117% 158% 207%
Annual Dividend per share............................ 0 0 0
Risk free interest rate.............................. 6.59% 4.73% 5.74%
Weighted average fair value of options granted....... $0.45 $1.14 $1.21
</TABLE>
The pro forma amounts for the employee stock purchase plan were estimated
using the Black-Scholes option-pricing model with the following assumptions
for 1999:
<TABLE>
<CAPTION>
1999
-----
<S> <C>
Weighted average expected life (years)............................. 1
Expected Volatility................................................ 118%
Annual Dividend per share.......................................... 0
Risk free interest rate............................................ 5.93%
Weighted average fair value of options granted..................... $0.27
</TABLE>
The following table reflects activity in options for the three-year period
ended December 31, 1999.
<TABLE>
<CAPTION>
Weighted-
Total average
1988 1998 Number of Exercise Option Price
Plan(1) 1994 Plan NQSO Plan Shares Price per share
-------- --------- -------- ------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding December 31, 1996. 481,100 600,000 1,081,100 $0.17 $0.10 to $1.06
Exercised..................... (136,600) (136,600) $0.10 $0.10 to $0.13
Canceled...................... (50,000) (50,000) $0.34 $0.10 to $1.00
Issued........................ 46,500 400,000 575,000 1,021,500 $1.24 $0.78 to $2.25
-------- --------- -------- ------- ---------
Outstanding December 31, 1997. 341,000 1,000,000 575,000 1,916,000 $0.74 $0.10 to $2.25
Exercised..................... (124,650) (124,650) $0.11 $0.10 to $0.55
Canceled...................... (41,500) (345,000) (386,500) $1.35 $0.10 to $2.06
Issued........................ 176,500 176,500 $1.23 $0.84 to $1.81
-------- --------- -------- ------- ---------
Outstanding December 31, 1998. 174,850 1,000,000 230,000 176,500 1,581,350 $0.56 $0.10 to $2.25
Exercised..................... (36,650) (600,000) (636,650) $0.15 $0.10 to $0.55
Canceled...................... (20,500) (230,000) (34,000) (284,500) $1.10 $0.10 to $1.81
Issued........................ 24,999 328,000 352,999 $0.52 $0.50 to $0.85
-------- --------- -------- ------- ---------
Outstanding December 31, 1999. 117,700 400,000 24,999 470,500 1,013,199 $0.86 $0.10 to $2.25
</TABLE>
- -------
(1) The 1988 Plan expired in 1998.
The following table reflects information for exercisable options for the
three year period ended December 31, 1999.
<TABLE>
<CAPTION>
Range of Shares Weighted Average
Exercise Prices Exercisable Exercise Price
--------------- ----------- ----------------
<S> <C> <C> <C>
1997......................... $0.10-$2.25 1,012,100 $0.31
1998......................... $0.10-$2.25 893,375 $0.33
1999......................... $0.10-$2.12 380,000 $0.91
</TABLE>
38
<PAGE>
The following table reflects option information as of December 31, 1999.
<TABLE>
<CAPTION>
Shares Average Weighted Shares Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
(Years)
<S> <C> <C> <C> <C> <C>
$0.10................... 53,000 3.5 $0.10 53,000 $0.10
$0.28................... 15,500 5.1 $0.28 15,500 $0.28
$0.50................... 273,500 9.0 $0.50 -0- -0-
$0.55-$0.59............. 56,199 7.0 $0.57 21,200 $0.58
$0.63-$1.00............. 79,000 8.2 $0.79 14,500 $0.85
$1.03................... 72,500 8.7 $1.03 17,300 $1.03
$1.06-$1.31............. 407,000 6.2 $1.09 244,600 $1.09
$1.81................... 43,500 8.5 $1.81 8,700 $1.81
$2.09-$2.12............. 13,000 7.8 $2.22 5,200 $2.22
</TABLE>
10. Earnings Per Share
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed giving effect to all
dilutive potential common shares that were outstanding during the period
(i.e., the denominator used in the basic calculation is increased to include
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued). A summary of the
calculations of basic and diluted earnings per share for the years ended
December 31, 1999, 1998, and 1997, is presented below:
<TABLE>
<CAPTION>
Basic EPS Diluted EPS
Year Ended December 31, Year Ended December 31,
----------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
---------- ----------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Shares
Outstanding............ 7,815,000 7,181,000 7,034,000 7,815,000 7,181,000 7,034,000
Options................. 968,000
Debt/Non Detachable
Warrants............... 2,179,000
Class B Preferred Stock. 934,000
---------- ----------- ---------- --------- ----------- ----------
Adjusted Weighted
Average Shares......... 7,815,000 7,181,000 7,034,000 7,815,000 7,181,000 11,115,000
---------- ----------- ---------- --------- ----------- ----------
Income (Loss) Before
Accounting Change...... $ (477,000) $(1,212,000) $ 936,000 $(477,000) $(1,212,000) $ 936,000
Class A Preferred
Dividends.............. (28,000) (28,000)
Class A Preferred Stock
Redemption (1)......... 1,210,000 1,210,000
Class B Preferred
Dividends Accretion.... (165,000) (142,000) (105,000) (165,000) (142,000)
Interest on Convertible
Debt, net of tax....... 92,000
---------- ----------- ---------- --------- ----------- ----------
Income (Loss) Available
to Common Shareholders
Before Accounting
Change................. (642,000) (1,354,000) 2,013,000 (642,000) (1,354,000) 2,210,000
Cumulative Effect on
Prior Years of
Accounting Change...... (659,000) (659,000)
---------- ----------- ---------- --------- ----------- ----------
Income (Loss) Available
to Common Shareholders. $ (642,000) $(1,354,000) $1,354,000 $(642,000) $(1,354,000) $1,551,000
========== =========== ========== ========= =========== ==========
Income (Loss) per Share
Before Accounting
Change................. (0.08) (0.19) 0.28 (0.08) (0.19) 0.20
Cumulative per Share
Effect of Accounting
Change................. (.09) (0.06)
---------- ----------- ---------- --------- ----------- ----------
Net Income (Loss) per
Share.................. $ (0.08) $ (0.19) $ 0.19 $ (0.08) $ (0.19) $ 0.14
========== =========== ========== ========= =========== ==========
</TABLE>
- --------
(1) Represents the excess of the carrying value of the preferred stock over
the amount of cash paid to the holder of the preferred stock retired on
February 25, 1997.
39
<PAGE>
11. Contingencies and Litigation:
In September 1999, the United States Internal Revenue Service (the "IRS")
notified the Company that its Federal tax return was being examined for the
years ended December 31, 1996, 1997 and 1998. The Company recently completed
the audit and no material changes or liabilities were incurred.
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.
Department of Education Matters
The Company generally relies on the availability of various federal and
state student financial assistance programs to provide funding for students
attending the Campuses. The Company also relies on the availability of lending
institutions willing to participate in these programs and to approve loans to
these students. Both federal and state financial aid programs contain numerous
and complex regulations which require compliance not only by the recipient
student but also by the institution which the student attends. If the Company
should fail to materially comply with such regulations at any of the Campuses,
such failure could have serious consequences, including limitation,
suspension, or termination of the eligibility of that Campus to participate in
the funding programs. The Company is not aware of any material violation of
these regulations.
After January 1, 1991, the Secretary of Education was authorized to
initiate proceedings to limit, suspend or terminate the eligibility of a
Campus to participate in the Federal Loan Programs if the Cohort Default Rate
for three consecutive years exceeds the prescribed threshold. Beginning with
the release of 1992 Cohort Default Rates in the summer of 1994, a Cohort
Default Rate equal to or exceeding 25% for each of the three most recent
fiscal years may be used as grounds for terminating Family Federal Education
Loan ("FFEL") eligibility.
The Company has a pending suit against the United States Department of
Education (ED) challenging past Cohort Default Rates published for the
Company's Campuses and the rate correction regulations, which ED adopted in
1994. ED's rate correction regulations contain a very restrictive standard for
removal of defaulted loans from a Campus Cohort Default Rate due to improper
servicing and collection, and the Company's suit contends that the regulations
are unlawful because they contravene provisions of the Higher Education Act of
1965 (as amended) and are arbitrary and capricious. All of the Company's
Campuses, 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 regained its eligibility to participate in the FFEL
program in December 1999. Previously, the Campus did not maintain loan
eligibility because its' Cohort Default Rates for one of the three consecutive
published years, 1992, 1993, and 1994, was not below 25%. The Campus continued
to operate without FFEL eligibility providing qualified students with access
to Federal Pell grants and other sources of student financing, including loans
made by the Campus.
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
40
<PAGE>
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 a proprietary Campuses
cash basis revenue that may be derived each year from the Title IV Programs,
(iii) revising the refund standards that require an institution 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.
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 will 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. As a result,
the new HEA requirements could have a material adverse effect on the Company's
results of operations, financial condition and cash flows beginning with the
2001 fiscal year. These new requirements contained in the 1998 HEA
reauthorization must be implemented by all institutions no later than October
7, 2000, but an institution may elect to begin complying with these new
standards at an earlier date. The Company does not plan to elect to comply
with these new standards prior to October 7, 2000.
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 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.
41
<PAGE>
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.
The Company was notified by the ED, during 1999, 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
has not incurred any financial impact, due to cash monitoring. There has not
been a material impact to its balance sheet, cash flows or results of
operations. The Company's consolidated composite score under the new financial
responsibility regulations was 1.5 for the year ending December 31, 1999. The
Company believes it will no longer be required to make disbursements to
students under the cash monitoring method since its consolidated corporate
score is 1.5.
The Company assessed each Campus' compliance with the regulatory provisions
contained in 34 CFR 600.5(d)--(e) for the year ended December 31, 1999. These
provisions state that the percentage of cash revenue derived by federal Title
IV student assistance program funds cannot exceed 90% of total cash revenues.
This is commonly referred to as the 90/10 Rule which was modified as part of
the new legislation extending the Higher Education Act of 1965, as amended.
The following table sets forth the 1999 cash revenue derived from federal
Title IV student assistance program funds, non Title IV program funds and the
percentage of Title IV program funds to total funds.
<TABLE>
<CAPTION>
Campus Title IV Funds Non-Title IV Funds Percentage
------ -------------- ------------------ ----------
<S> <C> <C> <C>
Garden Grove, CA(1)............ $3,363,000 $ 802,000 80.7%
Denver, CO..................... 1,669,000 542,000 75.5
Jacksonville, FL............... 1,417,000 254,000 84.8
Kansas City, MO................ 1,817,000 399,000 82.0
Lauderdale Lakes, FL........... 2,665,000 473,000 84.9
Memphis, TN.................... 3,272,000 546,000 85.7
North Hollywood, CA............ 4,740,000 1,379,000 77.5
Portland, OR................... 2,419,000 629,000 79.3
San Bernardino, CA............. 4,492,000 796,000 85.0
San Diego, CA.................. 452,000 847,000 34.8
Tampa, FL (2).................. 1,706,000 314,000 84.5
</TABLE>
- --------
(1) Formerly the Anaheim Campus.
(2) The Miami Campus is an additional location of the Tampa Campus.
Southern Career Institute
On May 31, 1990, a wholly-owned subsidiary of the Company, Concorde Career
Institute, Inc., a Florida corporation, acquired substantially all the assets
of Southern Career Institute, Inc. ("SCI"), a proprietary, postsecondary
vocational home-study school specializing in paralegal education. In 1991, an
accrediting commission failed to reaffirm accreditation of SCI under the
ownership of Concorde Career Institute, Inc. Also in 1991, SCI received notice
from the ED alleging that commencing June 1, 1990. SCI was ineligible to
participate in federal student financial assistance programs.
42
<PAGE>
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.
Other
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.
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 dropped from the case over time. The
Company made offers in 1999 to the remaining plaintiffs to settle all claims
for $750 per plaintiff (which included all attorneys' fees and costs) and
forgiveness of any debt due the Company from that plaintiff. Thirty nine of
the plaintiffs accepted the offer. The remaining plaintiffs currently number
43. On February 11, 2000 the court issued a decision dismissing the plaintiffs
fraud and misrepresentation allegations against the Company in one of the
cases. 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 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
43
<PAGE>
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.
12. Quarterly Financial Information (unaudited):
<TABLE>
<CAPTION>
1999 March 31 June 30 September 30 December 31
- ---- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Operating revenue............ $8,315,000 $8,562,000 $9,763,000 $ 9,308,000
========== ========== ========== ===========
Income (loss) before income
taxes....................... $ (594,000) $ (300,000) $ 224,000 $ (43,000)
========== ========== ========== ===========
Net income (loss)............ $ (362,000) $ (183,000) $ 136,000 $ (68,000)
========== ========== ========== ===========
Basic earnings (loss) per
share....................... $ (.05) $ (.03) $ .01 $ (.01)
========== ========== ========== ===========
Diluted earnings (loss) per
share....................... $ (.05) $ (.03) $ .01 $ (.01)
========== ========== ========== ===========
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C>
Operating revenue............ $9,094,000 $8,339,000 $8,642,000 $ 8,231,000
========== ========== ========== ===========
Income (loss) before income
taxes....................... $ 145,000 $ (741,000) $ (355,000) $(1,007,000)
========== ========== ========== ===========
Net income (loss)............ $ 89,000 $ (453,000) $ (216,000) $ (632,000)
========== ========== ========== ===========
Basic earnings (loss) per
share....................... $ .01 $ (.07) $ (.04) $ (.09)
========== ========== ========== ===========
Diluted earnings (loss) per
share....................... $ .01 $ (.07) $ (.04) $ (.09)
========== ========== ========== ===========
<CAPTION>
1997
- ----
<S> <C> <C> <C> <C>
Operating revenue............ $9,388,000 $9,220,000 $9,319,000 $ 9,788,000
========== ========== ========== ===========
Income (loss) before income
taxes....................... $ 658,000 $ (63,000) $ (67,000) $ 120,000
========== ========== ========== ===========
Income (loss) before
cumulative effect of change
in accounting principle..... $ 480,000 $ (55,000) $ 517,000 $ (6,000)
========== ========== ========== ===========
Cumulative effect of change
in accounting principle..... $ (659,000) $ $ $
========== ========== ========== ===========
Net income (loss)............ $ (179,000) $ (55,000) $ 517,000 $ (6,000)
========== ========== ========== ===========
Basic earning (loss) per
share:
Income (loss) before
cumulative effect of
change in accounting
principle................. $ .24 $ (.01) $ .07 $ (.01)
========== ========== ========== ===========
Cumulative effect of change
in accounting principle... $ (.10) $ $ $
========== ========== ========== ===========
Net income (loss).......... $ .14 $ (.01) $ .07 $ (.01)
========== ========== ========== ===========
Dilutive earning (loss) per
share:
Income (loss) before
cumulative effect of
change in accounting
principle................. $ .18 $ (.01) $ .05 $ (.01)
========== ========== ========== ===========
Cumulative effect of change
in accounting principle... $ (.07) $ $ $
========== ========== ========== ===========
Net income (loss).......... $ .11 $ (.01) $ .05 $ (.01)
========== ========== ========== ===========
</TABLE>
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
44
<PAGE>
(Exhibit 23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-26093) of Concorde Career Colleges, Inc. of our
report dated March 10, 2000 relating to the financial statements and financial
statement schedules, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 28, 2000
45
<PAGE>
PART III
Item 11. Directors and Executive Officers of the Registrant
Information regarding Directors and Executive Officers is incorporated
herein by reference from the Company's definitive proxy statement. This
information can be found in the proxy statement under the headings: DIRECTORS
and EXECUTIVE OFFICERS.
Item 12. Executive Compensation
Information regarding Executive Compensation is incorporated herein by
reference from the Company's definitive proxy statement. This information can
be found in the proxy statement under the heading: EXECUTIVE COMPENSATION AND
OTHER INFORMATION (specifically excluding disclosures in such section relating
to Item 402(I), (k), and (l) of Regulation S-K.)
Item 13. Security Ownership of Certain Beneficial Owners and Management
Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated herein by reference from the Company's definitive
proxy statement. This information can be found in the proxy statement under
the headings: PROXY STATEMENT and STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
Item 14. Certain Relationships and Related Transactions
Information regarding Certain Relationships and Related Transactions is
incorporated herein by reference from the Company's definitive proxy
statement. This information can be found in the proxy statement under the
headings: EXECUTIVE COMPENSATION AND OTHER INFORMATION and OTHER TRANSACTIONS.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. List of documents filed as part of this report.
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
1. Financial Statements:
Concorde Career Colleges, Inc. and Subsidiaries
Report of Independent Accountants..................................... II-16
Consolidated Balance Sheet............................................ II-17
Consolidated Statement of Operations.................................. II-19
Consolidated Statement of Cash Flows.................................. II-21
Consolidated Statement of Changes In Stockholders' Equity............. II-22
Notes to Consolidated Financial Statements............................ II-23
</TABLE>
2. Financial Statement Schedules:
Concorde Career Colleges, Inc. and Subsidiaries
Schedules have been omitted as not applicable or not required under the
instructions contained in Regulations S-X or the information is included
elsewhere in the financial statements or notes thereto.
46
<PAGE>
3. Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
3(a)-- Restated Certificate of Incorporation of the Registrant, as
amended (Incorporated by reference to Exhibit 3(a) of the
Annual Report on Form 10-K for the year ended December 31,
1994).
3(b)-- Amended and Restated Bylaws of the Registrant (Incorporated by
reference to Exhibit 3(b) of the Annual Report on Form 10-K
for the year ended December 31, 1991).
4(a)-- Specimen Common Stock Certificate (Incorporated by reference
to Exhibit 4(a) to Registration Statement on Form S-1 [SEC
File No. 33-21654]).
4(b)-- Specimen Class A Redeemable Preferred Stock Certificate
(Incorporated by reference to Exhibit 4(b) of the Annual
Report on Form 10-K for the year ended December 31, 1994).
4(c)-- Junior Secured Debenture in principal amount of $5,422,307
made by the Company dated October 30, 1992 to CenCor, Inc.
(Incorporated by reference to Exhibit 4(c) of the Annual
Report on Form 10-K for the ended December 31, 1992).
4(d)-- Certificate of Designation of the Class A Redeemable Preferred
Stock (Incorporated by reference to Exhibit 4(d) of the Annual
Report on Form 10-K for the year ended December 31, 1994).
4(e)-- Certificate of Designation of Class B Convertible Preferred
Stock. (Incorporated by reference to Exhibit 4(e) of the
Annual Report on Form 10-K for the year ended December 31,
1996).
4(f)-- Specimen Class B Convertible Preferred Stock Certificate.
(Incorporated by reference to Exhibit 4(f) of the Annual
Report on Form 10-K for the year ended December 31, 1996.)
4(g)-- Subordinated Debenture in principal amount of $3,316,250 made
by the Company dated February 25, 1997 to Cahill, Warnock
Strategic Partners Fund, L.P. (Incorporated by reference to
Exhibit 4(g) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
4(h)-- Subordinated Debenture in principal amount of $183,750 made by
the Company dated February 25, 1997 to Strategic Associates,
L.P. (Incorporated by reference to Exhibit 4(h) of the Annual
Report on Form 10-K for the year ended December 31, 1996.)
4(i)-- Common Stock Purchase Warrant dated February 25, 1997 issued
to Cahill, Warnock Strategic Partners Fund, L.P., granting the
right to purchase up to 2,483,419 shares of the Company's
Common Stock. (Incorporated by reference to Exhibit 4(i) of
the Annual Report on Form 10-K for the year ended December 31,
1996.)
4(j)-- Common Stock Purchase Warrant dated February 25, 1997 issued
to Strategic Associates, L.P., granting the right to purchase
up to 135,110 shares of the Company's Common Stock.
4(k)-- Registration Rights Agreement dated February 25, 1997 issued
among the Company; Cahill, Warnock Strategic Partners Fund,
L.P.; and Strategic Associates, L.P. (Incorporated by
reference to Exhibit 4(k) of The Annual Report on Form 10-K
for the year ended December 31, 1996.)
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<C> <S> <C>
9(a)-- Stockholders' Agreement dated February 25, 1997 among
the Company, Cahill, Warnock Strategic Partners Fund,
L.P. , Strategic Associates, L.P., Jack L. Brozman, The
Estate of Robert F. Brozman and the Robert F.Brozman
Trust under Agreement dated December 28, 1989 (the
"Stockholders Agreement Parties"). (Incorporated by
reference to Exhibit 9(a) of the Annual Report on Form
10-K for the year ended December 31, 1996.)
9(b)-- Agreement dated March 21, 1997 among the Stockholders
Agreement Parties and James R. Seward. (Incorporated by
reference to Exhibit 4(f) of the Annual Report on Form
10-K for the year ended December 31, 1996.)
**10(c)(v)-- Dr. Robert R. Roehrich Employment Agreement
(Incorporated by Reference to Exhibit 10(c)(v) to the
Quarterly Report on Form 10-Q dated June 30, 1997.)*
10(f)-- Second Amended and Restated Concorde Career Colleges,
Inc. 1988 Incentive Stock Option Plan, dated May 4, 1989
(Incorporated by reference to Exhibit 10 (f) (iii) to
Pre-effective Amendment No. 1 to Registration Statement
on Form S-1 [SEC File No. 33-30002]).*
10(g)(i)-- Concorde Career Colleges, Inc. 1994 Incentive Stock
Option Plan. (Incorporated by Reference to Exhibit 10(g)
of the Annual Report on Form 10-K for the year ended
December 31, 1993).*
**10(g)(ii)-- Dr. Robert R. Roehrich Option Agreement (Incorporated by
Reference to Exhibit 10(g)(i) to the Quarterly Report on
Form 10-Q dated June 30, 1997.)*
10(h)(i)-- Agreement for Transfer of Assets and Assumption of
Liabilities between CenCor and the Company dated as of
March 31, 1988. (Incorporated by Reference to Exhibit
10(d) to Registration Statement on Form S-1 [SEC File
No. 33-21654]).
10(h)(ii)-- Amendment to Agreement for Transfer of Assets and
Assumption of Liabilities between CenCor and the Company
dated October 30, 1992. (Incorporated by reference to
Exhibit 10(g)(ii) of the Annual Report on Form 10-K for
the year ended December 31, 1992).
10(h)(iii)-- Restructuring, Security and Guaranty Agreement between
CenCor and the Company dated October 30, 1992.
(Incorporated by reference to Exhibit 10(g)(iii) of the
Annual Report on Form 10-K for the year ended December
31, 1992).
10(h)(iv)-- First Amendment to the Restructuring, Security and
Guaranty Agreement dated December 30, 1993.
(Incorporated by reference to Exhibit 10(h)(iv) of the
Annual Report on Form 10-K for the year ended December
31, 1993).
10(h)(v)-- Assignments of Receivable to Concorde from Guarantors,
dated as of December 30, 1993. (Incorporated by
reference to Exhibit 10(h)(v) of the Annual Report on
Form 10-K for the year ended December 31, 1993).
10(h)(vi)-- Second Amendment to the Restructuring, Security and
Guaranty Agreement dated November 15, 1994 (Incorporated
by Reference to Exhibit 10(h)(vi) of the Annual Report
on Form 10-K for the year ended December 31, 1994).
10(h)(vii)-- Third Amendment to the Restructuring, Security and
Guaranty Agreement dated July 30, 1996 (Incorporated by
Reference to Exhibit 2 of the Quarterly Report on
Form 10-Q dated June 30,1996).
10(h)(viii)-- Fourth Amendment to the Restructuring, Security and
Guaranty Agreement dated December 30, 1996.
(Incorporated by reference to Exhibit 10(h)(viii) of the
Annual Report on Form 10-K for the year ended December
31, 1996.)
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S> <C>
10(i)-- Expense Sharing Agreement dated as of January 1, 1993, between
CenCor, Century Acceptance Corporation, La Petite Academy,
Inc. and the Company. (Incorporated by reference to Exhibit
10(h) to the Annual Report on Form 10-K for the year ended
December 31, 1992).
10(k)-- Asset Purchase Agreement dated July 10, 1996 regarding the
sale of assets of Person/Wolinsky Associates, Inc.
(Incorporated by reference to Exhibit 1 to the Quarterly
Report on Form 10Q dated June 30, 1996).
10(l)-- Convertible Preferred Stock Purchase Agreement dated February
25, 1997 among Cahill, Warnock Strategic Partners Fund, L.P.,
Strategic Associates, L.P., and the Company (the "Purchase
Agreement Parties")
10(m)-- Amendment No. 1 to the Convertible Preferred Stock Purchase
Agreement dated March 21, 1997 among the Purchase Agreement
Parties and James R. Seward. (Incorporated by reference to
Exhibit 10(m) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
10(n)-- Subordinated Debenture and Warrant Purchase Agreement dated as
of February 25, 1997 by the Company and Cahill, Warnock
Strategic Partners Fund, L.P. (Incorporated by reference to
Exhibit 10(n) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
10(o)-- Subordinated Debenture and Warrant Purchase Agreement dated as
of February 25, 1997 by the Company and Strategic Associates,
L.P. (Incorporated by reference to Exhibit 10(o) of the Annual
Report on Form 10-K for the year ended December 31, 1996.)
10(p)-- Revolving Credit, Security and Guaranty Agreement dated March
13, 1997 by and among the Registrant and Security Bank of
Kansas City, attached herewith. (Incorporated by reference to
Exhibit 10(p) of the Annual Report on Form 10-K for the year
ended December 31, 1996.)
**18-- Preferability Letter of Price Waterhouse LLP regarding the
change in tuition income recognition (Incorporated by
reference to Exhibit 18 to the Quarterly Report on Form 10-Q
dated September 30, 1997).
- --------
*Management contract or compensation plan.
**Previously filed.
b. Reports on Form 8-K
**21-- Subsidiaries of Registrant.
None.
23-- Consent of PricewaterhouseCoopers LLP (filed herewith).
</TABLE>
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Concorde Career Colleges, Inc.
/s/ Jack L. Brozman
By___________________________________
Jack L. Brozman
Chairman of the Board Date: March
28, 2000
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Date
--------- ----
<S> <C>
/s/ Jack L. Brozman March 28, 2000
By ________________________________________
Jack L. Brozman
(Chairman of the Board, Chief Executive
Officer, President, Treasurer and
Director)
/s/ Paul R. Gardner March 28, 2000
By ________________________________________
Paul R. Gardner
(Vice President, Chief Financial Officer,
and Principal Accounting Officer)
/s/ James R. Seward March 28, 2000
By ________________________________________
James R. Seward
(Director)
/s/ Thomas K. Sight March 28, 2000
By ________________________________________
Thomas K. Sight
(Director)
/s/ David L. Warnock March 28, 2000
By ________________________________________
David L. Warnock
(Director)
</TABLE>
50
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JAN-01-1999 OCT-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 2,229,000 0
<SECURITIES> 0 0
<RECEIVABLES> 13,458,000 0
<ALLOWANCES> 1,234,000 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 15,928,000 0
<PP&E> 8,776,000 0
<DEPRECIATION> 5,743,000 0
<TOTAL-ASSETS> 21,450,000 0
<CURRENT-LIABILITIES> 12,239,000 0
<BONDS> 3,500,000 0
0 0
6,000 0
<COMMON> 794,000 0
<OTHER-SE> 4,611,000 0
<TOTAL-LIABILITY-AND-EQUITY> 21,450,000 0
<SALES> 35,948,000 9,308,000
<TOTAL-REVENUES> 35,948,000 9,308,000
<CGS> 0 0
<TOTAL-COSTS> 35,678,000 9,057,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 812,000 250,000
<INTEREST-EXPENSE> 171,000 44,000
<INCOME-PRETAX> (713,000) (43,000)
<INCOME-TAX> (236,000) 25,000
<INCOME-CONTINUING> (477,000) (68,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (477,000) (68,000)
<EPS-BASIC> (.08) (.01)
<EPS-DILUTED> (.08) (.01)
</TABLE>
