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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2002 Commission File No. 0-16992
------------------ -------
CONCORDE CAREER COLLEGES, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 43-1440321
- ------------------------------- ---------------------------------
(State of other jurisdiction of (I. R. S. Employer Identification
Incorporation or Organization) Number)
5800 Foxridge, Suite 500
Mission, Kansas 66202
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(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (913) 831-9977
-----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.10 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No _____ (2) Yes X No _____
----- -----
As of October 22, 2002 Concorde Career Colleges, Inc. had 4,029,489 shares of
Common Stock outstanding.
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CONCORDE CAREER COLLEGES, INC.
FORM 10-Q
NINE MONTHS ENDED SEPTEMBER 30, 2002
INDEX
PART I - FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Notes to Condensed Consolidated Financial Statements
Note 1, 2, and 3 ....................................... 3
Condensed Consolidated Balance Sheets ........................... 4
Condensed Consolidated Statements of Operations ................. 6
Condensed Consolidated Statements of Cash Flows ................. 7
Consolidated Statement of Changes in Stockholders' Equity ....... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings ............................................... 15
Item 2. Change in Securities ............................................ 15
Item 3. Defaults Upon Senior Securities ................................. 15
Item 4. Submission of Matters to a Vote of Security Holders ............. 15
Item 5. Other Information ............................................... 15
Item 6. Exhibits and Reports on Form 8-K ................................ 15
Signatures ............................................................... 16
CEO Certification ........................................................ 17
CFO Certification ........................................................ 18
Exhibit 11 ............................................................... 19
Exhibit 12 ............................................................... 20
2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Overview
The discussion set forth below, as well as other portions of this Form
10-Q, may contain forward-looking comments. Such comments are based upon
information currently available to management and management's perception
thereof as of the date of this Form 10-Q. Actual results of the Company's
operations could materially differ from those forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, potential adverse effects of regulations;
impairment of federal funding; adverse legislative action; student loan default
rates; changes in federal or state authorization or accreditation; changes in
market needs and technology; changes in competition and the effects of such
changes; changes in the economic, political or regulatory environments;
litigation involving the Company; changes in the availability of a stable labor
force; or changes in management strategies. Readers should take these factors
into account in evaluating any such forward-looking comments.
Notes to Financial Statements
Note 1:
The condensed interim consolidated financial statements included herein
have been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared according to generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations although the Company
believes that the disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements be read in
conjunction with the financial statements and the notes thereto included in the
Company's 2001 Annual Report on Form 10-K that was filed by the Company with the
Commission on March 26, 2002 (the "2001 Form 10-K") incorporated herein by
reference.
The information included in these interim financial statements reflects all
normal recurring adjustments that are, in the opinion of management, necessary
to fairly state the results of the periods presented. Annualization of amounts
in these interim financial statements may not necessarily be indicative of the
actual operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The Company
has litigation pending which arose in the normal course of business. See further
discussion in Part I, Item 2 - "Contingencies", and Part II, Item 1 - "Legal
Proceedings".
Note 2:
Basic earnings per share is computed by deducting imputed preferred
dividends from net income or loss. This amount is then divided by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share is computed by adding interest on convertible
debt, net of tax and deducting imputed preferred dividends from net income or
loss during the period after giving effect for antidilution. This amount is then
divided by the weighted average number of common shares outstanding during the
period after giving effect for common stock equivalents (if dilutive) arising
from stock options, warrants and preferred stock assumed converted to common
stock.
Note 3:
Other non-operating income consists of interest income from certificates of
deposit, money market accounts and both the amortization and settlement of the
Person/Wolinsky non-compete agreement. Prior year information has been
reclassified for comparative purposes.
3
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
September 30, December 31,
2002 2001
--------------------------- --------------------------
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 10,511,000 $ 7,556,000
Short term investments ......................................... 2,510,000 2,183,000
Receivables
Accounts receivable .......................................... 24,029,000 16,639,000
Notes receivable ............................................. 1,537,000 1,534,000
Allowance for uncollectible accounts ......................... (1,949,000) (1,639,000)
-------------- --------------
Net receivables .......................................... 23,617,000 16,534,000
Deferred income taxes ........................................ 962,000 962,000
Supplies and prepaid expenses ................................ 1,570,000 1,119,000
--------------- --------------
Total current assets ..................................... 39,170,000 28,354,000
FIXED ASSETS, NET ................................................. 2,999,000 2,625,000
OTHER ASSETS:
Long-term notes receivable ................................... 258,000 306,000
Allowance for uncollectible notes ............................ (20,000) (28,000)
Deferred income taxes ........................................ 175,000 175,000
Goodwill ..................................................... 954,000 256,000
Intangibles .................................................. 242,000
Deferred financing cost, net ................................. 4,000 12,000
--------------- --------------
Total other assets ....................................... 1,613,000 721,000
--------------- --------------
$ 43,782,000 $ 31,700,000
=============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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4
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
--------------- ---------------
CURRENT Liabilities:
Deferred revenues ............................................. $ 24,778,000 $ 17,378,000
Accrued salaries and wages .................................... 1,757,000 846,000
Accrued interest .............................................. 15,000 59,000
Accrued payable ............................................... 2,753,000 1,884,000
Accrued liabilities ........................................... 1,265,000 986,000
Current income taxes payable .................................. 402,000 816,000
Subordinated debt due to related party ........................ 3,500,000
Dividends payable ............................................. 44,000 45,000
--------------- ---------------
Total current liabilities ................................. 34,514,000 22,014,000
SUBORDINATED DEBT DUE TO RELATED PARTY ............................. 3,500,000
STOCKHOLDERS' EQUITY:
Preferred Stock, ($.10 par value, 600,000 shares authorized)
Class B, 53,309 shares issued and outstanding ............. 5,000 5,000
Common stock, ($.10 par value, 19,400,000 shares
authorized) 4,268,311 shares and 4,254,255 shares
issued and 3,996,801 and 3,985,370 shares
outstanding at September 30, 2002 and
December 31, 2001, respectively ........................... 427,000 425,000
Capital in excess of par ...................................... 9,799,000 9,706,000
Accumulated deficit ........................................... (49,000) (3,055,000)
Less treasury stock, 271,510 and 268,885 shares at
cost at September 30, 2002 and December 31, 2001,
respectively .............................................. (914,000) (895,000)
--------------- ---------------
Total stockholders' equity ................................ 9,268,000 6,186,000
--------------- ---------------
$ 43,782,000 $ 31,700,000
=============== ===============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
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5
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Revenue ............................................. $ 45,338,000 $ 35,758,000 $ 16,060,000 $ 12,889,000
Costs and Expenses:
Instruction costs and services ..................... 13,815,000 12,753,000 4,626,000 4,408,000
Selling and promotional ............................ 6,213,000 5,842,000 2,125,000 2,041,000
General and administrative ......................... 17,692,000 13,934,000 6,267,000 4,725,000
Provision for uncollectible accounts ............... 2,637,000 1,565,000 975,000 620,000
---------------- ---------------- --------------- --------------
Total Expenses ................................. 40,357,000 34,094,000 13,993,000 11,794,000
---------------- ---------------- --------------- --------------
Operating Income ........................................ 4,981,000 1,664,000 2,067,000 1,095,000
Other Non-Operating Income .............................. 168,000 390,000 63,000 82,000
Interest Expense ........................................ 133,000 137,000 45,000 49,000
---------------- ---------------- --------------- --------------
Income Before Provision For Income Taxes ................ 5,016,000 1,917,000 2,085,000 1,128,000
Provision For Income Taxes .............................. 1,849,000 768,000 752,000 452,000
---------------- ---------------- --------------- --------------
Net Income .............................................. 3,167,000 1,149,000 1,333,000 676,000
Class B Preferred Stock Accretion ....................... 161,000 172,000 55,000 54,000
---------------- ---------------- --------------- --------------
Net Income Available to Common Shareholders ............. $ 3,006,000 $ 977,000 $ 1,278,000 $ 622,000
================ ================ =============== ==============
Weighted Average Shares Outstanding:
Basic ............................................... 3,992,000 3,929,000 3,996,000 4,024,000
Diluted ............................................. 6,145,000 5,431,000 6,174,000 6,118,000
Net Income Per Share:
Basic ............................................... $ .75 $ .25 $ .32 $ .15
Diluted ............................................. $ .53 $ .19 $ .22 $ .11
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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6
CONCORDE CAREER COLLEGES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
2002 2001
--------------------- -------------------
Cash Flows Operating Activities:
Net Income .............................................................. $ 3,167,000 $ 1,149,000
Adjustments to reconcile net income to net cash provided by
operating activities --
Depreciation and amortization ........................................... 697,000 753,000
Provision for uncollectible accounts .................................... 2,637,000 1,565,000
Decrease in Deferred income taxes ....................................... 663,000
Change in assets and liabilities --
Increase in receivables, net ............................................ (9,550,000) (6,176,000)
Increase in deferred revenue ............................................ 7,137,000 5,314,000
Decrease in income taxes payable ........................................ (414,000) (2,000)
Other changes in assets and liabilities, net ............................ 1,615,000 2,245,000
--------------------- -------------------
Total adjustments ................................................... 2,122,000 4,362,000
--------------------- -------------------
Net operating activities ............................................ 5,289,000 5,511,000
--------------------- -------------------
Cash Flows Investing Activities:
Acquisition of Extended Health Education ................................ (890,000)
Purchase of short term investments ...................................... (327,000) (1,521,000)
Capital expenditures .................................................... (1,031,000) (515,000)
---------------------- --------------------
Net investing activities ............................................ (2,248,000) (2,036,000)
---------------------- --------------------
Cash Flows Financing Activities:
Dividends paid .......................................................... (132,000) (90,000)
Treasury stock purchased ................................................ (19,000) (390,000)
Stock options exercised ................................................. 20,000 444,000
Stock purchase plan ..................................................... 45,000 11,000
--------------------- -------------------
Net financing activities ............................................ (86,000) (25,000)
---------------------- --------------------
Net Increase in Cash and Cash Equivalents .................................... 2,955,000 3,450,000
Cash and Cash Equivalents at Beginning of Period ............................. 7,556,000 4,512,000
--------------------- -------------------
Cash and Cash Equivalents at End of Period ................................... $ 10,511,000 $ 7,962,000
===================== ===================
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For:
Interest ................................................................ $ 177,000 $ 138,000
Income taxes ............................................................ $ 2,359,000 $ 109,000
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
CONCORDE CAREER COLLEGES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(unaudited)
Preferred Common Capital in Accumulated Treasury
Stock Stock Excess of Par Deficit Stock Total
--------- --------- ------------- ----------- ----------- -----------
BALANCE, December 31, 2001 ............. $ 5,000 $ 425,000 $ 9,706,000 $(3,055,000) $ (895,000) $ 6,186,000
Net Income .......................... 3,167,000 3,167,000
Class B Preferred Stock Accretion,... 161,000 (161,000)
Class B Preferred Stock Dividends,... (131,000) (131,000)
Stock Options Exercised ............. 1,000 19,000 20,000
Employee Stock Purchase Plan ........ 1,000 44,000 45,000
Treasury Stock Purchased ............ (19,000) (19,000)
--------- --------- ------------- ----------- ----------- -----------
BALANCE, Septemer 30, 2002 ............. $ 5,000 $ 427,000 $ 9,799,000 $ (49,000) $ (914,000) $ 9,268,000
========= ========= ============= =========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table presents the relative percentage of revenues
derived from the campuses and certain consolidated statement of operations items
as a percentage of total revenue for the periods indicated.
Nine Months Three Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue ....................................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Instruction costs and services ........... 30.5 35.7 28.8 34.2
Selling and promotional .................. 13.7 16.3 13.2 15.8
General and administrative ............... 39.0 39.0 39.0 36.6
Provision for uncollectible accounts...... 5.8 4.4 6.1 4.9
----- ----- ----- -----
Total operating expenses ................. 89.0 95.4 87.1 91.5
Operating income .............................. 11.0 4.6 12.9 8.5
Other non-operating income .................... 0.4 1.1 0.4 0.6
Interest expense .............................. 0.3 0.4 0.3 0.4
----- ----- ----- -----
Income before provision for income taxes....... 11.1 5.3 13.0 8.7
Provision for income taxes .................... 4.1 2.1 4.7 3.5
----- ----- ----- -----
Net income .................................... 7.0% 3.2% 8.3% 5.2%
===== ===== ===== =====
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9
Results of Operations
General
The Company owns and operates proprietary, postsecondary institutions that
offer career vocational training programs primarily in the allied health field.
As of September 30, 2002, the Company operated Campuses at 12 locations in seven
states (the "Campuses"). The Company's revenue is derived almost entirely from
tuition, textbook sales, fees and charges paid by, or on behalf of, our
students. A large number of the Company's students paid a substantial portion of
tuition and other fees with funds received through student assistance financial
aid programs under Title IV of the Higher Education Act of 1965, as amended (the
"HEA"). The Company received approximately 83% of cash receipts from such funds
for the year ended December 31, 2001.
The Company's revenue varies based on student enrollment and population.
The number of students that attend our Campuses, the number of new enrollments
during a fiscal period, student retention rates and general economic conditions
affect student population. The introduction of new programs at certain campuses,
improved advertising effectiveness and student retention have been significant
factors of increased student population in the last two years.
Each of the Company's Campuses must be authorized by the state in which it
operates, accredited by an accrediting commission that the U.S. Department of
Education ("ED") recognizes, and certified by the ED to participate in Title IV
Programs. Any substantial restrictions on the Campuses ability to participate in
Title IV Programs would adversely affect our ability to enroll students and
expand the number of programs.
The Company establishes an accounts receivable and a corresponding deferred
revenue liability for each student upon commencement of a program of study. The
deferred revenue liability, consisting of tuition and non-refundable
registration fees, is recognized into income ratably over the length of the
program. If a student withdraws from a program, the unearned portion of the
tuition for which the student has paid is refunded on a pro-rata basis. Textbook
and uniform sales are recognized when they occur. Any unpaid balance due when
the student withdraws is generally due directly from the student, not from a
federal or state agency.
Accounts receivable are due from students and are expected to be paid
primarily through the use of federal and state sources of funds. Students are
responsible for amounts not available through federal and state sources and
unpaid amounts due when the student withdraws. The Company realized a higher
level of uncollectible accounts receivable from students during the first,
second, and third quarters of 2002 as enrollment increased significantly. The
Company expects that non-Title IV accounts and notes receivable due from
students will increase in the future as student enrollment increases and that
the related provision for uncollectible accounts will also increase.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2001
Student enrollments increased 25.2% to 6,866 for the nine months ended
September 30, 2002 compared to 5,482 for the nine months ended September 30,
2001. Higher enrollments were the result of an increased demand for the
Company's courses compared to 2001. Student inquiries increased 34.8% for the
nine months ended September 30, 2002 compared to 2001. Student population
increased 22.8% to 5,482 at September 30, 2002 compared to 4,465 at September
30, 2001. Average student population for the nine months ended September 30,
2002 increased 19.7% to 4,988 compared to 4,166 for the same period in 2001.
Net income of $3,167,000 was recorded for nine months ended September 30,
2002 compared to $1,149,000 for the same period in 2001. The increased profit
was the result of increased revenue compared to 2001.
Revenue increased 26.8% or $9,580,000 to $45,338,000 for the nine months
ended September 30, 2002 compared to $35,758,000 for the same period in 2001.
The revenue increased due to higher student enrollments, increased average
student population and a minimal price increase compared to 2001.
Instruction Costs and Services - increased 8.3% or $1,062,000 to
$13,815,000 compared to $12,753,000 in 2001. The increase was primarily a result
of increased salary and supply expenses compared to 2001. Salaries increased
$788,000 due to higher wages required to remain competitive in the labor market
and an increase in the number of staff due to enrollment growth. Supply expense
increased $161,000 due to enrollment growth compared to 2001.
10
Selling and Promotional - increased to $6,213,000 compared to $5,842,000 in
2001. Salary expense increased $290,000 for the nine months ended September 30,
2002 compared to 2001. Salaries increased due to higher wages and additional
staff compared to 2001. Advertising increased $81,000 to generate additional
student inquiries.
General and Administrative - increased 27.0% or $3,758,000 to $17,692,000
compared to $13,934,000 in 2001. The majority of the increase was a result of a
$1,949,000 payroll increase compared to 2001. Additional employees due to
enrollment increases, higher wage rates and incentive compensation were factors
in the increase. The Company experienced additional expenses in several
categories as enrollment increased 25.2%. Outside services, insurance expense,
rent and health insurance increased $527,000, $411,000, $317,000 and $247,000
compared to 2001, respectively.
Provision for Uncollectible Accounts - increased $1,072,000 to $2,637,000
compared to $1,565,000 in 2001. This increase is attributable to the $9,580,000
increase in revenue for the nine months and a corresponding increase in accounts
and notes receivable of $7,345,000. The Company anticipates the 2002 provision
as a percentage of revenue will be higher than the previous year due to
increased accounts receivable.
Interest and Other Non-Operating Income - decreased to $168,000 for the
nine months ended September 30, 2002 compared to $390,000 for the same period in
2001. The decrease was the result of the Company recognizing the $157,500
remaining balance of the Person/Wolinsky non-compete agreement as income in the
second quarter of 2001. In addition interest earned on the Company's cash and
temporary investments was reduced due to lower interest rates in 2002 compared
to 2001.
Interest Expense - was $133,000 for the nine months ended September 30,
2002 compared to $137,000 in 2001.
Provision for Income Taxes - a tax provision of $1,849,000 or 36.9% of
pretax income was recorded for the nine months ended September 30, 2002 compared
to $768,000 or 40.1% for the nine months ended September 30, 2001. The Company
received a tax refund from the IRS for prior years taxes, which decreased the
2002 provision by $87,000.
EPS and Weighted Average Common Shares - Basic weighted average common
shares increased to 3,992,000 in 2002 from 3,929,000 in 2001. Common shares
increased as shares were issued pursuant to the employee stock purchase plan and
exercised stock options offset by stock repurchases. Basic income per share was
$.75 in 2002 compared with $.25 in 2001. Basic income per share is shown after a
reduction for preferred stock dividend accretion of $161,000 and $172,000 in
2002 and 2001, respectively. Diluted weighted average common shares outstanding
increased to 6,145,000 in 2002 from 5,431,000 in 2001. The share increase is
primarily due to the antidilutive effect of common stock equivalents in 2001.
Diluted income per share was $.53 for the nine months ended September 30, 2002
compared with $.19 in 2001. Diluted income per share is shown after a reduction
for preferred stock dividend accretion of $172,000 in 2001 and interest on
convertible debt, net of tax of $81,000 and $80,000 in 2002 and 2001,
respectively.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2001
Student enrollments increased 27.6% to 2,641 for the quarter ended
September 30, 2002 compared to 2,070 in the third quarter of 2001. Higher
enrollments were the result of an increased demand for the Company's courses
compared to 2001. Student inquiries increased 34.5% for the quarter ended
September 30, 2002 compared to 2001. Student population increased 22.8% to 5,482
at September 30, 2002 compared to 4,465 at September 30, 2001. Average student
population for the third quarter increased 19.3% to 5,238 compared to 4,389 for
the same period in 2001.
Net income of $1,333,000 was recorded for the quarter ended September 30,
2002 compared to $676,000 for the same period in 2001. The increased profit was
the result of increased revenue off set by lower increases in expenses.
Revenue increased 24.6% or $3,171,000 to $16,060,000 for the quarter ended
September 30, 2002 compared to $12,889,000 for the same period in 2001. The
revenue increased due to higher student enrollments, increased average student
population and a minimal price increase compared to 2001.
Instruction Costs and Services - increased 4.9% or $218,000 to $4,626,000
compared to $4,408,000 in 2001. Salaries increased $286,000 due to higher wage
rates required to remain competitive in the health care labor market and
increased number of staff due to enrollment growth. This increase was offset
primarily by a $86,000 decrease in textbook expense. Textbook expense decreased
due to a discount the Company received on textbook prices which reduced the cost
of the textbooks per student. The reduction was primarily limited to the second
and third quarters.
Selling and Promotional - increased to $2,125,000 compared to $2,041,000 in
2001. Salaries increased
11
$110,000 due to higher wage rates and additional staff compared to 2001 and was
offset by a small advertising decrease.
General and Administrative - increased 32.6% or $1,542,000 to $6,267,000
compared to $4,725,000 in 2001. The majority of the increase was a result of a
$743,000 payroll increase, $256,000 outside services expense increase, $132,000
compliance expense increase, and $121,000 insurance expense increase. Payroll
increased due to higher wage rates, additional employees, and incentive
compensation compared to 2001. Insurance expense increased due to higher
workers' compensation insurance rates based on an increase in the previous
year's claims that were filed. The Company also experienced increases in several
other categories as enrollments increased 27.6%.
Provision for Uncollectible Accounts - increased $355,000 to $975,000
compared to $620,000 in 2001. This increase is attributable to the $3,171,000
increase in revenue in the third quarter of 2002 and a corresponding increase in
accounts and notes receivable of $7,345,000. The Company anticipates the 2002
provision will be higher than the previous year due to increased accounts
receivable as enrollments increase.
Interest and Other Non-Operating Income - decreased to $63,000 for the
quarter ended September 30, 2002 compared to $82,000 for the quarter ended
September 30, 2001. The decrease was due to reduced interest earned on the
Company's cash and temporary investments due to lower interest rates in 2002
compared to 2001.
Interest Expense - was $45,000 for the quarter ended September 30, 2002
compared to $49,000 in 2001.
Provision for Income Taxes - a tax provision of $752,000 or 36.1% of pretax
income was recorded for the quarter ended September 30, 2002 compared to
$452,000 or 40.1% for the quarter ended September 30, 2001.
EPS and Weighted Average Common Shares - Basic weighted average common
shares increased to 3,996,000 in 2002 from 4,024,000 in 2001. Common shares
increased as shares were issued pursuant to the employee stock purchase plan and
exercised stock options offset by stock repurchases. Basic income per share was
$.32 in 2002 compared with $.15 in 2001. Basic income per share is shown after a
reduction for preferred stock dividend accretion of $55,000 and $54,000 in 2002
and 2001, respectively. Diluted weighted average common shares outstanding
increased to 6,174,000 in 2002 from 6,118,000 in 2001. Diluted income per share
was $.22 for the quarter ended September 30, 2002 compared with $.11 in 2001.
Diluted income per share is shown after interest on convertible debt, net of tax
of $27,000 in 2002 and 2001.
Recent Events
The Company acquired all the assets of Extended Health Education ("EHE") of
Arlington, Texas for $890,000 on August 22, 2002. EHE provides Vocational
Nursing and other health care-related courses. The Company currently plans to
enlarge the facility and expand the number of programs offered at the school
beginning sometime in 2003. The revenue and expenses contributed by EHE have
been included in the accompanying statement of operations since the date of
acquisition. Such revenue and expenses were minimal for the quarter and nine
months ended September 30, 2002.
The Company is negotiating an agreement with Cahill, Warnock Strategic
Partners Fund, LP and Strategic Associates, LP, an affiliated Baltimore-based
venture capital fund ("Cahill, Warnock") the holder of the Voting Convertible
Preferred Stock (the "Preferred Stock") to convert the Preferred Stock to common
stock. The Preferred Stock has no expiration date and the dividend rate
increases from 12% to 15% per annum beginning January 1, 2003. The dividend is
based upon the original $1,450,000 cost of the Preferred Stock. The current
proposal would require the Company to pay Cahill, Warnock $43,500 for the
remaining dividends due for 2002 plus an additional payment of $174,000. The
$174,000 payment would eliminate the recurring dividend obligation that
increases to $218,000 per annum on January 1, 2003. In return, Cahill, Warnock
would convert the shares into common stock and the Company would have no further
obligations to pay dividends. Outstanding common shares would increase 533,090.
There would be no change to diluted weighted average shares. The Company
anticipates finalizing the agreement in the fourth quarter.
The Company's debt consists of $3.5 million 5% Debentures issued to
Cahill,Warnock that mature February 25, 2003. The Debentures have nondetachable
warrants for 1,286,765 shares of common stock, exercisable at $2.72 per share of
common stock, through February 2003.
The Company received approval to offer a practical nursing program at the
Kansas City Campus. The Kansas City Campus began enrolling students in the
nursing program in October 2002.
12
Liquidity and Capital Resources
Bank Financing
The Company negotiated a $3,000,000 secured revolving credit facility on
December 28, 1998, with Security Bank of Kansas City. The amount available under
the facility is offset by the letter of credit discussed below. As a result
$2,646,000 is currently available under the facility. This facility is due to
expire on April 30, 2003. Funds borrowed under this facility, if any, will be
used for general corporate purposes. This facility has a variable interest rate
equal to the prime rate and no commitment fee. The credit facility is secured by
all cash, accounts and notes receivable, furniture and equipment, and capital
stock of the subsidiaries. The Company is required to maintain a minimum level
of consolidated tangible net worth as part of this agreement. The Company is
currently in compliance with this agreement. The Company has not borrowed any
funds under this facility.
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 Garden Grove, California
location. The letter of credit will expire October 2, 2003. Each year as the
letter of credit expires it will be replaced by replacement letters of credit
expiring annually through October 2, 2005. The replacement letters of credit
will be issued at amounts decreasing 20% annually from the original issue
amount. The letter of credit was $589,000, $471,000 and $354,000 at December 31,
1999, 2000, and 2001, respectively. The letter can only be drawn upon if there
is default under the lease agreement. There has been no default at any time
under the lease agreement.
Cash Flows and Other
Net cash flows provided by operating activities decreased slightly and were
$5,289,000 for the nine months ended September 30, 2002 compared to $5,511,000
in 2001. Cash flows from operating activities increased from an increase in net
income of $2,018,000 and a larger provision for uncollectible accounts of
$1,072,000 and were offset by higher tax payments of $2,250,000 and a decrease
in accounts payable and accrued expenses of $1,148,000.
Cash used in investing activities was $2,248,000 for the nine months ended
September 30, 2002 compared to $2,036,000 in 2001. Cash was used in both years
to purchase short-term investments and fixed assets, principally computer
equipment. In addition, the Company used $890,000 to purchase the net assets of
EHE in August 2002.
Cash used in financing activities was $86,000 for the nine months ended
September 30, 2002 compared to $25,000 in 2001. The decrease in cash used in
financing activities is a result of purchasing less treasury stock in 2002
offset by increased preferred dividends paid, stock options exercised and funds
received pursuant to the employee stock purchase plan.
The Company's Board of Directors approved a 500,000 shares repurchase
program in August 2000. As of September 30, 2002 the Company purchased a total
of 259,235 shares at an average price of $3.30 pursuant to the buy back plan.
The Company's last purchase was 3,000 shares at $6.35 per share in the first
quarter of 2002. The shares repurchase plan remains in effect.
The 5% Debentures issued to Cahill, Warnock Strategic Partners Fund, LP and
Strategic Associates, LP, an affiliated Baltimore-based venture capital fund,
mature February 25, 2003. The Debentures have nondetachable warrants for
1,286,765 shares of common stock, exercisable at $2.72 per share of common
stock, through February 2003. The $3.5 million in Debentures have been
reclassified to short term liabilities reflecting the maturity date of less than
one year.
The Company meets its working capital, capital equipment purchases and cash
requirements with funds generated internally. Management currently expects its
cash on hand, funds from operations and borrowings available under existing
credit facilities to be sufficient to cover both short-term and long-term
operating requirements. However, cash flows are dependent on the Company's
ability to maintain Title IV eligibility, maintain demand for programs and to
minimize uncollectible accounts receivable through effective collections and
improved retention.
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13
Contingencies
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
United States Department of Education ("ED") alleging that commencing June 1,
1990, SCI was ineligible to participate in federal student financial assistance
programs.
Subsequently, 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 to SCI. The amount currently 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 notified ED's collection agency that SCI disputes
these claims, provided certain information to the collection agency for ED and
offered to settle all of ED's claims for the amount of the funds then held by
SCI in its only 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 prior years. In response to the 1999 correspondence,
SCI again notified ED that it disputes these claims. Since that time, SCI has
not received any further demands, notice or information from ED.
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 it were determined that
SCI is obligated to pay ED's claims it is the opinion of management such
obligation of SCI would 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's exposure to market risk for changes in interest rates relate
to the increase or decrease in the amount of interest income the Company can
earn on short-term investments in certificate of deposits and cash balances.
Because the Company's investments are in short-term, investment-grade,
interest-bearing securities, the Company is exposed to minimum risk on the
principal of those investments. The Company ensures the safety and preservation
of its invested principal funds by limiting default risks, market risk and
investment risk. The Company does not use derivative financial instruments.
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14
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is 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, resolution of such pending
litigation and disputed findings will not have a material effect on the
Company's financial condition or its results of operation.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
Item 2. Change in Securities - - None
Item 3. Defaults upon Senior Securities - - None
Item 4. Submission of Matters to a Vote of Security Holders - - None
Item 5. Other Information
. The Company estimates the following for the year ending December
31, 2002:
- Revenue increase of approximately 22% compared to 2001
- Diluted earnings per share of approximately $.63 to $.65
compared to $.28 in 2001
- Gross margin of approximately 68.5%
- Operating margin of approximately 10.3%
- Net margin of approximately 6.6%
. The Company estimates revenue growth of approximately 15% in 2003
and net income and diluted earnings per share growth of
approximately 30%.
Item 6. Exhibits
11 Computation of per share earnings
12 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONCORDE CAREER COLLEGES, INC.
DATED: October 23, 2002
By: /s/ Jack L. Brozman
-----------------------------
Jack L. Brozman, Chief Executive Officer
By: /s/ Paul R. Gardner
-----------------------------------
Paul R. Gardner, Chief Financial Officer
(The remainder of this page was left intentionally blank.)
16
CEO Certification Letter
I, Jack L. Brozman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Concorde Career
Colleges, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: October 23, 2002
/s/ Jack L. Brozman
- --------------------
Jack L. Brozman, Chief Executive Officer
17
CFO Certification Letter
I, Paul R. Gardner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Concorde Career
Colleges, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: October 23, 2002.
/s/ Paul R. Gardner
- -------------------------------
Paul R. Gardner, Vice President, Chief Financial Officer
18