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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2002
Commission file number 0-16992
CONCORDE CAREER COLLEGES, INC.
(Exact name of registrant as specified in its charter)
5800 Foxridge Drive, 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
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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 February 28, 2003:
5,845,664 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 $41,712,721 as of February 28, 2003. Part III
incorporates information by reference to the Registrant's definitive proxy
statement for Annual Meeting of Stockholders to be held May 22, 2003.
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CONCORDE CAREER COLLEGES, INC.
FORM 10-K
YEAR ENDED DECEMBER 31, 2002
Index
Item Page
- ---- ----
Introduction and Note on Forward Looking Statements............................................ I-1
PART I
1. Business....................................................................................... I-1
2. Properties..................................................................................... I-11
3. Legal Proceedings.............................................................................. I-11
4. Submission of Matters to a Vote of Security Holders............................................ I-11
PART II
5. Market for the Registrant's Common Stock and Related Stockholder Matters....................... II-1
6. Selected Financial Data........................................................................ II-1
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... II-3
7A. Quantitative and Qualitative Disclosures about Market Risk..................................... II-12
8. Financial Statements and Supplementary Data.................................................... II-12
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........... II-33
Exhibit 23 - Consent of Independent Accountants................................................ II-34
Exhibit 24 - Consent of Independent Accountants................................................ II-35
PART III
10. Directors and Executive Officers of the Registrant............................................. III-1
11. Executive Compensation......................................................................... III-1
12. Security Ownership of Certain Beneficial Owners and Management................................. III-1
13. Certain Relationships and Related Transactions................................................. III-1
14. Controls and Procedures........................................................................ III-1
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... IV-1
Signatures..................................................................................... IV-5
CEO Certification Statement.................................................................... IV-6
CFO Certification Statement.................................................................... IV-7
Exhibit 99-1................................................................................... IV-8
Exhibit 99-2................................................................................... IV-9
Introduction and Note on Forward Looking Statements
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, financing 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."
Documents Incorporated By Reference
Portions of the Company's definitive Proxy Statement for the 2003 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange
Commission not later than 120 days after December 31, 2002, are incorporated by
reference into Part III of this report.
PART I
Item 1. Business
Overview
The Company owns and operates proprietary, postsecondary institutions
that offer career vocational training programs primarily in the allied health
field. The Company serves the segment of population seeking to acquire a
career-oriented education. The Campuses generally enjoy long operating histories
and strong franchise value in their local markets. As of December 31, 2002, the
Company operated Campuses at 12 locations in seven 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 Drive,
Suite 500, Mission, Kansas 66202 (telephone: (913) 831-9977). Unless otherwise
indicated, the term "Company" refers to Concorde Career Colleges, Inc. and its
direct wholly owned subsidiaries.
The Campuses
The Company's twelve Campuses are 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; Memphis, Tennessee; and Arlington, Texas. The
Company has designated each Campus except Memphis, Tennessee and Arlington,
Texas, as a "Concorde Career Institute," to increase name recognition. The
Memphis, Tennessee Campus has been designated as "Concorde Career College" and
the Arlington, Texas Campus which was purchased in August 2002 currently
operates as Extended Health Education ("EHE"). The Company anticipates
designating the Arlington Campus a Concorde Career Institute during 2003.
Programs of Study
The Company's programs of study are intended to provide students with
the requisite knowledge and job skills for the positions in their chosen career.
The programs are Vocational/Practical Nursing, Respiratory Therapist, Advanced
Respiratory Therapist, Surgical Technician, Pharmacy Technician, Limited Scope
X-Ray Technician, Radiology Technician, Medical Office Assistant, Medical
Assistant, Insurance Coding and Billing Specialist, Dental Assistant, Patient
Care Technician, and Massage Therapy. Program offerings vary by Campus. 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 and
various certification test preparations in allied health occupations.
Part I - Page 1
The Company's five largest programs represented approximately 90% of the
student population at December 31, 2002. The programs and their percentage of
the student population at December 31, 2002 are Medical Assistant 31%,
Vocational Nursing/Practical Nursing 19%, Dental Assistant 14%, Insurance Coding
and Billing Specialist 10%, and Respiratory Therapy 6%. None of the remaining
programs represented more than 4% of the student population.
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 programs of study range from five to
eighteen months and include from 400 to 2,265 hours of instruction. Most
programs are taught in a classroom atmosphere, with hands-on clinical and/or
laboratory experience as an integral part of the curriculum. Most programs
include an externship immediately prior to graduation, varying in duration from
four to twelve weeks, depending on the program.
Each Campus utilizes program advisory committees to provide ideas,
evaluate and improve the curriculum for each program. Advisory committees meet
once or twice a year and are comprised of local industry and business
professionals. Advisory committee members provide valuable input regarding
changes in the program and suggest new technologies and other factors that may
enhance curriculum.
Recruitment and Admissions
A typical student is either: (i) unemployed and enrolls to learn new
skills and obtain employment, or (ii) underemployed and enrolls 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. Management estimates that approximately
35% of all enrollments are the result of referrals from students and graduates.
Each Campus maintains an Admissions Department that is responsible for
conducting admissions interviews with potential applicants to provide
information regarding the 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 vary according to the program of study. Each
applicant for enrollment must have a high school diploma or the equivalent of a
high school diploma. Some Campuses accept students without a high school diploma
or equivalent however, the student must demonstrate the ability to benefit from
the program by meeting United States Department of Education ("ED") requirements
before admission is granted. All students must be beyond the age of compulsory
high school attendance. The Company utilizes a database maintained by ED to
identify applicants who may be in default on a prior student loan.
The Company had 5,056 students in attendance at the Campuses at
December 31, 2002 compared to 4,269 at December 31, 2001.
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 at least one 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 and some general education classes are 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.
Campus Administration
The President and Chief Executive Officer (the "CEO") is responsible for
the overall performance of the Campuses. Reporting to him are: the Vice
President, Chief Financial Officer; Vice President, Human Resources; Vice
President of Operations ("VPO"); Vice President of Academic Affairs; and the
Vice President of Financial Aid & Compliance.
The Company maintains a strict focus on compliance in all areas of
campus management and utilizes the following staff to review, train and support
Campus programs and personnel: National Director of Nursing, Regional Training
Developer, Director of Special Projects - Nursing, Internal Compliance Auditor,
Financial Aid Specialist, and two Regional Specialists. In addition, other
corporate staff train and supplement Campus staff when needed.
Part I - Page 2
The Company has centralized some functions to capitalize on expertise at
the corporate level. These functions include financial aid fund processing,
student collections, and default management. The Company's operation structure
is supported by a management information system that links all Campuses to a
centralized administrative database and provides management with real-time
access to Campus information and statistics.
Each Campus is operated independently and is managed on site by an
Executive Campus Director reporting to the VPO. In addition, most Campuses are
staffed with a Director of Admissions, Academic Dean, Director of Graduate
Services, Director of Finance or a Financial Aid Director and a Director of
Business Services, and several other support staff. Instruction at each Campus
is conducted by educators from the health care field or by former and current
members of the medical community on a full-time or part-time basis.
Instructional staff is selected based upon academic and professional
qualifications, and experience level.
Student Placement
The Company, through placement personnel at each Campus, provides job
placement assistance for 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 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 Campuses are located. Frequently, the externship programs result
in placement of students with the practitioners participating in the externship.
Accreditation and Licensing
The Campuses are accredited through accreditation associations
recognized by ED. These associations are the Accrediting Commission of Career
Schools and Colleges of Technology ("ACCSCT"), the Council on Occupational
Education ("COE") and the Accrediting Bureau of Health Education Schools
("ABHES"). The Memphis, Tennessee Campus is accredited by COE. The Arlington,
Texas Campus is accredited by ABHES. The remaining Campuses are accredited by
ACCSCT. Accreditation by an accrediting body recognized by ED is necessary for a
Campus to be eligible to participate in federally sponsored financial aid
programs. See "Financing Student Education."
Certain Campuses have received accreditation or approval for specific
programs from the following 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, the
California Board of Vocational Nurse and Psychiatric Technician Examiners,
Colorado Board of Nursing, Texas Board of Nursing, Florida Board of Nursing, and
the Missouri Board of Nursing. Program specific accreditation/approvals are not
necessary for participation in federally sponsored financial aid programs;
however, they are required for certification and/or licensure of graduates from
some programs, such as the Vocational or Practical Nurse and Respiratory Therapy
programs offered by some of the Campuses. These accreditations or approvals have
been obtained because management believes they enhance the students' employment
opportunities in those states that recognize the accrediting agencies.
The qualifications of faculty members are regulated by applicable
accreditation associations and/or agencies. Faculty standards must be met before
the Campuses accreditation is renewed. In addition, faculty members teaching
certain curriculum must meet standards set by applicable state licensing laws.
Each Campus is licensed as an educational institution under applicable
state and local laws, and is subject to a variety of state and local
regulations. These regulations may include approval of the curriculum, faculty
and general operations.
Financing Student Education
Tuition and other ancillary fees vary from program to program,
depending on the subject matter and length of the program. The total cost per
program ranges from approximately $4,000 to $22,000.
Most students attending the Campuses utilize federal government grants
and/or the Federal Family Education Loan programs available under the Higher
Education Act of 1965 ("HEA"), and various programs administered thereunder to
finance their tuition.
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 2002, 82% of 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 Workforce
Investment Act.
Part I - Page 3
The states of California, Colorado, Tennessee, Florida, Oregon, and
Texas 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 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. Federal
Subsidized Stafford Loans are need based and awarded annually to students
studying at least half time at an approved postsecondary educational
institution. The maximum Pell Grant a student may receive for the 2002-2003
award year is $4,000. 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 parent
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, with 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 HEA.
State and federal student financial aid programs are subject to the
effects of state and federal budgetary processes. There can be no assurance that
government funding for the financial aid programs in which the Company's
students participate will continue to be available or maintained at current
levels. The loss or reduction in funding levels for state and federal student
financial aid programs could have a material adverse effect on the Company.
Regulation
Both federal and state financial aid programs contain numerous and
complex regulations which require compliance not only by the recipient student
but also by the institution which the student attends. The Company monitors
compliance through periodic visits to the individual Campuses by Corporate
staff. Failure to materially comply with such regulations at any of the Campuses
could have serious consequences, including limitation, suspension, or
termination of the eligibility of that Campus to participate in the funding
programs. Independent certified public accountants audit the Campus'
administration of federal funds as mandated by federal regulations.
Additionally, these aid programs require 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. The regulations apply to the 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 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 three consecutive fiscal years may be used as
grounds for terminating FFEL eligibility.
(The remainder of this page left blank intentionally.)
Part I - Page 4
The following table sets forth the 2001, 2000, and 1999 cohort default
rates for each of the Campuses.
Cohort Default Rates Cohort Default Rates
-------------------- --------------------
Campus 2001/(1)/ 2000 1999 2001/(1)/ 2000 1999
---- ---- ---- ---- ---- ----
Garden Grove, CA 8.6 10.8 8.1 North Hollywood, CA 10.7 7.6 3.9
Denver, CO 15.2 11.7 3.2 Portland, OR 5.1 9.5 6.3
Jacksonville, FL 4.7 3.4 6.9 San Bernardino, CA 15.4 13.0 8.2
Kansas City, MO 5.4 6.8 9.3 San Diego, CA 10.6 4.4 8.6
Lauderdale Lakes, FL 14.2 12.1 5.4 Tampa, FL 11.7 10.7 10.1
Memphis TN 13.6 13.5 6.7 Arlington, TX/(2)/
(1) Preliminary rates received February 2003. These rates are subject to
change and may not be reflective of the final rates for 2001.
(2) The Arlington Campus began participating in the FFEL program in July
2001. Their first cohort year was October 1, 2001 to September 30, 2002.
Therefore, Arlington will not have a published default rate until the
2002 rates are released in 2003.
All of the Company's Campuses have at least one of their three most
recent rates below 25% and are, therefore, eligible to participate in the FFEL
program. The Company maintains aggressive default management plans for each
Campus and monitors activity monthly. Staff at each Campus and Corporate Office
assist and educate student borrowers in understanding their rights and
responsibilities as borrowers under these student loan programs.
In 1994, ED established a policy of recertifying all institutions
participating in Title IV programs every five years. 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 Portland and Memphis campus received
provisional certifications in 2002 that will expire in 2005. Provisional
certification was received due to default rates and financial responsibility
described below. In addition, the Arlington, Texas campus, which was purchased
in 2002, received provisional certification due to the change in ownership. The
Company does not believe provisional certification will have a material impact
on its liquidity, results of future operations or financial position. There has
been no material impact due to provisional certification in prior years.
The Company is subject to extensive regulation by federal and state
governmental agencies and accreditation bodies. In particular, the Higher
Education Act of 1965 ("HEA"), and the regulations promulgated thereunder by ED
subject the Campuses to significant regulatory scrutiny on the basis of numerous
standards that Campuses must satisfy to participate in the various federal
student financial assistance programs under Title IV of the HEA.
To participate in 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, accreditation 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. The 1998 HEA reauthorization changes included (i) expansion of 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)
revision of 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 1998 HEA reauthorization imposed 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 payment period. 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 this HEA
requirement, students are obligated to the Company for education costs that the
students can no longer pay with Title IV funds. The Company implemented this
requirement on October 7, 2000 as required by regulation. The Company monitors
the increase in accounts receivable from students and its impact on the
Company's results of operations, financial condition and cash flows. During 2001
and 2002, the Company's provision for uncollectible accounts increased as a
result of this regulation.
ED issued a new financial responsibility regulation that became
effective July 1, 1998. Institutions are required to meet this regulation to
maintain eligibility to participate in Title IV programs. This 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.
Part I - Page 5
The Company's composite score was 1.4, 1.7, and 2.0 in 2000, 2001, and
2002, respectively. The Company has demonstrated that it is financially
responsible according to this calculation and was notified in 2002 that it no
longer had to operate under the zone regulations due to its' composite score of
1.4 in 2000.
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 did not incur any
financial impact when it operated in the zone.
An additional HEA standard prohibits an institution from providing any
commission, bonus or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to any person or entity engaged
in any student recruitment, admission or financial aid awarding activity. The
Company believes that its method of compensating persons engaged in student
recruitment, admission or financial aid awarding activity complies with the
requirements of the HEA. The regulations do not, however, establish clear
standards for compliance, and the Company cannot assure you that ED will not
find any deficiencies in our present or former methods of compensation.
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, 2002, the Company had approximately 821 full and
part-time employees, of which approximately 443 were faculty members. The
Company has 272 management and administrative staff members employed at the
Campuses and 45 employed at corporate headquarters. The remaining 61 employees
are admissions personnel.
Management and supervisory members of both the administrative staff and
administrative faculty are salaried. All other faculty and employees are paid on
an hourly basis. The Company employs full-time, part-time, and 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.
Risk Factors
Any of the following risks could materially adversely affect the Company's
business, results of operations or financial condition.
Failure to Comply with Extensive Regulations Could Have a Material Adverse
Effect on the Company's Business. Failure of the Company's Campuses to comply
with extensive regulations could result in financial penalties, loss or
suspension of federal funding.
The Company's revenue is derived almost entirely from tuition, textbook
sales, fees and charges paid by, or on behalf of, the Company's 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 HEA. The Company received approximately 82% of cash
receipts from such funds for the year ended December 31, 2002. To participate in
such programs, an institution must obtain and maintain authorization by the
appropriate state agencies, accreditation by an accrediting agency recognized by
the ED, and certification by the ED. As a result, the Company's Campuses are
subject to extensive regulation by these agencies that, among other things,
requires the Company to:
. undertake steps to assure that the students at each of our Campuses
do not default on federally guaranteed or funded student loans at a
rate of 25% or more for three consecutive years;
. limit the percentage of revenues derived at each Campus from
federal student financial aid programs to less tan 90%;
. adhere to financial responsibility and administrative capability
standards;
Part I - Page 6
. prohibit the payment of incentives to personnel engaged in student
recruiting, admissions activities or awarding financial aid; and
. achieve stringent completion and placement outcomes for short-term
programs.
These regulations cover virtually all phases of the Company's
operations, including the Company's educational programs, facilities,
instructional and administrative staff, administrative procedures, financial
operations and financial strength. They also affect the Company's ability to
acquire or open additional Campuses or change the Company's corporate structure.
These regulatory agencies periodically revise their requirements and modify
their interpretations of existing requirements.
If one of the Company's Campuses were to violate any of these regulatory
requirements, the Company could suffer a financial penalty. The regulatory
agencies could also place limitations on or terminate the Company's Campuses'
receipt of federal student financial aid funds, which could have a material
adverse effect on the Company's business, results of operations or financial
condition. The Company believes that the Campuses substantially comply with the
requirements of these regulatory agencies, but the Company cannot predict with
certainty how all of these requirements will be applied, or whether the Company
will be able to comply with all of the requirements in the future. Some of the
most significant regulatory requirements and risks that apply to the Company's
Campuses are described in the following paragraphs.
The U.S. Congress may change the law or reduce funding for federal student
financial aid programs, which could harm the Company's business.
The U.S. Congress regularly reviews and revises the laws governing the
federal student financial aid programs and annually determines the funding level
for each of these programs. Congress must reauthorize HEA approximately every
six years. The most recent reauthorization occurred in 1998 and reauthorized the
HEA until September 30, 2004. Any action by Congress that significantly reduces
funding for the federal student financial aid programs or the ability of the
Company's Campuses or students to participate in these programs could have a
material adverse effect on the Company's business, results of operations or
financial condition. Legislative action may also increase the Company's
administrative costs and burden and require the Company to modify the Company's
practices in order for the Company's Campuses to comply fully with applicable
requirements, which could have a material adverse effect on the Company's
business, results of operations or financial condition.
For example, the 1998 amendments to the HEA changed substantially the
way federal student aid funds are handled when a student withdraws from a
school. Instead of the previous federal refund policy, institutions must follow
requirements which ensure the return to the federal student financial aid
programs of all the unearned funds of a student who withdraws from a program.
Final regulations implementing the new return of federal student financial aid
funds policy were issued in November 1999. The regulations became effective
October 7, 2000 and were implemented at our Campuses at that time.
The effect of these new federal policies is to generally reduce the
amount of federal loans and grant funds available to students who withdraw from
school before finishing their programs. Consequently, the amount of money owed
directly by the students to the Campuses could increase and, to the extent the
students fail to pay the amounts owed, the Company's bad debt expense would
increase. The Company has implemented procedures designed to mitigate the
adverse impact of these new federal refund policies. The procedures, however,
may be insufficient to entirely mitigate any adverse effect on bad debt expense.
Any significant increase in bad debt could have a material adverse effect on the
Company.
If the Company does not meet financial responsibility standards, the Company's
Campuses may lose eligibility to participate in federal student financial aid
programs.
To participate in the federal student financial aid programs, an
institution must either satisfy numeric standards of financial responsibility,
or post a letter of credit in favor of the ED and possibly accept other
conditions on its participation in the federal student financial aid programs.
Currently, only one of the Company's Campuses is required to post a letter of
credit in favor of the ED. The ED is requiring the Company's new Campus acquired
in August 2002 to post a letter of credit in the amount of $76,500. None of the
remaining eleven Campuses are required to post a letter of credit in favor of
the ED or accept other conditions on its participation in the federal student
financial aid programs due to failure to satisfy the numeric standards of
financial responsibility. The Company cannot assure you that the Company or the
Company's Campuses will satisfy the numeric standards in the future.
The Campuses may lose eligibility to participate in federal student financial
aid programs if their student loan default rates are too high.
An institution may lose its eligibility to participate in some or all of
the federal student financial aid programs if defaults by its students on their
federal student loans exceed specified rates. If any of the Company's Campuses,
depending on its size, loses eligibility to participate in federal student
financial aid programs because of high student loan default rates, it could have
a material adverse effect on the Company's business, results of operations or
financial condition.
Part I - Page 7
Campuses may lose eligibility to participate in federal student financial paid
programs if the percentage of their revenue derived from those programs is too
high.
A proprietary institution loses its eligibility to participate in the
federal student financial aid programs if it derives more than 90% of its
revenue from these programs in any fiscal year. If any of the Company's
Campuses, depending on its size, loses eligibility to participate in federal
student financial aid programs, it could have a material adverse effect on the
Company's business, results of operations or financial condition. The Company
received a total of $49,144,000 from federal student financial aid programs in
2002.
If the Company fails to demonstrate "administrative capability" to the ED, the
Company's business could suffer.
ED regulations specify extensive criteria an institution must satisfy
to establish that it has the requisite "administrative capability" to
participate in federal student financial aid programs. These criteria require,
among other things, that the institution:
. comply with all applicable federal student financial aid regulations;
. have capable and sufficient personnel to administer the federal
student financial aid programs;
. provide financial aid counseling to its students; and
. submit all reports and financial statements required by the
regulations.
If an institution fails to satisfy any of these criteria, the ED may:
. require the repayment of federal student financial aid funds;
. transfer the institution from the "advance" system of payment of
federal student financial aid funds to the "reimbursement" system of
payment or cash monitoring;
. place the institution on provisional certification status; or
. commence a proceeding to impose a fine or to limit, suspend or
terminate the participation of the institution in federal student
financial aid programs.
Should one or more of the Company's Campuses be limited in their access
to, or lose, federal student financial aid funds due to their failure to
demonstrate administrative capability, the Company's business could be
materially adversely affected.
Regulatory agencies or third parties may commence investigation, bring claims or
institute litigation against the Company.
Because the Company operates in a highly regulated industry, the
Company may be subject from time to time to investigations, claims of
non-compliance, or law suits by governmental agencies, or third parties, which
may allege statutory violation, regulatory infractions, or common law causes of
action. If the results of the investigations are unfavorable to the Company or
if the Company were unable to successfully defend against third-party lawsuits,
the Company may be required to pay money damages or be subject to fines,
penalties, injunctions or other censure that could have a material adverse
effect on the Company's business. Even if the Company adequately address the
issues raised by an agency investigation or successfully defend a third-party
lawsuit, the Company may have to devote significant money and management
resources to address these issues, which could harm the Company's business.
If regulators do not approve the Company's acquisitions, the ability of the
acquired institution to participate in federal student financial aid programs
would be limited.
When the Company acquires an institution, ED and most applicable state
agencies and accrediting agencies consider that a change of ownership or control
of the institution has occurred. A change of ownership or control of an
institution under the standards of ED may result in the temporary suspension of
the institution's participation in the federal student financial aid programs
until the ED issues a temporary certification document. If the Company were
unable to reestablish the state authorization, accreditation or ED certification
of an institution the Company acquired, depending on the size of that
acquisition, could have a material adverse effect on the Company's business,
results of operations or financial condition. If regulators do not approve
transactions involving a change of control, the institutions acquired may lose
their ability to participate in federal student financial aid programs. If the
Company or any of the Company's Campuses experience a change of control under
the standards of applicable state agencies or accrediting agencies or the ED,
the Company or the affected Campuses must seek the approval of the
Part I - Page 8
relevant agencies. The failure of any of the Company's Campuses to reestablish
its state authorization, accreditation or ED certification would result in a
suspension or loss of federal student financial aid funding, which could have a
material adverse effect on the Company's business, results of operations or
financial condition.
The ED, applicable state education agencies or applicable accrediting
agencies may consider other transactions or events to constitute a change of
control. Some of these transactions or events, such as a significant acquisition
or disposition of the Company's common stock, may be beyond the Company's
control.
If the Company's Campuses do not maintain their state authorizations and
accreditations, they may not operate or participate in federal student financial
aid programs.
An institution that grants degrees, diplomas or certificates must be
authorized by the relevant agencies of the state in which it is located and, in
some cases, other states. Requirements for authorization vary substantially
among the states. State authorization and accreditation by an accrediting agency
recognized by the ED are also required for an institution to participate in the
federal student financial aid programs. Loss of state authorization or
accreditation by any of the Company's Campuses, depending on the size of the
Campus, could have a material adverse effect on the Company's business, results
of operations or financial condition.
Failure to effectively manage the Company's growth could harm the Company's
business.
The Company expects to acquire new Campuses as a component of its
strategy for growth. The Company regularly engages in evaluations of possible
acquisition candidates, including evaluations relating to acquisitions that may
be material in size and/or scope. There can be no assurance that the Company
will continue to be able to identify educational institutions that provide
suitable acquisition opportunities or to acquire any such institutions on
favorable terms. Furthermore, there can be no assurance that any acquired
institutions can be successfully integrated into the Company's operations or be
operated profitably. Acquisitions involve a number of special risks and
challenges, including the diversion of management's attention, assimilation of
the operations and personnel of acquired companies, adverse short-term effects
on reported operating results, possible loss of key employees and difficulty of
presenting a unified corporate image. Continued growth through acquisition may
also subject the Company to unanticipated business or regulatory uncertainties
or liabilities.
Opening new Campuses and adding new services could be difficult for the Company.
The Company expects to develop, open and operate new Campuses, most
likely as additional locations of existing Campuses. Establishing additional
locations would pose unique challenges and require the Company to make
investments in management, capital expenditures, marketing expenses and other
resources. Because the Company has not yet established any new additional
locations, there can be no certainty as to the Company's ability to be
successful in any such endeavor. Any failure of the Company to effectively
manage the operations of newly established Campuses could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Failure to keep pace with changing market needs and technology could harm the
Company's business.
Prospective employers of the Company's graduates increasingly demand
that their entry-level employees possess appropriate technological skills.
Educational programs at the Company's Campuses must keep pace with these
evolving requirements. If the Company cannot respond to changes in industry
requirements, it could have a material adverse effect on the Company's business,
results of operations or financial condition. Competitors with greater resources
could harm the Company's business. The postsecondary education market is highly
competitive. The Company's Campuses compete with traditional public and private
two-year and four-year colleges and universities and other proprietary schools,
including those that offer distance learning programs. Some public and private
colleges and universities, as well as other private career-oriented schools, may
offer programs similar to those of the Company's Campuses. Although tuition at
private nonprofit institutions is, on average, higher than tuition at the
Company's Campuses, some public institutions are able to charge lower tuition
than the Company's Campuses, due in part to government subsidies, government and
foundation grants, tax-deductible contributions and other financial sources not
available to proprietary schools. Some of the Company's competitors in both the
public and private sectors have substantially greater financial and other
resources than the Company.
Failure to obtain additional capital in the future could reduce the Company's
ability to grow.
No assurance can be given that the Company will be able to obtain
adequate funding to complete any potential acquisition or new Campus opening or
that such an acquisition or opening will succeed in enhancing the Company's
business and will not ultimately have a material adverse effect on the Company's
business, results of operations and financial condition.
A Number of the Company's Shares of Common Stock Will be Eligible for Future
Sale, Which May Cause the Company's Stock Price to Decline.
Part I - Page 9
The exercise of substantial amounts of options or warrants or the
perception that such sales or exercises might occur could cause the market price
of the Company's Common Stock to decline. On December 31, 2002, the Company had
4,558,289 shares of the Company's Common Stock outstanding. As of December 31,
2002, options to purchase 644,468 shares of the Company's Common Stock were
outstanding, of which approximately 202,000 were exercisable as of such date at
an average exercise price of $2.33. This concentration of stock options,
relative to the amount of Common Stock outstanding, if exercised, will have a
dilutive effect on the Company's earnings per share which could adversely affect
the market price of the Company's Common Stock. From time to time, the Company
may issue additional options to the Company's employees under the Company's
existing stock option plan and under any new plans the Company may adopt.
The Company entered into agreements on February 25, 1997 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 55,147 shares of the Company's new
Class B Voting Convertible Preferred Stock ("Voting Preferred Stock") for $1.5
million, and 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. Mr. Seward
purchased such shares for their purchase price of approximately $50,000. On
September 30, 2001, Mr. Seward converted his 1,838 shares of Voting Preferred
Stock into 18,380 shares of Common Stock. The New Debentures had nondetachable
warrants ("Warrants") for approximately 1,286,765 shares of Common Stock,
exercisable at $2.72 per share of Common Stock. The following transactions have
occurred with respect to the Voting Preferred Stock and New Debentures since
December 31, 2001:
(1) The Company entered into a Conversion and Exchange Agreement with Cahill,
Warnock Strategic Partners Fund, L.P. and Strategic Association, L.P.
(collectively, "Cahill-Warnock") on November 25, 2002. The purpose of the
agreement was to covert the Voting Preferred Stock into Common Stock.
(2) The Company filed a Registration Statement on Form S-3 to register
1,133,090 shares of common stock. The Registration Statement was effective
February 5, 2003. The Company received no funds as a result of the
registration or subsequent distribution of common stock. Six hundred
thousand (600,000) shares of the common stock were issued and outstanding
as of the date of the Registration Statement. The Robert F. Brozman Trust
held 350,000 shares, Cahill, Warnock Strategic Partners Fund, L.P. held
237,000 shares, and Strategic Associates, L.P. held 13,000 shares. The
remaining 533,090 shares related to common shares issued upon conversion of
the preferred stock to common stock.
(3) The Securities and Exchange Commission made the Registration Statement
effective February 5, 2003.
(4) Cahill-Warnock exchanged their 53,309 shares of Class B Voting Convertible
Preferred Stock for 533,090 shares of Common Stock on February 7, 2003. The
Company has no remaining Preferred Stock outstanding.
(5) The Company paid to Cahill-Warnock a dividend equal to $4.08 per share of
the Class B Voting Convertible Preferred Stock on February 7, 2003. This
constituted all dividend payments owed to Cahill-Warnock including the
fourth quarter 2002 dividend of $43,500 and a special dividend to encourage
the conversion of $174,000.
(6) Cahill-Warnock exercised the non-detachable Warrants on February 19, 2003.
(7) The Company issued 1,286,764 shares of Common Stock to Cahill-Warnock
pursuant to the exercise of the Warrants.
The resulting issuance of 1,286,764 shares of Common Stock increased the
availability of shares of Common Stock on the market. This exchange or
subsequent registration of the Common Stock may depress the market price of the
Company's Common Stock.
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Part I - Page 10
Item 2. Properties
The Company's corporate office is located in Mission, Kansas. All
Company buildings facilities are leased.
The Company recently purchased a parcel of land to construct a parking
lot for the Tampa Campus. The land is recorded on the balance sheet at its
purchase price of $231,000.
The following table sets forth the location, approximate square footage
and expiration of lease terms for each of the Campuses as of December 31, 2002:
Square
Locations Footage Expiration/(1)/
--------- ------- ---------------
Garden Grove, CA ......................... 25,931 9-30-14
North Hollywood, CA ...................... 35,155 7-31-11
San Bernardino, CA ....................... 20,933 2-07-03
San Bernardino, CA/(2)/ .................. 33,000 2-07-13
San Diego, CA /(3)/ ...................... 12,244 10-31-03
Denver, CO. .............................. 19,438 7-31-04
Lauderdale Lakes, FL ..................... 18,288 5-31-04
Jacksonville, FL ......................... 21,147 12-31-09
Tampa, FL ................................ 17,257 12-31-11
Kansas City, MO .......................... 24,214 2-28-06
Mission, KS (Corporate Office) ........... 14,384 7-31-03
Portland, OR. ............................ 17,049 10-31-04
Memphis, TN. ............................. 34,394 8-31-08
Arlington, Texas /(4)/ ................... 9,783 6-30-03
/(1)/ Several of the leases provide renewal options, although renewals may
be at increased rental rates.
/(2)/ The Company has signed a lease agreement for a new San Bernardino
location and moved in February 2003.
/(3)/ The Company has signed a lease for a new facility in San Diego that is
under construction. The lease will be 15 years from the date of
occupancy and is 23,000 square feet. The Company anticipates moving in
late 2003.
/(4)/ The Company has signed a lease for a new facility. The facility is
26,562 square feet and the lease will be 10 years from date of
occupancy. The Company anticipates moving in the summer of 2003. The
Company also rents various equipment under leases that are generally
cancelable within 30 days.
Item 3. 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 had 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 contended 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. The Company and ED agreed to dismiss
the suit. The suit was dismissed in June 2002.
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
Part I - Page 11
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 NASDAQ SmallCap Market. The following table sets forth
the high and low closing price reported at the end of the trading day, for the
periods indicated as reported by NASDAQ. All price amounts below have been
retroactively adjusted to reflect the Reverse Stock Split that occurred on
November 21, 2001. The Company's stock was listed on the Over-the-Counter
Bulletin Board ("OTCBB") prior to May 22, 2002. Prices prior to listing on
NASDAQ were reported by the OTCBB.
2002 High Low
---- ---- ---
First Quarter ........................ $ 7.80 $ 6.30
Second Quarter ....................... $ 9.00 $ 7.15
Third Quarter ........................ $10.78 $ 7.90
Fourth Quarter ....................... $13.45 $10.35
2001 High Low
---- ---- ---
First Quarter ........................ $ 1.90 $ 1.54
Second Quarter ....................... $ 2.50 $ 1.60
Third Quarter ........................ $ 5.20 $ 2.26
Fourth Quarter ....................... $ 7.25 $ 5.00
There were 212 shareholders of record of Common Stock at December 31,
2002.
On February 28, 2003, the bid and asked prices of the Company's Common
Stock on the NASDAQ SmallCap Market were $14.09 and $14.36 per share,
respectively.
The Company has never paid cash dividends on its common stock.
Management currently anticipates retaining future earnings to finance internal
growth and potential acquisitions. Payment of common stock dividends in the
future will depend upon the Company's earnings and financial condition and
various other factors the Board of Directors may deem appropriate at the time.
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."
Changes in Accounting Principle
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. The Company adopted SAB 101 and recorded a one-time charge of $86,000 or
$.02 a share, net of tax, as the cumulative effect of this change in accounting
principle during the first quarter of 2000. Under SAB 101, non-refundable
registration fees are recognized ratably over the life of the course rather than
in the month the student starts the program.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible
Assets." There was no impact to the consolidated financial statements upon
adoption of the accounting pronouncement. See Note 2 to Consolidated Financial
Statements.
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Part II - Page 1
The following selected data has been derived from the Company's audited
financial statements for the years-ended 1998 through 2002. All share and per
share amounts have been retroactively adjusted to reflect the Reverse Stock
Split for all periods presented.
Years Ended December 31,
----------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Income Statement Data: (Dollars in thousands, except for per share data)
Revenues .................................................. $61,112 $49,049 $38,785 $35,299 $33,607
Operating expenses ........................................ 54,412 46,562 39,211 35,911 35,524
Operating income (loss) ................................... 6,700 2,487 (426) (612) (1,917)
Other non-operating income ................................ 231 442 181 70 147
Interest expense .......................................... 176 182 185 171 188
Income (loss) before change in accounting principle ....... 4,234 1,633 (266) (477) (1,212)
Basic earnings (loss) per share before change in
accounting principle (1) ............................... $ .85 $ .36 ($.12) ($.16) ($.38)
Diluted earnings (loss) per share before change in
accounting principle (1) ............................... $ .68 $ .28 ($.12) ($.16) ($.38)
Net income (loss) ......................................... 4,234 1,633 (352) (477) (1,212)
Basic earnings (loss) per share (1) ....................... $ .85 $ .36 ($.14) ($.16) ($.38)
Diluted earnings (loss) per share (1) ..................... $ .68 $ .28 ($.14) ($.16) ($.38)
Balance Sheet Data:
Total assets .............................................. $40,051 $31,700 $25,012 $21,450 $21,235
Subordinated debt due to related party .................... 3,500 3,500 3,500 3,500 3,500
Stockholders' equity ...................................... 9,990 6,186 4,977 5,411 5,536
Other Data:
Number of locations (2) ................................... 12 11 11 11 12
Net enrollments (3) ....................................... 8,510 7,080 6,072 5,633 4,823
(1) See Note 10 of Notes to Consolidated Financial Statements for the basis of
presentation of earnings per share.
(2) Includes only Campuses open at December 31.
(3) "Net enrollments" are students who begin a program of study, net of
cancellations.
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Part II - Page 2
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read with the Selected Financial Data and the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included elsewhere in this report.
General
The Company owns and operates proprietary, postsecondary institutions
that offer career vocational training programs primarily in the allied health
field. As of December 31, 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 82% of cash revenue from such funds
for the year ended December 31, 2002.
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 impacts 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 three
years.
The Company's revenues normally fluctuate as a result of seasonal
variations in our business, due to enrollments and student population. Student
population varies as a result of new student enrollments and student attrition.
Historically, the Campuses have had lower student populations in the fourth
quarter than in the remainder of the year due to fewer enrollments during the
holiday periods in November and December. Expenses, however, do not vary as
significantly as student population and revenues. The Company expects quarterly
fluctuations in operating results to continue as a result of seasonal enrollment
patterns. Such patterns may change, however, as a result of acquisitions, new
school openings, and new program introductions. The operating results for any
quarter are not necessarily indicative of the results for any future period.
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 primarily expected to
be paid 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 2001 and 2002.
This was a result of the Higher Education Act of 1965 ("HEA") refund provision
that became effective October 2000. Under the HEA requirements, students are
obligated to the Company for education costs that the student can no longer pay
with Title IV funds. 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.
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Part II - Page 3
The following table presents the revenue for the periods indicated.
Years Ended December 31,
---------------------------------------------------
(In Thousands)
2002 2001 2000
---- ---- ----
Revenue ........................................................ $61,112 $49,049 $38,785
The following table presents the relative percentage of revenues
derived and certain consolidated statement of operations items as a percentage
of total revenues for the periods indicated.
Years Ended December 31,
---------------------------------------------------
2002 2001 2000
---- ---- ----
Revenue ........................................................ 100.0% 100.0% 100.0%
Operating expenses:
Instruction costs and services ............................. 30.6 35.3 39.6
Selling and promotional .................................... 13.7 15.8 17.1
General and administrative ................................. 39.1 39.0 42.9
Provision for uncollectible accounts ........................... 5.6 4.8 1.5
----- ----- -----
Total operating expense .................................... 89.0 94.9 101.1
---- ----- -----
Operating income (loss) ........................................ 11.0 5.1 (1.1)
Other non-operating income ................................. 0.4 0.9 0.5
Interest expense ............................................... 0.3 0.4 0.5
----- ----- -----
Income (loss) before income taxes and cumulative effect of
change in accounting principle ............................. 11.1 5.6 (1.1)
Provision (benefit) from income taxes .......................... 4.1 2.3 (0.4)
Income (loss) before cumulative effect of change in accounting
principle .................................................. 7.0 3.3 (0.7)
Cumulative effect of change in accounting principle ............ (0.2)
------ ----- -----
Net Income(loss) ............................................... 7.0% 3.3% (0.9)%
====== ===== =====
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.
Part II - Page 4
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.
Current Trends and Recent Events
The Company began trading on the NASDAQ SmallCap Market on May 22, 2002
under the ticker symbol CCDC. Previously the Company was listed on the
over-the-counter bulletin board.
The Company acquired all the assets of EHE of Arlington, Texas for
$890,000 on August 22, 2002. EHE provides Vocational Nursing and other
health-care related courses. 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 year ended December
31, 2002. The Company signed a lease for a new facility and plans to expand the
number of programs offered at the campus beginning in mid-2003.
The Company received an insurance settlement of $306,000 for damages to
the Lauderdale Lakes campus in 2000. Construction workers failed to properly
secure the roof resulting in water damage to the facility. The settlement was
recorded as a reduction to General and Administrative expense in the fourth
quarter and was primarily for supplies damaged by the water.
The Company entered into a Conversion and Exchange Agreement with
Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Association, L.P.
(collectively, "Cahill-Warnock") on November 25, 2002, which provides in part,
that upon the second business day following the effectiveness of a Registration
Statement (the "Conversion Date"), (i) the Selling Shareholders shall exchange
their 53,309 shares of Class B Voting Convertible Preferred Stock for 533,090
shares of Common Stock and (ii) the Company shall pay to Cahill-Warnock an
amount that is equal to $4.08 per share of the Class B Voting Convertible
Preferred Stock beneficially owned by Cahill-Warnock on the Conversion Date,
which, notwithstanding anything to the contrary in the certificate of
designation of the Company, shall constitute all dividend payments owed to
Cahill-Warnock through the years ended December 31, 2002 and December 31, 2003.
The Conversion and Exchange Agreement provides, among other things; that the
Company and the Selling Stockholders execute the Amended and Restated
Stockholders' Agreement, dated November 25, 2002, which contains agreements
pertaining to (i) the manner in which the Board of Directors of the Company are
elected, (ii) restrictions on the transfer of shares of Common Stock and (iii)
the right of the Selling Stockholders to require the Company to register their
shares of Common Stock in the event this Registration Statement does not remain
effective. The Company's 2002 consolidated financial statements reflect the
conversion of preferred shares to common shares as of November 25, 2002.
The Company's Board of Directors appointed Janet M. Stallmeyer, R.N. to
the Board of Directors on December 17, 2002. Ms. Stallmeyer has thirty years of
experience in health-care and is currently President and Chief Executive Officer
of Coventry Health Care of Kansas, Inc.
The student population was 5,056 at December 31, 2002 compared to 4,269
at December 31, 2001. The student population increase was primarily due to
increased demand for courses. Student enrollments increased 20.2% to 8,510 for
the year ended December 31, 2002 compared to 7,080 in 2001.
The Company filed a Registration Statement on Form S-3 to register
1,133,090 shares of common stock. The Registration Statement was effective
February 5, 2003. The Company received no funds as a result of the registration
or subsequent distribution of common stock. Six hundred thousand (600,000)
shares of the common stock were issued and outstanding as of the date of the
Registration Statement. The Robert F. Brozman Trust held 350,000 shares, Cahill,
Warnock Strategic Partners Fund, L.P. held 237,000 shares, and Strategic
Associates, L.P. held 13,000 shares. The remaining 533,090 shares related to
common shares issued upon conversion of the preferred stock to common stock.
Cahill-Warnock exercised the non-detachable Warrants related to the
$3,500,000, 5% debentures on February 19, 2003. The Company issued 1,286,764
shares of Common Stock to Cahill-Warnock pursuant to the exercise of the
Warrants.
Part II - Page 5
Operating Results
2002 compared to 2001
The student population was 5,056 at December 31, 2002 compared to 4,269
at December 31, 2001. The student population increase was primarily due to
increased demand for courses. Student enrollments increased 20.2% to 8,510 for
the year ended December 31, 2002 compared to 7,080 in 2001. Two new courses at
current locations increased enrollment by 133 students. The Arlington, Texas
campus purchased in August 2002 contributed 49 new enrollments. The remaining
enrollment increase of 1,248 or 17.2% was from existing programs at established
schools.
Net income of $4,234,000 was recorded for the year ended December 31,
2002 compared to $1,633,000 for the year ended December 31, 2001. The increase
in net income is mostly attributable to increases in student enrollment and
related revenues exceeding increases in variable costs. Total operating expenses
as a percentage of revenues decreased to 89.0% in 2002 from 94.9% in 2001.
Revenue increased 24.6% or $12,063,000 to $61,112,000 for the year
ended December 31, 2002 compared to $49,049,000 in 2001. The revenue increased
due to higher student enrollments, increased average student population and a
small price increase. Average student population increased 19.1% to 5,069 in
2002 compared with 4,257 in 2001.
Instruction Costs and Services - increased $1,379,000 or 8.0% to
$18,709,000 compared to $17,330,000 in 2001. The increase from 2001 was
primarily a result of increased salaries due to additional enrollments. Salaries
increased $1,215,000 compared to 2001.
Selling and Promotional - increased $621,000 or 8.0% to $8,390,000
compared to $7,769,000 in 2001. The increase was due to additional advertising
expenses and salaries compared to 2001. Advertising and salary expense increased
$226,000 and $395,000, respectively to generate more prospective student leads.
General and Administrative - increased 25.0% or $4,767,000 to
$23,871,000 compared to $19,104,000 in 2001. The increase was primarily the
result of additional payroll, rent, insurance expense, and health insurance.
Administrative payroll increased $2,382,000 as enrollments improved compared to
2001. Rent increased $413,000 due to annual rent increases, additional leased
space at current locations, and rent at the new Campus in Arlington, Texas.
Insurance expense increased $439,000 compared to 2001 as a result of higher
insurance premiums. Health insurance increased $473,000 due to higher
administrative expenses and claims filed in 2002. The Company received an
insurance settlement of $306,000 for damages done to its' Lauderdale Lakes,
Florida Campus in 2000. The settlement was recorded as a reduction of expenses
in the fourth quarter of 2002. The Company also experienced increases in several
other categories as enrollments increased 20.2% compared to 2001.
Provision for Uncollectible Accounts - increased $1,083,000 during
2002. This increase is attributable to the $12,063,000 increase in revenues, the
$3,256,000 increase in accounts and notes receivable from December 31, 2001 and
a slight deterioration in the aging of accounts receivable. The accounts and
notes receivable increased due to higher student enrollments.
Other Non-Operating Income - decreased $211,000 to $231,000 compared to
$442,000 in 2001. The decrease was primarily a 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, see discussion under Asset Sales. In
addition, interest income decreased due to falling interest rates in 2002.
Interest Expense - decreased $6,000 or 3.3% to $176,000 compared to
$182,000 in 2001.
Provision for Income Taxes - a tax provision of $2,521,000 or 37.3% of
pretax income was recorded in 2002 compared to $1,114,000 or 40.6% of pretax
income in 2001.
EPS and Weighted Average Common Shares - Basic weighted average common
shares increased to 4,533,000 in 2002 from 3,940,000 in 2001. Basic income per
share was $.85 in 2002 compared to $.36 in 2001. Basic income per share is shown
after a reduction for preferred stock dividend accretion of $214,000 and
$226,000 in 2002 and 2001, respectively. In addition, basic income per share is
shown after the special dividend payment of $174,000 for the early payment of
the 2003 dividends, see discussion of Cahill, Warnock transaction under
Liquidity and Capital Resources. Diluted weighted average common shares
outstanding increased to 6,142,000 in 2002 from 5,473,000 in 2001. Diluted
income per share was $.68 for the year ended December 31, 2002 compared to $.28
in 2001. Diluted income per share is shown after a reduction for preferred stock
dividend accretion of $226,000 in 2001 and interest on convertible debt, net of
tax of $108,000 in 2002 and $105,000 in 2001. In addition, diluted income per
share is shown after the special dividend payment of $174,000 for the early
payment of the 2003 dividends, see discussion of Cahill, Warnock transaction
under Liquidity and Capital Resources.
Part II - Page 6
2001 compared to 2000
In 2001, student population increased primarily due to offering new
courses at certain campuses and increased emphasis on advertising.
Net income of $1,633,000 was recorded for the year ended December 31,
2001 compared to a net loss of $352,000 for the year ended December 31, 2000.
The $1,985,000 improvement was due to additional revenue and other non-operating
income. The increased revenue was somewhat offset by increased operating
expenses in all categories compared to 2000.
Revenue increased 26.5% or $10,264,000 to $49,049,000 for the year
ended December 31, 2001 compared to $38,785,000 for the same period of 2000. The
revenue increased due to higher student enrollments, increased average student
population and an average 5% price increase compared to 2000. Student
enrollments increased 16.6% to 7,080 from 6,072 in 2000. Average student
population increased 16.7% to 4,257 in 2001 compared with 3,649 in 2000.
Instruction Costs and Services - increased $1,983,000 or 12.9% to
$17,330,000 compared to $15,347,000 in 2000. The increase from 2000 was
primarily a result of increased salaries, textbook and uniform expenses due to
additional enrollments.
Selling and Promotional - increased $1,151,000 or 17.4% to $7,769,000
compared to $6,618,000 in 2000. The majority of the $1,151,000 increase was due
to additional advertising expenses compared to 2000. Advertising expense
increased $1,028,000 to generate more prospective student leads. The increase in
advertising expense consisted of $171,000 in television, $673,000 in newsprint
and $184,000 related to internet advertising and general production costs.
General and Administrative - increased 14.7% or $2,451,000 to
$19,104,000 compared to $16,653,000 in 2000. The increase was primarily the
result of additional payroll, rent, employee procurement, and insurance expense.
Administrative payroll increased $1,274,000 as enrollments improved compared to
2000. Rent increased $294,000 due to annual rent increases and additional leased
space at current locations. Employee procurement increased $214,000 due to a
tight labor market, which made it more expensive for the Company to hire
qualified employees. Insurance expense increased $172,000 compared to 2000 as a
result of higher insurance premiums.
Provision for Uncollectible Accounts - increased $1,766,000 during
2001. This increase is attributable to the $10,264,000 increase in revenues, the
$3,790,000 increase in accounts and notes receivable from December 31, 2000 and
a slight deterioration in the aging of accounts receivable. The accounts and
notes receivable increased due to higher student enrollments and as a result of
the new refund provision of the Higher Education Act of 1965 ("HEA")
reauthorization that took effect October 7, 2000.
Other Non-Operating Income - increased $261,000 to $442,000 compared to
$181,000 in 2000. Most of the increase was a 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, see discussion under Asset Sales. In
addition, interest income increased due to the Company having a larger cash
balance, offset by falling interest rates during 2001.
Interest Expense - decreased $3,000 or 1.6% to $182,000 compared to
$185,000 in 2000.
Provision for Income Taxes - a tax provision of $1,114,000 or 41% of
pretax income was recorded in 2001 compared to a tax benefit of $164,000 or 38%
of pretax loss in 2000.
EPS and Weighted Average Common Shares - Basic weighted average common
shares decreased to 3,940,000 in 2001 from 3,976,000 in 2000. Basic income per
share was $.36 in 2001 compared with basic loss per share of $.14 in 2000. Basic
income and loss per share is shown after a reduction for preferred stock
dividend accretion of $226,000 and $191,000 in 2001 and 2000, respectively.
Diluted weighted average common shares outstanding increased to 5,473,000 in
2001 from 3,976,000 in 2000. Diluted income per share was $.28 for the year
ended December 31, 2001 compared with diluted loss per share of $.14 in 2000.
Diluted income and loss per share is shown after a reduction for preferred stock
dividend accretion of $191,000 and $226,000 in 2000 and 2001, respectively and
interest on convertible debt, net of tax of $105,000 in 2001.
2000 compared to 1999
Student enrollments increased 7.8% to 6,072 for the year ended December
31, 2000 compared to 5,633 in 1999. Student population increased to
approximately 3,700 at December 31, 2000 compared to 3,300 at December 31, 1999.
Student population increased due to higher enrollments. Higher enrollments were
a result of offering new courses at certain campuses, improving focus on student
retention and increasing emphasis on advertising.
Part II - Page 7
A net loss of $352,000 and $477,000 were recorded for the years ended
December 31, 2000 and 1999 respectively. The $125,000 decrease in net loss was
due to additional revenue and decreased provision for uncollectible accounts.
Provision for uncollectible accounts decreased as a result of centralization of
the accounts receivable process, improved cash collections and improvement in
the aging of accounts receivable during the year. The majority of the increased
revenue was offset by instruction costs and services, selling and promotional,
and general and administrative expenses increasing compared to 1999.
Instruction Costs and Services - increased $1,359,000 to $15,347,000
compared to $13,988,000 in 1999. The increase was primarily a result of
increased salaries, textbook and uniform expenses due to additional enrollments
compared to 1999.
Selling and Promotional - increased $935,000 to $6,618,000 compared to
$5,683,000 in 1999. The $935,000 increase was due to increased wages and
advertising expenses compared to 1999. The additional wages resulted from an
increase in admissions salaries in 2000 due to higher pay rates for admission
personnel. Advertising expense increased $413,000 in order to generate more
prospective students. The increase in advertising expense consisted of $184,000
in television, $114,000 related to an internet marketing campaign, and newsprint
and yellow pages advertising.
General and Administrative - increased $1,225,000 to $16,653,000
compared to $15,428,000 in 1999. The increase was primarily a result of
additional rent, health insurance and salaries compared to 1999. The majority of
the rent increase was due to increased rent for the Garden Grove campus, which
was relocated in the third quarter of 1999. Health insurance increased due to
higher administrative costs and claims filed in the third quarter of 2000.
Provision for Uncollectible Accounts - decreased $219,000 or 27.0% to
$593,000 compared to $812,000 in 1999. This decrease was a result of reduced
allowance for uncollectible accounts. Allowance for uncollectible accounts
decreased as a result of improved collection efforts due to a centralized
collection process instituted by the Company in 2000 and the improvement in the
aging of accounts receivable during the year. The improved aging in accounts
receivable is mitigated by the HEA refund provision. Management anticipates
higher accounts receivable in the future related to the HEA refund provision.
Student collections improved 22% or $8,060,000 to $44,286,000 compared to
$36,226,000 in 1999.
Interest Expense - increased $14,000 to $185,000 compared to $171,000
in 1999. The increase was primarily a result of the Company reversing estimated
interest associated with prior tax returns in 1999.
Provision for Income Taxes - In 2000, a tax benefit of $164,000 or 38%
was recorded compared to a tax benefit of $236,000 or 33% in 1999.
EPS and Weighted Average Common Shares - Basic and diluted weighted
average common shares increased to 3,976,000 in 2000 from 3,907,000 in 1999.
Basic and diluted loss per share was $.14 and $.16 for the year ended December
31, 2000 and 1999, respectively. Basic and diluted loss per share is shown after
a reduction for preferred stock dividends accretion of $191,000 in 2000 and
$165,000 in 1999.
Cumulative Effect of Change in Accounting Principle - On January 1,
2000, the Company adopted Securities and Exchange Commission "SEC" Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 contains guidance for the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. As it relates
to the Company, SAB101 requires non-refundable course registration fees to be
recognized ratably over the life of the course rather than in the month the
student starts the program. Previously, the non-refundable registration fees
were recognized the month the student started the program. The Company reported
an $86,000, or $.02 per share, cumulative effect of change in accounting
principle, net of tax in the first quarter 2000.
Liquidity and Capital Resources
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 82% of cash revenue from such funds
for the year ended December 31, 2002 compared to 83% for 2001.
Accounts receivable are due from students and are primarily expected to
be paid 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 2001 and 2002.
This was as a result of the Higher Education Act of 1965 ("HEA") refund
provision that became effective October 2000. Under the HEA requirements,
students are obligated to the Company for education costs that the student can
no longer pay with Title IV funds. 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.
Part II - Page 8
Asset Sales
On August 2, 1996, the assets of Person/Wolinsky Associates, a wholly
owned subsidiary of the Company, which taught the CPA review course, were sold.
As a result of the sale the Company received proceeds of $879,000. In addition,
a $750,000 non-compete agreement was payable to the Company in ten equal annual
installments commencing December 15, 1996. The income from the non-compete
agreement was being recognized as the payments were earned over the legally
enforceable period. The Company received $300,000 through December 31, 1999.
The Company entered into an agreement with Person/Wolinsky, Inc. to
satisfy certain contractual obligations between Person/Wolinsky, Inc. and the
Company for a cash payment of $200,000, which was received during March 2000.
The $200,000 was being recognized ratably over the remaining life of the
non-compete agreement, which was due to expire August 2006.
In the second quarter of 2001, the Company entered into an agreement
with Person/Wolinsky, Inc. to eliminate all contractual obligations between
Person/Wolinsky, Inc. and the Company for a nominal cash payment. As a result,
the non-compete agreement between Person/Wolinsky, Inc. and the Company has been
cancelled. The Company recorded the $157,500 remaining balance of the deferred
revenue relating to the non-compete agreement as non-operating income in the
second quarter of 2001. Previously the non-compete agreement was being
recognized ratably over the life of the agreement.
Cahill, Warnock Transactions
The Company entered into agreements on February 25, 1997 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 55,147 shares of the Company's new
Class B Voting Convertible Preferred Stock ("Voting Preferred Stock") for $1.5
million, and 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. Mr. Seward
purchased such shares for their purchase price of approximately $50,000. On
September 30, 2001, Mr. Seward converted his 1,838 shares of Voting Preferred
Stock into 18,380 shares of Common Stock. The New Debentures had nondetachable
warrants ("Warrants") for approximately 1,286,765 shares of Common Stock,
exercisable at $2.72 per share of Common Stock. The following transactions have
occurred with respect to the Voting Preferred Stock and New Debentures since
December 31, 2001:
(1) The Company entered into a Conversion and Exchange Agreement with Cahill,
Warnock Strategic Partners Fund, L.P. and Strategic Association, L.P.
(collectively "Cahill-Warnock") on November 25, 2002. The purpose of the
agreement was to covert the Voting Preferred Stock into Common Stock.
(2) The Company filed a Registration Statement on Form S-3 to register
1,133,090 shares of common stock. The Registration Statement was effective
February 5, 2003. The Company received no funds as a result of the
registration or subsequent distribution of common stock. Six hundred
thousand (600,000) shares of the common stock were issued and outstanding
as of the date of the Registration Statement. The Robert F. Brozman Trust
held 350,000 shares, Cahill, Warnock Strategic Partners Fund, L.P. held
237,000 shares, and Strategic Associates, L.P. held 13,000 shares. The
remaining 533,090 shares related to common shares issued upon conversion of
the preferred stock to common stock.
(3) The Securities and Exchange Commission made the Registration Statement
effective February 5, 2003.
(4) Cahill-Warnock exchanged their 53,309 shares of Class B Voting Convertible
Preferred Stock for 533,090 shares of Common Stock on February 7, 2003. The
Company has no remaining Preferred Stock outstanding.
(5) The Company paid to Cahill-Warnock a dividend equal to $4.08 per share of
the Class B Voting Convertible Preferred Stock on February 7, 2003. This
constituted all dividend payments owed to Cahill-Warnock including the
fourth quarter 2002 dividend of $43,500 and a special dividend to encourage
the conversion of $174,000.
(6) Cahill-Warnock exercised the non-detachable Warrants on February 19, 2003.
(7) The Company issued 1,286,764 shares of Common Stock to Cahill-Warnock
pursuant to the exercise of the Warrants.
Please see note 10 concerning the pro-forma effect of the redemption of
debentures and related exercise of warrants.
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 $2,764,000 is currently available under the facility. This facility is
due to expire on April 30, 2003. The Company expects to renew or replace the
facility before it expires 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 of prime plus one percent, 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.
Part II - Page 9
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, $354,000, and $236,000 at
December 31, 1999, 2000, 2001, and 2002, 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.
On November 21, 2002, Security Bank of Kansas City issued a $77,000 letter
of credit to ED. This was due to EHE not meeting financial responsibility and
compliance attestation standards. The letter of credit will expire in one year
but the Company anticipates they will no longer have to post the letter of
credit once the Company submits its 2002 financial statement to ED.
Cash Flows and Other
Net cash flows from operating activities was $5,548,000 in 2002 compared to
$5,817,000 in 2001. Net income increased $2,601,000 from $1,633,000 in 2001 to
$4,234,000 in 2002. The increase in net income was off-set by an increase in
accounts receivable and higher cash payments for income taxes, resulting in a
small decrease in net cash flows for operating activities.
Cash used in investing activities was $3,070,000 and $2,394,000 in 2002 and
2001, respectively. Cash was used in both years to purchase short-term
investments and capital expenditures. In addition, the company purchased EHE in
August 2002 for $890,000. The Company also purchased land in 2002 for $231,000
to add parking at its' Tampa, Florida Campus. Capital expenditures in both years
were primarily for additional computer equipment, classroom furniture,
equipment, and leasehold improvements.
Cash used in financing activities was $257,000 in 2002 compared to $379,000
in 2001. The cash used in financing activities in 2002 is the result of the
purchase of treasury shares and payment of dividends on the Voting Preferred
Stock, off set by a decrease in proceeds from the issuance of common shares
under the stock option plan.
The Company's Board of Directors approved a 500,000 shares repurchase
program in August 2000. As of December 31, 2002 the Company had purchased a
total of 276,135 shares at an average price of $3.84 pursuant to the buy back
plan. The purchases as of December 31, 2001 were 256,235 shares at an average
price of $3.27. The Company purchased 19,900 shares in 2002 at an average price
of $11.18.
The Company meets its working capital, capital equipment purchases and cash
requirements with funds generated internally. The Company has generated positive
cash flows from operations for the last four years. Management currently expects
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.
The Company has no off balance sheet financing arrangements.
Critical Accounting Policies and Estimates
The Company's consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The preparation of the
financial statements requires us to make estimates and judgments that affect the
reported amount of assets and liabilities, revenues and expenses and contingent
assets and liabilities. Actual results may differ from those estimates and
judgments under different assumptions or conditions. The Company evaluates on a
continuing basis, our estimates, including those related to allowance for
doubtful accounts and intangible assets. The Company bases estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. The Company believes the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our financial statements:
Allowance for Doubtful Accounts.
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 offers a variety of
payment plans to students for payment of the portion of their education expense
not covered by financial aid programs. These balances are unsecured and not
guaranteed. The Company maintains an allowance for doubtful accounts for
estimated losses resulting from the inability or failure of our students to make
required payments. The Company's estimate is based upon historical experience
and is continually updated. The Company realized
Part II - Page 10
a higher level of uncollectible accounts receivable from students during the
first three 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. The Company believes
the allowance for doubtful accounts is adequate; however, losses related to
unpaid student balances could exceed the amounts reserved for allowance for
doubtful accounts.
Intangible Assets.
The Company has intangible assets, including goodwill and non-compete
agreements. The determination of related estimated useful lives and whether or
not these assets are impaired involves significant judgments. The Company
reviews intangible assets whenever certain events occur or there are changes in
circumstances for impairment by comparing the carrying value to future
undiscounted cash flows. To the extent that there is impairment, analysis is
performed based on several criteria, including but not limited to, revenue
trends, discounted operating cash flows and other operating factors to determine
the impairment amount. In addition, a determination is made by management to
ascertain whether goodwill has been impaired. Analysis is performed on an
operating business unit basis under the fair value method. If the review
indicates that goodwill is not recoverable, the Company would recognize an
impairment loss.
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 1999, 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.
Other
The Company assessed each Campus' compliance with the regulatory provisions
contained in 34 CFR 600.5(d) - (e) for the year ended December 31, 2002. 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
legislation extending the Higher Education Act of 1965, as amended. During 2002,
the Campus' percentages of Title IV Funds ranged from 62.3% to 86.9%.
New Accounting Pronouncements
SFAS 143, "Accounting for Asset Retirement Obligations" requires an entity
to record a liability for an obligation associated with the retirement of an
asset at the time the liability is incurred by capitalizing the cost as part of
the carrying value of the related asset and depreciating it over the remaining
useful life of that asset. Adoption of SFAS 143, effective January 1, 2003, had
no effect on the Company's financial position or results of operations.
Page II - Page 11
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 instruments.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Concorde Career Colleges, Inc. and Subsidiaries:
Report of Independent Accountants-BKD, LLP. .................................................... II-13
Report of Independent Accountants-PricewaterhouseCoopers LLP. .................................. II-14
Consolidated Balance Sheets--December 31, 2002 and 2001 ........................................ II-15
Consolidated Statements of Operations--Years Ended December 31, 2002, 2001 and 2000 ............ II-17
Consolidated Statements of Cash Flows--Years Ended December 31, 2002, 2001 and 2000 ............ II-18
Consolidated Statements of Changes In Stockholders' Equity--
Years Ended December 31, 2002, 2001 and 2000 ............................................... II-19
Notes to Consolidated Financial Statements--Years Ended December 31, 2002, 2001 and 2000 ....... II-20
(The remainder of this page left intentionally blank.)
Part II - Page 12
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Concorde Career Colleges, Inc.
Mission, Kansas:
We have audited the accompanying consolidated balance sheets of Concorde
Career Colleges, Inc. and subsidiaries as of December 31, 2002 and 2001 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years then ended. 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 in accordance with auditing standards generally
accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Concorde Career Colleges, Inc. and subsidiaries as of December 31, 2002 and 2001
and the results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 2, in 2002 the Company changed its method of
accounting for goodwill and intangible assets.
BKD, LLP
Kansas City, Missouri
February 25, 2003
(The remainder of this page left intentionally blank.)
Part II - Page 13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Concorde Career Colleges, Inc. and Subsidiaries:
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity for the year ended December 31, 2000 (listed in
the index appearing under Item 15(a)(1) and Part IV - Page 1) present fairly, in
all material respects, the results of operations and cash flows of Concorde
Career Colleges and its subsidiaries in conformity with accounting principles
generally accepted in the United States of America. 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 audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Kansas City, Missouri
March 23, 2001, except as to the reverse stock
split which is as of November 21, 2001
and except with respect to the 2001 transitional
disclosures relating to the adoption of Statement of Financial
Accounting Standards No. 142 as described in Note 2,
as to which the date is January 1, 2002
(The remainder of this page left intentionally blank.)
Part II - Page 14
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------------
2002 2001
------------ ------------
Current Assets:
Cash and cash equivalents ................. $ 9,777,000 $ 7,556,000
Short term investments .................... 2,521,000 2,183,000
Receivables
Accounts receivable ..................... 19,784,000 16,639,000
Notes receivable ........................ 1,733,000 1,534,000
Allowance for uncollectible accounts .... (1,909,000) (1,639,000)
------------ ------------
Net receivables ..................... 19,608,000 16,534,000
Recoverable income taxes .................. 227,000
Deferred income taxes ..................... 952,000 962,000
Supplies and prepaid expenses ............. 2,005,000 1,119,000
------------ ------------
Total current assets ................ 35,090,000 28,354,000
Fixed Assets, Net ............................ 3,541,000 2,625,000
------------ ------------
Other Assets:
Long-term notes receivable .............. 218,000 306,000
Allowance for uncollectible notes ....... (19,000) (28,000)
Deferred income taxes ................... 175,000
Goodwill ................................ 954,000 256,000
Intangible, net ......................... 265,000
Deferred financing cost, net ............ 2,000 12,000
------------ ------------
Total other assets .................. 1,420,000 721,000
------------ ------------
$ 40,051,000 $ 31,700,000
============ ============
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 15
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31,
----------------------------
2002 2001
------------ ------------
Current Liabilities:
Deferred revenues .............................................. $ 20,996,000 $ 17,378,000
Accrued salaries and wages ..................................... 1,363,000 846,000
Accounts payable ............................................... 2,599,000 1,884,000
Accrued liabilities ............................................ 1,228,000 1,045,000
Accrued income taxes payable ................................... 816,000
Subordinated debt due to related party ......................... 3,500,000
Dividends payable .............................................. 218,000 45,000
------------ ------------
Total current liabilities .................................. 29,904,000 22,014,000
Subordinated Debt Due To Related Party .............................. 3,500,000
Deferred Income Taxes ............................................... 157,000
Stockholders' Equity:
Preferred Stock, ($.10 par value, 600,000 shares authorized)
53,309 Class B shares issued and outstanding at December
31, 2001 ................................................... 5,000
Common stock, ($.10 par value, 19,400,000 shares
authorized) 4,846,699 shares issued and 4,558,289 shares
outstanding in 2002 (4,254,255 shares issued
and 3,985,370 shares outstanding in 2001) .................. 485,000 425,000
Capital in excess of par ....................................... 9,831,000 9,706,000
Retained Earnings (Deficit) .................................... 791,000 (3,055,000)
Less treasury stock, 288,410 shares in 2002 and 268,885 in
2001, at cost .............................................. (1,117,000) (895,000)
------------ ------------
Total stockholders' equity ................................. 9,990,000 6,186,000
------------ ------------
$ 40,051,000 $ 31,700,000
============ ============
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 16
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net Revenues .............................................. $ 61,112,000 $ 49,049,000 $ 38,785,000
Costs and Expenses:
Instruction costs and services ....................... 18,709,000 17,330,000 15,347,000
Selling and promotional .............................. 8,390,000 7,769,000 6,618,000
General and administrative ........................... 23,871,000 19,104,000 16,653,000
Provision for uncollectible accounts ................. 3,442,000 2,359,000 593,000
------------ ------------ ------------
Total Costs and Expenses ......................... 54,412,000 46,562,000 39,211,000
------------ ------------ ------------
Operating Income (Loss) ................................... 6,700,000 2,487,000 (426,000)
Interest and Other Non-Operating Income ................... 231,000 442,000 181,000
Interest Expense .......................................... 176,000 182,000 185,000
------------ ------------ ------------
Income (Loss) Before Benefit from Income Taxes and
Cumulative Effect of Change in Accounting Principle ....... 6,755,000 2,747,000 (430,000)
Provision (Benefit) For Income Taxes ...................... 2,521,000 1,114,000 (164,000)
------------ ------------ ------------
Income (Loss) Before Cumulative Effect of Change in
Accounting Principle ...................................... 4,234,000 1,633,000 (266,000)
Cumulative Effect of Change in Accounting Principle, net of
Tax ................................................... (86,000)
------------ ------------ ------------
Net Income (Loss) ..................................... 4,234,000 1,633,000 (352,000)
Class B Preferred Stock Accretion ......................... 388,000 226,000 191,000
------------ ------------ ------------
Net Income (Loss) Available to Common Shareholders ........ $ 3,846,000 $ 1,407,000 $ (543,000)
============ ============ ============
Weighted Average Shares Outstanding:
Basic ................................................. 4,533,000 3,940,000 3,976,000
Diluted ............................................... 6,142,000 5,473,000 3,976,000
Basic Income (Loss) Per Share:
Income (Loss) before cumulative effect of change in
accounting principle ................................ $ .85 $ .36 $ (.12)
Cumulative effect to January 1, 2000 of change in
accounting principle, net of tax .................... $ $ $ (.02)
------------ ------------ ------------
Net Income (Loss) ..................................... $ .85 $ .36 $ (.14)
============ ============ ============
Diluted Income (Loss) Per Share:
Income (Loss) before cumulative effect of change in
accounting principle ................................ $ .68 $ .28 $ (.12)
Cumulative effect to January 1, 2000 of change in
accounting principle, net of tax .................... $ $ $ (.02)
------------ ------------ ------------
Net Income (Loss) ......................................... $ .68 $ .28 $ (.14)
============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 17
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------
2002 2001 2000
----------- ----------- -----------
Cash Flows Operating Activities:
Net Income (Loss) .................................... $ 4,234,000 $ 1,633,000 $ (352,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities - -
Depreciation and amortization ........................ 992,000 998,000 1,151,000
Provision for uncollectible accounts ................. 3,442,000 2,359,000 593,000
Cumulative effect of change in accounting principle .. 86,000
Provision for deferred income taxes .................. 342,000 189,000 (207,000)
Change in assets and liabilities - -
Increase in receivables, net ......................... (6,307,000) (4,830,000) (1,723,000)
Increase in deferred revenue ......................... 3,355,000 3,262,000 3,781,000
Income taxes payable/recoverable ..................... (1,043,000) 820,000 418,000
Increase in accounts payable and other, net .......... 533,000 1,386,000 28,000
----------- ----------- -----------
Total adjustments .................................. 1,314,000 4,184,000 4,127,000
----------- ----------- -----------
Net operating activities ........................... 5,548,000 5,817,000 3,775,000
----------- ----------- -----------
Cash Flows Investing Activities:
Acquisition of Extended Health Education ............. (890,000)
Purchase of short term investments ................... (338,000) (1,567,000) (616,000)
Capital expenditures ................................. (1,842,000) (827,000) (794,000)
----------- ----------- -----------
Net investing activities ........................... (3,070,000) (2,394,000) (1,410,000)
----------- ----------- -----------
Cash Flows Financing Activities:
Treasury stock purchased ............................. (222,000) (724,000) (113,000)
Dividends paid ....................................... (174,000) (135,000)
Stock options exercised .............................. 73,000 458,000 2,000
Stock purchase plan .................................. 66,000 22,000 29,000
----------- ----------- -----------
Net financing activities ........................... (257,000) (379,000) (82,000)
----------- ----------- -----------
Net Increase in Cash and Cash Equivalents ............... 2,221,000 3,044,000 2,283,000
Cash and Cash Equivalents at Beginning of Year .......... 7,556,000 4,512,000 2,229,000
----------- ----------- -----------
Cash and Cash Equivalents at End of Year ................ $ 9,777,000 $ 7,556,000 $ 4,512,000
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid During the Year For:
Interest ............................................. $ 220,000 $ 139,000 $ 185,000
Income taxes ......................................... 3,319,000 120,000 45,000
The accompanying notes are an integral part of these consolidated statements.
Part II - Page 18
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained
Capital in Earnings Treasury
Preferred Stock Common Stock Excess of Par (Deficit) Stock Total
--------------- ------------ -------------- ------------ ------------ -----------
BALANCE, December 31, 1999 ............. $ 6,000 $ 397,000 $ 8,986,000 $(3,919,000) $ (59,000) $ 5,411,000
Net Loss ............................ (352,000) (352,000)
Class B Preferred Stock Accretion ... 191,000 (191,000)
Stock Options Exercised ............. 1,000 1,000 2,000
Employee Stock Purchase Plan ........ 2,000 27,000 29,000
Treasury Stock Issued ............... (1,000) 1,000
Treasury Stock Purchased ............ (113,000) (113,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2000 ............. 6,000 400,000 9,204,000 (4,462,000) (171,000) 4,977,000
Net Income .......................... 1,633,000 1,633,000
Class B Preferred Stock Accretion ... 226,000 (226,000)
Class B Preferred Stock Dividends ... (180,000) (180,000)
Preferred Stock Converted to
Common Stock .................... (1,000) 2,000 (1,000)
Stock Options Exercised ............. 22,000 436,000 458,000
Employee Stock Purchase Plan ........ 1,000 21,000 22,000
Treasury Stock Purchased ............ (724,000) (724,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2001 ............. 5,000 425,000 9,706,000 (3,055,000) (895,000) 6,186,000
Net Income .......................... 4,234,000 4,234,000
Class B Preferred Stock Accretion ... 388,000 (388,000)
Class B Preferred Stock Dividends ...
including special dividend of
$174,000 ........................ (347,000) (347,000)
Preferred Stock Converted to
Common Stock .................... (5,000) 53,000 (48,000)
Stock Options Exercised ............. 6,000 67,000 73,000
Employee Stock Purchase Plan ........ 1,000 65,000 66,000
Treasury Stock Purchased ............ (222,000) (222,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 2002 ............. $ $ 485,000 $ 9,831,000 $ 791,000 $(1,117,000) $ 9,990,000
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
(The remainder of this page left intentionally blank.)
Part II - Page 19
CONCORDE CAREER COLLEGES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001, and 2000
1. Business and Summary of Significant Accounting Policies:
Background
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 seven states, California, Colorado, Florida, Missouri, Oregon,
Tennessee, and Texas (the "Campuses").
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 in the United States require 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.
Revenue Recognition
The Company establishes an account 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.
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 2002, management estimates that 82 percent of its cash
receipts were derived from funds obtained by students through federal Title IV
student aid programs and 18 percent were derived from state sponsored student
education and training programs and cash received from students and other
sources.
In December 1999, the SEC issued SAB No. 101 "Revenue Recognition in
Financial Statements". SAB 101 provides guidance for the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. The Company adopted SAB 101 and recorded a one-time charge of $86,000 or
$.02 a share net of tax for the cumulative effect of this change in accounting
principle during the first quarter of 2000. Under SAB 101, non-refundable
registration fees are recognized ratably over the life of the course rather than
in the month the student starts the program as discussed above.
Reverse Stock Split
The Company affected a one-for-two Reverse Stock Split on November 21,
2001. All share and per share amounts have been retroactively adjusted to
reflect the Reverse Stock Split for all periods presented. The par value of the
Company's Common Stock remained $.10 per share.
Cash and Cash Equivalents
Cash and cash equivalents are made up of cash and those items with
maturity at the date of purchase of three months or less. Cash equivalents
include money market funds, certificates of deposit and treasury bills that are
carried at cost, which approximates fair value. Income on cash equivalents is
included in other non-operating income in the statement of operations.
Part II - Page 20
Short Term Investments
Short-term investments are those items with maturity of three months to
one year. Short-term investments are carried at cost, which approximates fair
value. At December 31, 2002 short-term investments consisted of certificates of
deposit with a six-month maturity. Income related to short term investments is
included in other non-operating income in the statement of operations.
Accounts Receivable and Notes Receivable
Accounts receivable are amounts due from students that are primarily
expected to be paid through the use of federal and state sources of funds. The
Company has realized a higher level of uncollectible accounts receivable from
students as a result of the Higher Education Act of 1965 ("HEA") refund
provision which became effective in October 2000. Under the HEA requirements
students are obligated to the Company for education costs that the student can
no longer pay with Title IV funds. The Company's accounts and notes receivable
increased $3,256,000 in 2002.
The Company maintains an allowance for uncollectible accounts and notes
receivable. A provision is charged to earnings for the amount of estimated
uncollectible accounts based upon collection trends, aging of accounts and other
current factors. 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. The amount of actual
uncollectible accounts could differ materially from the estimates reflected in
the financial statements.
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 uncollectible accounts) recorded at
December 31, 2002, are not impaired and are not materially different from their
corresponding fair values.
Fixed Assets
Fixed assets are recorded at cost. Furniture and equipment is
depreciated over the estimated useful lives of the assets (three to five years)
using the straight-line method. Leasehold improvements are amortized over the
shorter of their estimated useful life or terms of the related leases.
Maintenance and repairs are charged to expense as incurred. The costs
of additions and improvements are capitalized and depreciated over the remaining
useful lives of the assets. The costs and accumulated depreciation of assets
sold or retired are removed from the accounts and any gain or loss is recognized
in the year of disposal. Depreciation expense was $957,000 in 2002, $939,000 in
2001, and $1,091,000 in 2000.
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.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Recoverability of assets to be held and
used is measured by comparison of the carrying amount of the asset to future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amounts of the assets exceed the fair value less costs to
sell. The Company has not reported any provision for impairment of long-lived
assets.
Advertising Costs
The Company expenses advertising costs as they occur. Advertising
expense, which is included in selling and promotional expenses, was $4,899,000
in 2002, $4,673,000 in 2001, and $3,645,000 in 2000.
Part II - Page 21
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets for cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities, and
deferred revenue approximate fair value because of immediate or short-term
maturity of these financial instruments. Short term investments are recorded at
their cost. As it was not practicable to estimate the fair value of the
subordinated debentures with nondetachable warrants without incurring excessive
costs, these are carried at their original value of $3,500,000 in the
consolidated balance sheet. The warrants expire in 2003.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are
described more fully in Note 10. The Company accounts for these plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. No stock-based employee
compensation cost is reflected in the results of operations, as all options
granted under those plans had an exercise price equal to or exceeding the market
value of the underlying common stock on the grant date. The following table
illustrates the effect on net income and income per share if the Company had
applied the fair value provisions of Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
Year Ended December 31,
----------------------------------------
2002 2001 2000
---- ---- ----
Net income (loss) before cumulative effect of change
in accounting principle, as reported ............... $4,234,000 $1,633,000 $(266,000)
Total stock-based employee compensation cost
determined under the fair value based method,
net of income taxes ................................ (329,000) (138,000) (202,000)
---------- ---------- ---------
Pro forma net income (loss) before cumulative effect
of change in accounting principle .................. $3,905,000 $1,495,000 $(468,000)
========== ========== =========
Income (loss) per share before cumulative effect of
change in accounting principle
Basic - as reported ................................ $ .85 $ .36 $ (.12)
========== ========== =========
Basic - pro forma .................................. $ .78 $ .32 $ (.08)
========== ========== =========
Diluted - as reported .............................. $ .68 $ .28 $ (.12)
========== ========== =========
Diluted - pro forma ................................ $ .63 $ .27 $ (.08)
========== ========== =========
2. Business Combination and Accounting for Goodwill and Intangible Assets:
Effective January 1, 2002, the Company adopted SFAS No. 142,
"Accounting for Goodwill and Other Intangible Assets." SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead, such assets must be tested for impairment at least
annually in accordance with the provision of SFAS No. 142. This statement also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." There was no impact to the consolidated financial statements
upon adoption of SFAS No. 142.
On August 22, 2002, the Company acquired certain assets and assumed
certain liabilities of Extended Health Education, Inc. for $890,000 in cash.
This business combination has been accounted for as a purchase whereby the
purchase price was allocated based on the estimated fair value of assets
acquired and liabilities assumed at the date of acquisition. Of the $998,016 of
acquired intangible assets, $250,000 was assigned to non-compete agreements and
will be amortized over the three-year term of the agreements, and $50,000 was
allocated to course curriculum and will be amortized over three years. The
excess of the purchase price over the fair value of the net assets acquired of
$698,016 has been recorded as goodwill and is not subject to amortization. The
revenues and expenses contributed by Extended Health Education, Inc. have been
included in the statement of operations since the date of acquisition.
Part II - Page 22
The carrying basis and accumulated amortization of recognized intangible assets
as December 31, 2002 were:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- ------------ ------------
Amortized intangible assets
Non compete agreement ........ $ 250,000 $ 29,000 $ 221,000
Course curriculum ............ 50,000 6,000 44,000
-------------- ------------ ------------
$ 300,000 $ 35,000 $ 265,000
============== ============ ============
Amortization expense relative to acquired intangibles was $35,000 in
2002. Amortization of purchased intangibles with estimatable useful lives is
estimated as follows: 2003 - $100,000, 2004 - $100,000, and 2005 - $65,000.
The changes in the carrying amount of goodwill for the year ended December 31,
2002 were:
Balance - January 1, 2002 ............. $ 256,000
Goodwill acquired ..................... 698,000
----------------
Balance - December 31, 2002 ........... $ 954,000
================
Net income for the years ended December 31, 2001 and 2000, exclusive of
amortization expense recognized related to goodwill and other intangible assets
which will no longer be amortized under provisions of SFAS No. 142, is presented
in the table below. There is no impact to net income (loss) per share for either
year.
Pro Forma Information 2001 2000
---- ----
Net income (loss) as reported ........................ $ 1,633,000 $ (352,000)
Add back goodwill amortization ....................... 60,000 59,000
Less tax effect ...................................... (22,000) (24,000)
------------ ------------
Adjusted net income (loss) ...................... $ 1,671,000 $ (317,000)
============ ============
3. Receivables:
Changes in the allowance for uncollectible accounts were
as follows for the year ended December 31: 2002 2001 2000
---- ---- ----
Balance-beginning of year ............................ $ 1,639,000 $ 663,000 $ 1,234,000
Provision for uncollectible accounts ................. 3,407,000 2,320,000 567,000
Charge-offs, net of recoveries ....................... (3,137,000) (1,344,000) (1,138,000)
------------ ------------ ------------
Balance - end of year ........................... $ 1,909,000 $ 1,639,000 $ 663,000
============ ============ ============
Changes in the allowance for uncollectible notes were
as follows for the year ended December 31: 2002 2001 2000
---- ---- ----
Balance-beginning of year ............................ $ 28,000 $ 30,000 $ 186,000
Provision for uncollectible accounts ................. 35,000 39,000 26,000
Charge-offs, net of recoveries ....................... (44,000) (41,000) (182,000)
------------ ------------- ------------
Balance - end of year ........................... $ 19,000 $ 28,000 $ 30,000
============ ============ ============
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Part II - Page 23
4. Fixed Assets and Leases:
Fixed assets consist of the following at December 31: 2002 2001
---- ----
Furniture and equipment ............................. $ 5,835,000 $ 7,083,000
Leasehold improvements .............................. 2,277,000 3,055,000
Land ................................................ 231,000
------------ -------------
Gross fixed assets ................................ 8,343,000 10,138,000
Less accumulated depreciation and amortization ...... 4,802,000 7,513,000
------------ -------------
Net fixed assets .................................. $ 3,541,000 $ 2,625,000
============ =============
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 has a lease obligation for the Chief Executive
Officer's automobile. The Company also rents various equipment under operating
leases that are generally cancelable within 30 days. Rental expense for these
leases was $3,817,000 in 2002, $3,357,000 in 2001, and $3,054,000 in 2000.
Aggregate minimum future rentals payable under the operating leases at December
31, 2002, were:
2003 .......................................... $ 4,124,000
2004 .......................................... 4,050,000
2005 .......................................... 3,664,000
2006 .......................................... 3,487,000
2007 and thereafter ........................... 20,047,000
5. Accrued Liabilities:
Accrued Liabilities consist of the following at December 31: 2002 2001
---- ----
Vacation ................................................. $ 861,000 $ 742,000
Health insurance claims .................................. 217,000 126,000
Other liabilities ........................................ 111,000 110,000
Interest ................................................. 15,000 59,000
Other taxes .............................................. 24,000 8,000
------------ ------------
Total accrued liabilities ............................ $ 1,228,000 $ 1,045,000
============ ============
6. Interest and other Non-Operating Income:
Non-operating income consists of the following for the
years ended December 31: 2002 2001 2000
---- ---- ----
Interest .................................................. $ 231,000 $ 270,000 $ 181,000
Amortization of non-compete agreement ..................... 15,000
Cancellation of non-compete agreement ..................... 157,000
------------ ------------ ------------
Total $ 231,000 $ 442,000 $ 181,000
============ ============ ============
In the second quarter of 2001, the Company entered into an agreement with
Person/Wolinsky, Inc. to eliminate all contractual obligations between
Person/Wolinsky, Inc. and the Company for a nominal cash payment. As a
result, a non-compete agreement was cancelled and the Company recorded the
$157,500 remaining balance of deferred revenue relating to the non-compete
agreement as non-operating income. Previously the non-compete agreement was
being recognized ratably over the life of the agreement.
Part II - Page 24
7. Subordinated Debt and Credit Facility: 2002 2001
---- ----
Subordinated debenture payable to related party, interest at five
percent, due February 2003 ....................................... $ 3,500,000 $ 3,500,000
=========== ===========
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 ("Debentures") for $3.5 million. David L. Warnock is
a principal of Cahill, Warnock, and a Director of the Company. 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 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 maturity date of the Debenture. No warrants had been
exercised at December 31, 2002.
As further explained in Note 10, effective November 25, 2002, 53,309
shares of Class B Voting Convertible Preferred Stock were converted into 533,090
common shares. Also as further explained in Note 10, on February 19, 2003,
Cahill-Warnock exercised all non-detachable warrants related to the $3,500,000,
5% subordinated debentures.
Credit Facility
The Company has a $3,000,000 secured revolving credit facility with
Security Bank of Kansas City. The amount available under the facility is offset
by the letter of credit discussed below. As a result, $2,764,000 was available
under the facility at December 31, 2002. This facility is due to expire on April
30, 2003. The Company expects to renew or replace the facility before it expires
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 of prime
plus one percent, 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
subordinated debt plus consolidated tangible net worth of not less than
$7,600,000 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, $354,000, and $236,000 at
December 31, 1999, 2000, 2001, and 2002, 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.
On November 21, 2002, Security Bank of Kansas City issued a $77,000
letter of credit to ED. This was due to EHE not meeting financial responsibility
and compliance attestation standards. The letter of credit will expire in one
year but the Company anticipates the letter of credit will not be required once
the Company submits its 2002 financial statement to ED in June 2003.
(The remainder of this page left intentionally blank.)
Part II - Page 25
9. Income Taxes:
The income tax expense (benefit), excluding the cumulative effect of a
change in accounting method, for the years ended December 31, consist of the
following:
2002 2001 2000
---- ---- ----
Current tax expense (benefit)
Federal .............................................. $ 1,851,000 $ 752,000 $ (17,000)
State ................................................ 328,000 173,000 5,000
------------ ------------ ------------
2,179,000 925,000 (12,000)
Deferred tax expense (benefit)
Federal .............................................. 308,000 130,000 (143,000)
State ................................................ 34,000 59,000 (64,000)
------------ ------------ ------------
342,000 189,000 (207,000)
------------ ------------ ------------
Less benefit of cumulative effect of a change in accounting ... (55,000)
------------ ------------ ------------
Tax provision (benefit) ....................................... $ 2,521,000 $ 1,114,000 $ (164,000)
============ ============ ============
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 years ended December 31, as follows:
2002 2001 2000
---- ---- ----
Expense (benefit) at federal statutory rate ................... $ 2,297,000 $ 934,000 $ (146,000)
State expense (benefit), net .................................. 224,000 113,000 (39,000)
Goodwill amortization ......................................... 20,000 20,000
Other, net .................................................... 47,000 1,000
------------ ------------ -----------
$ 2,521,000 $ 1,114,000 $ (164,000)
============ ============ ===========
Deferred tax assets and liabilities consisted of the following at
December 31:
2002 2001
---- ----
Credit losses ......................................................... $ 752,000 $ 650,000
Deferred student tuition .............................................. 104,000 117,000
AMT credit carryforward ............................................... 90,000
Depreciation and amortization ......................................... 9,000 25,000
NOL carryforwards ..................................................... 14,000 49,000
Other expenses currently deductible for financial reporting purposes
but not for tax .................................................... 256,000 238,000
------------ ------------
Net assets ..................................................... 1,135,000 1,169,000
Depreciation and amortization ......................................... (222,000) (32,000)
Other expenses currently deductible for tax purposes but not for
financial reporting ............................................... (118,000)
------------
Net ............................................................ $ 795,000 $ 1,137,000
============ ============
At December 31, 2002, deferred tax assets included $952,000 current
assets and $157,000 non-current liabilities.
The Company has not recorded a valuation allowance relating to the
deferred tax assets, as taxable temporary difference are expected to be offset
by deductible temporary differences and future taxable income.
The Company had no federal net operating loss ("NOL") carryforwards
available to offset taxable income at December 31, 2002 or 2001. The Company has
NOL carryforwards for state purposes. The deferred tax asset related to the
state NOL is expected to be fully utilized.
Part III - Page 26
10. Stockholders' Equity:
Preferred Stock Conversion
The Company entered into a Conversion and Exchange Agreement with
Cahill, Warnock Strategic Partners Fund, L.P. and Strategic Association, L.P.
(collectively, "Cahill-Warnock") on November 25, 2002, which provides in part,
that upon the second business day following the effectiveness of a Registration
Statement (the "Conversion Date"), (i) the Selling Shareholders shall exchange
their 53,309 shares of Class B Voting Convertible Preferred Stock for 533,090
shares of Common Stock and (ii) the Company shall pay to Cahill-Warnock an
amount that is equal to $4.08 per share, of the Class B Voting Convertible
Preferred Stock beneficially owned by Cahill-Warnock on the Conversion Date,
which, notwithstanding anything to the contrary in the certificate of
designation of the Company, shall constitute all dividend payments owed to
Cahill-Warnock through the years ended December 31, 2002 and December 31, 2003.
The $4.08 per share is the fourth quarter 2002 dividend of $43,500 and a special
dividend of $174,000 that was paid to induce the holder to convert the Preferred
Stock. The Conversion and Exchange Agreement provides, among other things; that
the Company and the Selling Stockholders execute the Amended and Restated
Stockholders' Agreement, dated as of November 25, 2002, which contains
agreements pertaining to (i) the manner in which the Board of Directors of the
Company are elected, (ii) restrictions on the transfer of shares of Common Stock
and (iii) the right of the Selling Stockholders to require the Company to
register their shares of Common Stock in the event this Registration Statement
does not remain effective. The 2002 consolidated financial statement reflect the
conversion of preferred shares to common shares as of November 25, 2002.
The Company filed a Registration Statement on Form S-3 to register
1,133,090 shares of common stock. The Registration Statement was effective
February 5, 2003. The Company will receive no funds as a result of the
registration or subsequent distribution of common stock. Six hundred thousand
(600,000) shares of the common stock are currently issued and outstanding. The
issued shares are held by the Robert F. Brozman Trust (350,000 shares), Cahill,
Warnock Strategic Partners Fund, L.P. (237,000 shares), and Strategic
Associates, L.P. (13,000 shares). The remaining 533,090 shares relate to common
shares issued upon conversion of the preferred stock to common stock.
Conversion of Subordinated Debt to Equity
As described in Note 7, in conjunction with the Company borrowing
$3,500,000 of 5% subordinated debt, Cahill-Warnock were issued non-detachable
warrants to purchase 1,286,764 shares of common stock. On February 13, 2003, the
Company informed Cahill-Warnock it would pay off the $3,500,000 of debt.
Subsequent to this notification, Cahill-Warnock elected to exercise their
warrants and purchase 1,286,764 shares of comon stock at the exercise price of
$2.72 per share, for a total purchase price of $3,500,000. No cash was exchanged
in this transaction which was completed on February 19, 2003. The following
table presents pro forma information as if the transaction had occurred on
January 1, 2002.
For the Year Ended December 31, 2002
---------------------------------------------------
As Reported Adjustments Pro forma
------------ ---------------- ------------
Net Income ............................................. $ 4,234,000 $ 108,000 (a) $ 4,342,000
============ ============ ============
Net Income Available to Common Shareholders ............ $ 3,846,000 $ 108,000 (a) $ 3,954,000
============ ============ ============
Weighted Average Shares Outstanding .................... 4,533,000 1,287,000 (b) 5,820,000
============ ============ ============
Basic Income Per Share ................................. $ 0.85 $ 0.68
============ ============
Diluted Income Per Share ............................... $ 0.68 $ 0.68
============ ============
As of December 31, 2002
---------------------------------------------------
As Reported Adjustments Pro forma
------------ ----------------- ------------
5% Subordinated Debt ................................... $ 3,500,000 $ (3,500,000) (c) $
============ ============ ============
Total Stockholders' Equity ............................. $ 9,990,000 $ 3,500,000 (b) $ 13,490,000
============ ============ ============
(a) Interest expense on 5% subordinated debt, net of tax.
(b) Issuance of common shares upon exercise of warrants.
Part II - Page 27
(c) Retirement of 5% subordinated debt.
Treasury Stock
In August 2000, the Board of Directors authorized the repurchase of up
to 500,000 shares of Concorde's common stock in the open market, subject to
normal trading restrictions. The Company purchased 19,900 shares at a cost of
$222,000 in 2002, 196,485 shares at a cost of $724,000 in 2001, and 59,750
shares at a cost of $113,000 during 2000. The Company currently uses treasury
stock for general corporate purposes.
Stock Purchase Plan
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 maximum numbers of shares
that can be purchased under the Plan are 125,000 with no more than 25,000 in any
year. The purchase price per share is the lower of 95% of the closing price on
the offering commencement date or termination date. A total of 69,181 shares
have been issued pursuant to the plan since its approval. In 2000, 24,009 shares
of stock were issued at prices between $1.00 and $1.56. In 2001, 15,348 shares
of stock were issued at prices between $1.58 and $2.15. In 2002, 9,927 shares of
stock were issued at prices between $4.75 and $8.22.
Stock Option Plans
The Company has incentive stock option plans (the "2002 Option Plan,"
"2000 Option Plan" and the "1998 Option Plan") which authorized the Company to
issue 300,000, 125,000 and 250,000 shares, respectively of its common stock to
certain officers and employees of the Company. Options for all plans are granted
at fair market value or greater on the date of grant for a term of not more than
ten years unless options are canceled due to employee termination. As of
December 31, 2002, 1,750 shares remain available to be granted with the 1998 and
2000 option plans and 34,500 shares remain available to be granted with the 2002
Plan.
Under the Company's 1994 Option Plan, options for 500,000 common shares
were issued to an officer of the Company, all of which have been exercised. No
additional shares can be issued under the 1994 Option Plan.
During 2001, the Company awarded the three non-officer Directors the
option to purchase 4,167 shares each pursuant to a non-qualified stock option
agreement. Under the agreement three Directors' were granted the right to
immediately exercise 4,167 shares each at an exercise price of $4.50. The market
value on the date of the grant equaled the exercise price.
During 2002, the Company awarded the three non-officer Directors the
option to purchase 5,000 shares each pursuant to a non-qualified stock option
agreement. Under the agreement three Directors' were granted the right to
immediately exercise 5,000 shares each at an exercise price of $8.60. In
addition, a fourth non-officer Director was awarded the option to purchase 5,000
shares pursuant to a non-qualified stock option agreement and was granted the
right to immediately exercise 5,000 shares at an exercise price of $11.00. The
market value on the date of each grant equaled the exercise price. The fourth
Director was appointed to the Board in December 2002.
(The remainder of this page left blank intentionally.)
Part II - Page 28
The following table reflects activity in options for 2002, 2001, and 2000.
Weighted-
Total Average
1988 1994 1998 2000 2002 Number Exercise Option Price
Plan/(1)/ Plan NQSO Plan Plan Plan of Shares Price Per Share
--------- ---- ---- ---- ---- ---- --------- ----- ---------
Outstanding 12/31/99 58,850 200,000 12,501 235,250 506,601 $1.72 $0.20 to $4.50
Exercised (7,500) (7,500) $0.30 $0.20 to $1.18
Cancelled (10,250) (98,300) (5,000) (113,550) $1.58 $0.20 to $4.24
Issued 85,000 130,000 215,000 $1.14 $0.92 to $1.82
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding 12/31/00 41,100 200,000 12,501 221,950 125,000 600,551 $1.56 $0.20 to $4.50
Exercised (8,250) (200,000) (4,167) (8,000) (2,500) (222,917) $2.06 $0.20 to $3.62
Cancelled (4,000) (6,700) (10,700) $2.15 $0.20 to $3.62
Issued 12,501 33,000 45,501 $3.85 $1.66 to $5.50
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding 12/31/01 28,850 -0- 20,835 240,250 122,500 412,435 $1.52 $0.20 to $5.50
Exercised (2,250) (4,167) (38,550) (4,500) (49,467) $1.46 $0.20 to $4.50
Cancelled (4,000) (4,000) $0.45 $0.20 to $1.18
Issued 20,000 265,500 285,500 $9.39 $7.75 to$12.60
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding 12/31/02 22,600 -0- 36,668 201,700 118,000 265,500 644,468 $5.02 $0.20 to$12.60
(1) The 1988 Plan expired in 1998, however options issued under the Plan remain
active until exercised, canceled, or expire. These options expire ten years
from date of issuance.
The following table reflects information for exercisable options at
December 31:
Range of Shares Weighted Average
Exercise Prices Exercisable Exercise Price
------------------- --------------- --------------------
2000 $0.20 - $4.50 193,170 $1.84
2001 $0.20 - $5.50 143,135 $1.58
2002 $0.20 - $11.00 202,138 $2.33
The following table reflects option information as of December 31, 2002.
Range of Shares Average Weighted Shares Weighted
Exercise Outstanding at Remaining Average Exercisable Average
Prices 12/31/02 Contractural Life Exercise Price at 12/31/02 Exercise Price
- -------------- ---------------- ------------------- ---------------- ------------- ----------------
(Years)
$0.20-$0.92 56,750 2.5 $ 0.83 28,250 $ 0.74
$1.00-$1.90 239,884 6.0 $ 1.18 116,204 $ 1.16
$2.06-$3.62 33,250 6.1 $ 2.46 20,600 $ 2.53
$4.18-$5.50 29,084 4.5 $ 4.99 17,084 $ 4.66
$7.75-$8.65 165,500 6.6 $ 7.84 15,000 $ 8.60
$11.00-$12.60 120,000 9.6 $11.53 5,000 $11.00
--------- ---------
644,468 202,138 $ 2.33
========= =========
The Company applies Accounting Principles Board 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
Option Plans 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.
Information about compensation expense determined based on the fair value at
grant dates consistent with SFAS No. 123 "Accounting for Stock-Based
Compensation," the Company's pro forma net income and basic and diluted earnings
per share is presented in Note 1.
Part II - Page 29
The pro forma amounts set forth in Note 1 were estimated for common stock
options using the Black-Scholes option-pricing model with the following
assumptions:
Stock Options 2002 2001 2000
------------- ---- ---- ----
Weighted average expected life (years) .................... 7 6 6
Expected Volatility ....................................... 95% 101% 102%
Annual Dividend per share ................................. 0 0 0
Risk free interest rate ................................... 3.34% 4.98% 5.04%
Weighted average fair value of options granted ............ $7.64 $3.13 $0.94
Stock Purchase Plan 2002 2001 2000
------------------- ---- ---- ----
Weighted average expected life (years) .................... .25 .25 1
Expected Volatility ....................................... 41% 63% 117%
Annual Dividend per share ................................. 0 0 0
Risk free interest rate ................................... .92% 2.39% 5.41%
Weighted average fair value of options granted ............ $1.05 $1.82 $1.10
11. Employee Benefit Plan
The Company has a 401(k)-retirement savings plan covering all employees
that meet certain eligibility requirements. Eligible participating employees may
elect to contribute up to a maximum amount of tax deferred contribution allowed
by the Internal Revenue Code. In 2000, 2001, and 2002, the Company matched 50%
of an employee's contributions up to 2% of an employee's salary that was
contributed to the plan. In 2003, the Company will match 50% of an employee's
contribution up to 3% of an employee's salary that is contributed to the plan.
The Company contributed $86,000, $66,000, and $71,000 to the plan in 2002, 2001,
and 2000, respectively.
(The remainder of this page left blank intentionally.)
Part II - Page 30
12. Earnings Per Share (EPS)
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 is presented below:
Basic EPS Diluted EPS
Year Ended December 31, Year Ended December 31,
2002 2001 2000 2002 2001 2000
----------- ----------- ----------- ----------- ----------- -----------
Weighted Average Shares Outstanding ........... 4,533,000 3,940,000 3,976,000 4,533,000 3,940,000 3,976,000
Options ....................................... 322,000 246,000
Debt/Non-detachable Warrants .................. 1,287,000 1,287,000
----------- ----------- ----------- ----------- ----------- -----------
Adjusted Weighted Average Shares .............. 4,533,000 3,940,000 3,976,000 6,142,000 5,473,000 3,976,000
=========== =========== =========== =========== =========== ===========
Income (Loss) Before Cumulative
Effect of Change in Accounting
Principle .................................. $ 4,234,000 $ 1,633,000 $ (266,000) $ 4,234,000 $ 1,633,000 $ (266,000)
Cumulative Effect of Change in
Accounting Principle, Net of Tax ........... (86,000) (86,000)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) ............................. 4,234,000 1,633,000 (352,000) 4,234,000 1,633,000 (352,000)
Class B Preferred Stock Accretion ............. (214,000) (226,000) (191,000) (226,000) (191,000)
Special Dividend on Preferred Stock ........... (174,000) (174,000)
Interest on Convertible debt, net of tax ...... 108,000 105,000
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) Available to
Common Shareholders ........................ $ 3,846,000 $ 1,407,000 $ (543,000) $ 4,168,000 $ 1,512,000 $ (543,000)
=========== =========== =========== =========== =========== ===========
Income (Loss) per Share Before
Cumulative Effect of Change in
Accounting Principle ....................... $ .85 $ .36 $ (.12) $ .68 $ .28 $ (.12)
Cumulative Effect of Change in
Accounting Principle, Net of Tax ........... (.02) (.02)
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) per Share ................... $ .85 $ .36 $ (.14) $ .68 $ .28 $ (.14)
=========== =========== =========== =========== =========== ===========
13. Contingencies and Litigation:
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
Part II - Page 31
demands, notice or information from ED since 1999.
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.
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 had 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 contended 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. The Company and ED agreed to dismiss the
suit. The suit was dismissed June 18, 2002.
The Company is not aware of any material violation by the Company of
applicable local, state and federal laws.
14. Department of Education Matters
The Company assessed each Campus' compliance with the regulatory provisions
contained in 34 CFR 600.5(d) - (e) for the year ended December 31, 2002. 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 that was modified as part of the new
legislation extending the Higher Education Act of 1965, as amended. The Campus'
90/10 percentages ranged between 62.3% and 86.9% for the year ended December 31,
2002.
ED issued a financial responsibility regulation that became effective July
1, 1998. Institutions are required to meet this regulation to maintain
eligibility to participate in Title IV programs. This 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.
The Company's composite score was 1.4, 1.7, and 2.0 in 2000, 2001, and
2002, respectively. The Company has demonstrated that it is financially
responsible according to this calculation and was notified in 2002 that it no
longer had to operate under the zone regulations due to its' composite score of
1.4 in 2000.
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 did not incur any
financial impact when it operated in the zone.
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Part II - Page 32
15. Quarterly Financial Information (unaudited):
2002 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
Operating Revenue .................. $14,353,000 $14,925,000 $16,060,000 $15,774,000
=========== =========== =========== ===========
Income before income taxes ......... $ 1,420,000 $ 1,511,000 $ 2,085,000 $ 1,739,000
=========== =========== =========== ===========
Net income ......................... $ 838,000 $ 996,000 $ 1,333,000 $ 1,067,000
=========== =========== =========== ===========
Basic earnings per share ........... $ .20 $ .24 $ .32 $ .18
=========== =========== =========== ===========
Diluted earnings per share ......... $ .14 $ .17 $ .22 $ .15
=========== =========== =========== ===========
2001
- ----
Operating Revenue .................. $10,768,000 $12,101,000 $12,889,000 $13,291,000
=========== =========== =========== ===========
Income (loss) before income taxes .. $ (213,000) $ 1,002,000 $ 1,128,000 $ 830,000
=========== =========== =========== ===========
Net income (loss) ................. $ (136,000) $ 609,000 $ 676,000 $ 484,000
=========== =========== =========== ===========
Basic earnings (loss) per share .... $ (.05) $ .14 $ .15 $ .11
=========== =========== =========== ===========
Diluted earnings (loss) per share .. $ (.05) $ .11 $ .11 $ .08
=========== =========== =========== ===========
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no disagreements with the Company's accountants which require
disclosure pursuant to this rule.
(The remainder of this page left blank intentionally.)
Part II - Page 33
PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding Directors and Executive Officers is incorporated
herein by reference from the Company's definitive proxy statement. This
information can be found in the proxy statement under the headings: DIRECTORS
and EXECUTIVE OFFICERS.
Item 11. Executive Compensation
Information regarding Executive Compensation is incorporated herein by
reference from the Company's definitive proxy statement. This information can be
found in the proxy statement under the heading: EXECUTIVE COMPENSATION AND OTHER
INFORMATION (specifically excluding disclosures in such section relating to Item
402(I), (k), and (l) of Regulation S-K.)
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding Security Ownership of Certain Beneficial Owners
and Management is incorporated herein by reference from the Company's definitive
proxy statement. This information can be found in the proxy statement under the
headings: PROXY STATEMENT and STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
Item 13. Certain Relationships and Related Transactions
Information regarding Certain Relationships and Related Transactions is
incorporated herein by reference from the Company's definitive proxy statement.
This information can be found in the proxy statement under the headings:
EXECUTIVE COMPENSATION AND OTHER INFORMATION and OTHER TRANSACTIONS.
Item 14: Controls and Procedures
The Company maintains a set of disclosure controls and procedures and
internal controls designed to ensure that information required to be disclosed
in the Company's filings under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. Our principle executive
and financial officers have evaluated the Company's disclosure controls and
procedures within 90 days prior to the filing of this Annual Report on Form 10-K
and have determined that such disclosure controls and procedures are effective.
Subsequent to the Company's evaluation, there were no significant changes in
internal controls or other factors that could significantly affect internal
control, including any corrective actions with regard to significant
deficiencies and material weaknesses.
(The remainder of this page left intentionally blank.)
Part III - Page 1
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. List of documents filed as part of this report.
Description Page
- ----------- ----
1. Financial Statements:
Concorde Career Colleges, Inc. and Subsidiaries
Reports of Independent Accountants.............................................. II-13
Consolidated Balance Sheets..................................................... II-15
Consolidated Statements of Operations........................................... II-17
Consolidated Statements of Cash Flows....................................... II-18
Consolidated Statements of Changes In Stockholders' Equity.................. II-19
Notes to Consolidated Financial Statements...................................... II-20
2. Financial Statement Schedules:
Schedules have been omitted as not applicable or not required under the
instructions contained in Regulations S-X or the information is included
elsewhere in the financial statements or notes thereto.
3. Exhibits:
Exhibit Number Description
-------------- -----------
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 year 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).
Part IV-Page 1
Exhibit Number Description
-------------- -----------
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. (Incorporated by
reference to Exhibit 4(j) of the Annual Report on Form 10-K for
the year ended December 31, 1996.)
4(k)-- Registration Rights Agreement dated February 25, 1997 issued
among the Company; Cahill, Warnock Strategic Partners Fund, L.P.;
and Strategic Associates, L.P. (Incorporated by reference to
Exhibit 4(k) of The Annual Report on Form 10-K for the year ended
December 31, 1996.)
9(a)-- Stockholders' Agreement dated February 25, 1997 among the
Company, Cahill, Warnock Strategic Partners Fund, L.P. ,
Strategic Associates, L.P., Jack L. Brozman, The Estate of Robert
F. Brozman and the Robert F. Brozman Trust under Agreement dated
December 28, 1989 (the "Stockholders Agreement Parties").
(Incorporated by reference to Exhibit 9(a) of the Annual Report
on Form 10-K for the year ended December 31, 1996.)
9(b)-- Agreement dated March 21, 1997 among the Stockholders Agreement
Parties and James R. Seward. (Incorporated by reference to
Exhibit 4(f) of the Annual Report on Form 10-K for the year ended
December 31, 1996.)
**10(c)(v) -- Dr. Robert R. Roehrich Employment Agreement (Incorporated by
Reference to Exhibit 10(c)(v) to the Quarterly Report on Form
10-Q dated June 30, 1997.)*
10(f) -- Second Amended and Restated Concorde Career Colleges, Inc. 1988
Incentive Stock Option Plan, dated May 4, 1989 (Incorporated by
reference to Exhibit 10 (f) (iii) to Pre-effective Amendment No.
1 to Registration Statement on Form S-1 [SEC File No.
33-30002]).*
10(f)(i) -- Concorde Career Colleges, Inc. 1998 Incentive Stock Option Plan,
dated May 29, 1998 (Incorporated by reference to Exhibit 10(f) of
the Annual Report on Form 10-K for the year ended December 31,
1998).
10(f)(ii)-- Concorde Career Colleges, Inc 2000 Incentive Stock Option Plan,
dated May 25, 2000 (Incorporated by reference to Exhibit 10(f) of
the Annual Report on Form 10-K for the year ended December 31,
2000).
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]).
Page IV - Page 2
Exhibit Number Description
- -------------- -----------
10(h)(ii) -- Amendment to Agreement for Transfer of Assets and Assumption
of Liabilities between CenCor and the Company dated October
30, 1992. (Incorporated by reference to Exhibit 10(g)(ii) of
the Annual Report on Form 10-K for the year ended December
31, 1992).
10(h)(iii) -- Restructuring, Security and Guaranty Agreement between CenCor
and the Company dated October 30, 1992. (Incorporated by
reference to Exhibit 10(g)(iii) of the Annual Report on Form
10-K for the year ended December 31, 1992).
10(h)(iv) -- First Amendment to the Restructuring, Security and Guaranty
Agreement dated December 30, 1993. (Incorporated by reference
to Exhibit 10(h)(iv) of the Annual Report on Form 10-K for
the year ended December 31, 1993).
10(h)(v) -- Assignments of Receivable to Concorde from Guarantors, dated
as of December 30, 1993. (Incorporated by reference to
Exhibit 10(h)(v) of the Annual Report on Form 10-K for the
year ended December 31, 1993).
10(h)(vi) -- Second Amendment to the Restructuring, Security and Guaranty
Agreement dated November 15, 1994 (Incorporated by Reference
to Exhibit 10(h)(vi) of the Annual Report on Form 10-K for
the year ended December 31, 1994).
10(h)(vii) -- Third Amendment to the Restructuring, Security and Guaranty
Agreement dated July 30, 1996 (Incorporated by Reference to
Exhibit 2 of the Quarterly Report on Form 10Q dated June
30,1996).
10(h)(viii) -- Fourth Amendment to the Restructuring, Security and Guaranty
Agreement dated December 30, 1996. (Incorporated by reference
to Exhibit 10(h)(viii) of the Annual Report on Form 10-K for
the year ended December 31, 1996.)
10(i) -- Expense Sharing Agreement dated as of January 1, 1993,
between CenCor, Century Acceptance Corporation, La Petite
Academy, Inc. and the Company. (Incorporated by reference to
Exhibit 10(h) to the Annual Report on Form 10-K for the year
ended December 31, 1992).
10(k) -- Asset Purchase Agreement dated July 10, 1996 regarding the
sale of assets of Person/Wolinsky Associates, Inc.
(Incorporated by reference to Exhibit 1 to the Quarterly
Report on Form 10Q dated June 30, 1996).
10(l) -- Convertible Preferred Stock Purchase Agreement dated February
25, 1997 among Cahill, Warnock Strategic Partners Fund, L.P.,
Strategic Associates, L.P., and the Company (the "Purchase
Agreement Parties") (Incorporated by reference to Exhibit
10(l) of the Annual Report on Form 10-K for the year ended
December 31, 1996.)
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.)
Page IV - Page 3
Exhibit Number Description
- -------------- -----------
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.)
10(q) -- Form 8-K filed, September 11, 2001, dismissing
PricewaterhouseCoopers LLP as the Company's current
independent public accounts and engaging BKD LLP as its
independent public accountants, effective September 12, 2001.
(Incorporated by reference to Exhibit 10(q) of the Annual
Report on Form 10-K for the year ended December 31, 2001.)
10(r) -- Definitive 14C information statement regarding a one-for-two
Reverse Stock Split. (Incorporated by reference to Exhibit
10(r) of the Annual Report on Form 10-K for the year ended
December 31, 2001.)
10(s) -- Preliminary 14C information statement regarding the 2002
Long-Term Compensation Plan. (Incorporated by reference to
Exhibit 10(s) of the Annual Report on Form 10-K for the year
ended December 31, 2001.)
**18 -- Preferability Letter of Price Waterhouse LLP regarding the
change in tuition income recognition (Incorporated by
reference to Exhibit 18 to the Quarterly Report on Form 10-Q
dated September 30, 1997).
**21 -- Subsidiaries of Registrant.
23 -- Consent of BKD, LLP (filed herewith).
24 -- Consent of PricewaterhouseCoopers LLP (filed herewith)
99-1 -- Certification pursuant to 18. U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99-2 -- Certification pursuant to 18. U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Management contract or compensation plan.
** Previously filed.
b. Reports on Form 8-K - none
(The remainder of this page left blank intentionally.)
Part IV - Page 4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CONCORDE CAREER COLLEGES, INC.
By / s/ JACK L. BROZMAN
----------------------------------
Jack L. Brozman
Chairman of the Board
Date: March 6, 2003
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.
Signature Date
--------- ----
By /s/ JACK L. BROZMAN March 6, 2003
--------------------------------------------------------------------------------------------------------
Jack L. Brozman
(Chairman of the Board, Chief Executive Officer,
President, Treasurer and Director)
By /s/ PAUL R. GARDNER March 6, 2003
--------------------------------------------------------------------------------------------------------
Paul R. Gardner
(Vice President, Chief Financial Officer, and
Principal Accounting Officer)
By /s/ JAMES R. SEWARD March 6, 2003
--------------------------------------------------------------------------------------------------------
James R. Seward
(Director)
By /s/ THOMAS K. SIGHT March 6, 2003
--------------------------------------------------------------------------------------------------------
Thomas K. Sight
(Director)
By /s/ JANET M. STALLMEYER March 6, 2003
--------------------------------------------------------------------------------------------------------
Janet M. Stallmeyer
(Director)
By /s/ DAVID L. WARNOCK March 6, 2003
--------------------------------------------------------------------------------------------------------
David L. Warnock
(Director)
Part IV - Page 5
I, Jack L. Brozman, certify that:
1. I have reviewed this annual report on Form 10-K of Concorde Career
Colleges, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 6, 2003
/s/ Jack L. Brozman
- ---------------------
Jack L. Brozman, Chief Executive Officer
Part IV - Page 6
I, Paul R. Gardner, certify that:
1. I have reviewed this annual report on Form 10-K of Concorde Career
Colleges, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: March 6, 2003
/s/ Paul R. Gardner
- -------------------
Paul R. Gardner, Vice President, Chief Financial Officer
Part IV - Page 7