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, 2004
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
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), (2) has been subject to such filing requirements for the
past 90 days, and (3) is an accelerated filer (as defined by Rule 12 b-2 of the
Exchange Act).
(1)
Yes [ X ] No
[ ] (2)
Yes [ X ] No
[ ] (3)
Yes [ X ] No
[ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [
X ]
Indicate
the number of outstanding shares of the Registrant’s Common Stock, as of March
8, 2005:
5,977,908
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 $53,995,993 as of March 8, 2005. Part III incorporates
information by reference to the Registrant’s definitive proxy statement for
Annual Meeting of Stockholders to be held May 26, 2005.
CONCORDE
CAREER COLLEGES, INC.
FORM
10-K
YEAR
ENDED DECEMBER 31, 2004
| Item |
Index |
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 Registrant’s Common Equity, Related Stockholders Matters and Issuer
Purchases of Equity Securities |
II-1 |
| |
|
|
|
6.
|
Selected
Financial Data |
II-2 |
| |
|
|
|
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
II-3 |
| |
|
|
|
7a.
|
Quantitative
and Qualitative Disclosures about Market Risk |
II-14 |
| |
|
|
|
8.
|
Financial
Statements and Supplementary Data |
II-15 |
| |
|
|
|
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
II-34 |
| |
|
|
|
9a. |
Controls
and Procedures |
II-34 |
| |
|
|
|
9b. |
Other
Information |
II-34 |
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.
|
Principal
Accountant Fees and Services |
III-1 |
PART
IV
|
15.
|
Exhibits,
Financial Statement Schedules, and Reports on Form 8-K |
IV-1 |
| |
|
|
|
|
Signatures |
IV-3 |
| |
|
|
| |
Exhibit
31-1 |
IV-4 |
| |
|
|
| |
Exhibit
31-2 |
IV-5 |
| |
|
|
| |
Exhibit
32-1 |
IV-6 |
| |
|
|
| |
Exhibit
32-2 |
IV-7 |
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.
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.
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 2005 Annual Meeting of
Stockholders, which will be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2004, 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 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, 2004, 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.
Available
Information on Website
The
Company’s website is located at http://www.concorde.edu. The
Company’s filings are all placed on the Company’s website within a reasonable
time after the filing is completed with the SEC.
The
Campuses
The
Company’s twelve Campuses are located in the following cities: North Hollywood,
Garden Grove, San Bernardino, and San Diego, California; Aurora, 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, as a “Concorde Career Institute,” to
increase name recognition. The Memphis, Tennessee Campus has been designated as
“Concorde Career College.”
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, Radiology Technician,
Medical Administrative Assistant, Medical Office Professional, Medical
Assistant, Insurance Coding and Billing Specialist, Dental Assistant, Patient
Care Technician, and Massage Therapy. Program offerings vary by Campus. The
Garden Grove, San Bernardino, Kansas City, North Hollywood and Memphis Campuses
offer selected associate degree programs. 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, Clinical Assistant, Patient Care Assistant, Home Health
Aide, and various certification test preparations in allied health
occupations.
The
Company’s five largest programs represented approximately 80% of the student
population at December 31, 2004. The programs and their percentage of the
student population at December 31, 2004 are Medical Assistant 31%, Vocational
Nursing/Practical Nursing 18%, Dental Assistant 16%, Insurance Coding and
Billing Specialist 13%, and Surgical Technology/Technologist 4%. Each of the
remaining programs represented less than 4% of the student
population.
The
Campuses utilize a non-traditional academic calendar with program start dates
varying by location and type of program. Programs typically commence monthly at
most Campuses. Programs of study range from five to eighteen months and include
from 400 to 2,985 hours of instruction. Programs are generally taught in a
classroom atmosphere, with hands-on clinical and/or laboratory experience as an
integral part of the curriculum. Programs generally include an externship
immediately prior to graduation, varying in duration from four to twelve weeks,
depending on the program.
Clinical
programs (Surgical Technology, Respiratory Therapy, Radiologic Technology, and
Practical/Vocational Nurse) are generally 12 to 15 months in length. The weekend
Vocational Nursing program and Radiological Technician are longer, 18 and 24
months respectively. Clinical programs utilize clinical training that occurs in
a hospital or medical facility.
Core
programs (Medical Assistant, Dental Assistant, Massage Therapy, Medical Office
Professional, Patient Care Technician, Pharmacy Technician, Patient Care
Assistant, Health Unit Coordinator, and Insurance Coding and Billing Specialist)
are generally 9 to 12 months in length and utilize an externship immediately
prior to graduation. Externships occur in medical offices, dental offices,
medical and dental clinics, medical facilities, and hospitals.
Program
advisory committees provide ideas, evaluate and recommend improvements to the
curriculum for each program. Advisory committees meet 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. Students are recruited
through advertising in various media, including television, newspapers,
Internet, and direct mail. Management estimates that approximately 38% of all
enrollments during 2004 were the result of referrals from students and
graduates. Referrals accounted for approximately 37% of enrollment during
2003.
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 5,148 students in attendance at the Campuses at December 31, 2004
compared to 5,732 at December 31, 2003.
Student
Retention
The
Company strives to help students complete their program of study through
admissions screening, financial 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. Campuses
do not offer all programs at all times. The Vocational Nursing Program and a few
other programs are offered on a limited basis during 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 generally 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.
The
President and Chief Executive Officer (the “CEO”) is responsible for the overall
performance of the Campuses. Reporting to him are the following Vice Presidents:
Chief Financial Officer, Human Resources; Campus Operations; Marketing and
Strategic Development; Academic Affairs; and Compliance.
The
Company changed its organizational structure during the fourth quarter of 2004
and created a regional structure designed to provide focused support to
campuses. Four new positions were created: Vice President of Campus Operations,
Regional Director of Operations - Eastern Region, Regional Director of
Operations - Western Region and Regional Admissions Director.
The
Company maintains a strict focus on compliance in all areas of campus
management. Campuses are divided into two divisions, East and West reporting to
their respective Regional Director of Operations. In addition, the Company
utilizes a variety of staff to review, train and support Campus programs and
personnel. These include admissions staff (regional and national), nursing
directors and specialists, internal compliance staff, financial aid specialists,
and academic specialists. Other corporate staff are utilized to train and
supplement Campus staff when needed.
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
Company and its campuses are subject to numerous regulations including
oversight, approvals and licensing by the Department of Education, accrediting
agencies, state education bodies and program specific agencies. ED authorizes
legislation regarding student loans, grants and other funding. In addition, ED
approves accrediting agencies and conducts periodic compliance reviews of
institutions. Accrediting agencies verify that institutions meet specific
standards established by the respective agency including completion and
placement rates. State education bodies approve institutions eligibility to
operate in their state, process student complaints and provide oversight
concerning state education regulations. Program specific agencies provide
oversight and approval for certain programs such as Vocational / Practical
Nursing, Respiratory Therapy, Radiologic Technology, and Surgical
Technologist.
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 Allied Health Education Programs, Joint Review
Committee on Education in Radiologic Technology, 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 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 $6,000 to $25,000.
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 2004, 79% 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 Subsidized Stafford Loan, Federal
Unsubsidized Stafford Loan, and Veterans benefits. Also, some students are
eligible for assistance under the Department of Labor's Workforce Investment
Act.
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 2004-2005 award year is $4,050. The amount a
student actually receives is based on a federal regulatory formula devised by
ED. The Company received 26.9% or $21,070,000 of its cash receipts from Pell
Grants in 2004 compared to 29.3% or $21,643,000 in 2003.
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); 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
following table sets forth the 2003, 2002, and 2001 cohort default rates for
each of the Campuses.
| |
Cohort
Default Rates |
|
|
Cohort
Default Rates |
|
Campus |
2003(1) |
2002 |
2001 |
|
|
2003(1) |
2002 |
2001 |
|
Garden
Grove, CA |
6.3 |
9.7 |
8.6 |
|
North
Hollywood, CA |
6.1 |
7.5 |
10.9 |
|
Denver,
CO |
7.2 |
4.6 |
14.5 |
|
Portland,
OR |
2.4 |
4.7 |
4.8 |
|
Jacksonville,
FL |
6.1 |
7.8 |
4.8 |
|
San
Bernardino, CA |
7.7 |
16.2 |
16.0 |
|
Kansas
City, MO |
7.9 |
5.8 |
5.2 |
|
San
Diego, CA |
8.8 |
8.2 |
10.9 |
|
Lauderdale
Lakes, FL |
5.0 |
8.8 |
14.1 |
|
Tampa,
FL |
6.9 |
9.4 |
11.6 |
|
Memphis
TN |
5.1 |
6.0 |
13.4 |
|
Arlington,
TX (2) |
0.0 |
7.1 |
|
| (1) |
Preliminary
rates received February 2005. These rates are subject to change and may
not be reflective of the final rates for
2003. |
| (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.
|
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 frequently. 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. Eight of the Company’s Campuses have full certification.
Four Campuses currently have provisional certifications, Kansas City, Portland,
and Memphis, received provisional certification due to high Federal Perkins Loan
default rates. The Arlington Campus was acquired by the Company in August 2002
and received provisional certification due to the change of 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.
The
Company had four programs that were placed on Outcomes Reporting by their
accreditation association. The programs are being monitored for completion
rates, placement rates, or both. The Campuses are addressing the issues
associated with the Outcomes issues. The Company does not believe that Outcomes
Reporting on the four programs will have a material impact on the results of
operations.
Congress
must reauthorize the HEA approximately every six years. The most recent
reauthorization in October 1998 reauthorized the HEA until September 30, 2004.
Congress has delayed the reauthorization scheduled for October 1, 2004. The
Company does not believe the reauthorization will have a material financial
impact on the Company when it is completed. However, there has been recent
negative publicity regarding for profit post secondary schools that may impact
reauthorization. The 1998 reauthorization has been extended until the 2004
reauthorization is completed. 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 period of
enrollment / 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 / payment period. 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. The Company’s provision for uncollectible
accounts has 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.
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’s composite score was 2.0, 2.7, and 2.8 in 2002, 2003, and 2004,
respectively.
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.
Congress
temporarily extended the HEA reauthorization which was set to expire September
30, 2004. The reauthorization is currently being discussed and the Company is
not aware of any changes that may be made during reauthorization that will have
a material financial impact on the Company. However, there can be no assurance
of the impact of new regulations or requirements from reauthorization. A change
was implemented by ED in December 2004 reducing certain students Pell Grant
eligibility. The Company does not believe this change will have a material
impact on its student’s ability to fund their education.
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, 2004, the Company had approximately 950 full and part-time
employees, of which approximately 500 were faculty members. The Company had 330
management and administrative staff members employed at the Campuses and 54
employed at corporate headquarters. The remaining 66 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 or 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 79% of cash receipts from such
funds for the year ended December 31, 2004. 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 than 90%; |