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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-25283
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CORINTHIAN COLLEGES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0717312
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
6 Hutton Centre Drive, Suite 400, Santa Ana, California 92707
(Address of principal executive offices) (Zip Code)
(714) 427-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value per share
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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 the 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. _________________
As of September 13, 2000, the aggregate market value of voting and non-
voting common equity held by non-affiliates of the registrant was approximately
$248.2 million. For this computation, the Company has excluded the market value
of all common stock beneficially owned by all executive officers and directors
of the Company and their associates as a group. As of September 13, 2000, the
number of outstanding shares of voting and non-voting common equity of the
registrant was approximately 10,350,235.
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CORINTHIAN COLLEGES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
Page No.
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INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS;
DOCUMENTS INCORPORATED BY REFERENCE.................... 1
PART I
ITEM 1. BUSINESS............................................. 2
GOVERNMENTAL REGULATION AND FINANCIAL AID............ 10
RISKS RELATED TO OUR BUSINESS........................ 22
ITEM 2. DESCRIPTION OF PROPERTY.............................. 27
ITEM 3. LEGAL PROCEEDINGS.................................... 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 28
SPECIAL ITEM. EXECUTIVE OFFICERS................................... 29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.................................. 31
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER
DATA................................................. 32
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK................................................. 39
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA................................................. 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 60
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT... 60
ITEM 11. EXECUTIVE COMPENSATION............................... 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................... 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.......................................... 62
-i-
INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS
Corinthian Colleges, Inc. is a Delaware corporation; its principal executive
offices are located at 6 Hutton Centre Drive, Suite 400, Santa Ana California,
92707.
You should keep in mind the following points as you read this Report on Form
10-K:
. the terms "we," "us" or the "Company" refer to Corinthian Colleges, Inc.
and its subsidiaries, including all of its schools and campuses;
. the terms "school," "college" or "campus" refer to a single location of
any school;
. the term "institution" means a main campus and its additional locations,
as such are defined under the regulations of the U.S. Department of
Education; and
. our fiscal year ends on June 30. References to fiscal 2000, fiscal 1999
and similar constructions refer to the fiscal year ended on June 30 of
the applicable year.
This Annual Report on Form 10-K contains statements which, to the extent
they do not recite historical fact, may constitute "forward-looking
statements," within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements are used under the captions "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this Report. You can identify these statements by the use of words
like "may," "will," "could," "should," "project," "believe," "anticipate,"
"expect," "plan," "estimate," "forecast," "potential," "intend," "continue,"
and variations of these words or comparable words. Forward-looking statements
do not guarantee future performance and involve risks and uncertainties. Actual
results may differ substantially from the results that the forward-looking
statements suggest for various reasons, including those discussed under the
caption entitled "Business--Risks Related to Our Business." These forward-
looking statements are made only as of the date of this Report. We do not
undertake to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the 2000 Annual
Meeting of Stockholders, to be held on November 16, 2000, have been
incorporated by reference into Part III of this report. The definitive proxy
will be filed within 120 days after June 30, 2000.
1
PART I
ITEM 1. BUSINESS
Overview
Our company is one of the largest private, for-profit, post-secondary
education companies in the United States, with more than 19,400 students
enrolled as of June 30, 2000. We currently operate 45 colleges in 18 states,
including ten in California, nine in Florida, and four in Georgia and serve the
large and growing segment of the population seeking to acquire career-oriented
education. Our schools generally enjoy long operating histories and strong
franchise value in their local markets.
We offer a variety of master's, bachelor's and associate's degrees and
diploma programs through two operating divisions. Our Corinthian Schools
division operates diploma-granting schools in the healthcare, electronics and
information technology fields and seeks to provide its students a solid base of
training for a variety of entry-level positions. Our Rhodes Colleges division
operates degree-granting schools principally in the business, healthcare and
information technology areas and provides its students with professional
education to succeed in today's competitive workplace. Both divisions receive
strategic direction and operational support from senior management and
corporate staff.
Our company is led by David G. Moore, our President and Chief Executive
Officer, and an experienced executive management team. Our team of eight
executives, including Mr. Moore, has an average of approximately 12 years
experience in various fields of education and an average of approximately ten
years in the for-profit, post-secondary education industry. We currently have
five regions, each headed by a regional operations director and a regional
admissions director. This regional structure is supported by our proprietary
management information system, which links all of our colleges and provides
management with real-time access to marketing reports, lead tracking, academic
records, grades, transcripts and placement information.
Operating Strategy
We have increased enrollment and improved profitability through the
successful implementation of our operating strategy developed with our
management's extensive industry experience. Key elements of our operating
strategy include the following:
Focus on Attractive Markets. We design our educational programs to benefit
from favorable demographic trends. Our diploma-granting colleges provide
programs in healthcare and technology related fields, allowing us to capitalize
on the growth in entry-level positions in these industries. Our degree-granting
colleges, with their business focus, and modern facilities and equipment and
excellent faculty, seek to provide students with specific knowledge and skills
necessary to advance in business and industry. Our geographic strategy is to
build a strong competitive position in attractive and growing local markets
where we can take advantage of operating efficiencies and benefit from
favorable demographic trends. For example, we moved into the Atlanta, Georgia
market, one of the fastest growing metropolitan areas in the country, with four
new schools in fiscal 2000. Additionally, we are well positioned, with ten
schools in California and nine schools in Florida, to benefit from the
population growth in these states which is expected to exceed the national
average over the next several years.
Centralize Key Functions. In order to capitalize on the experience of our
senior management and encourage best practices, we have established a regional
management organization to divide responsibilities among school administrators,
regional administrators and senior management. Since our initial public
offering in February 1999, we have created a new Southeast region to help
manage our recent acquisitions and branches, particularly our five new schools
in Virginia and Georgia.
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Local school administrators retain control of, and accountability for, the
day-to-day academic, operational and financial performance of their individual
schools and receive appropriate financial incentives. The corporate management
team controls key operational functions such as financial aid management,
marketing, curriculum development, staff training, human resources and
centralized purchasing, which we believe enables us to achieve significant
operating efficiencies. For example, our corporate headquarters controls the
advertising function and utilizes our proprietary management information system
to analyze the effectiveness of our marketing efforts and make timely and
efficient decisions regarding the allocation of marketing resources at
individual colleges.
Emphasize Student Outcomes. We believe that positive student outcomes are a
critical driver of our long-term success. Accordingly, we devote substantial
resources to maintaining and improving our retention and placement rates.
Modest increases in student retention can have a significant impact on our
profitability and high graduation and placement rates enhance a school's
reputation and marketability, increase referrals and improve cohort default
rates. We have studied attrition patterns and implemented a variety of
programs, including tutoring, advising, ride-sharing and referral programs, all
of which are designed to improve student retention. We utilize a curriculum
development team and advisory boards comprised of local business professionals
to help maintain our current, market driven curricula that provide the
foundation of our placement effort. We also maintain dedicated, full-time
placement personnel at each school that undertake extensive placement efforts,
including recruiting prospective employers, helping students prepare resumes,
conducting practice interviews, establishing internship programs and tracking
students' placement success on a monthly basis. As a result of our efforts in
this area, 86% of our graduates in calendar 1999 who were "available for
placement," as defined by industry and accreditation standards, were placed in
a job for which they had trained within six months after graduation.
Create a Supportive and Friendly Learning Environment. We view our students
as customers and seek to provide a supportive and convenient learning
environment where student satisfaction is achieved. We offer a flexible
schedule of classes, providing our students with the opportunity to attend
classes throughout the day, as well as nights and weekends. Schools operate
year-round, permitting students to complete their course of study more quickly.
We limit class sizes and focus the efforts of our faculty on teaching students
rather than research. Personal interaction between students and faculty is
encouraged and we offer several support programs, such as on-campus advising
and tutoring, which are designed to help students successfully complete their
course of study. We also maintain a toll-free student hotline to address and
help resolve student concerns.
Growth Strategy
We intend to achieve continued growth in revenues and profitability by
pursuing the following components of our growth strategy:
Enhance Growth at Existing Campuses. We have enhanced growth at existing
campuses through the following measures:
Curriculum Expansion and Development. We have refined, developed and
added curricula based on market research and the recommendations of our
faculty, employees, industry advisory board members and our curriculum
development team. We believe considerable opportunities exist for
curriculum expansion and expect to continue developing and adding new
curricula and selectively replicating existing programs at new locations,
including introducing our longer-term programs more broadly. In fiscal
2000, we developed four new programs and implemented those programs in an
aggregate of 18 locations. Additionally we replicated a total of 32
programs in 17 locations.
Integrated and Centralized Marketing Program. We have increased student
enrollment at our existing, newly opened and acquired schools by employing
an integrated marketing program that utilizes an extensive direct response
advertising campaign delivered through television, newspaper, direct mail
and the Internet. In addition, we began a significant sales and marketing
effort directed at high school guidance counselors in fiscal 2000. A
professional marketing staff at our headquarters coordinates marketing
efforts through an in-bound call center and the sophisticated real-time
leads tracking capability of our proprietary management information system.
3
Facilities Enhancement and Expansion. In order to expand capacity to
meet enrollment demand, as well as to improve the location and appearance
of its facilities, we have relocated, and will continue to systematically
relocate, selected colleges within their respective markets to larger,
enhanced facilities upon lease expiration. Since 1995, 17 colleges have
been relocated and an additional seven campuses have been either remodeled
or enlarged. As of August 15, 2000, the total square footage of our
campuses was approximately 906,000 square feet.
Establish Additional Locations. Since our initial public offering in
February 1999, we have opened and successfully integrated five branch campuses
into our operations. Of the five branch campuses, two were opened in each of
fiscal 2000 and fiscal 1999, and one was opened in mid July 2000, during fiscal
2001. A key advantage of this strategy is that students attending new campuses
branched from existing campuses have immediate access to federally funded
student financial aid. Students attending new campuses that are not branched
from an existing campus must wait at least two years before they are eligible
to participate in federal student financial aid programs. We believe that
opening new branch campuses will allow us to enter new geographic markets,
create additional capacity in existing markets and effectively leverage our
infrastructure and curriculum library.
Acquire Accredited Colleges. Since our founding in 1995, acquisitions have
been an important part of our growth strategy. Of the 45 campuses that we
currently operate, 40 have been acquired and successfully integrated into our
operations. During fiscal 2000, we acquired and successfully integrated five
campuses. Additionally, on September 4, 2000, we signed an agreement to acquire
substantially all the assets of Educorp, Inc., a proprietary education company
with four campuses in Southern California, and approximately 1,375 students as
of August 31, 2000. On September 10, 2000, we signed an agreement to acquire
substantially all of the assets of Computer Training Academy, Inc., which
includes two campuses in the San Jose, California area and had approximately
500 students as of August 31, 2000. We expect to complete both of these
transactions during the second quarter of fiscal 2001, subject to the
satisfaction of certain customary conditions to closing and the receipt of
regulatory approvals from the State of California, although we can give no
assurance that these transactions will be completed at that time, or at all. To
evaluate acquisition opportunities, we have established several criteria, such
as demographics, curricula, geographic proximity to our existing campuses and
selected financial measurements.
Expand Service Areas and Delivery Models. We intend to expand our distance
learning and contract training initiatives.
Distance Learning. We believe that distance learning will become an
increasingly important component of the higher education market. During
fiscal 1999, we began offering selected courses over the Internet to our
students and currently offer courses over the Internet at twelve campuses.
We expect to continue to expand these offerings at selected campuses in
fiscal 2001 and are actively pursuing relationships with technology
providers to capitalize on additional distance learning opportunities.
Contract Training. We employ a full-time contracts administrator and
actively pursue corporate training opportunities and other state and
federal programs. Although we do not derive a significant portion of our
revenues from contract training, we believe that the corporate training
arena is an attractive market and that our curricula and national market
presence address the needs of a variety of employers.
Programs of Study
Our diploma programs are intended to provide students with the requisite
knowledge and job skills for entry-level positions in their chosen career
field. Our degree programs are primarily designed to help career-oriented
adults advance in business and industry. Our curriculum development team has
responsibility for maintaining high quality, market driven curricula. Each
college also utilizes advisory boards to help evaluate and improve the
curriculum for each program offered. These advisory boards meet at least twice
a year and are comprised of local industry and business professionals. Board
members provide valuable input regarding changes in the discipline, new
technologies and any other factors that require curriculum adjustments.
4
Among the diploma-granting colleges, the curriculum principally includes
medical assisting, dental assisting, medical office management, information
technology, business operation, medical administrative assistant, dialysis
technician, respiratory therapy technician, and electronics and computer
technology. Medical assisting is the most popular program of study, often
accounting for 60% or more of the student body at any given diploma-granting
campus. Six of the National Institute of Technology, or "NIT," colleges also
offer electronics technology, network administration and Microsoft Office User
Specialist. At these colleges, the student population is generally split
between technology programs and medical assisting. The curriculum at the
degree-granting colleges includes accounting, business administration, computer
information technology, hospitality management, marketing, criminal justice,
medical assisting, paralegal, commercial art, court reporting, film and video
and travel and tourism. Most programs lead to an associate's degree, while at
the Florida Metropolitan University, or "FMU," campuses most programs also lead
to a bachelor's degree. Master's degrees are also offered at FMU in business
administration and criminal justice.
Diploma programs generally have a duration of 8-19 months, depending on the
course of study. Associate's degree programs have a duration of 18-24 months,
bachelor's degree programs last 36-48 months and master's degree programs have
a duration of 24 months, except for the executive MBA, which is 12 months. As
of June 30, 2000, we had 7,874 students enrolled in associate's programs, 1,801
enrolled in bachelor's programs, 423 enrolled in master's programs, and 9,366
enrolled in diploma programs.
The following table reflects our schools, their locations and principal
curricula. In the table below, programs offered are designated as follows:
healthcare (HC), business (B), information technology and/or electronics (IT),
and criminal justice (CJ).
Principal
Degree-Granting Colleges Curricula
- ------------------------ -------------
Blair College, Colorado
Springs, CO................. HC, B, IT, CJ
Duff's, Pittsburgh, PA....... HC, B, IT, CJ
FMU, Brandon, FL............. HC, B, IT, CJ
FMU, Ft. Lauderdale, FL...... B, IT, CJ
FMU, Jacksonville, FL........ B, IT, CJ
FMU, Lakeland, FL............ HC, B, IT, CJ
FMU, Melbourne, FL........... HC, B, IT, CJ
FMU, Orlando, FL North....... HC, B, IT, CJ
FMU, Orlando, FL South....... HC, B, IT, CJ
FMU, Pinellas, FL............ HC, B, IT, CJ
FMU, Tampa, FL............... HC, B, IT, CJ
Las Vegas College,
Las Vegas, NV............... HC, B, IT, CJ
Mountain West College, Salt Lake
City, UT.................... HC, B, IT, CJ
Parks College, Thornton, CO.. HC, B, IT, CJ
Parks College, Aurora, CO.... HC, B, IT, CJ
RBI, Rochester, NY........... B, IT
Rhodes College, Phoenix, AZ.. B, IT, CJ
Springfield College,
Springfield, MO............. HC, B, IT, CJ
Western Business College, Vancouver, WA.. HC, B, IT, CJ
Western Business College,
Portland, OR................ HC, B, IT, CJ
Principal
Diploma-Granting Colleges Curricula
- ------------------------- ---------
Bryman, Brighton, MA........ HC
Bryman, El Monte, CA........ HC, B, IT
Bryman, Gardena, CA......... HC
Bryman, Los Angeles, CA..... HC
Bryman, New Orleans, LA..... HC
Bryman, Anaheim, CA......... HC
Bryman, San Francisco, CA... HC
Bryman, San Jose, CA North.. HC
Bryman, San Jose, CA South.. HC
Bryman, Reseda, CA.......... HC
Bryman, Sea Tac, WA......... HC
GMI, Atlanta, GA............ HC
GMI, Jonesboro, GA.......... HC
GMI, Marietta, GA........... HC
Harbor Medical College,
Torrance, CA............... HC
Kee Business College,
Newport News, VA........... HC, B, IT
Kee Business College,
Chesapeake, VA............. HC, B, IT
NIT, Atlanta, GA............ HC, IT
NIT, Cross Lanes, WV........ HC, IT
NIT, Greenspoint, TX........ HC, B
NIT, Houston, TX............ HC, IT
NIT, San Antonio, TX........ HC, B, IT
NIT, Southfield, MI......... HC, IT
NIT, Wyoming, MI............ HC, IT
Skadron College,
San Bernardino, CA......... HC, B, IT
Marketing and Recruitment
We employ a variety of methods to attract qualified applicants who will
benefit from our programs and achieve success in their chosen career fields. We
believe that one of the principal attractions for prospective students is the
excellent reputation which our schools enjoy in their respective communities,
where nine have been operating for
5
more than 80 years. We believe the franchise value of these schools enhances
their marketability within their respective communities. This franchise value,
along with the quality of the programs offered, has enabled us to generate
significant new student enrollments from referrals. For the year ended June 30,
2000, we generated approximately 30% of our new student enrollments from
referrals.
We also employ a variety of direct response advertising techniques to
generate leads on candidates for its schools. Our advertising department
generates more than 200,000 leads per year through television, direct mail,
newspaper, and yellow pages. The effectiveness of this advertising campaign is
dependent on timely and accurate lead tracking. To that end, we operate a Call
Center at our headquarters, staffed by a team of operators who receive incoming
lead calls generated by all television and newspaper media sources. These
trained operators enter data on each prospect into our proprietary management
information system during the call and immediately transmit the lead to the
appropriate college. The college admissions department receives the lead and
the local admissions representative contacts the prospect to begin the
admissions process.
This leads tracking capability allows us to identify leads generated by
specific commercials and spot time. Our four advertising agencies are networked
into our proprietary management information database and are provided with real
time information on the effectiveness of individual commercials as well as the
effectiveness of the media "buy." The agencies consult with our advertising
department to adjust schedules for ads depending on our needs and the
effectiveness of particular ads. Since more than 80% of our advertising budget
is spent on television and newspaper ads, the availability of timely and
accurate lead information is critical to management of the leads generation
process. For the year ended June 30, 2000, approximately 53% of our new student
enrollments were generated through television, newspaper and yellow pages
advertising, 30% were generated through referrals, 8% were generated through
direct mail, and 9% were generated through a variety of other methods.
Television and referrals combined generate approximately two-thirds of all our
new student enrollments. In fiscal 2000, we initiated a significant marketing
effort directed at the high school market.
Admissions
We employ approximately 235 admissions representatives who work directly
with prospective students to facilitate the enrollment process. These
representatives interview and advise students interested in specific careers to
determine the likelihood of their success and are a key component of our effort
to generate interest in our educational services. In satisfaction surveys
conducted quarterly, students have consistently given high marks to our
admissions personnel for helpfulness, courtesy and accuracy of information.
Because our success is highly dependent on the efficiency and effectiveness of
our admissions process, we spend considerable time and energy training our
representatives to improve their product knowledge and customer service. We
also employ various supervisory and monitoring efforts, including a survey of
students to solicit their views of the "truthfulness" of the admissions
process, to help ensure compliance with government regulations and our
corporate policies.
One of the our primary objectives in the admissions process is to identify
students who have appropriate qualifications to succeed in its schools. Most
candidates for admission to colleges in our degree-granting colleges must have
a high school diploma or a GED and must pass a standardized admissions test.
Students with these credentials can also attend our diploma-granting colleges.
In addition, most diploma-granting colleges accept non-high school graduates
who can demonstrate an ability to benefit, or "ATB," from the program by
passing certain tests required by the U.S. Department of Education. We believe
that ATB students can successfully complete many of our diploma programs and
our colleges have demonstrated success in graduating and placing these students
over the years. As of June 30, 2000, ATB students accounted for approximately
4.8% of total enrollments in our schools.
Placement
Our placement success is critical to our colleges' reputations and their
ability to continue to successfully recruit new students. We maintain a
placement department at each college and, in the aggregate, employ
approximately 85 professionals in this capacity. In many cases, our placement
staff work with students from the time they begin their
6
courses of study to prepare them for the job search they will conduct at the
end of their programs. We view our placement departments as essentially in-
house employment agencies, assisting students with resumes, conducting practice
interview sessions, and recruiting prospective employers for the colleges'
graduates.
The efforts we devote to place our students have achieved excellent results.
Based on information received from graduating students and employers for
calendar year 1999, 86% of our graduates who were "available for placement"
were placed within six months after their graduation date. In accordance with
industry practice, the term "available for placement" includes all graduates
except those who are continuing their education, are in active military service
or are deceased or disabled, and foreign students who are ineligible to work in
the United States after graduation.
Tuition
Typical tuition for our diploma programs range from $6,000 to $23,000,
depending upon the nature and length of the program. Tuition for degree
programs is charged on a credit hour basis and varies by college, typically
ranging from $160 to $250 per undergraduate credit hour, depending upon the
program of study and the number of courses taken per quarter. Tuition for
graduate programs ranges from $275 to $289 per credit hour, except for the
executive MBA program, which is $457 per credit hour. On average, an
undergraduate degree candidate can expect tuition of approximately $6,500 per
academic year, while a master's degree candidate can expect tuition of
approximately $7,000 per academic year. In addition to tuition, students at our
schools must also typically purchase textbooks and other supplies as part of
their educational programs. We anticipate increasing tuition based on the
market conditions prevailing at our individual colleges. Our tuition ranges are
competitive with similar institutions, but like many proprietary institutions,
are somewhat higher than public institutions such as community colleges and
state universities.
Under DOE refund regulations in effect prior to October 7, 2000, if a
student fails to complete the initial period of enrollment such as a quarter,
trimester, semester, academic year, or program, the institution must refund the
larger amount required by: (i) the state refund policy, as in California, where
a pro rata refund may be required for the duration of the program; or (ii) the
accrediting agency refund policy calculation set forth in DOE regulations for
students who withdraw before the 60 percent point in the enrollment period. If
the student terminates after the initial period, the institution must pay the
refund for such subsequent period under the state refund policy or, if no such
policy applies, the larger of the amount required by additional federal refund
policy requirements or the institution's own policy. Effective October 7, 2000,
these requirements will be superceded with new regulations on return of federal
student financial aid funds that will require institutions to return to the
federal student financial aid programs unearned funds of a student who
withdraws from a program.
Management and Employees
Our company is led by David G. Moore, President and Chief Executive Officer
and a senior management team of Paul R. St. Pierre, Dennis L. Devereux, Dennis
N. Beal, Beth A. Wilson, Mary H. Barry, Nolan A. Miura and Stan A. Mortensen.
In fiscal 2000, we created the position of Vice President of Strategic Planning
in recognition of the importance of acquisitions to our growth strategy.
Additionally, a general counsel joined the executive team with extensive
mergers and acquisition experience. Beyond the senior management level, our
management structure includes five regional operations directors and five
regional admissions directors. As of June 30, 2000, we had approximately 2,945
employees, of whom approximately 1,846 were part-time and approximately 118
were employed at our headquarters and regional offices.
7
Campus Administration
We set policy and monitor the performance of all of the schools and
implement these policies through the coordination of a Vice President of
Operations and five Regional Operations Directors. The college presidents, in
consultation with their respective management teams, have the responsibility
for the day-to-day operation of the schools. Each college employs the following
management personnel which report to the college president:
. an academic dean or education director;
. an admissions director;
. a placement director; and
. a finance or business director.
Corporate personnel at headquarters manage several key functions, including
financial aid, MIS, finance, marketing and advertising, purchasing, human
resources, payroll, curriculum development, leads management, staff training
and development, and internal compliance audit. Among the principal oversight
functions performed by us, in cooperation with our regional and college
managers, is the budget, strategic planning and forecasting processes. These
processes establish goals for each college, implement strategies and set
performance incentives for achieving targeted results. Our senior management
team monitors operating performance and profitability of each college and has
daily access to operational data through our proprietary management information
system and conducts weekly conference calls with the college presidents to
review results of operations and set or reorder priorities for the coming week.
Faculty
Faculty at all of our colleges is expected to be industry professionals and
hold appropriate credentials in their respective disciplines. We choose faculty
carefully and provide support for these professionals to pursue professional
development activities. We believe the skill and dedication of our faculty have
the single greatest impact on the placement and success of our students
following their graduation. As of June 30, 2000, we employed 1,772 faculty, 468
of whom were full time employees. Faculty represents approximately 60% of all
our employees.
Competition
The post-secondary education market, consisting of approximately 6,000
accredited institutions, is highly fragmented and competitive, with no
institution having a significant market share. Many of the programs offered by
our colleges are also offered by public and private non-profit institutions, as
well as by many of the approximately 2,000 private, for-profit colleges and
schools. Typically, the tuition charged by public institutions is less than
tuition we charge for comparable programs because public institutions receive
state tax subsidies, donations, and government grants that are not available to
our colleges. However, tuition at private non-profit institutions is typically
higher than that at our colleges.
We compete in most markets with other private, for-profit institutions
offering similar programs. We believe that the franchise value of our colleges,
the qualifications of our faculty, our facilities, and our emphasis on student
services allow us to compete effectively. In addition, most of our colleges
have been operating in their markets for more than 35 years, which has led to a
substantial number of graduates who are working in the market and validating
the quality of the colleges' programs. For example, the Bryman Colleges have
been well known in the healthcare education field in California for over 35
years. Many physicians and dentists in California have hired Bryman graduates
and continue to view Bryman as a source of qualified Medical and Dental
Assistants.
8
Facilities
Our corporate office is located in Santa Ana, California and our 45 campuses
are located in 18 states. Each campus provides our students with modern lecture
halls, medical labs, libraries, Internet access and an administrative staff
lead by a college president.
We actively monitor our facility capacity and future facility capacity
required to accommodate campus growth initiatives. We provide for expansion and
future growth at each campus through relocations to larger facilities and by
expanding or remodeling at existing facilities. From the end of fiscal 1995
through August 15, 2000, approximately 37% of the campuses have been relocated
and an additional 15% of total campuses have been either expanded or remodeled.
The following table reflects the number of campuses added or closed during each
of the last five fiscal years, the number of campuses at the end of each of the
last five fiscal years and the number of campuses that have been remodeled,
enlarged or relocated in each of the last five fiscal years:
Years Ended June 30,
----------------------------
1996 1997 1998 1999 2000 (1)
---- ---- ---- ---- --------
Opened
Acquired...................................... 11 20 0 0 5
Branched...................................... 0 0 0 2 2
Closed.......................................... 0 0 1 0 0
Total campuses at year end...................... 16 36 35 37 44
Relocated....................................... 1 2 6 5 2
Enlarged or remodeled........................... 0 0 1 1 1
- --------
(1) Does not include one branch opened on July 17, 2000, one relocation and
four enlargements and remodels completed in August 2000.
All but four of our campuses are leased and we lease our headquarters
offices. Most of our leases have primary terms between five and ten years with
options to extend the lease, at our election.
9
GOVERNMENTAL REGULATION AND FINANCIAL AID
Students attending the Company's schools finance their education through a
combination of family contributions, individual resources (including earnings
from full or part-time employment) and government-sponsored financial aid. The
Company estimates that approximately 70.2% of its students, as of June 30,
2000, received some federal Title IV financial aid. For fiscal 2000,
approximately 77% of the Company's revenue (on a cash basis) was derived from
federal Title IV Programs (as defined herein).
In connection with the receipt by its students of government-sponsored
financial aid, the Company is subject to extensive regulation by governmental
agencies and licensing and accrediting bodies. In particular, the Higher
Education Act of 1965, as amended (the "HEA"), and the regulations issued
thereunder by the DOE, subject the Company to significant regulatory scrutiny
in the form of numerous standards that schools must satisfy in order to
participate in the various federal student financial aid programs under Title
IV of the HEA (the "Title IV Programs"). Under the HEA, regulatory authority is
divided among each of the following three components: (i) the federal
government, which acts through the DOE; (ii) the accrediting agencies
recognized by the DOE; and (iii) state higher education regulatory bodies.
Among other things, the HEA and its implementing regulations require the
Company's institutions to: (i) maintain a rate of default by its students on
federally guaranteed or funded student loans that is below a specified rate;
(ii) limit the proportion of its revenue derived from the Title IV Programs;
(iii) establish certain financial responsibility and administrative capability
standards; (iv) prohibit the payment of certain incentives to personnel engaged
in student recruiting and admissions activities; and (v) achieve stringent
completion and placement outcomes for short-term programs. The regulations,
standards and policies of the regulatory agencies frequently change, and
changes in, or new interpretations of, applicable laws, regulations or
standards could have material consequences for the Company's accreditation,
authorization to operate in various states, permissible activities, receipt of
funds under Title IV Programs and/or costs of doing business.
Certain of the foregoing standards must be complied with on an institutional
basis. For purposes of those standards, the regulations define an institution
as a main campus and its additional locations, if any. Under this definition,
each of the Company's campuses is a separate institution with the following
exceptions: Bryman College in New Orleans, Louisiana is an additional location
of Bryman College (South) in San Jose, California; the Florida Metropolitan
University ("FMU") campuses in Melbourne, Florida and Orlando, Florida (South)
are additional locations of FMU, Orlando (North); FMU in Brandon, Florida is an
additional location of FMU in Tampa, Florida; FMU in Lakeland, Florida and FMU
in Jacksonville, Florida are additional locations of FMU in Pinellas, Florida;
Parks College (South) in Denver, Colorado is an additional location of Parks
College (North) in Denver; the National Institute of Technology ("NIT") in
Houston, Texas is an additional location of NIT in San Antonio, Texas; Kee
Business College in Chesapeake, Virginia is an additional location of Kee
Business College in Newport News, Virginia; the Georgia Medical Institute
("GMI") campuses in Jonesboro and Marrietta, Georgia are additional locations
of GMI in Atlanta, Georgia; and Western Business College in Vancouver,
Washington is an additional location of Western Business College in Portland,
Oregon.
Accreditation
Accreditation is a voluntary non-governmental process by which institutions
submit themselves to qualitative review by an organization of peer
institutions. There are three types of accrediting agencies: (i) national
accrediting agencies, which accredit institutions on the basis of the overall
nature of the institutions without regard to geographical location; (ii)
regional accrediting agencies, which accredit institutions within their
geographic areas; and (iii) programmatic accrediting agencies, which accredit
specific educational programs offered by institutions. Accrediting agencies
primarily examine the academic quality of the instructional programs offered at
the institution, including retention and placement rates, and also review the
administrative and financial operations of the institution to ensure that it
has the academic and financial resources to achieve its educational mission. A
grant of accreditation is generally viewed as certification that an institution
and its programs meet generally accepted academic standards.
10
Pursuant to provisions of the HEA, the DOE relies on accrediting agencies to
determine whether an institution and its educational programs are of sufficient
quality to permit it to participate in Title IV Programs. The HEA specifies
certain standards that all recognized accrediting agencies must adopt in
connection with their review of post-secondary institutions and requires
accrediting agencies to submit to a periodic review by the DOE as a condition
of their continued recognition. All of our colleges are accredited by an
accrediting agency recognized by the DOE. Twenty-two of the Company's schools
are accredited by the Accrediting Council for Independent Colleges and Schools
("ACICS") and eighteen schools are accredited by the Accrediting Commission of
Career Schools and Colleges of Technology (the "ACCSCT"). One school is
accredited by the Accrediting Council for Continuing Education and Training
(the "ACCET"), three schools are accredited by the Accrediting Bureau of Health
Education Sciences (the "ABHES") and one school is accredited by North Central
Association (the "NCA").
11
The following table specifies the accrediting agency and the expiration of
accreditation for each college. Unless otherwise indicated, accreditation
expires on December 31 of the year indicated:
Accrediting
Degree-Granting Colleges Location Agency Expiration
------------------------ -------- ----------- ----------
Blair College.................. Colorado Springs, CO ACICS 2002
Duff's Business Institute...... Pittsburgh, PA ACICS 2000
FMU - Jacksonville, FL......... Jacksonville, FL ACICS 2002
FMU - Ft. Lauderdale College... Fort Lauderdale, FL ACICS 2003
FMU - Orlando College, North... Orlando, FL ACICS 2001
FMU - Orlando College, South... Orlando, FL ACICS 2001
FMU - Orlando, Melbourne....... Melbourne, FL ACICS 2001
FMU - Tampa College............ Tampa, FL ACICS 2001
FMU - Tampa College, Brandon... Brandon, FL ACICS 2001
FMU - Tampa College, Lakeland.. Lakeland, FL ACICS 2003
FMU - Tampa College, Pinellas.. Clearwater, FL ACICS 2003
Las Vegas College.............. Las Vegas, NV ACICS 2000
Mountain West College.......... Salt Lake City, UT ACICS 2000
Parks College North............ Thornton, CO ACICS 2000
Parks College South............ Aurora, CO ACICS 2000
Rhodes College................. Phoenix, AZ NCA 2001*
Rochester Business Institute... Rochester, NY ACICS 2000
Springfield College............ Springfield, MO ACICS 2004
Western Business College....... Portland, OR ACICS 2001
Western Business College....... Vancouver, WA ACICS 2001
Accrediting
Diploma-Granting Colleges Location Agency Expiration
------------------------- -------------------- ----------- ----------
Bryman College................. Los Angeles, CA ACCSCT 2000
Bryman College................. New Orleans, LA ACCSCT 2001
Bryman Institute............... Brighton, MA ACCSCT 2002
Bryman College................. Anaheim, CA ACCSCT 2002
Bryman College................. El Monte, CA ACCSCT 2004
Bryman College................. San Francisco, CA ACCSCT 2001
Bryman College................. SeaTac, WA ACCSCT 2002
Bryman College................. Gardena, CA ACCSCT 2002
Bryman College................. Reseda, CA ACCSCT 2001
Bryman College North........... San Jose, CA ACCSCT 2003
Bryman College South........... San Jose, CA ACCSCT 2001
GMI - Atlanta.................. Atlanta, GA ABHES 2004
GMI - Jonesboro................ Jonesboro, GA ABHES 2004
GMI - Marietta................. Marietta, GA ABHES 2004
Harbor Medical College......... Torrance, CA ACCET 2001
Kee Business College........... Newport News, VA ACICS 2004
Kee Business College........... Chesapeake, VA ACICS 2000
National Institute of
Technology.................... San Antonio, TX ACCSCT 2001
National Institute of
Technology.................... Atlanta, GA ACCSCT 2002
National Institute of
Technology.................... Greenspoint, TX ACCSCT 2001
National Institute of
Technology.................... Houston, TX ACCSCT 2000
National Institute of
Technology.................... Southfield, MI ACCSCT 2003
National Institute of
Technology.................... Wyoming, MI ACCSCT 2002
National Institute of
Technology.................... Cross Lanes, WV ACCSCT 2001
Skadron College................ San Bernardino, CA ACICS 2001
- --------
* Because of the recent change of ownership of this institution, the regularly
scheduled reaccreditation visit, which was previously scheduled for the
spring of 2000, has been extended to May 2001 to accommodate a November 2000
change of ownership focused visit.
12
The HEA requires accrediting agencies recognized by the DOE to review many
aspects of an institution's operations in order to ensure that the education or
training offered is of sufficient quality to achieve, for the duration of the
accreditation period, the stated objectives of the education or training
offered. Under the HEA, recognized accrediting agencies must conduct regular
inspections and reviews of the institutions they accredit. In addition to
periodic accreditation reviews, institutions undergoing a change of ownership
must be reviewed by the accrediting agency. Except for Rhodes College in
Phoenix, Arizona, which will be visited in November 2000, all of the Company's
colleges have been visited and reviewed by their respective accrediting
agencies subsequent to the date of acquisition by the Company. Accrediting
agencies also monitor institutions' compliance during the term of their
accreditation. If an accrediting agency believes that an institution may be out
of compliance with accrediting standards, it may place the institution on
probation or a similar warning status or direct the institution to show cause
why its accreditation should not be revoked. An accrediting agency may also
place an institution on "reporting" status in order to monitor one or more
specific areas of the institution's performance. An institution placed on
reporting status is required to report periodically to its accrediting agency
on that institution's performance in specific areas. Failure to demonstrate
compliance with accrediting standards in any of these instances could result in
loss of accreditation. While on probation, show cause or reporting status, an
institution may be required to seek permission of its accrediting agency to
open and commence instruction at new locations. One of the Company's colleges,
Harbor Medical College in Torrance, California, was placed on show cause in
February 2000 with respect to student completion and placement outcomes.
Federal Support for Post-Secondary Education
While many of the states support their public colleges and universities
through direct state subsidies, the federal government provides a substantial
part of its support for post-secondary education by way of grants and loans to
students who can use this money at any institution certified as eligible by the
DOE. Since 1972, Congress has expanded the scope of the HEA by, among other
things, (i) providing that students at proprietary institutions, such as the
Company's institutions, are eligible for assistance under the Title IV
Programs, (ii) establishing a program for loans to parents of eligible
students, (iii) opening the Title IV Programs to part-time students, and (iv)
increasing maximum loan limits and in some cases eliminating the requirement
that students demonstrate financial need to obtain federally guaranteed loans.
Most recently, the Federal Direct Lending Program ("FDL") was enacted, enabling
students to obtain loans directly from the federal government rather than from
commercial lenders. Congress reauthorizes the student financial assistance
programs of the HEA approximately every five years. The current reauthorization
process was recently completed in 1998.
Students at the Company's institutions receive grants, loans and work
opportunities to fund their education under several of the Title IV Programs,
of which the two largest are the Federal Student Loan Program ("FFEL") and the
Federal Pell Grant ("Pell") program. The Company's institutions also
participate in the Federal Supplemental Educational Opportunity Grant ("FSEOG")
program, and some of them participate in the Perkins program and the Federal
Work-Study ("FWS") program. None of the Company's institutions have elected to
participate in the William D. Ford Federal Direct Loan ("FDL") program.
Most aid under the Title IV Programs is awarded on the basis of financial
need, generally defined under the HEA as the difference between the cost of
attending an educational institution and the amount a student can reasonably
contribute to that cost. All recipients of Title IV Program funds must maintain
a satisfactory grade point average and progress in a timely manner toward
completion of their program of study.
Pell. Pell grants are the primary component of the Title IV Programs under
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no institutional
allocation or limit. For the 1999-2000 award year, Pell grants ranged from $400
to $3,125 per year, and the authorization for such grants has been increased in
the 1998 Amendments. Amounts received by students enrolled in the Company's
institutions in the 1999-2000 award year under the Pell program equaled
approximately 22% of the Company's net revenue.
FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest
students. FSEOG grants generally range in amount from $100 to $4,000 per year;
however, the availability of FSEOG awards is limited
13
by the amount of those funds allocated to an institution under a formula that
takes into account the size of the institution, its costs and the income levels
of its students. The Company is required to make a 25% matching contribution
for all FSEOG program funds disbursed. Resources for this institutional
contribution may include institutional grants, scholarships and other eligible
funds (i.e., funds from foundations and other charitable organizations) and, in
certain states, portions of state scholarships and grants. During the 1999-2000
award year, the Company's required 25% institutional match was met by
approximately $550,000 in funds from its institutions and funds from state
scholarships and grants and from foundations and other charitable
organizations. Amounts received by students in the Company's institutions under
the federal share of the FSEOG programs in the 1999-2000 award year equaled
approximately 1.3% of the Company's net revenue.
FFEL and FDL. The FFEL program consists of two types of loans, Stafford
loans, which are made available to students, and PLUS loans, which are made
available to parents of students classified as dependents. Under the FDL
program, students may obtain loans directly from the DOE rather than commercial
lenders. The conditions on FDL loans are generally the same as on loans made
under the FFEL program. Under the Stafford loan program, a student may borrow
up to $2,625 for the first academic year, $3,500 for the second academic year
and, in some educational programs, $5,500 for each of the third and fourth
academic years. Students with financial need qualify for interest subsidies
while in school and during grace periods. Students who are classified as
independent can increase their borrowing limits and receive additional
unsubsidized Stafford loans. Such students can obtain an additional $4,000 for
each of the first and second academic years and, depending upon the educational
program, an additional $5,000 for each of the third and fourth academic years.
The obligation to begin repaying Stafford loans does not commence until six
months after a student ceases enrollment as at least a half-time student.
Amounts received by students in the Company's institutions under the Stafford
program in the 1999-2000 award year equaled approximately 50.0% of the
Company's net revenue. PLUS loans may be obtained by the parents of a dependent
student in an amount not to exceed the difference between the total cost of
that student's education (including allowable expenses) and other aid to which
that student is entitled. Amounts received by students in the Company's
institutions under the PLUS program in the 1999-2000 award year equaled
approximately 3.4% of the Company's net revenue.
The Company's schools and their students use a wide variety of lenders and
guaranty agencies and have generally not experienced difficulties in
identifying lenders and guaranty agencies willing to make federal student
loans. Three of the Company's colleges are currently ineligible to participate
in FFEL and PLUS loan programs as a result of past Cohort Default Rates that
exceeded federal standards for fiscal years prior to the Company's acquisition
of such schools. The colleges will be eligible to reapply in October 2000.
Additionally, the HEA requires the establishment of lenders of last resort in
every state to ensure that students at any institution that cannot identify
such lenders will have access to the FFEL program loans. None of the Company's
colleges uses a lender of last resort.
Perkins. Eligible undergraduate students may borrow up to $3,000 under the
Perkins program during each academic year, with repayment delayed until nine
months after the borrower ceases to be enrolled on at least a half-time basis.
Perkins loans are made available to those students who demonstrate the greatest
financial need. Perkins loans are made from a revolving account, 75% of which
was initially capitalized by the DOE. Subsequent federal capital contributions,
with an institutional match in the same proportion, may be received if an
institution meets certain requirements. Each institution collects payments on
Perkins loans from its former students and loans those funds to currently
enrolled students. Collection and disbursement of Perkins loans is the
responsibility of each participating institution. During the 1999-2000 award
year, the Company collected approximately $704,000 from its former students in
repayment of Perkins loans. In the 1999-2000 award year, the Company had no
required matching contribution. The Perkins loans disbursed to students in the
Company's institutions in the 1999-2000 award year equaled approximately 0.4%
of the Company's net revenue.
FWS. Under the FWS program, federal funds are made available to pay up to
75% of the cost of part-time employment of eligible students, based on their
financial need, to perform work for the institution or for off-campus public or
non-profit organizations. During the 1999-2000 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $174,000. At least 5% of an
14
institution's FWS allocation must be used to fund student employment in
community service positions. FWS earnings are not used for tuition and fees.
However, in the 1999-2000 award year, the federal share of FWS earnings equaled
0.3% of the Company's net revenue.
Federal Oversight of the Title IV Programs
The substantial amount of federal funds disbursed through the Title IV
Programs coupled with the large numbers of students and institutions
participating in those programs have led to instances of fraud, waste and
abuse. As a result, the United States Congress has required the DOE to increase
its level of regulatory oversight of institutions to ensure that public funds
are properly used. Each institution which participates in the Title IV Programs
must annually submit to the DOE an audit by an independent accounting firm of
that institution's compliance with the Title IV Program requirements, as well
as audited financial statements. The DOE also conducts compliance reviews,
which include on-site evaluations, of several hundred institutions each year,
and directs student loan guaranty agencies to conduct additional reviews
relating to the FFEL programs. In addition, the Office of the Inspector General
of the DOE conducts audits and investigations of institutions in certain
circumstances. Under the HEA, accrediting agencies and state licensing agencies
also have responsibilities for overseeing institutions' compliance with Title
IV Program requirements. As a result, each participating institution, including
each of the Company's institutions, is subject to frequent and detailed
oversight and must comply with a complex framework of laws and regulations or
risk being required to repay funds or becoming ineligible to participate in the
Title IV Programs. In addition, the DOE periodically revises its regulations
(e.g., in November 1999, the DOE published new regulations which took effect on
July 1, 2000) and changes its interpretation of existing laws and regulations.
Cohort Default Rates. A significant component of the Congressional
initiative aimed at reducing fraud, waste and abuse was the imposition of
limitations on participation in the Title IV Programs by institutions whose
former students defaulted on the repayment of federally guaranteed or funded
student loans at an "excessive" rate ("Cohort Default Rates"). Since the DOE
began to impose sanctions on institutions with Cohort Default Rates above
certain levels, the DOE has reported that more than 1,000 institutions have
lost their eligibility to participate in some or all of the Title IV Programs.
However, many institutions, including all of the Company's institutions, have
responded by implementing aggressive student loan default management programs
aimed at reducing the likelihood of students failing to repay their loans in a
timely manner. An institution's Cohort Default Rates under the FFEL and FDL
programs are calculated on an annual basis as the rate at which student
borrowers scheduled to begin repayment on their loans in one federal fiscal
year default on those loans by the end of the next federal fiscal year. An
institution that participates in both the FFEL and FDL programs, including any
of the Company's institutions, receives a single "weighted average" cohort
default rate in place of an FFEL or FDL cohort default rate. Any institution
whose cohort default rate equals or exceeds 25% for any one of the three most
recent federal fiscal years may be found by the DOE to lack administrative
capability and, on that basis, placed on provisional certification status for
up to three years. Provisional certification status does not limit an
institution's access to Title IV Program funds but does subject that
institution to closer review by the DOE and possible summary adverse action if
that institution commits violations of the Title IV Program requirements. Any
institution whose Cohort Default Rates equal or exceed 25% for three
consecutive years will no longer be eligible to participate in the FFEL or FDL
programs for the remainder of the federal fiscal year in which the DOE
determines that such institution has lost its eligibility and for the two
subsequent federal fiscal years. In addition, an institution whose cohort
default rate for any federal fiscal year exceeds 40% may have its eligibility
to participate in all of the Title IV Programs limited, suspended or
terminated. The 1998 Amendments to the HEA provide that institutions which
become ineligible to participate in the Title IV loan programs because of
Cohort Default Rates in excess of the applicable levels will also become
ineligible to participate in the Pell Grant Program. Since the calculation of
Cohort Default Rates involves the collection of data from many non-governmental
agencies (i.e., lenders, private guarantors or servicers), as well as the DOE,
the HEA provides a formal process for the review and appeal of the accuracy of
Cohort Default Rates before the DOE takes any action against an institution
based on such rates. The 1998 Amendments expand institutions' ability to appeal
loss of eligibility owing to such default rates.
15
The Company proactively manages its students' repayment obligations and has
engaged two professional default management firms to assist the Company in
reducing the Cohort Default Rates at its colleges. To date the two firms have
favorably impacted the Cohort Default Rates at the Company's colleges, lowering
historical default rates at certain colleges by ten percentage points or more.
The Company believes that professional default management services can continue
to assist the Company in controlling the Cohort Default Rates at its colleges.
For federal fiscal year 1997, the published Cohort Default Rates for the
Company's institutions ranged from a low of 6.6% to a high of 30.1%. Currently,
three of the diploma-granting colleges are ineligible to participate in FFEL as
a result of Cohort Default Rates relating to fiscal years prior to the
acquisition of the schools by the Company. One of the Company's diploma-
granting institutions, Skadron College in San Bernardino, California, had a
default rate in excess of 25% for three consecutive federal fiscal years (1994,
1995, 1996). The published 1996 rate for this college has been successfully
appealed based on mitigating circumstances, and the published 1997 rate is
below 25%. Skadron College, along with six other schools, NIT in Wyoming,
Michigan, Bryman Institute in Brighton, Massachusetts, and the Bryman Colleges
in El Monte, California, Los Angeles, California, San Jose (South), California
and New Orleans, Louisiana had default rates in excess of 25% for the 1992,
1993, and 1994 federal fiscal years. As a result, six schools became ineligible
to participate in the FFEL programs beginning in May 1997. Skadron College in
San Bernardino, California, had previously lost its eligibility to participate
in the FFEL program in June of 1994.
Through the Company's aggressive default management efforts, two of these
seven colleges had fiscal 1995 published default rates below 25%: Bryman
College in Brighton, Massachusetts had a default rate of 23.4% and NIT in
Wyoming, Michigan had a default rate of 22.1%. Moreover, as a result of
negotiations between the Company and the DOE regarding reinstatement of
eligibility for the seven campuses that lost eligibility, the DOE has
reinstated four of the seven colleges. The remaining three colleges, Bryman
Colleges in San Jose, California and New Orleans, Louisiana and Skadron College
in San Bernardino, California will be eligible for reinstatement in calendar
2000, based on published rates for fiscal 1995 and 1996, respectively.
16
The following table sets forth the final Cohort Default Rates for our
institutions for federal fiscal years 1995, 1996 and 1997 and the preliminary
Cohort Default Rates for fiscal year 1998:
Preliminary
Institution 1995 1996 1997 1998(1)
----------- ---- ---- ---- -----------
Degree-Granting Colleges
Blair College, Colorado Springs, CO...................... 15.5% 13.2% 13.9% 14.7%
Duff's Business Institute, Pittsburgh, PA................ 17.1% 20.1% 21.8% 23.1%
FMU - Orlando (North, South, Melbourne), FL(2)........... 16.7% 20.0% 22.5% 10.4%
FMU - Pinellas (Lakeland), FL(2)......................... 21.5% 21.7% 21.3% 12.3%
FMU - Tampa (Brandon), FL(2)............................. 17.4% 20.4% 18.7% 11.8%
Ft. Lauderdale College, FL............................... 19.8% 19.5% 25.5% 8.7%
Las Vegas College, NV.................................... 28.8% 18.9% 17.1% 11.1%
Mountain West College, Salt Lake City, UT................ 14.8% 16.5% 23.0% 16.2%
Parks College North and South, CO(2)..................... 19.3% 15.8% 15.2% 15.0%
Rochester Business Institute, Rochester, NY.............. 24.6% 22.7% 23.2% 22.8%
Springfield College, Springfield, MO..................... 16.5% 18.8% 21.1% 22.3%
Western Bus. College (Portland, OR and Vancouver,
WA)(2).................................................. 24.8% 21.7% 18.1% 13.1%
Rhodes College, Phoenix, AZ.............................. 15.7% 17.2% 18.5% 17.4%
Diploma-Granting Colleges(3)
Bryman Institute, Brighton, MA........................... 23.4% 23.0% 23.8% 18.1%
Bryman College, El Monte, CA............................. 26.2% 14.7% 17.4% 15.5%
Bryman College, Gardena, CA.............................. 25.8% 29.3% 19.2% 11.9%
Bryman College, Los Angeles, CA.......................... 25.1% 18.8% 13.5% 13.3%
Bryman College, Anaheim CA............................... 19.5% 18.5% 17.0% 9.6%
Bryman College, San Francisco, CA........................ 21.0% 24.5% 19.6% 14.3%
Bryman College, San Jose No., CA......................... 30.5% 22.3% 23.1% 10.9%
Bryman College, San Jose South, CA (New Orleans, LA)(2).. 32.6% 20.2% 16.0% 16.8%
Bryman College, Sea Tac, WA.............................. 7.5% 4.9% 6.6% 16.9%
Bryman College, Reseda, CA............................... 21.4% 19.2% 19.1% 14.3%
Georgia Medical Institute (Atlanta, Jonesboro and
Marrietta, GA).......................................... 16.7% 21.3% 22.2% 14.3%
Kee Business College, Newport News, VA(4)................ 2.6% 12.3% 30.1% 20.9%
NIT, Cross Lanes, WV..................................... 20.7% 19.1% 18.0% 15.9%
NIT, San Antonio, TX(4).................................. 24.5% 17.6% 22.5% 17.1%
NIT, Southfield, MI...................................... 18.9% 17.7% 12.6% 16.6%
NIT, Wyoming, MI......................................... 22.1% 14.7% 13.8% 18.4%
Skadron College, San Bernardino, CA(5)................... 25.1% 27.2% 23.2% 4.5%
- --------
(1) Preliminary Cohort Default Rates for federal fiscal 1998 were issued by the
DOE in February 2000. Final 1998 rates are expected to be released in late
September 2000. Preliminary rates are subject to change and the final
rates, when issued, may be materially different from the preliminary rates.
(2) Indicates additional location wherein cohort default rates are blended with
the main campus.
(3) The list of Diploma-Granting Colleges does not include Harbor Medical
College in Torrance, California because the first student who received
Title IV funds did not begin repayment until after the end of federal
fiscal year 1998.
(4) The Cohort Default Rates for Chesapeake, Virginia and Houston, Texas are
calculated as blended rates with Kee Business College in Newport News,
Virginia, and NIT for San Antonio, Texas, respectively.
(5) The 1996 Cohort Default Rate for this college was successfully appealed
based on mitigating circumstances.
In addition, if an institution's cohort default rate for loans under the
Perkins Program exceeds 15% for any federal award year (i.e., July 1 through
June 30), that institution may be placed on provisional certification status
for up to three years. Fifteen of the Company's institutions have Perkins
Cohort Default Rates in excess of 15% for students who were scheduled to begin
repayment in the 1998 federal award year, the most recent year for which such
rates have been calculated. During fiscal 2000, Perkins loans amounted to 0.4%
of total company revenues. The Perkins Program Cohort Default Rates for these
institutions ranged from 31.3% to 100%. Default
17
rates in excess of 15% could result in provisional certification status.
Historically, provisional certification due to excessive Perkins Program Cohort
Default Rates has not had a material adverse effect on our business.
Beyond the efforts of the professional default management firms, each of the
Company's colleges has adopted an internal student loan default management
plan. Those plans emphasize the importance of meeting loan repayment
requirements and provide for extensive loan counseling, along with methods to
increase student persistence and completion rates and graduate employment
(placement) rates. Immediately upon a student's cessation of enrollment, the
professional default management firm initiates regular contact with the
student, and maintains regular contact throughout the grace period, and
continues this activity through the entire cohort period. The colleges continue
to work with the default management firm to maintain accurate and up-to-date
information on address changes, marital status changes, or changes in
circumstance that may allow the student to apply for additional deferments.
These activities are all in addition to the loan servicing and collection
activities of FFEL lenders and guarantee agencies.
Increased Regulatory Scrutiny. The HEA provides for a three-part initiative,
generally referred to as the Triad, intended to increase regulatory scrutiny of
post-secondary education institutions. One part of the Triad expands the role
of accrediting agencies in the oversight of institutions participating in the
Title IV Programs. Accrediting agencies which review and accredit the Company's
campuses conduct reviews of substantial breadth. Their examinations pertain to
such areas as financial responsibility and timeliness of student refunds. The
Triad provisions also require each accrediting agency recognized by the DOE to
undergo comprehensive periodic reviews by the DOE to ascertain whether such
accrediting agency is adhering to required standards.
A second part of the Triad involved the standards to be applied by the DOE
in evaluating the financial responsibility and administrative capability of
institutions participating in the Title IV Programs. In addition, the Triad
mandated that the DOE periodically reviews the eligibility and certification to
participate in the Title IV Programs of every such eligible institution. By law
all institutions are required to undergo a recertification review at least
every six years, although the DOE may recertify an institution for a shorter
time period. Under these standards, each of our institutions is evaluated by
the DOE on a routine basis. A denial of recertification would preclude an
institution from continuing to participate in the Title IV Programs.
A third part of the Triad involves approvals by state education agencies
with jurisdiction over educational institutions. State requirements are
important to an institution's eligibility to participate in the Title IV
Programs since an institution must be licensed or otherwise authorized to
operate in the state in which it offers education or training services in order
to be certified as eligible.
Financial Responsibility Standards. All institutions participating in the
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements in several circumstances, including as part of the DOE's
recertification process and also annually as each institution submits its
audited financial statements to the DOE. In November 1997, the DOE published
new regulations regarding financial responsibility that took effect on July 1,
1998. Under the new regulations, the DOE calculates three financial ratios for
an institution, an equity ratio, a primary reserve ratio, and a net income
ratio, each of which is scored separately and is then combined to determine the
institution's financial responsibility. If an institution's composite score is
below the minimum requirement for unconditional approval (which is a score of
1.5) but above a designated threshold level (the "Intermediate Zone," which is
1.0 to 1.4), such institution may take advantage of an alternative that allows
it to continue to participate in the Title IV Programs for up to three years
under additional monitoring and reporting procedures. If an institution's
composite score falls below the minimum threshold level of 1.0 or is in the
Intermediate Zone for more than three consecutive years, the institution may be
required to post a letter of credit in favor of the DOE.
For fiscal 2000, our calculations show that all of our schools exceed the
requirements for financial responsibility on an individual basis, with
composite scores from 1.7 to 3.0. Also, the Company, on a consolidated basis,
meets the requirements with a composite score of 3.0.
An institution that is determined by the DOE not to meet any one of the
standards of financial responsibility is nonetheless entitled to participate in
the Title IV Programs if it can demonstrate to the DOE that it is financially
responsible on an alternative basis. An institution may do so by posting surety
either in an
18
amount equal to 50% (or greater, as the DOE may require) of the total Title IV
Program funds received by students enrolled at such institution during the
prior year or in an amount equal to 10% (or greater, as the DOE may require) of
such prior year's funds if the institution also agrees to provisional
certification and to transfer to the reimbursement or cash monitoring system of
payment for its Title IV Program funds. The DOE has interpreted this surety
condition to require the posting of an irrevocable letter of credit in favor of
the DOE.
Based on financial responsibility standards in place at the time of the
Phillips acquisition, the Company was required to post a $1.0 million letter of
credit in favor of DOE at the time of the acquisition. In addition, the
18 colleges the Company purchased were required to remain on the reimbursement
program (they had been placed on reimbursement under prior ownership). Although
the $1.0 million letter of credit is less than the amount normally required
under such circumstances, the DOE agreed to these terms in order to facilitate
the sale of the colleges to the Company. The need for and sufficiency of the
letter of credit has been reviewed annually by the DOE. As a result of this
review in 1998, the letter of credit was increased to $1.5 million based on the
increased usage of Title IV funds by the Company's students. After review of
our fiscal 1999 financial statements, the letter of credit was released by DOE
in fiscal 2000.
Under a separate standard of financial responsibility, if an institution has
made late Title IV refunds to students in its prior two years, the institution
is required to post a letter of credit in favor of the DOE in an amount equal
to 25% of the total Title IV Program refunds paid by the institution in its
prior fiscal year. As of July 1, 1997, this standard has been modified to
exempt an institution if it has not been found to make late refunds to 5% or
more of its students who were due refunds in either of the two most recent
fiscal years and has not been cited for a reportable condition or material
weakness in its internal controls related to late refunds in either of its two
most recent fiscal years. Based on this standard, the Company currently has
seven outstanding letters of credit in the aggregate amount of approximately
$218,000. Although there are no citations for material weaknesses in the
Company's or its colleges' internal controls, there can be no assurance that,
upon review by the DOE, that the Company will not be required to post
additional letters of credit in favor of the DOE on behalf of the affected
colleges.
Restrictions on Acquiring or Opening Additional Schools and Adding
Educational Programs. An institution which undergoes a change of ownership
resulting in a change in control, including all the institutions the Company
has acquired or will acquire, must be reviewed and recertified for
participation in the Title IV Programs under its new ownership. Pending
recertification, the DOE suspends Title IV Program funding to that
institution's students except for certain Title IV Program funds that were
committed under the prior owner. If an institution is recertified following a
change of ownership, it will be on a provisional basis. During the time an
institution is provisionally certified, it may be subject to closer review by
the DOE and to summary adverse action for violations of Title IV Program
requirements, but provisional certification does not otherwise limit an
institution's access to Title IV Program funds. All of the Company's schools
were provisionally certified following their acquisition by the Company.
Currently, 13 have received full certification and 32 remain on provisional
certification.
The 1998 Amendments allow for the temporary certification of an institution
that has undergone a change of ownership that results in a change of control so
that Title IV Program funds may not be interrupted. To qualify for such
temporary certification, the institution must submit a "materially complete"
application for recertification within 10 business days of the transaction.
Such temporary certification continues until the application for
recertification is acted upon by the DOE.
In addition, the HEA generally requires that proprietary institutions be
fully operational for two years before applying to participate in the Title IV
Programs. However, under the HEA and applicable regulations, an institution
that is certified to participate in the Title IV Programs may establish an
additional location and apply to participate in the Title IV Programs at that
location without reference to the two-year requirement, if such additional
location satisfies all other applicable eligibility requirements. The Company's
expansion plans are based, in part, on its ability to acquire schools that can
be recertified and to open additional locations as part of its existing
institutions.
19
Generally, if an institution that is eligible to participate in the Title IV
Programs adds an educational program after it has been designated as an
eligible institution, the institution must apply to the DOE to have the
additional program designated as eligible. However, an institution is not
obligated to obtain DOE approval of an additional program that leads to an
associate's, bachelor's, professional or graduate degree or which prepares
students for gainful employment in the same or related recognized occupation as
an educational program that has previously been designated as an eligible
program at that institution and meets certain minimum length requirements.
Furthermore, short-term educational programs, which generally consist of those
programs that provide at least 300 but less than 600 clock hours of
instruction, are eligible only for FFEL funding and only if they have been
offered for a year and the institution can demonstrate, based on an attestation
by its independent auditor, that 70% of all students who enroll in such
programs complete them within a prescribed time and 70% of those students who
graduate from such programs obtain employment in the recognized occupation for
which they were trained within a prescribed time. Certain of the Company's
colleges offer such short-term programs, but students enrolled in such programs
represent a small percentage of the total enrollment of the Company's colleges.
In the event that an institution erroneously determines that an educational
program is eligible for purposes of the Title IV Programs without the DOE's
express approval, the institution would likely be liable for repayment of the
Title IV Program funds provided to students in that educational program.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over the Company's campuses also have requirements that may, in
certain instances, limit the ability of the Company to open a new campus,
acquire an existing campus or establish an additional location of an existing
institution or begin offering a new educational program.
Ability to Benefit Regulations. Under certain circumstances, an institution
may elect to admit non-high school graduates into certain of its programs of
study. In such instances, the institution must demonstrate that the student has
the "ability to benefit" from the program of study ("ATB"). Fifteen of the
Company's colleges admit ATB students into their programs. The basic evaluation
method to determine that a student has the ability to benefit from the program
is the student's achievement of a minimum score on a test approved by the DOE.
In addition to the testing requirements, the DOE regulations also prohibit
enrollment of ATB students from constituting 50% or more of the total
enrollment of the institution. None of the Company's colleges that accept ATB
students has an ATB enrollment population that exceeds 50% of the total
enrolled population. As of June 30, 2000, ATB students represented
approximately 4.8% of the Company's total enrollments.
The "90/10 Rule"(formerly the "85/15 Rule"). Under a provision of the HEA
commonly referred to as the "90/10 Rule," a private, for-profit institution,
such as each of the Company's institutions, would cease being eligible to
participate in the Title IV Programs if, on a cash accounting basis, more than
90% of its revenue for the prior fiscal year was derived from the Title IV
Programs. Prior to the 1998 Amendments, the proportion of revenues that an
institution was permitted to derive from the Title IV programs was 85%. Any
institution that violates the 90/10 Rule immediately becomes ineligible to
participate in the Title IV Programs and is unable to apply to regain its
eligibility until the following fiscal year. The Company has calculated, and
the Company's independent auditors have certified, that, since this requirement
took effect in 1995, each of the Company's institutions has met this
requirement in each fiscal year. The Company regularly monitors compliance with
this requirement in order to minimize the risk that any of its institutions
would derive more than the applicable thresholds of its revenue from the Title
IV Programs for any fiscal year. If an institution appears likely to approach
the threshold, the Company would evaluate the appropriateness of making changes
in student funding and financing to ensure compliance with the 90/10 Rule.
In October 1998, the Inspector General's Office (the "IG") of the DOE began
an examination of the Company's compliance with the former "85/15" rule (now
the "90/10" rule) and a general review of the Company's administration of Title
IV funds. This examination was part of a broader review conducted by the IG of
proprietary institutions' compliance with these requirements. The Company
provided all information and documentation requested by the IG. The IG has
issued its final audit report to the DOE and has not recommended any action be
taken against the Company as a result of its examination.
20
Restrictions on Payment of Bonuses, Commissions or Other Incentives. The HEA
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 for programs eligible
for Title IV Program funds. The Company believes that its current compensation
plans are in compliance with HEA standards.
Return of Title IV Funds. The 1998 Amendment to the HEA changed
substantially the way Title IV funds are handled when a Title IV recipient
withdraws from a school. Instead of meeting federal refund requirements,
institutions must follow requirements which ensure the return to the Title IV
programs of all unearned Title IV funds of a student who withdraws from a
program. Final regulations implementing the new return of Title IV funds policy
were issued in November 1999. The regulations become effective October 7, 2000.
The Company must ensure that all of its schools adhere to the new regulations
by that date.
Possible Regulatory Changes. In August 2000, the Department of Education
published proposed revisions to certain regulations pertaining to the Title IV
programs. The changes arose from a negotiated rulemaking process involving
interested organizations selected by the DOE to participate in the drafting of
the proposed rules. Among the proposed regulations are possible changes to the
Department's Change of Ownership standards that would expand the definition of
a change of control resulting in a change of ownership for a publicly held
company to include any transaction that results in the controlling shareholder
ceasing to be the controlling shareholder. The proposed regulations define
controlling shareholder to be a person with twenty-five percent or more of the
total outstanding voting stock of the corporation. Other proposed changes to
the regulations pertain to the process for calculating default rates and the
process of challenging default rate determinations, changes to the process for
seeking approval of additional locations, as well as other changes to technical
aspects of the various federal loan programs. Consistent with the requirements
of federal law, the DOE is providing interested parties with an opportunity to
comment on the proposed regulations. Once the comment process is concluded, the
Department likely will issue revised regulations. The revised regulations
adopted by the Department may differ in form and substance from those initially
proposed by the Department.
State Authorization. Each of the company's campuses is authorized to offer
educational programs and grant degrees or diplomas by the state in which such
campus is located. The level of regulatory oversight varies substantially from
state to state. In some states, the campuses are subject to licensure by the
state education agency and also by a separate higher education agency. State
laws establish standards for instruction, qualifications of faculty, location
and nature of facilities, financial policies and responsibility and other
operational matters. State laws and regulations may limit the ability of the
Company to obtain authorization to operate in certain states or to award
degrees or diplomas or offer new degree programs. Certain states prescribe
standards of financial responsibility that are different from those prescribed
by the DOE. The Company believes that each of its campuses is in substantial
compliance with state authorizing and licensure laws.
21
RISKS RELATED TO OUR BUSINESS
Risks Related To Extensive Regulation Of Our Business
If we fail to follow extensive regulatory requirements for our business, we
could suffer severe fines and penalties, including loss of access to federal
student loans and grants for our students.
We derive a majority of our revenues from federal student financial aid
programs. 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 Department of Education, or "DOE," and
certification by the DOE. As a result, our schools are subject to extensive
regulation by these agencies that, among other things, requires us to:
. undertake steps to assure that the students at each of our schools 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 of our institutions
from federal student financial aid programs to less than 90%;
. adhere to financial responsibility and administrative capability
standards;
. prohibit the payment of incentives to personnel engaged in student
recruiting and admissions activities; and
. achieve stringent completion and placement outcomes for short-term
programs.
These regulations also affect our ability to acquire or open additional
schools or change our corporate structure. These regulatory agencies
periodically revise their requirements and modify their interpretations of
existing requirements.
If one or more of our schools were to violate any of these regulatory
requirements, we could suffer fines, penalties or other censure, including the
loss of our ability to participate in federal student financial aid programs at
those schools that could have a materially adverse effect on our business. We
cannot predict how all of these requirements will be applied, or whether we
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 our schools
are described in the following paragraphs.
Congress may change the law or reduce funding for federal student financial
programs, which could harm our business.
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. Any action by Congress that significantly reduces
funding for the federal student financial aid programs or the ability of our
schools or students to participate in these programs could harm our business.
Legislative action may also increase our administrative costs and burden and
require us to modify our practices in order for our schools to comply fully
with applicable requirements, which could have a material adverse effect on our
business.
For example, the 1998 amendments to the Higher Education Act changed
substantially the way federal student financial 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 all of 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 become effective October 7, 2000. We must ensure that all of our
schools adhere to the new regulations by that date. If our schools fail to
adhere to such new regulations, or we fail to appropriately implement
procedures to mitigate the anticipated effect of such new regulations, it could
have a material adverse effect on our business.
22
In August 2000, the DOE published proposed revisions to certain regulations
pertaining to federal student financial aid programs. Among the proposed
regulations are changes to the DOE's change of ownership standards that would
expand the definition of a change of control resulting in a change of ownership
for a publicly held company to include any transaction that results in a
controlling stockholder ceasing to be a controlling stockholder. The proposed
regulations define a controlling stockholder to be a person owning 25% or more
of the total outstanding voting stock of the corporation. Based on the DOE's
administrative schedule, the proposed regulations regarding a change of
control, if adopted, will not become effective prior to July 1, 2001. Other
proposed changes to the regulations pertain to the process for calculating
default rates and the process for challenging default rate determinations,
changes to the process for seeking approval of additional locations, as well as
other changes to technical aspects of the various federal loan programs.
Consistent with the requirements of federal law, the DOE is providing
interested parties with an opportunity to comment on the proposed regulations.
Once the comment process is concluded, the DOE likely will issue revised
regulations. The revised regulations adopted by the DOE may differ in form and
substance from those initially proposed. If final regulations are adopted which
cause us to materially alter our business practices, or if we fail to
adequately respond to changes in the regulatory environment, it could have a
material adverse effect on our business.
If we do not meet specific financial responsibility ratios and tests
established by the Department of Education, our schools 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 DOE and possibly accept other conditions on
its participation in the federal student financial aid programs. Each year,
based on financial information submitted by institutions that participate in
federal student financial aid programs, the DOE calculates three financial
ratios for an institution: an equity ratio, a primary reserve ratio and a net
income ratio. Each of these ratios is scored separately and then combined to
determine the institution's financial responsibility. If an institution's score
is above 1.5, it may continue its participation in federal student financial
aid programs. For fiscal 2000, our calculations show that all of our schools
exceed this requirement on an individual basis, with composite scores from 1.7
to 3.0. On a consolidated basis, our company also exceeds this requirement with
a composite score of 3.0. We cannot assure you that we or our institutions will
satisfy the numeric standards in the future.
Our schools may lose eligibility to participate in federal student financial
aid programs if the percentage of their revenues derived from those programs is
too high.
A proprietary institution loses its eligibility to participate in the
federal student financial aid programs for a period of one year if it derives
more than 90% of its revenues, on a cash basis, from these programs in any
fiscal year. Any institution that violates this rule immediately becomes
ineligible to participate in federal student financial aid programs and is
ineligible to reapply to regain its eligibility until the following fiscal
year. Based on our calculations, none of our schools received more than 90% of
its revenues, on a cash basis, in fiscal 2000, with our highest institution
receiving 86% of its revenues, on a cash basis, from federal student financial
aid programs. On a consolidated basis, our company received 77% of its
revenues, on a cash basis, from federal student financial aid programs. If any
of our institutions, depending on its size, loses eligibility to participate in
federal student financial aid programs, it could have a material adverse effect
on our business.
Our schools may lose eligibility to participate in federal student financial
aid programs if their current and former students' 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 former students on
their federal student loans exceed 25% per year for three consecutive years.
For federal fiscal year 1997, the last year for which final rates have been
published, the published default rates for our institution ranged from a low of
6.6% to a high of 30.1%, with both FMU - Ft. Lauderdale and Kee Business
College in Newport News, Virginia exceeding the 25% threshold with default
rates of 25.5% and 30.1%, respectively. Based on our preliminary rates for
federal fiscal year 1998 none of our institutions had student default
23
rates of 25% or more. The preliminary rates are subject to change and could
change materially. If any of our institutions, 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 our
business.
If regulators do not approve our acquisitions, the acquired school would not
be permitted to participate in federal student financial aid programs.
When we acquire an institution, we must seek approval from the DOE and most
applicable state agencies and accrediting agencies, because an acquisition is
considered a change of ownership or control of the acquired institution under
applicable regulatory standards. A change of ownership or control of an
institution under the DOE standards can result in the temporary suspension of
the institution's participation in the federal student financial aid programs
unless a timely and materially complete application for recertification is
filed with the DOE and the DOE issues a temporary certification document. If we
were unable to reestablish the state authorization, accreditation or DOE
certification of an institution we acquired, depending on the size of that
acquisition, that failure could have a material adverse effect on our business.
Additionally, if regulators do not approve transactions involving a change
of control of our company or any of our schools, we may lose our ability to
participate in federal student financial aid programs. If we or any of our
institutions experience a change of control under the standards of applicable
state agencies or accrediting agencies or the DOE, we or the affected
institutions must seek the approval of the relevant agencies. Some of these
transactions or events, such as a significant acquisition or disposition of our
common stock, may be beyond our control. The adverse regulatory effect of a
change of ownership resulting in a change of control could also discourage bids
for your shares of common stock at a premium and could have an adverse effect
on the market price of your shares.
If any of our schools fails to maintain its state authorizations and
accreditations, we may lose our ability to operate in that state and to
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 DOE are also required for an institution to
participate in the federal student financial aid programs. If any of our
campuses were to lose its state authorization or accreditation, it could have a
materially adverse effect on our business.
During calendar year 2000, current accreditation for nine of our schools
will expire and these schools will be subject to reaccreditation reviews by
their respective accrediting agencies. In addition, during calendar year 2001,
current accreditation for 16 of our schools will expire and these schools will
be subject to reaccreditation reviews. If one or more of these schools fails to
be reaccredited, our business could be harmed.
If we fail to demonstrate "administrative capability" to the Department of
Education, our business could suffer.
DOE 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;
. have acceptable methods of defining and measuring the satisfactory
academic progress of its students;
. provide financial aid counseling to its students; and
. submit all reports and financial statements required by the regulations.
24
If an institution fails to satisfy any of these criteria, the DOE 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 our institutions be limited in their access to, or
lose, federal student financial aid funds due to their failure to demonstrate
administrative capability, our business could be materially adversely
affected.
Regulatory agencies or third parties may commence investigations or bring
claims instituting litigation against us.
Because we operate in a highly regulated industry, we may be subject from
time to time to investigations, claims of non-compliance, or lawsuits by
governmental agencies or third parties, which may allege statutory violations,
regulatory infractions, or common law causes of action. If the results of the
investigations are unfavorable to us or if we are unable to successfully
defend against third-party lawsuits, we may be required to pay money damages
or be subject to fines, penalties, injunctions or other censure that could
have a materially adverse effect on our business. Even if we adequately
address the issues raised by an agency investigation or successfully defend a
third-party lawsuit, we may have to devote significant money and management
resources to address these issues, which could harm our business.
Other Risks that Could Have a Material Adverse Effect on our Business
If students fail to repay the loans we make, our business will be harmed.
We offer short-term installment payment plans to many of our students to
supplement their financial aid. In late 1997, we expanded the internal loan
program to assist students in six of our colleges that lost access to federal
student loan programs during that year. As of June 30, 2000, outstanding
student loan balances were approximately $4.1 million, net of a $1.2 million
allowance for bad debts. These student loans are unsecured and not guaranteed.
Losses related to unpaid student loans in excess of the amounts we have
reserved for bad debts could have a material adverse effect on our business.
Failure to effectively manage our growth could harm our business.
We have grown rapidly since we formed our company in 1995. Our rapid
growth, now or in the future, could place a strain on our management,
operations, employees or resources. We cannot assure you that we will be able
to maintain or accelerate our current growth rate, effectively manage our
expanding operations or achieve planned growth on a timely or profitable
basis. If we are unable to manage our growth effectively, our business could
be materially adversely affected.
If we cannot effectively identify, acquire and integrate additional
schools, it could harm our business.
We expect to continue to rely on acquisitions as a key component of our
growth. We often engage in evaluations of, and discussions with, possible
acquisition candidates. We cannot assure you that we will be able to identify
suitable acquisition candidates or that we will be able to acquire any of the
acquisition candidates on favorable terms. Furthermore, we cannot assure you
that any acquired schools can be successfully integrated into our operations
or be operated profitably. Acquisitions involve a number of risks that
include:
. diversion of management resources;
25
. integration of the acquired schools' operations;
. adverse short-term effects on reported operating results; and
. possible loss of key employees.
Continued growth through acquisition may also subject us to unanticipated
business or regulatory uncertainties or liabilities. When we acquire an
existing school, we typically allocate a significant portion of the purchase
price to fixed assets, curriculum, goodwill and intangibles, such as covenants
not-to-compete. For our acquisitions to date, we have amortized goodwill and
trade names over a period of 40 years and curricula over 15 years. In addition,
our acquisition of a school is a change of ownership of that school, which may
result in the temporary suspension of that school's participation in federal
student financial aid programs until it obtains the DOE's approval. If we fail
to manage successfully our acquisitions, our business would likely suffer.
Failure to open new schools and add new services could harm our business.
Establishing new schools requires us to make investments in management,
capital expenditures, marketing expenses and other resources. To open a new
school, we would be required to obtain appropriate state and accrediting agency
approvals. In addition, to be eligible for federal student financial aid
programs, the new school would have to be certified by the DOE. We cannot
assure you that we will be able to successfully open new schools in the future.
Our failure to effectively manage the operations of newly established schools
could have a material adverse effect on our business.
Our success depends upon our ability to recruit and retain key personnel.
We depend on key personnel, including David G. Moore, Paul R. St. Pierre,
Dennis L. Devereux and Dennis N. Beal, to effectively operate our business. If
we ceased to employ any of these people and failed to manage a transition to
new people, our business could suffer.
Our success also depends, in large part, upon our ability to attract and
retain highly qualified faculty, school presidents and administrators and
corporate management. Due to the nature of our business, we may have difficulty
locating and hiring qualified personnel, and retaining such personnel once
hired. The loss of the services of any of our key personnel, or our failure to
attract and retain other qualified and experienced personnel on acceptable
terms, could cause our business to suffer.
Anti-takeover provisions in our charter documents and Delaware law could
make an acquisition of our company difficult.
Our certificate of incorporation, our by-laws and Delaware law contain
provisions that may delay, defer or inhibit a future acquisition of us not
approved by our board of directors. These provisions are intended to encourage
any person interested in acquiring us to negotiate with and obtain the approval
of our board of directors. Our certificate of incorporation also permits our
board of directors to issue shares of preferred stock with voting, conversion
and other rights as it determines, without any further vote or action by our
stockholders. By using preferred stock, we could:
. discourage a proxy contest,
. make the acquisition of a substantial block of our common stock more
difficult, or
. limit the price investors may be willing to pay in the future for shares
of our common stock.
In addition, our bylaws provide that (a) special meetings of our
stockholders may be called only by our board of directors and (b) only two of
our six Directors may be elected at a special meeting. These provisions also
could discourage bids for your shares of common stock at a premium and could
have a material adverse effect on the market price of your shares.
26
Failure to keep pace with changing market needs and technology could harm
our business.
Prospective employers of our graduates increasingly demand that their
entry-level employees possess appropriate technological skills. Educational
programs at our schools, particularly programs in information technology, must
keep pace with these evolving requirements. If we cannot respond to changes in
industry requirements, it could have a material adverse effect on our
business.
Competitors with greater resources could harm our business.
The post-secondary education market is highly competitive. Our schools
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 our schools. Although tuition at private non-profit institutions
is, on average, higher than tuition at our schools, some public institutions
are able to charge lower tuition than our schools, due in part to government
subsidies, government and foundation grants, tax-deductible contributions and
other financial sources not available to proprietary schools. Some of our
competitors in both the public and private sectors have substantially greater
financial and other resources than us.
Failure to obtain additional capital in the future could reduce our ability
to grow.
We believe that funds from operations, cash, investments and borrowings
under our $10 million credit facility pursuant to our credit agreement will be
adequate to fund our current operation plans for the foreseeable future.
However, we may need additional debt or equity financing in order to carry out
our strategy of growth through acquisitions. We may also need additional debt
or equity financing in the future to carry out our growth strategy. The amount
and timing of such additional financing will vary principally depending on the
timing and size of acquisitions and the sellers' willingness to provide
financing themselves. To the extent that we require additional financing in
the future and are unable to obtain such additional financing, we may not be
able to fully implement our growth strategy.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate office is located in Santa Ana, California and our 45
campuses are located in 18 states. Each campus provides our students with
modern lecture halls, medical labs, libraries, Internet access and an
administrative staff lead by a college president.
We actively monitor our facility capacity and future facility capacity
required to accommodate campus growth initiatives. We provide for expansion
and future growth at each campus through relocations to larger facilities and
by expanding or remodeling at existing facilities. From the end of fiscal 1995
through August 15, 2000, approximately 37% of the campuses have been relocated
and an additional 15% of total campuses have been either expanded or
remodeled. The following table reflects the number of campuses added or closed
during each of the last five fiscal years, the number of campuses at the end
of each of the last five fiscal years and the number of campuses that have
been remodeled, enlarged or relocated in each of the last five fiscal years:
During Fiscal Year Ended 6/30/96 6/30/97 6/30/98 6/30/99 6/30/2000(1)
------------------------ ------- ------- ------- ------- -----------
Opened
Acquired.......................... 11 20 0 0 5
Branched.......................... 0 0 0 2 2
Closed.............................. 0 0 1 0 0
Total campuses at year end.......... 16 36 35 37 44
Relocated........................... 1 2 6 5 2
Enlarged or remodeled............... 0 0 1 1 2
- --------
(1) Does not include one branch opened on July 17, 2000, one relocation and
four enlargements and remodels completed in August 2000.
27
All but four of our campuses are leased and we lease our headquarters
offices. Most of our leases have primary terms between five and ten years with
options to extend the lease, at our election.
Square footage of the Company's colleges varies significantly based upon the
type of programs offered and the market being served. The following table
reflects square footage by location as of August 15, 2000:
Approx.
Square
Degree-Granting Colleges Footage
------------------------ -------
Blair College, Colorado Springs,
CO*............................ 22,300
Duff's, Pittsburgh, PA.......... 30,370
FMU, Brandon, FL................ 35,250
FMU, Ft. Lauderdale, FL......... 24,500
FMU, Jacksonville, FL........... 12,000
FMU, Lakeland, FL............... 23,717
FMU, Melbourne, FL*............. 16,500
FMU, Orlando, FL North.......... 39,424
FMU, Orlando, FL South.......... 31,680
FMU, Pinellas, FL............... 30,734
FMU, Tampa, FL*................. 30,000
Las Vegas College, Las Vegas,
NV............................. 16,664
Mountain West College, Salt Lake
City, UT....................... 19,620
Parks College, Thornton, CO*.... 24,000
Parks College, Aurora, CO....... 30,000
RBI, Rochester, NY.............. 29,300
Rhodes College, Phoenix, AZ..... 14,472
Springfield College,
Springfield, MO................ 23,012
Western Business College,
Vancouver, WA.................. 10,243
Western Business College,
Portland, OR................... 26,800
Corporate Offices...............
Santa Ana, CA................... 34,099
Gulfport, MS.................... 2,204
Approx.
Square
Diploma-Granting Colleges Footage
------------------------- -------
Bryman, Brighton, MA............................................... 14,664
Bryman, El Monte, CA............................................... 22,195
Bryman, Gardena, CA................................................ 14,356
Bryman, Los Angeles, CA............................................ 14,588
Bryman, New Orleans, LA............................................ 14,423
Bryman, Anaheim, CA................................................ 16,906
Bryman, San Francisco, CA.......................................... 18,500
Bryman, San Jose, CA North......................................... 14,624
Bryman, San Jose, CA South......................................... 3,054
Bryman, Reseda, CA................................................. 14,200
Bryman, Sea Tac, WA................................................ 12,239
GMI, Atlanta, GA................................................... 18,116
GMI, Jonesboro, GA................................................. 16,700
GMI, Marietta, GA.................................................. 13,396
Harbor Medical College, Torrance, CA............................... 3,604
Kee Business College, Newport News, VA............................. 16,126
Kee Business College, Chesapeake, VA............................... 14,396
NIT, Atlanta, GA................................................... 18,000
NIT, Cross Lanes, WV............................................... 24,000
NIT, Greenspoint, TX............................................... 18,000
NIT, Houston, TX................................................... 20,585
NIT, San Antonio, TX............................................... 37,300
NIT, Southfield, MI................................................ 22,259
NIT, Wyoming, MI................................................... 12,000
Skadron College, San Bernardino, CA................................ 21,600
- --------
* Indicates owned properties
ITEM 3. LEGAL PROCEEDINGS
In the ordinary conduct of our business, we and our colleges are subject to
occasional lawsuits, investigations and claims. Although we cannot predict the
ultimate resolution of lawsuits, investigations and claims asserted against us,
we do not believe that any currently pending legal proceeding to which we are a
party will have a material adverse effect on our business, results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended June 30, 2000.
28
SPECIAL ITEM. EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our
executive officers:
Name Age Position
---- --- --------
David G. Moore.............. 62 President, Chief Executive Officer, Director
Paul R. St. Pierre.......... 55 Executive Vice President, Marketing and
Admissions, Director
Dennis L. Devereux.......... 53 Executive Vice President, Human Resources,
Assistant Secretary
Dennis N. Beal.............. 49 Executive Vice President and Chief Financial
Officer
Beth A. Wilson.............. 48 Vice President, Operations
Mary H. Barry............... 51 Vice President, Education
Nolan A. Miura.............. 45 Vice President, Strategic Planning,
Treasurer
Stan A. Mortensen........... 33 Vice President, General Counsel and
Corporate Secretary
Loyal Wilson................ 52 Director
David G. Moore is one of the founders of our company and has served as our
President and Chief Executive Officer, as well as a member of our board of
directors, since our inception in July 1995. Immediately prior to forming our
company, he was President of National Education Centers, Inc., a subsidiary of
National Education Corporation. From 1992 to 1994, Mr. Moore served as
President of DeVry Institute of Technology in Los Angeles, where he developed
DeVry's West Coast growth strategy. From 1980 to 1992, he was employed by Mott
Community College in Flint, Michigan, where he was President from 1984 to 1992.
From 1960 to 1980, Mr. Moore served a distinguished career in the U.S. Army,
retiring at the rank of Colonel. Mr. Moore received a Bachelor of Arts in
Political Science from Seattle University and Master of Business Administration
from the University of Puget Sound. He has also completed the Management of
Higher Education Program at Harvard University, post graduate studies in Higher
Education Management at the University of Michigan and graduate study and
research in Computer Science at Kansas State University.
Paul R. St. Pierre has served as our Vice President, Marketing & Admissions
as well as a member of our board of directors since our inception in July 1995.
He was promoted to Executive Vice President in April 1998. He was employed by
National Education Centers, Inc. from 1991 to 1995. His first assignment at
NECI was as School President for its San Bernardino, California campus.
Subsequently, he held corporate assignments as Director of Special Projects,
Vice President of Operations for the Learning Institutes Group (the largest
colleges owned by NEC) and as Vice President, Marketing & Admissions for NEC.
From 1986 to 1991, Mr. St. Pierre was employed by Allied Education Corporation,
initially as School Director, but the majority of the period as Regional
Operations Manager. He was employed as School Director at Watterson College in
1985. From 1982 to 1985, Mr. St. Pierre was Executive Vice President and
Partner for University Consulting Associates, principally responsible for the
marketing and sales of education services, on a contract basis, to institutions
of higher education. He was previously employed, from 1980 to 1982, as Division
Manager for the Institute for Professional Development, a division of Apollo
Group. Mr. St. Pierre received a Bachelor of Arts in Philosophy from Stonehill
College, a Master of Arts in Philosophy from Villanova University and is a
Ph.D. candidate in Philosophy at Marquette University.
Dennis L. Devereux has served as our Vice President, Human Resources since
our inception in July 1995. He was promoted to Executive Vice President in
April 1998. He was employed by National Education Centers, Inc. as its Vice
President, Human Resources from 1988 to 1995. From 1987 to 1988, he was
Director, Human Resources for Jacobs Engineering Group, Inc. He was employed by
American Diversified Companies, Inc. as its Director, Human Resources from 1985
to 1987. From 1973 to 1984, Mr. Devereux was employed by Bechtel Group, Inc. in
a variety of human resources management positions, including Personnel Manager
for a subsidiary company and Personnel Supervisor for a major construction site
and within a large regional operation. Previously, he was employed in a
compensation assignment with Frito-Lay, Inc. and as Personnel Manager and
Personnel Assistant with Anaconda Wire & Cable Company from 1969 to 1973. Mr.
Devereux
29
received a Bachelor of Science in Business Administration (Industrial
Relations) from California State University, Long Beach.
Dennis N. Beal joined us as our Executive Vice President and Chief Financial
Officer in May 2000. Prior to joining our company, Mr. Beal was employed by
Stater Bros. Holdings Inc. (an operator of 155 supermarkets in California) as
its Vice President and Chief Financial Officer from 1992 to 1998 and as its
Senior Vice President and Chief Financial Officer from 1998 to May 2000. From
1981 to 1992, Mr. Beal was employed by American Stores Company (an operator of
1,500 supermarkets and drug stores) and served in various financial capacities
including Vice President, Controller. From 1974 to 1981, Mr. Beal was employed
by the firm of Bushman, Daines, Rasmussan and Wisan CPA's and was admitted as a
Partner in 1980. Mr. Beal, a Certified Public Accountant, graduated with a
Bachelor of Science degree in Accounting from the University of Utah and
received a Masters of Business Administration degree from Westminster College,
Salt Lake City, Utah.
Beth A. Wilson has been employed by us since our inception in July 1995. She
is currently our Vice President of Operations. Previously, Ms. Wilson was
Regional Operations Director for the College Region of Rhodes Colleges, Inc.
from May 1997 to June 1998. From July 1995 to May 1997 she was Operations
Director and Regional Operations Director for Corinthian Schools, Inc. Ms.
Wilson was employed by National Education Centers, Inc. from 1991 to 1995,
initially as Executive Director of its Capital Hill campus, then as Area
Operations Manager. From 1990 to 1991, she was Vice President, Branch
Operations for National College. She was employed by United Education and
Software from 1984 to 1990, initially as Executive Director of a business
school, then as Group Manager for four to fifteen locations and finally as Vice
President, Administration. She was Scholarship Administrator for National
University from 1982 to 1984 and Assistant Director of American Business
College from 1976 to 1981. Ms. Wilson earned an MBA from National University
and a Bachelor of Arts degree from California State College, Sonoma.
Mary H. Barry has served as our Vice President of Education since April
1998. She was previously employed by University of Phoenix from 1992 through
April 1998, where her assignments included Director of Academic Affairs,
Director of Administration and Director of the California Center for
Professional Education. From 1990 to 1991, Ms. Barry was Director of National
College. During the period 1980 to 1990, she was employed in the banking
industry as Senior Vice President of Marquette Banks, Director for Citibank,
South Dakota and Vice President of First National Bank, Chicago. Ms. Barry
served as a public affairs officer in the U.S. Marine Corps from 1971 to 1979,
achieving the rank of Major. Ms. Barry earned a Bachelor of Science in
Speech/Drama from Bowling Green State University, a Master of Management from
Northwestern University and a Juris Doctorate from Western State University.
Nolan A. Miura has been our Vice President of Strategic Planning and
Treasurer since his promotion to this position in October 1999. Mr. Miura
joined the company as Director of Treasury and Business Analysis in November
1997 and was promoted to Treasurer in December 1998. He was employed by
Atlantic Richfield Company ("ARCO") from 1990 to 1997 in various financial and
marketing positions including Planning Manager - ARCO Products Company,
Marketing Director--ARCO Pipe Line Company, Marketing Analysis Manager - ARCO
Products Company and Planning, Evaluation and Business Development Manager -
ARCO Marine, Inc. During the period from 1979 to 1990, his assignments ranged
from Senior Internal Auditor to Government Compliance Manager--ARCO
Transportation Company and Budgets and Performance Analysis Manager - ARCO
Marine, Inc. Mr. Miura received an MBA (Corporate Finance) from the University
of Southern California and a Bachelor of Science in Business Administration
(Finance) from California State University, Long Beach. Mr. Miura is also a
Certified Internal Auditor.
Stan A. Mortensen has been Vice President, General Counsel and Corporate
Secretary since January 2000. Prior to that time, Mr. Mortensen was an
associate at the law firm of O'Melveny & Myers LLP from March 1997 through
December 1999, where his practice focused on corporate finance, mergers and
acquisitions, and general corporate matters. From August 1994 through February
1997, Mr. Mortensen was an associate at the law firm of Robins, Kaplan, Miller
& Ciresi, where his practice focused on complex commercial litigation.
Mr. Mortensen received a Juris Doctor and a Bachelor of Arts in Political
Science from Brigham Young University.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Dividend Policy
We have never paid cash dividends on our common stock. We currently
anticipate retaining future earnings, if any, to finance internal growth and
potential acquisitions. Payment of dividends in the future, if at all, will
depend upon our earnings and financial condition and various other factors our
directors may deem appropriate at the time. Our credit agreement restricts the
payment of cash dividends.
Price Range of Common Stock
Our common stock is listed on the Nasdaq National Market System under the
symbol "COCO." The approximate number of holders of record of our common stock
as of August 31, 2000 was 21 and the number of beneficial owners is believed to
be in excess of 750. Our common stock was first listed after the completion of
our initial public offering of shares in February, 1999.
The range of high and low sales prices of our common stock, as reported by
the Nasdaq National Market System, for each applicable quarter in fiscal 1999,
2000 and 2001 is as follows:
Price Range
of Common
Stock
-------------
High Low
------ ------
1999:
Third Quarter (from February 5, 1999)....................... $25.00 $20.88
Fourth Quarter.............................................. 22.06 12.50
2000:
First Quarter............................................... $23.50 $13.88
Second Quarter.............................................. 24.13 16.63
Third Quarter............................................... 27.25 15.88
Fourth Quarter.............................................. 25.75 15.50
2001:
First Quarter (through September 14, 2000).................. $59.00 $23.00
31
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following selected historical consolidated financial and other data are
qualified by reference to, and should be read in conjunction with, our
consolidated financial statements and the related notes thereto appearing
elsewhere in this Report on Form 10-K and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The selected statement of
operations data and the balance sheet data set forth below for each of the five
years ended June 30, 1996, 1997, 1998, 1999 and 2000, and as of June 30, 1996,
1997, 1998, 1999 and 2000 are derived from our audited consolidated financial
statements. These historical results are not necessarily indicative of the
results that may be expected in the future.
Years Ended June 30,
-----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(In thousands, except per share data)
Statement of Operations Data:
Net revenues(1)............. $31,498 $ 77,201 $106,486 $132,972 $170,734
------- -------- -------- -------- --------
Operating expenses:
Educational services....... 18,594 50,568 65,927 76,425 92,757
General and
administrative............ 3,298 8,101 10,777 13,961 16,346
Marketing and
advertising............... 7,562 19,000 24,268 29,702 37,225
------- -------- -------- -------- --------
Total operating expenses... 29,454 77,669 100,972 120,088 146,328
------- -------- -------- -------- --------
Income (loss) from
operations................. 2,044 (468) 5,514 12,884 24,406
Interest expense (income),
net........................ 274 2,524 3,305 1,678 (1,681)
Other (income).............. -- -- -- -- (175)
------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary
(loss)..................... 1,770 (2,992) 2,209 11,206 26,262
Provision (benefit) for
income taxes............... 722 (1,107) 988 4,703 10,840
------- -------- -------- -------- --------
Net income (loss) before
extraordinary (loss)....... 1,048 (1,885) 1,221 6,503 15,422
Extraordinary (loss) net of
tax benefit................ -- -- -- (2,011) --
------- -------- -------- -------- --------
Net income (loss)........... $ 1,048 $ (1,885) $ 1,221 $ 4,492 $ 15,422
======= ======== ======== ======== ========
INCOME (LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Net income (loss) before
extraordinary (loss)...... $ 1,048 $ (1,885) $ 1,221 $ 6,503 $ 15,422
Less preferred stock
dividends................. (111) (118) (365) (355) --
------- -------- -------- -------- --------
Income (loss) before
extraordinary (loss)
attributable to common
stockholders............ 937 (2,003) 856 6,148 15,422
Extraordinary (loss)....... -- -- -- (2,011) --
------- -------- -------- -------- --------
Net income (loss)
attributable to common
stockholders............ $ 937 $(2,003) $ 856 $ 4,137 $ 15,422
======= ======== ======== ======== ========
INCOME (LOSS) PER SHARE
ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic--
Income (loss) before
extraordinary (loss)...... $ 0.21 $ (0.41) $ 0.16 $ 0.85 $ 1.49
Extraordinary (loss)....... -- -- -- (0.28) --
------- -------- -------- -------- --------
Net income (loss)........ $ 0.21 $ (0.41) $ 0.16 $ 0.57 $ 1.49
======= ======== ======== ======== ========
Diluted--
Income (loss) before
extraordinary (loss)...... $ 0.15 $ (0.41) $ 0.12 $ 0.72 $ 1.48
Extraordinary (loss)....... -- -- -- (0.24) --
------- -------- -------- -------- --------
Net income (loss)........ $ 0.15 $ (0.41) $ 0.12 $ 0.48 $ 1.48
======= ======== ======== ======== ========
Weighted average number of
common shares outstanding:
Basic....................... 4,409 4,896 5,236 7,266 10,347
======= ======== ======== ======== ========
Diluted..................... 6,339 4,896 7,125 8,549 10,425
======= ======== ======== ======== ========
32
Years Ended June 30,
---------------------------------------------
1996 1997 1998 1999 2000
------- ------- ------- -------- --------
(Dollars In thousands)
Other Data:
EBITDA(2)..................... $ 2,726 $ 1,602 $ 8,573 $ 16,329 $ 28,204
Cash flow provided by (used
in):
Operating activities......... 997 995 (3,373) 5,794 23,582
Investing activities......... (4,295) (30,973) (1,676) (16,140) (19,362)
Financing activities......... 3,903 30,975 4,630 9,731 (1,121)
Capital expenditures(3)....... 1,046 5,936 1,926 2,790 4,182
Number of colleges at end of
period....................... 16 36 35 37 44
Student population at end of
period....................... 4,938 12,820 13,992 16,012 19,464
Starts during the period(4)... 5,834 13,673 18,261 21,008 24,660
Balance Sheet Data:
Cash, cash equivalents and
restricted cash(5)........... $ 2,024 $ 3,831 $ 3,162 $ 1,797 $ 4,896
Marketable investments........ -- -- -- 14,501 24,107
Working capital............... 2,306 1,844 606 19,108 29,069
Total assets.................. 13,487 53,809 59,905 73,857 95,233
Long-term debt, net of current
maturities................... 2,537 36,168 31,535 3,396 2,230
Redeemable preferred stock.... 1,924 2,042 2,167 -- --
Convertible preferred stock... -- -- 5,174 -- --
Total stockholders' equity.... $ 2,124 $ 121 $ 977 $ 53,536 $ 69,003
- --------
(1) Represents student tuition and fees and bookstore sales, net of refunds.
Year ended June 30, 1996 includes a non-recurring management fee of
approximately $2.1 million earned by us for managing certain colleges owned
by National Education Corporation during the first six months of that year.
(2) EBITDA equals earnings before interest, taxes, depreciation and
amortization, including amortization of deferred financing costs. For the
year ended June 30, 1999, EBITDA excludes the extraordinary loss from early
extinguishment of debt which amounted to $2.0 million (net of $1.5 million
tax benefit). EBITDA is presented because we believe it allows for a more
complete analysis of our results of operations. EBITDA should not be
considered as an alternative to, nor is there any implication that it is
more meaningful than, any measure of performance or liquidity as
promulgated under GAAP.
(3) Year ended June 30, 1997 includes approximately $3.4 million for real
estate acquired in connection with the acquisition of certain schools from
Philips Colleges, Inc.
(4) Represents the new students starting school during the periods presented.
(5) Includes approximately $200,000, $1.0 million, $760,000, $10,000 and
$10,000 of restricted cash at June 30, 1996, 1997, 1998, 1999 and 2000,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Selected Historical Consolidated Financial and Other Data and the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report on Form 10-K. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from
those anticipated in those forward-looking statements as a result of a number
of factors, including those set forth in the section entitled "Business--Risks
Related to Our Business" included elsewhere in this Report.
Background and Overview
As of June 30, 2000, we operated 44 colleges, with more than 19,400
students, in 18 states. During the fiscal year ended June 30, 2000, our company
had net revenues of $170.7 million. Our revenues consist principally of student
tuition, enrollment fees and bookstore sales, and are presented as net revenues
after deducting refunds.
Net revenues increased 28.4% to $170.7 million in 2000 from $133.0 million
in 1999. The increase is largely the result of a 15.7% increase in the average
student population and a 10.6% increase in the average
33
tuition rate per student during the period. Tuition revenues, which
represented 91.8% of fiscal 2000 total net revenues, fluctuate with the
aggregate enrolled student population and the average program or credit hour
charge. The student population varies depending on, among other factors, the
number of (i) continuing students at the beginning of a fiscal period, (ii)
new student enrollments during the fiscal period, (iii) students who have
previously withdrawn but who reenter during the fiscal period, and (iv)
graduations and withdrawals during the fiscal period. New student starts occur
on a monthly basis in the diploma-granting colleges. In the degree-granting
colleges, the majority of new student starts occur in the first month of each
calendar quarter with an additional "mini-start" in the second month of each
quarter in most colleges. The tuition charges vary by college depending on the
local market, the program level, such as diploma, or associate's, bachelor's
or masters degree, and the specific curriculum.
The majority of students at our colleges rely on funds received under
various government sponsored student financial aid programs to pay a
substantial portion of their tuition and other education-related expenses. In
fiscal 2000, approximately 77% of our net revenues, on a cash basis, was
derived from federal student financial aid programs.
We categorize our expenses as educational services, general and
administrative, and marketing and advertising. Educational services expense is
primarily comprised of those costs incurred to deliver and administer the
education programs at the colleges, including faculty and college
administration compensation; education materials and supplies; college
facility rent and other occupancy costs; bad debt expense; depreciation and
amortization of college property, equipment and goodwill; and default
management and financial aid processing costs.
General and administrative expense consists principally of those costs
incurred at the corporate and regional level in support of college operations,
except for marketing and advertising related costs. Included in general and
administrative costs are company executive management, corporate staff and
regional operations management compensation; rent and other occupancy costs
for corporate headquarters; depreciation and amortization of corporate
property, equipment and intangibles; and other expenses incurred at corporate
headquarters.
Marketing and advertising expense includes compensation for college
admissions staff, regional admissions directors, corporate marketing and
advertising executive management, and staff and all advertising and production
costs.
Acquisitions
Since our inception, we have completed the following acquisitions, each of
which was accounted for as an asset purchase using the purchase method of
accounting, and the results of their operations are included in our
consolidated results of operations since their respective dates of
acquisition:
On June 30, 1995, we acquired five colleges from National Education
Corporation. As part of the same transaction, we subsequently acquired from
National Education Corporation a second group of five colleges on September
30, 1995 and an additional six colleges on December 31, 1995. The adjusted
purchase price for all 16 colleges was approximately $4.7 million in cash.
On July 1, 1996, we acquired one college from Repose, Inc., for a purchase
price of $250,000 in cash.
On August 31, 1996, we acquired one college from Concorde Career Colleges,
Inc., for a purchase price of $350,000 in cash.
On October 17, 1996, we acquired 18 colleges from Phillips Colleges, Inc.,
for an adjusted purchase price of approximately $23.6 million in cash.
On January 18, 2000, we acquired substantially all of the assets of Harbor
Medical College, which operated one college in Torrance, California, for
approximately $300,000 in cash.
34
On April 1, 2000, we acquired substantially all of the assets of the
Georgia Medical Institute, which operated three colleges in the greater
Atlanta, Georgia metropolitan area, for approximately $7.0 million in cash.
On June 1, 2000, we acquired substantially all of the assets of Academy of
Business College, which operated one college in Phoenix, Arizona, for
approximately $1.0 million in cash.
Results of Operations
Comparisons of results of operations between fiscal year ended June 30,
2000 and fiscal years ended June 30, 1999 and 1998 are difficult due to the
acquisitions of five campuses in fiscal 2000, the opening of two branch
campuses in fiscal 2000 and the opening of two additional branch campuses in
fiscal 1999.
The following table summarizes our operating results as a percentage of net
revenues for the periods indicated.
Years Ended June 30,
----------------------
1998 1999 2000
------ ------ ------
Statement of Operations Data:
Net revenues....................................... 100.0% 100.0% 100.0%
------ ------ ------
Operating expenses:
Educational services............................... 61.9 57.5 54.3
General and administrative......................... 10.1 10.5 9.6
Marketing and advertising.......................... 22.8 22.3 21.8
------ ------ ------
Total operating expenses......................... 94.8 90.3 85.7
Income from operations............................. 5.2 9.7 14.3
Interest expense (income), net..................... 3.1 1.3 (1.0)
Other (income)..................................... -- -- (0.1)
------ ------ ------
Income before income taxes......................... 2.1 8.4 15.4
Provision for income taxes......................... 0.9 3.5 6.4
------ ------ ------
Net income before extraordinary (loss)............. 1.2 4.9 9.0
Extraordinary (loss), net of tax benefit........... -- (1.5) --
------ ------ ------
Net income....................................... 1.2% 3.4% 9.0%
====== ====== ======
Year Ended June 30, 2000 Compared to Year Ended June 30, 1999
Net Revenues. Net revenues increased $37.8 million, or 28.4%, from $133.0
million in fiscal 1999 to $170.7 million in fiscal 2000 due primarily to a
15.7% increase in the average student population during the year and a 10.6%
increase in the average tuition rate per student. At June 30, 2000, the total
student population was 19,464, compared with 16,012 at June 30, 1999. Same
school student population increased 13.0% as of June 30, 2000.
In connection with our acquisition of 18 colleges from Phillips Colleges,
Inc. in fiscal 1997, we honored certain fixed price commitments to students
already in school ("grandfathered students") when we acquired those colleges.
As a result, over the last several years, including fiscal 2000, our average
tuition rate per student has increased more dramatically than the actual
tuition price increases at our schools. This is as a result of the changing
mix of new to grandfathered students, as the latter students have graduated or
discontinued their education. With virtually all grandfathered students having
now graduated or discontinued their education, we expect year-over-year
increases in the average tuition rate per student to more closely track the
actual tuition price increases implemented.
Educational Services. Educational services expense increased $16.3 million,
or 21.4%, from $76.4 million in fiscal 1999 to $92.8 million in fiscal 2000.
The increase was due primarily to the 15.7% increase in the average
35
student population and wage increases for employees. Additionally, a number of
colleges were moved to larger upgraded facilities, two new branches were
opened, and five campuses were acquired. As a percentage of net revenues,
educational services expense decreased from 57.5% to 54.3%.
General and Administrative. General and administrative expense increased
$2.4 million, or 17.1%, from $14.0 million in fiscal 1999 to $16.4 million in
fiscal 2000. The increase was primarily a result of (i) additional headquarters
staff to support operations, (ii) wage increases for employees, (iii) higher
management incentive compensation due to our performance, (iv) increased travel
and training, and (v) one-time Year 2000 remediation expenses. As a percentage
of net revenues, general and administrative expense decreased from 10.5% to
9.6%.
Marketing and Advertising. Marketing and advertising expense increased $7.5
million, or 25.3%, from $29.7 million in fiscal 1999 to $37.2 million in fiscal
2000, primarily due to the increased volume of advertising and additional
admissions staff necessary to support the 17.4% increase in starts. Also
contributing to the increase was advertising cost inflation and wage increases
for employees. As a percentage of net revenues, marketing and advertising
expense decreased from 22.3% to 21.8%.
Income From Operations. Income from operations increased 89.4% to $24.4
million, or 14.3% of revenues in fiscal 2000, compared to $12.9 million, or
9.7% of revenues in fiscal 1999.
Interest Income, Net. Interest income (net of interest expense of $0.4
million) amounted to $1.7 million in fiscal 2000 compared to interest expense
(net of interest income of $0.7 million) of $1.7 million in fiscal 1999. In the
third quarter of fiscal 1999, we retired approximately $35.8 million of long-
term debt and, as such, did not incur the related interest expense during
fiscal 2000. Additionally, as a result of increased earnings and related cash
flow available for investing, interest income increased by $1.3 million in
fiscal 2000 when compared to fiscal 1999.
Provision for Income Taxes. The effective income tax rate for fiscal 2000
decreased to 41.3% of income before taxes compared to 42.0% of income before
taxes in fiscal 1999.
Net Income. Net income for fiscal 2000 increased 243% to $15.4 million, or
9.0% of revenues, compared to net income of $4.5 million, or 3.4% of revenues,
for fiscal 1999. Net income for fiscal 1999 includes an extraordinary loss from
the early retirement of debt of $2.0 million (net of $1.5 million from income
tax benefits).
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Net Revenues. Net revenues increased $26.5 million, or 24.9%, from $106.5
million in fiscal 1998 to $133.0 million in fiscal 1999 due primarily to a
12.4% increase in the average student population during the year and a 9.7%
increase in the average tuition rate per student. At June 30, 1999, the total
student population was 16,012 compared with 13,992 at June 30, 1998. Except for
151 students in the two new branches opened in March and April, 1999, the
increase in student population was all "same school" growth.
Educational Services. Educational services expense increased $10.5 million,
or 15.9%, from $65.9 million in fiscal 1998 to $76.4 million in fiscal 1999.
The increase was due primarily to the 14.4% increase in the student population
and wage increases for employees. Additionally, a number of colleges were moved
to larger upgraded facilities, two new branches were opened, and annual lease
escalations took place during the year resulting in higher facility-related
expenses. As a percentage of net revenues, educational services expense
decreased from 61.9% to 57.5%.
General and Administrative. General and administrative expense increased
$3.2 million, or 29.5%, from $10.8 million in fiscal 1998 to $14.0 million in
fiscal 1999. The increase was primarily a result of (i) additional headquarters
staff to support operations, (ii) wage increases for employees, (iii) higher
management incentive compensation due to our performance, (iv) increased travel
and training, and (v) the one-time Year 2000
36
remediation expenses. As a percentage of net revenues, general and
administrative expense increased from 10.1% to 10.5%. However, if the one-time
Year 2000 remediation expenses were excluded, the general and administrative
expense would be 9.9% of net revenues for 1999.
Marketing and Advertising. Marketing and advertising expense increased $5.4
million, or 22.4%, from $24.3 million in fiscal 1998 to $29.7 million in fiscal
1999, primarily due to the increased volume of advertising and additional
admissions staff necessary to support the 15% increase in starts. Also
contributing to the increase was advertising cost inflation and wage increases
for employees. As a percentage of net revenues, marketing and advertising
expense decreased from 22.8% to 22.3%.
Income From Operations. Income from operations increased 133% to $12.9
million in fiscal 1999, or 9.7% of revenues, compared to $5.5 million, or 5.2%
of revenues in fiscal 1998.
Interest Expense, Net. Net interest expense decreased $1.6 million, or
49.2%, from $3.3 million in fiscal 1998 to $1.7 million in fiscal 1999, due
primarily to the repayment of debt with a portion of the proceeds from our
initial public offering in February 1999.
Provision for Income Taxes. The provision for income taxes increased $3.7
million from $1.0 million in fiscal 1998 to $4.7 million in fiscal 1999. The
effective tax rate decreased from 44.7% to 42.0% as a result of a reduction in
the state income tax component.
Income before Extraordinary Loss. Income before extraordinary loss increased
$5.3 million, or 433%, from $1.2 million in fiscal 1998 to $6.5 million in
fiscal 1999, due primarily to the factors discussed above.
Extraordinary Loss. In fiscal 1999 we recorded an extraordinary loss of $2.0
million (net of a $1.5 million tax benefit) related to a prepayment penalty and
the write-off of deferred loan fees associated with the early extinguishment of
debt with a portion of the proceeds from the initial public offering, compared
to no extraordinary items in fiscal 1998.
Net Income. Net income increased $3.3 million, or 268%, from $1.2 million in
fiscal 1998 to $4.5 million in fiscal 1999 as a result of the factors discussed
above.
Seasonality
Our revenues normally fluctuate as a result of seasonal variations in our
business, principally in its total student population. Student population
varies as a result of new student enrollments and student attrition.
Historically, our colleges have had lower student populations in the first
fiscal quarter than in the remainder of the year. Our expenses, however, do not
vary as significantly as student population and revenues. We expect 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, new program introductions and increased high
school enrollments. The operating results for any quarter are not necessarily
indicative of the results for any future period. See Note 13 of the
Consolidated Financial Statements included elsewhere herein.
Liquidity and Capital Resources
In February 2000, we entered into an Amended and Restated Loan Agreement,
our "Credit Facility," for $10.0 million with Union Bank of California, which
expires in September 2002. The Credit Facility includes a non-usage fee of 1/8%
per year on the unused portion and borrowings will bear interest at LIBOR plus
150 basis points. At September 2002, any outstanding acquisition advances, as
defined by the Credit Facility, will be converted into a three year amortizing
term loan. The Credit Facility requires us to meet various financial covenants
with which we were in compliance as of June 30, 2000. There were no borrowings
outstanding at June 30, 2000 and June 30, 1999 and average daily borrowings
outstanding amounted to $20,000 in fiscal 2000. The Credit Facility provides
for a standby letter of credit sub-limit of $2.0 million, of which $218,000 was
issued and $1.8 million was available as of June 30, 2000.
37
Working capital amounted to $29.1 million as of June 30, 2000 and $19.1
million as of June 30, 1999 and the current ratios were 2.3:1 and 2.2:1,
respectively.
Cash flows provided by operating activities amounted to $23.6 million in
fiscal 2000 compared to $5.8 million in fiscal 1999. Cash used in operating
activities amounted to $3.4 million in 1998. The increase in cash provided by
operating activities in fiscal 2000 was due to increased earnings, reductions
in student receivables, increases in accounts payable, accrued expenses and
prepaid tuition. The increase in cash provided by operating activities in
fiscal 1999 was due to increases in student receivables and prepaid and other
current assets, partially offset by increases in accounts payable and increases
in accrued expenses, net income and prepaid tuition. Cash used in operating
activities of $3.4 million in fiscal 1998 was due to increases in accounts
receivable and student notes receivable, deferred income taxes and prepaid
tuition.
Cash flows used in investing activities amounted to $19.4 million in fiscal
2000, $16.1 million in fiscal 1999 and $1.7 million in fiscal 1998. The change
in cash flows used in investing activities is due primarily to the acquisition
of colleges, net of liabilities assumed, capital expenditures, net of proceeds
from asset dispositions, and from changes in restricted cash and in marketable
investments. During fiscal 2000, we completed the acquisition of substantially
all of the assets of five colleges in three separate transactions for a
combined purchase price of $8.3 million in cash, including $0.7 million of
liabilities assumed or paid. The amount paid in excess of the fair market value
of the assets acquired, net of liabilities assumed, was $7.9 million and was
allocated to goodwill and is being amortized over 40 years. The acquisitions
were accounted for using the purchase method of accounting and their respective
results of operations are included in our consolidated results of operations
since their respective acquisition dates.
Capital expenditures amounted to $4.2 million in fiscal 2000, $2.8 million
in fiscal 1999 and $1.9 million in fiscal 1998. Capital expenditures were
incurred to open two new branches in each of fiscal 2000 and 1999, for
purchases of equipment to accommodate the increasing student population and to
continue to upgrade existing schools and equipment. Capital expenditures were
also incurred to relocate, remodel and enlarge campuses. During fiscal 2000,
two campuses were relocated and one campus was remodeled. During fiscal 1999,
five campuses were relocated and one campus was remodeled and during fiscal
1998, six campuses were relocated and one campus was remodeled. In June 2000,
we sold one of our Colorado facilities and subsequently leased the facility
back at rents which approximate fair market rents. Net proceeds from the sale
were approximately $2.0 million and the gain on the sale of the facility was
approximately $1.0 million which will be amortized into income over the term of
the lease. We believe that our capital expenditures for fiscal 2001 will
approximate $6.0 million.
During fiscal 2000 and fiscal 1999, marketable securities increased by $9.6
million and $14.5 million, respectively.
Net cash used in financing activities amounted to $1.1 million in fiscal
2000. Net cash provided from financing activities amounted to $9.7 million in
fiscal 1999 and $4.6 million in fiscal 1998. During fiscal 2000, net cash used
in financing activities consisted primarily of payments on long-term debt.
During fiscal 1998, net cash provided by financing activities amounted to $4.6
million and consisted primarily of proceeds from the issuance of convertible
preferred stock, net of reductions in long-term debt. During fiscal 1999, net
cash provided by financing activities amounted to $9.7 million primarily from
the our initial public offering in February 1999.
Initial Public Stock Offering
In February 1999, we issued and sold 2,700,000 shares of common stock at a
price of $18.00 per share in our initial public offering, or "IPO." We received
total net proceeds, after deduction of underwriting discounts, of approximately
$45.2 million. After the IPO, we applied $1.9 million of the proceeds to the
expenses of the IPO, repaid $22.6 million of senior indebtedness, including a
prepayment penalty of $2.6 million, repaid $5.0 million of subordinated
indebtedness, repaid $3.0 million of outstanding credit facility borrowings,
redeemed $2.2 million in redeemable preferred stock, including accumulated
dividends, and paid accumulated
38
dividends of $0.5 million on convertible preferred stock. The remaining $10.0
million of proceeds were available for general corporate purposes. In
conjunction with the early retirement of debt in February 1999, we recorded a
$2.0 million extraordinary loss, net of tax benefit of $1.5 million, resulting
from prepayment penalties and the write-off of deferred loan fees associated
with the indebtedness. In February 1999, we received $187,312 from five of our
executive officers as full payment for notes receivable from these executive
officers, plus the accumulated interest on the notes.
We believe that our working capital, cash flow from operations, access to
operating leases and borrowings from our Credit Facility will provide us with
adequate resources for ongoing operations through fiscal 2001 and currently
identified expansion and planned capital expenditures.
Recent Developments
On September 4, 2000, we signed an agreement to acquire substantially all of
the assets of Educorp, Inc., a proprietary school company with four campuses in
the Los Angeles metropolitan area. As of the end of August 2000, Educorp had
approximately 1,375 students. The purchase price for Educorp's assets will be
approximately $12.0 million in cash. On September 10, 2000, we signed an
agreement to acquire substantially all of the assets of Computer Training
Academy, Inc., which includes two campuses in the San Jose, California area and
had approximately 500 students as of August 31, 2000. The purchase price for
Computer Training Academy's assets will be approximately $5.4 million in cash.
We expect to complete both of these transactions during the second quarter of
fiscal 2001, subject to the satisfaction of certain customary conditions to
closing and the receipt of regulatory approvals from the State of California,
although we can give no assurance that these transactions will be completed at
that time, or at all.
New Accounting Pronouncements
For fiscal 2000, we were required to adopt Statement of Position ("SOP") No.
98-1, "Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" and SOP No. 98-5, "Reporting on the Costs of Start-Up
Activities." The adoptions of SOP No 98-1, and SOP No. 98-5 did not have a
material impact on our presentation of financial position or results of
operations.
For fiscal 2001, we will be required to adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The adoption of SFAS No. 133 is
not expected to have a material adverse effect on our financial position or
results of operations.
Additionally, on or before June 30, 2001, we will be required to adopt Staff
Accounting Bulletin 101 ("SAB 101"). SAB 101 requires us to change our
accounting method of revenue recognition of certain one-time non-refundable
fees from immediate recognition, to amortizing the fees into revenues over the
period of active enrollment of the student. We have completed preliminary
calculations with respect to SAB 101 upon adoption and we anticipate a charge
to earnings of approximately $0.03 per diluted common share, which will be
accounted for as a cumulative effect from a change in accounting principal.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not utilize interest rate swaps, forward or option contracts on
foreign currencies or commodities, or other types of derivative financial
instruments. Our only assets or liabilities which are subject to risks from
interest rate changes are (i) mortgage debt in the aggregate amount of $2.3
million, (ii) notes receivable from students in the aggregate amount of $4.1
million, and (iii) marketable investments of $24.1 million, all as of June 30,
2000. Our mortgage debt, student notes receivable, and marketable investments
are all at fixed interest rates. We do not believe we are subject to material
risks from reasonably possible near-term changes in market interest rates.
39
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corinthian Colleges, Inc.:
We have audited the accompanying consolidated balance sheets of CORINTHIAN
COLLEGES, INC. (a Delaware corporation) and subsidiaries as of June 30, 1999
and 2000 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
2000. These consolidated 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. Those standards require that we plan and perform
the audits 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 financial position of Corinthian
Colleges, Inc. and subsidiaries, as of June 30, 1999 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 2000 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Orange County, California
August 17, 2000
40
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30,
---------------
1999 2000
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 1,787 $ 4,886
Restricted cash.............................................. 10 10
Marketable investments....................................... 14,501 24,107
Accounts receivable, net of allowance for doubtful accounts
of $3,258 and $4,363 at June 30, 1999 and 2000,
respectively................................................ 11,385 14,208
Student notes receivable, net of allowance for doubtful
accounts of $463 and $247 at June 30, 1999 and 2000,
respectively................................................ 1,959 919
Deferred income taxes........................................ 1,901 2,481
Prepaid expenses and other current assets.................... 4,037 4,125
------- -------
Total current assets....................................... 35,580 50,736
PROPERTY AND EQUIPMENT, net.................................... 10,981 12,141
OTHER ASSETS:
Intangibles, net of accumulated amortization of $3,110 and
$4,248 at June 30, 1999 and 2000, respectively.............. 21,218 27,946
Student notes receivable, net of allowance for doubtful
accounts of $1,435 and $934 at June 30, 1999 and 2000,
respectively................................................ 5,175 3,157
Deposits and other assets.................................... 903 1,253
------- -------
TOTAL ASSETS............................................... $73,857 $95,233
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................. $ 4,828 $ 5,521
Accrued compensation and related liabilities................. 5,749 7,722
Accrued expenses............................................. 652 1,310
Income tax payable........................................... 1,848 1,161
Prepaid tuition.............................................. 3,257 5,851
Current portion of long-term debt............................ 138 102
------- -------
Total current liabilities.................................. 16,472 21,667
LONG-TERM DEBT, net of current portion......................... 3,396 2,230
DEFERRED INCOME................................................ -- 808
DEFERRED INCOME TAXES.......................................... 453 935
OTHER LIABILITIES.............................................. -- 590
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $0.0001 par value:
Common Stock, 40,000 shares authorized, 9,169 shares and
9,172 shares issued and outstanding at June 30, 1999 and
2000, respectively.......................................... 1 1
Nonvoting Common Stock, 2,500 shares authorized, 1,177 shares
issued and outstanding at June 30, 1999 and 200............. -- --
Additional paid-in capital................................... 49,609 49,654
Retained earnings............................................ 3,926 19,348
------- -------
Total stockholders' equity................................. 53,536 69,003
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $73,857 $95,233
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
41
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended June 30,
----------------------------
1998 1999 2000
-------- -------- --------
NET REVENUES..................................... $106,486 $132,972 $170,734
-------- -------- --------
OPERATING EXPENSES:
Educational services (including a provision for
bad debt expense of $5,963, $7,673 and $8,760
for the years ended June 30, 1998, 1999 and
2000, respectively)........................... 65,927 76,425 92,757
General and administrative..................... 10,777 13,961 16,346
Marketing and advertising...................... 24,268 29,702 37,225
-------- -------- --------
Total operating expenses..................... 100,972 120,088 146,328
-------- -------- --------
Income from operations....................... 5,514 12,884 24,406
INTEREST EXPENSE (INCOME), net................... 3,305 1,678 (1,681)
OTHER (INCOME)................................... -- -- (175)
-------- -------- --------
Income before provision for income taxes and
extraordinary (loss)........................ 2,209 11,206 26,262
PROVISION FOR INCOME TAXES....................... 988 4,703 10,840
-------- -------- --------
INCOME BEFORE EXTRAORDINARY (LOSS)............... 1,221 6,503 15,422
EXTRAORDINARY (LOSS) FROM EARLY EXTINGUISHMENT OF
DEBT (net of tax benefit of $1,518)............. -- (2,011) --
-------- -------- --------
NET INCOME....................................... $ 1,221 $ 4,492 $ 15,422
======== ======== ========
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS:
Net income before extraordinary (loss)......... $ 1,221 $ 6,503 $ 15,422
Less preferred stock dividends................. (365) (355) --
-------- -------- --------
Income before extraordinary (loss)
attributable to common stockholders......... 856 6,148 15,422
Extraordinary (loss)........................... -- (2,011) --
-------- -------- --------
Net income attributable to common
stockholders................................ $ 856 $ 4,137 $ 15,422
======== ======== ========
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic
Income before extraordinary (loss)........... $ 0.16 $ 0.85 $ 1.49
Extraordinary (loss)......................... -- (0.28) --
-------- -------- --------
Net income................................. $ 0.16 $ 0.57 $ 1.49
======== ======== ========
Diluted
Income before extraordinary (loss)........... $ 0.12 $ 0.72 $ 1.48
Extraordinary (loss)......................... -- (0.24) --
-------- -------- --------
Net income................................. $ 0.12 $ 0.48 $ 1.48
======== ======== ========
Weighted average number of common shares
outstanding:
Basic.......................................... 5,236 7,266 10,347
======== ======== ========
Diluted........................................ 7,125 8,549 10,425
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
42
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Nonvoting
Common Stock Common Stock Retained
------------ ------------- Additional Earnings Total
Par Par Paid-in Notes (Accumulated Stockholders'
Shares Value Shares Value Capital Receivable Deficit) Equity
------ ----- ------ ----- ---------- ---------- ------------ -------------
Balance at June 30,
1997................... 4,924 $ 1 1,415 $ -- $ 1,374 $(187) $(1,067) $ 121
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (125) (125)
Convertible Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (240) (240)
Net income............ -- -- -- -- -- -- 1,221 1,221
----- --- ----- ---- ------- ----- ------- -------
Balance at June 30,
1998................... 4,924 1 1,415 -- 1,374 (187) (211) 977
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (85) (85)
Convertible Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (270) (270)
Conversion of
Convertible Preferred
Stock to Common Stock
and Nonvoting Common
Stock................ 388 -- 388 -- 4,934 -- -- 4,934
Conversion of
Nonvoting Common
Stock to Common
Stock................ 827 -- (827) -- -- -- -- --
Exercise of warrants
for Common Stock and
Nonvoting Common
Stock................ 330 -- 201 -- -- -- -- --
Issuance of Common
Stock from initial
public offering...... 2,700 -- -- -- 43,301 -- -- 43,301
Proceeds from notes
receivable for
stock................ -- -- -- -- -- 187 -- 187
Net income............ -- -- -- -- -- -- 4,492 4,492
----- --- ----- ---- ------- ----- ------- -------
Balance at June 30,
1999................... 9,169 1 1,177 -- 49,609 -- 3,926 53,536
Exercise of Stock
Options.............. 3 -- -- -- 45 -- -- 45
Net income............ -- -- -- -- -- -- 15,422 15,422
----- --- ----- ---- ------- ----- ------- -------
Balance at June 30,
2000................... 9,172 $ 1 1,177 $ -- $49,654 $ -- $19,348 $69,003
===== === ===== ==== ======= ===== ======= =======
The accompanying notes are an integral part of these consolidated statements.
43
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended June 30,
---------------------------
1998 1999 2000
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 1,221 $ 4,492 $ 15,422
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization.................. 3,051 3,445 3,798
Deferred income taxes.......................... (1,083) 827 (98)
Write-off of deferred financing costs.......... -- 911 --
(Gain) on disposal of assets................... -- -- (175)
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable.......................... (820) (1,308) (2,192)
Student notes receivable..................... (3,966) (950) 3,058
Income tax refund receivable................. 195 -- --
Prepaid expenses and other assets............ (2,184) (2,660) (397)
Accounts payable............................. (420) 101 463
Accrued expenses............................. 1,207 522 2,068
Income tax payable........................... 1,739 109 (687)
Prepaid tuition.............................. (2,313) 305 1,732
Other long-term liabilities.................. -- -- 590
------- -------- --------
Net cash provided by (used in) operating
activities.................................... (3,373) 5,794 23,582
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of schools and colleges, net of
cash acquired................................... -- -- (7,588)
Change in restricted cash........................ 250 750 --
Capital expenditures............................. (1,926) (2,790) (4,182)
Proceeds from sale of assets..................... -- -- 2,014
Phillips College acquisition purchase price
adjustment...................................... -- 401 --
Increase in marketable investments............... -- (14,501) (9,606)
------- -------- --------
Net cash used in investing activities.......... (1,676) (16,140) (19,362)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of convertible preferred
stock........................................... 4,934 -- --
Increase in deferred financing costs............. (182) (256) --
Borrowings under long-term debt.................. 3,000 3,200 --
Principal repayments on long-term debt........... (3,122) (35,835) (1,166)
Proceeds from initial public offering............ -- 45,198 --
Payment of redeemable preferred stock and
accrued dividends............................... -- (2,253) --
Payment of convertible preferred stock
dividends....................................... -- (510) --
Exercise of stock options........................ -- -- 45
Proceeds from notes receivable for stock......... -- 187 --
------- -------- --------
Net cash provided by (used in) financing
activities.................................... 4,630 9,731 (1,121)
------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... (419) (615) 3,099
CASH AND CASH EQUIVALENTS, beginning of year...... 2,821 2,402 1,787
------- -------- --------
CASH AND CASH EQUIVALENTS, end of year............ $ 2,402 $ 1,787 $ 4,886
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes................................... $ 334 $ 2,666 $ 11,526
======= ======== ========
Interest....................................... $ 3,192 $ 3,673 $ 392
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividend accrual................. $ 365 $ 355 $ --
======= ======== ========
Acquisitions of various schools and colleges--
Fair value of assets acquired.................. $ -- $ -- $ 9,051
Net cash used in acquisitions.................. -- -- 7,588
======= ======== ========
Liabilities assumed or incurred.............. $ -- $ -- $ 1,463
======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
44
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of the Business
Corinthian Colleges, Inc. (the "Company"), a Delaware corporation, was
formed in October 1996 during a reorganization transaction with a predecessor
company which was accounted for as a recapitalization. Prior to October 1996,
the Company operated under the name of its predecessor, Corinthian Schools,
Inc.
The Company's primary business is the operation of band diploma-granting
private, for-profit, post-secondary schools devoted to career program training
primarily in the medical, technical and business fields. The Company currently
operates 45 colleges located in 18 states: Virginia, West Virginia, Texas,
Michigan, Massachusetts, Louisiana, California, Oregon, Colorado, Nevada, Utah,
Missouri, Pennsylvania, New York, Washington, Arizona, Georgia and Florida.
Revenues generated from these schools consist primarily of tuition and fees
paid by students. To pay for a substantial portion of their tuition, the
majority of students rely on funds received from federal financial aid programs
under Title IV ("Title IV Programs") of the Higher Education Act of 1965, as
amended ("HEA"). For further discussion see Concentration of Risk below and
Note 12--Governmental Regulation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Corinthian Colleges, Inc. and each of its wholly owned subsidiaries. All
intercompany activity has been eliminated in consolidation.
Financial Statement Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States requires management to make
estimates and assumptions. Such estimates and assumptions 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 reported period. Actual results could differ
from estimated amounts.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Marketable Investments
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
For Certain Debt and Equity Securities" requires that all applicable
investments be classified as trading securities, available-for-sale securities
or held-to-maturity securities. The Company does not currently have any trading
securities or held-to-maturity securities.
Securities classified as available-for-sale may be sold in response to
changes in interest rates, liquidity needs and for other purposes. Available-
for-sale securities are carried at fair value and include all debt and equity
securities not classified as held-to-maturity or trading. Unrealized holding
gains and losses for available-for-sale securities are excluded from earnings
and reported, net of any income tax effect, as a separate component of
stockholders' equity. Realized gains and losses for securities classified as
available-for-sale are reported in earnings based on the adjusted cost of the
specific security sold. At June 30, 1999 and 2000, the unrealized loss on
available-for-sale securities was immaterial.
45
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Cash
Restricted cash consists of $10,000 as required by the State of
Pennsylvania Department of Education.
Revenue Recognition
Revenues consist primarily of tuition derived from courses taught in the
Company's career colleges. Tuition revenues are recognized on a straight-line
basis over the term of the applicable course. If a student withdraws from a
course or program, the paid but unearned portion of the student tuition is
refunded. Textbook sales and other revenues are recognized as sales occur or
services are performed and represent less than 10% of total revenues. Prepaid
tuition is the portion of payments received but not earned and is reflected as
a current liability in the accompanying consolidated balance sheets as such
amount is expected to be earned within the next year.
Educational Services
Educational services include direct operating expenses of the schools
consisting primarily of payroll and payroll related, occupancy and supplies
costs, as well as amortization of goodwill.
Marketing and Advertising
Marketing and advertising consists primarily of payroll and payroll
related, direct-response and other advertising, promotional materials and
other related marketing costs. All marketing and advertising costs are
expensed as incurred.
Property and Equipment
Property and equipment are stated at cost and are being depreciated or
amortized utilizing the straight-line method over the following estimated
useful lives:
Furniture and equipment.................. 7 years
Computer hardware and software........... 3-5 years
Leasehold improvements................... Shorter of 7 years or term of lease
Buildings................................ 39 years
Deferred Financing Costs
Costs incurred in connection with obtaining financing are capitalized and
amortized over the maturity period of the debt and are included in deposits
and other assets in the accompanying consolidated balance sheets.
Intangible Assets
Intangible assets consist of goodwill, trade names and course curriculum.
Goodwill represents the excess of cost over the fair market value of net
assets acquired, including identified intangible assets. Goodwill is amortized
using the straight-line method over 40 years. Course curriculum represents the
cost of acquiring such curriculum and is amortized using the straight-line
method over 15 years. Trade names represent the cost to acquire and use the
names of the colleges acquired and are amortized using the straight line
method over 40 years. Amortization of curriculum and trade names is included
in general and administrative expenses in the accompanying consolidated
statements of operations. Management evaluates the realizability of
intangibles periodically as events or circumstances indicate a possible
inability to recover the carrying amount. If such events or changes in
circumstances occur, the Company will recognize an impairment loss if the
undiscounted
46
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
future cash flows expected to be generated by the asset (or acquired business)
are less than the carrying value of the related asset. The impairment loss
would adjust the asset to its fair value.
Deferred Income
The Company sold one of its Colorado facilities and subsequently leased the
facility back at rents which we believe approximate fair market rents. The gain
on the sale of the facility was approximately $1.0 million and will be
amortized into income over the term of the lease.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, restricted cash, marketable
investments, receivables and accounts payable approximates the fair value. In
addition, the carrying value of all borrowings approximate fair value based on
interest rates currently available to the Company.
Post Retirement Benefit Obligation
The Company has elected to provide certain post retirement benefits to
certain key employees. Accordingly, the Company has adopted SFAS No. 106
"Accounting For Postretirement Benefits Other Than Pensions". The adoption of
SFAS No. 106 did not have a material effect on the Company's consolidated
financial position or results of operations.
Income Taxes
The Company accounts for income taxes as prescribed by SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 prescribes the use of the asset and
liability method to compute the differences between the tax basis of assets and
liabilities and the related financial amounts, using currently enacted tax
laws. Valuation allowances are established, when necessary, to reduce deferred
tax assets to the amount that more likely than not will be realized.
Stock-Based Compensation
In accordance with SFAS No. 123 "Accounting for Stock-Based Compensation,"
the Company accounts for stock option grants in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and has adopted the "disclosure only" alternative allowed under
SFAS No. 123.
Net Income (Loss) Per Common Share
The Company accounts for net income per common share in accordance with SFAS
No. 128 "Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." Basic net income (loss) per common share is computed by
dividing income (loss) available to common stockholders by the weighted average
number of common shares outstanding. Diluted net income (loss) per common share
is computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding plus the effect of any
dilutive stock options, common stock warrants and convertible preferred stock,
utilizing the treasury stock method.
New Accounting Pronouncements
For fiscal 2000, the Company adopted Statement of Position ("SOP") No. 98-1,
"Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use" and SOP No. 98-5, "Reporting on the Costs of
47
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Start-Up Activities." The adoptions of SOP No. 98-1 and SOP 98-5 did not have a
material impact on the Company's results of operations.
For fiscal 2001, the Company will be required to adopt SFAS No. 133,
"Accounting for Derivative Investments and Hedging Activities." The adoption of
SFAS No. 133 is not expected to have a material impact on the Company's
financial position or results of operations.
Additionally, on or before June 30, 2001, we will be required to adopt Staff
Accounting Bulletin 101 ("SAB 101"). SAB 101 requires us to change our
accounting method of revenue recognition of certain one-time non-refundable
fees from immediate recognition, to amortizing the fees into revenues over the
period of active enrollment of the student. We have completed preliminary
calculations with respect to SAB 101 upon adoption and we anticipate a charge
to earnings of approximately $0.03 per diluted common share, which will be
accounted for as a cumulative effect from a change in accounting principal.
Concentration of Risk
The Company extends credit for tuition to a majority of the students. A
substantial portion is repaid through the student's participation in federally
funded financial aid programs. Transfers of funds from the financial aid
programs to the Company are made in accordance with the DOE requirements.
Approximately 72%, 78% and 77% of the Company's revenues, on a cash basis, were
collected from funds distributed under Title IV Programs of the HEA for the
years ended June 30, 1998, 1999 and 2000 respectively. The financial aid and
assistance programs are subject to political and budgetary considerations.
There is no assurance that such funding will be maintained at current levels.
Extensive and complex regulations in the U.S. govern all the government
financial assistance programs in which the Company's students participate. The
Company's administration of these programs is periodically reviewed by various
regulatory agencies. Any regulatory violation could be the basis for the
initiation of a suspension, limitation or termination proceeding which could
have a material adverse effect to the Company.
The Company has routinely afforded relatively short-term installment payment
plans to many of its students to supplement their federally funded financial
aid. During fiscal 1998, the Company expanded the internal loan program to
assist students in those colleges that lost access to Federal Family Education
Loans ("FFEL") (see Note 12). During fiscal 1999, various schools that had lost
access to FFEL were reinstated. Accordingly, there were fewer internal loans
granted during fiscal 1999 as compared to fiscal 1998. During fiscal 2000, the
Company continued to reduce its reliance on the issuance of internal loans.
While these loans are unsecured, the Company believes it has adequate reserves
against these loan balances. However, there can be no assurance that losses
will not exceed reserves. Losses in excess of reserves could have a material
adverse effect on the Company's business.
NOTE 2--INITIAL PUBLIC OFFERING
On February 10, 1999, the Company completed an initial public offering
("IPO") of Common Stock. Prior to the IPO, on February 3, 1999 the Company
filed with the Delaware Secretary of State its Restated Certificate of
Incorporation, which was thereby amended to provide for, among other things,
(i) an increase in the authorized capital stock of the Company to 43,000,000
shares, (ii) a 44.094522 for 1 split of all shares of the Common Stock and
Nonvoting Common Stock, and (iii) a change in par value for the Common Stock
and Nonvoting Common Stock to $0.0001 per share. All share and per share
amounts shown in the accompanying consolidated financial statements have been
retroactively adjusted to reflect this increase in authorized shares, stock
split and change in par value.
48
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In connection with the IPO, the Company also caused the conversion of all
existing Series 2 Convertible Preferred Stock into 388,334 shares of Nonvoting
Common Stock and all existing Series 3 Convertible Preferred Stock into 388,334
shares of Common Stock. The holders of 826,773 shares of Nonvoting Common Stock
exercised their contractual rights to exchange all such shares of Nonvoting
Common Stock for an equal number of shares of Common Stock. The holders of all
outstanding exercisable warrants to purchase Common Stock and Nonvoting Common
Stock exercised such warrants for an aggregate of 330,362 shares of Common
Stock and 200,005 shares of Nonvoting Common Stock. Concurrent with the IPO,
the Company granted an option to purchase 6,000 shares of Common Stock at
$18.00 to each of its four directors who are not employees of the Company. The
options will vest at the rate of 50 percent on each of the first and second
anniversaries of the grant date.
In the IPO, the Company issued and sold 2,700,000 shares of Common Stock at
a price of $18.00 per share. The Company received total net proceeds, after
deduction of underwriting discounts, of approximately $45.2 million. Subsequent
to the IPO, the Company applied $1.9 million of the proceeds to the expenses of
the IPO, repaid $22.6 million of senior indebtedness, including a prepayment
penalty of $2.6 million, repaid $5.0 million of subordinated indebtedness,
repaid $3.0 million of outstanding credit facility borrowings, redeemed
$2.2 million in redeemable preferred stock including accumulated dividends
thereon, and paid accumulated dividends of $0.5 million on convertible
preferred stock. The remaining $10.0 million of proceeds were available for
general corporate purposes.
NOTE 3--DETAIL OF SELECTED BALANCE SHEET ACCOUNTS
Prepaid expenses and other current assets consist of the following:
June 30,
----------------
1999 2000
------- -------
(In thousands)
Course materials, net..................................... $ 1,288 $ 1,460
Prepaids.................................................. 2,549 2,492
Other current assets...................................... 200 173
------- -------
$ 4,037 $ 4,125
======= =======
Property and equipment consist of the following:
June 30,
----------------
1999 2000
------- -------
(In thousands)
Furniture and equipment................................... $ 8,231 $10,417
Computer hardware and software............................ 3,504 4,146
Leasehold improvements.................................... 1,453 3,231
Land...................................................... 2,249 1,687
Buildings................................................. 1,178 884
------- -------
16,615 20,365
Less--accumulated depreciation and amortization........... (5,634) (8,224)
------- -------
$10,981 $12,141
======= =======
Depreciation and amortization expense associated with property and equipment
was $1,778,000, $2,141,000, $2,640,000 for the years ended June 30, 1998, 1999
and 2000, respectively.
49
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible assets consist of the following:
June 30,
-----------------
1999 2000
-------- -------
(In thousands)
Goodwill.................................................. $ 7,884 $15,750
Curriculum................................................ 11,405 11,405
Trade names............................................... 5,039 5,039
-------- -------
24,328 32,194
Less--accumulated amortization............................ (3,110) (4,248)
-------- -------
$ 21,218 $27,946
======== =======
Amortization expense associated with intangibles was $1,120,000, $1,100,000
and $1,138,000 for the years ended June 30, 1998, 1999, and 2000, respectively.
NOTE 4--STUDENT NOTES RECEIVABLE
Student notes receivable represent loans which have maturity dates of 6
months to 84 months from the loan origination date. The interest charged on the
notes ranges from 8.25 to 18.00 percent per annum.
The following reflects on analysis of student notes receivable at June 30,
2000:
Net Allowance Gross
Student for Student
Notes Doubtful Notes
Receivable Accounts Receivable
---------- --------- ----------
(In thousands)
Current...................................... $ 919 $247 $1,166
Long-term.................................... 3,157 934 4,091
Add-unearned portion......................... 634
Add-unrecorded interest...................... 1,854
------
Total........................................ $7,745
======
Payments due under student notes receivable are as follows:
Years Ending June 30,
---------------------
(In thousands)
2001................................................... $2,421
2002................................................... 1,829
2003................................................... 1,677
2004................................................... 974
2005................................................... 462
Thereafter............................................. 382
------
Total.................................................. $7,745
======
NOTE 5--BUSINESS ACQUISITIONS
In the first quarter of fiscal 1997, the Company entered into asset purchase
agreements with Repose, Inc. and Concorde Career Colleges, Inc. to purchase
certain assets and assume certain liabilities of the Bryman Colleges, in
50
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Bellevue, Washington and San Jose, California for $600,000 in cash. The
colleges currently offer career training in the medical and technical fields.
Subsequent to the acquisition, the Bellevue location moved to Sea Tac,
Washington.
In the second quarter of fiscal 1997, the Company entered into an asset
purchase agreement with Phillips Colleges, Inc. ("Phillips") to purchase
certain assets and assume certain liabilities of 18 colleges currently
operating under the names of Rhodes Colleges, Inc., and Florida Metropolitan
University, Inc., for $6.0 million in cash. Additionally, the Company entered
into a separate transaction with Phillips to purchase certain curriculum and
trade names. The cost to purchase the curriculum, trade names and other
intangibles was approximately $17.6 million.
During fiscal year ended June 30, 2000 the Company completed the acquisition
of substantially all of the assets of five colleges in three separate
transactions for a combined purchase price of $8.3 million before working
capital adjustments and liabilities assumed. The amount paid in excess of the
fair market value of the assets acquired, net of liabilities assumed was $7.9
million and was allocated to goodwill and is being amortized over 40 years. The
acquisitions were accounted for using the purchase method of accounting and
their respective results of operations are included in the consolidated results
of operations of the Company since their respective acquisition dates.
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
----------------
1999 2000
------- -------
(In thousands)
Promissory note due April 2007, with interest at 10.95%
per annum, secured by certain land and improvements...... $ 3,528 $ 2,332
Other..................................................... 6 --
------- -------
3,534 2,332
Less--current portion..................................... (138) (102)
------- -------
$3,396 $ 2,230
======= =======
During 2000, the Company entered into a $10.0 million credit facility with
Union Bank of California (the "Credit Facility"). The Credit Facility expires
in September 2002 and is unsecured, bears interest at LIBOR plus 150 basis
points, and includes a non-usage fee of 1/8% per year on the unused portion.
Under the Credit Facility, the Company will be required to maintain certain
financial and other covenants and the Company was in compliance with these
covenants as of June 30, 2000. At June 30, 2000, there were no outstanding
borrowings under the Credit Facility.
Principal payments due under the long-term debt arrangements discussed above
are as follows:
Years Ending
June 30,
--------------
(In thousands)
2001.......................................................... $ 102
2002.......................................................... 114
2003.......................................................... 127
2004.......................................................... 141
2005.......................................................... 158
Thereafter.................................................... 1,690
------
$2,332
======
51
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 7--PREFERRED STOCK AND COMMON STOCKHOLDERS' EQUITY
The Company is authorized to issue 500,000 shares of preferred stock.
Preferred stock outstanding at June 30, 1998 consisted of Series 1 Preferred
Stock, $1.00 par value ("Redeemable Preferred Stock"), Series 2 Preferred
Stock, $1.00 par value ("Series 2 Convertible Preferred Stock") and Series 3
Preferred Stock, $1.00 par value ("Series 3 Convertible Preferred Stock"). As
of June 30, 2000, there were no outstanding Shares of Preferred Stock.
Redeemable Preferred Stock
There were no issued and outstanding shares of Redeemable Preferred Stock at
June 30, 2000. The Company redeemed the Redeemable Preferred Stock including
accumulated dividends thereon in connection with the IPO in February 1999.
Convertible Preferred Stock
There are no outstanding shares of Series 2 and Series 3 Convertible
Preferred Stock. All outstanding shares of the Series 2 and Series 3
Convertible Preferred Stock were converted into Nonvoting Common Stock and
Common Stock, respectively, in connection with the IPO in February 1999.
Common Stock
Class A common stock (referred to herein as the "Common Stock") is entitled
to one vote per share on all matters. Class B common stock (referred to herein
as the "Nonvoting Common Stock") has no voting rights, except the Nonvoting
Common Stock together with Common Stock, as one class, has the right to vote on
(i) any merger or consolidation of the Company with or into another company,
(ii) any sale of all or substantially all of the Company's assets and (iii) any
amendment to the Company's Certificate of Incorporation.
In connection with 2,204,726 shares of Common Stock issued on June 30, 1995,
the Company entered into various Executive Stock Agreements (the "Agreements"),
as amended, with each of its principal executives. Under the terms of these
Agreements, the shares of Common Stock acquired by the executives vested
concurrent with the Company's IPO in February 1999 (See Note 2).
On June 30, 1995, the Company also sold 826,773 shares of Nonvoting Common
Stock at $0.2268 per share to certain executives. Concurrent with the Company's
IPO, and, pursuant to contractual obligations of the Company to the executives,
the Nonvoting Common Stock was exchanged for an equal number of shares of
Common Stock (See Note 2).
Warrants
The following represents a summary of the warrant activity:
Years Ended June 30,
---------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Wt. Wt. Wt.
Average Average Average
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
(In thousands, except Wt. Average Ex. Price)
Outstanding, beginning
of the year............ 525 $0.0005 968 $ 0.0004 -- $ --
Granted................. 443 0.0002 -- -- -- --
Exercised............... -- -- (530) (0.0002) -- --
Forfeited/expired....... -- -- (438) (0.0005) -- --
--- ------- ---- -------- --- ----
Outstanding, end of the
year................... 968 $0.0004 -- $ -- -- $ --
=== ======= ==== ======== === ====
52
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The warrants granted during fiscal 1997 were issued to lenders in
conjunction with loans made to the Company. No amount was allocated to these
warrants because management believes the effect would not be material to the
consolidated results of operations. In November 1997, in connection with the
amended Senior Credit Agreement, the lenders received additional warrants
equivalent to two percent of the Company on a fully diluted basis, exercisable
at $0.0002 per share. These warrants were subject to forfeiture by the lenders
if the Company attained certain performance criteria, as defined. In connection
with the IPO, 330,362 warrants were exercised into Common Stock and 200,005
warrants were exercised into Nonvoting Common Stock during fiscal 1999. The
remaining outstanding warrants were forfeited.
Stock Options
On April 28, 1998, the Board of Directors adopted the 1998 Performance Award
Plan (the "Plan"). Under the Plan, 529,134 options, stock appreciation rights
or other common stock based securities may be granted to directors, officers,
employees and other eligible persons. As of June 30, 2000, approximately
153,593 shares were available for granting. Options granted under the Plan were
issued at exercise prices ranging from $12.47-$23.875 per share and have
expiration dates not longer than 10 years. Options granted generally vest over
a period of two to five years.
A summary of the status of the Company's stock option plan is presented
below:
Weighted-
Average
Exercise
Shares Price
------- ---------
Outstanding at June 30, 1997.............................. -- $ --
Stock options granted during the year..................... 121,039 12.47
Stock options exercised................................... -- --
Forfeitures............................................... -- --
------- ------
Outstanding at June 30, 1998.............................. 121,039 12.47
Stock options granted during the year..................... 24,000 18.00
Stock options exercised................................... -- --
Forfeitures............................................... (2,473) 12.47
------- ------
Outstanding at June 30, 1999.............................. 142,566 13.42
Stock options granted during the year..................... 239,640 16.83
Stock options exercised................................... (3,612) 12.47
Forfeitures............................................... (6,665) 14.32
------- ------
Outstanding at June 30, 2000.............................. 371,929 $15.60
======= ======
53
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
and exercisable at June 30, 2000.
Options Outstanding Options Exercisable
----------------------------------- --------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Exercise Outstanding Remaining Outstanding Exercisable Exercise
Prices at 6/30/00 Life Price at 6/30/00 Price
-------- ----------- --------- ----------- ----------- ---------
$12.47 111,789 8.0 $12.47 54,197 $12.47
16.00 166,500 9.2 16.00 -- --
17.00 39,640 9.6 17.00 -- --
18.00 24,000 8.6 18.00 12,000 18.00
20.00 20,000 9.8 20.00 -- --
$23.88 10,000 9.5 23.88 -- --
------- --- ------ ------ ------
371,929 $15.60 66,197 $13.47
======= ====== ====== ======
There were no stock options exercisable at June 30, 1998 and June 30, 1999.
Pursuant to SFAS No. 123, the weighted average fair value of stock options
granted during fiscal 1998, 1999 and 2000 was $4.01, $11.16 and $11.64,
respectively. As discussed in Note 1, the Company elected the "disclosure
alternative" allowed under SFAS No. 123. Accordingly, the Company is required
to disclose pro forma net income over the vesting period of the options. As the
initial 121,039 stock options were granted on the last day of the 1998 fiscal
year, the pro forma effect for 1998 is immaterial.
The following is the pro forma effect for fiscal 1999 and 2000:
Fiscal Years
----------------------
1999 2000
---------- -----------
(In thousands, except
per share data)
Net income:
As reported......................................... $4,492 $15,422
Pro forma........................................... $4,315 $14,589
Diluted earnings per share:
As reported......................................... $0.48 $1.48
Pro forma........................................... $0.46 $1.40
For pro forma disclosure, the fair value of compensatory stock options,
stock appreciation rights and other common stock based securities was estimated
using the Black-Scholes option pricing model using the following weighted
average assumptions:
1998 1999 2000
------- ------- -------
Risk-free rate....................................... 5.54% 6.00% 6.75%
Expected years until exercise........................ 7 years 7 years 7 years
Expected stock volatility............................ 0% 54% 64%
Expected dividends................................... $ -- $ -- $ --
54
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
The table below indicates the weighted average number of common share
calculations used in computing basic and diluted net income (loss) per common
share utilizing the treasury stock method:
June 30,
------------------
1998 1999 2000
----- ----- ------
(In thousands)
Basic common shares outstanding........................... 5,236 7,266 10,347
Effects of dilutive securities:
Warrants................................................ 787 584 --
Non-vested executive Common Stock....................... 275 166 --
Non-vested executive Nonvoting Common Stock............. 827 498 --
Stock options........................................... -- 35 78
----- ----- ------
Diluted common shares outstanding......................... 7,125 8,549 10,425
===== ===== ======
The computation of diluted net income per common share for the year ended
June 30, 1998 did not assume the conversion of the Convertible Preferred Stock
as it would have been antidilutive.
NOTE 9--INCOME TAXES
The components of the income tax provision (benefit) are as follows:
Years Ended June 30,
-----------------------
1998 1999 2000
------- ------ -------
(In thousands)
Current provision:
Federal........................................... $ 1,562 $3,178 $ 8,843
State............................................. 510 698 2,095
------- ------ -------
2,072 3,876 10,938
======= ====== =======
Deferred provision:
Federal........................................... (857) 615 (221)
State............................................. (227) 212 123
------- ------ -------
(1,084) 827 (98)
======= ====== =======
Total provision for income taxes................ $ 988 $4,703 $10,840
======= ====== =======
Actual income tax provision (benefit) differs from the income tax provision
(benefit) computed by applying the U.S. federal statutory tax rate of 34% for
fiscal 1998 and 1999 and 35% for fiscal 2000 to income (loss) before provision
for income taxes as follows:
Years Ended June 30,
---------------------
1998 1999 2000
------ ------ -------
(In thousands)
Provision at the statutory rate....................... $ 751 $3,810 $ 9,192
State income tax provision, net of federal benefit.... 187 822 1,441
Other................................................. 50 71 207
------ ------ -------
$ 988 $4,703 $10,840
====== ====== =======
55
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of the Company's deferred tax asset and liability are as
follows:
June 30,
----------------
1999 2000
------- -------
(In thousands)
Current deferred tax asset:
Accounts receivable allowance for doubtful accounts...... $ 1,108 $ 1,286
Accrued vacation......................................... 429 533
State taxes.............................................. 364 662
------- -------
Current deferred tax asset............................. 1,901 2,481
======= =======
Non-current deferred tax asset (liability):
Notes receivable allowance for doubtful accounts......... 490 301
Depreciation............................................. (354) (384)
Amortization............................................. (589) (852)
------- -------
Non-current deferred tax liability..................... (453) (935)
------- -------
$1,448 $ 1,546
======= =======
NOTE 10--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases most of its operating facilities and various equipment
under non-cancellable operating leases expiring at various dates through 2017.
The facilities leases require the Company to pay various operating expenses of
the facilities in addition to base monthly lease payments.
Future minimum lease payments under operating leases are as follows:
Years Ending
June 30,
--------------
(In thousands)
2001.......................................................... $ 14,020
2002.......................................................... 12,301
2003.......................................................... 9,625
2004.......................................................... 7,520
2005.......................................................... 7,242
Thereafter.................................................... 19,510
--------
$ 70,218
========
Rent expense for the years ended June 30, 1998, 1999 and 2000 amounted to
$9,078,000, $10,126,000, and $12,441,000, respectively, and is reflected in
educational services and general and administrative expense in the accompanying
consolidated statements of operations.
Legal Matters
The Company is involved in various legal proceedings which have been routine
and in the normal course of business. In the opinion of management, after
consultation with legal counsel, the resolution of these matters will not have
a material adverse impact on the Company's financial position or results of
operations.
56
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 11--EMPLOYEE SAVINGS PLAN
The Company has established an employee savings plan under Section 401(k) of
the Internal Revenue Code. All employees with at least one year and 1,000 hours
of employment are eligible to participate. Contributions to the plan by the
Company are discretionary. The plan provides for vesting of Company
contributions over a five-year period. Employees previously employed by each of
the sellers shall vest in the plan based on total service time. Company
contributions to the plan were $293,000, $333,000 and $498,000 for the years
ended June 30, 1998, 1999 and 2000, respectively.
NOTE 12--GOVERNMENTAL REGULATION
The Company and each school are subject to extensive regulation by federal
and state governmental agencies and accrediting bodies. In particular, the
Higher Education Act ("HEA"), and the regulations promulgated thereunder by DOE
subject the schools to significant regulatory scrutiny on the basis of numerous
standards that schools must satisfy in order to participate in the various
federal student financial assistance programs under Title IV of the HEA ("Title
IV Programs").
To participate in the Title IV Programs, an institution must be authorized
to offer its programs of instruction by the relevant agencies of the state in
which it is located, accredited by an accrediting agency recognized by the DOE
and certified as eligible by the DOE. The DOE will certify an institution to
participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the DOE's extensive regulations
regarding institutional eligibility. An institution must also demonstrate its
compliance to the DOE on an ongoing basis. As of June 30, 2000, management
believes all of the Company's schools meet these requirements.
Political and budgetary concerns significantly affect the Title IV Programs.
Congress must reauthorize the HEA approximately every six years. The most
recent reauthorization in October 1998 reauthorized the HEA for an additional
five years (the "1998 HEA Reauthorization"). Congress reauthorized all of the
Title IV Programs in which the schools participate, generally in the same form
and at funding levels no less than for the prior year. Changes made by the 1998
HEA Reauthorization include (i) expanding the adverse effects on schools with
high student loan default rates, (ii) increasing from 85% to 90% the portion a
proprietary school's cash basis revenues that may be derived each year from the
Title IV Programs, (iii) revising the refund standards that require an
institution to return a portion of the Title IV Program funds for students who
withdraw from school and (iv) giving the DOE flexibility to continue an
institution's Title IV participation without interruption in some circumstances
following a change of ownership or control.
A significant component of Congress' initiative to reduce abuse in the Title
IV Programs has been the imposition of limitations on institutions whose former
students default on the repayment of their federally guaranteed or funded
student loans above specific rates (cohort default rate). An institution whose
cohort default rates equal or exceed 25% for three consecutive years will no
longer be eligible to participate in the FFEL or FDL programs. An institution
whose cohort default rate ("CDR") under certain Title IV programs for any
federal fiscal year exceeds 40% may have its eligibility to participate in all
of the Title IV Programs limited, suspended or terminated by the DOE.
All institutions participating in the Title IV Programs must satisfy
specific standards of financial responsibility. The DOE evaluates institutions
for compliance with these standards each year, based on the institution's
annual audited financial statements and following a change of ownership of the
institution.
Under new regulations which took effect July 1, 1998, the DOE calculates the
institution's composite score for financial responsibility based on its (i)
equity ratio, which measures the institution's capital resources, ability
57
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to borrow and financial viability; (ii) primary reserve ratio, which measures
the institution's ability to support current operations from expendable
resources; and (iii) net income ratio, which measures the institution's ability
to operate at a profit. An institution that does not meet the DOE's minimum
composite score may demonstrate its financial responsibility by posting a
letter of credit in favor of the DOE in an amount equal to at least 50% of the
Title IV Program funds received by the institution during its prior fiscal year
and possibly accepting other conditions on its participation in the Title IV
Programs. At June 30, 2000, all of the Company's schools and the Company on a
consolidated basis satisfied each of the DOE's standards of financial
responsibility.
As of June 30, 1999, all schools except for four (NIT in Wyoming, Michigan;
Bryman College in New Orleans, Louisiana; Bryman College (South) in San Jose,
California; and Skadron College in San Bernardino, California) were eligible to
receive federal funding, including loan funds. These schools were ineligible
for federal loan funds as they exceeded the CDR threshold. NIT in Wyoming,
Michigan was reinstated in calendar 1999 and Bryman College in New Orleans,
Louisiana, Bryman College (South) in San Jose, California and Skadron College
in San Bernardino, California will be eligible for reinstatement in calendar
2000.
Because the Company operates in a highly regulated industry, it, like other
industry participants, may be subject from time to time to investigations,
claims of non-compliance, or lawsuits by governmental agencies or third parties
which allege statutory violations, regulatory infractions or common law causes
of action. In October 1998, the Inspector General's Office (IG) of the DOE
began an examination of the Company's compliance with the 85/15 rule and to
review in general the Company's administration of Title IV funds. This
examination was part of a broader review conducted by the IG of proprietary
institutions' compliance with these requirements. The Company provided all
information and documentation requested by the IG. During fiscal 2000, the
Company received the final audit report from the DOE. There were no actions
taken against the Company as a result of the examination. However, there can be
no assurance that other regulatory agencies or third parties will not undertake
investigations or make claims against the Company, or that such claims, if
made, will not have a material adverse effect on the Company's business,
results of operations or financial condition.
58
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13--QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
Fiscal Quarters
-------------------------------- Fiscal
First Second Third Fourth Year
------- ------- ------- ------- --------
(In thousands, except per share amounts)
Fiscal 2000
Net revenues........................ $38,644 $42,183 $43,874 $46,033 $170,734
Income from operations.............. 3,729 6,216 7,544 6,917 24,406
Net income.......................... 2,379 3,852 4,659 4,532 15,422
Net income per common share
Basic............................. $ 0.23 $ 0.37 $ 0.45 $ 0.44 $ 1.49
Diluted........................... $ 0.23 $ 0.37 $ 0.45 $ 0.43 $ 1.48
Fiscal 1999
Net revenues........................ $30,296 $32,974 $34,939 $34,763 $132,972
Income from operations.............. 1,393 3,574 4,225 3,692 12,884
Income before extraordinary loss
from the early retirement of debt.. 295 1,518 2,352 2,338 6,503
Net income.......................... 295 1,518 341 2,338 4,492
Net income per common share
Basic--before extraordinary loss.. $ 0.03 $ 0.26 $ 0.27 $ 0.23 $ 0.85
Basic--after extraordinary loss... $ 0.03 $ 0.26 $ 0.03 $ 0.23 $ 0.57
Diluted--before extraordinary
loss............................. $ 0.02 $ 0.19 $ 0.25 $ 0.23 $ 0.72
Diluted--after extraordinary
loss............................. $ 0.02 $ 0.19 $ 0.03 $ 0.23 $ 0.48
Fiscal 1998
Net revenues........................ $24,346 $26,440 $27,841 $27,859 $106,486
Income from operations.............. 70 2,075 1,833 1,536 5,514
Net income (loss)................... (427) 712 614 322 1,221
Net income (loss) per common share
Basic............................. $ (0.10) $ 0.14 $ 0.09 $ 0.03 $ 0.16
Diluted........................... $ (0.07) $ 0.10 $ 0.06 $ 0.03 $ 0.12
NOTE 14--LOAN TO COMPANY OFFICER
The Company has loaned a Company officer a total of $350,000 under the terms
of a promissory note and pledge agreement (the "Agreement") between the Company
and the officer. The terms of the Agreement provide for an interest rate of
seven percent per annum, payable on an annual basis and when the principal
becomes due and payable in August 2002. As security for this loan, the officer
has pledged to the Company 34,043 shares of his common stock in the Company.
59
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is incorporated herein by reference
from the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on November 16, 2000. The Company's executive officers
are identified in Part I of this Report:
60
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is incorporated herein by reference
from the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on November 16, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is incorporated herein by reference
from the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on November 16, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is incorporated herein by reference
from the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on November 16, 2000.
61
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Index to Financial Statements
Page
----
Report of Independent Public Accountants............................ 40
Consolidated Balance Sheets as of June 30, 1999 and 2000............ 41
Consolidated Statements of Operations for the years ended June 30,
1998, 1999
and 2000........................................................... 42
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1998, 1999 and 2000....................................... 43
Consolidated Statements of Cash Flows for the years ended June 30,
1998, 1999
and 2000........................................................... 44
Notes to Consolidated Financial Statements.......................... 45
2. Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts...................... 66
Report of Independent Public Accountants with Respect to Schedule
II--Valuation and Qualifying Accounts.............................. 67
All other schedules have been omitted since the required information is
not present or not present in amounts sufficient to require the submission
of the schedules, or because the information required is included in the
consolidated financial statements or the notes thereto.
3. Exhibits:
The exhibits listed in the accompanying Index to Exhibits are filed as
part of this annual report.
(b) Reports on Form 8-K:
None.
62
CORINTHIAN COLLEGES, INC.
INDEX TO EXHIBITS
Exhibit Incorporation
Number Description of Exhibit Reference
------- ---------------------- -------------
3.3 + Restated Certificate of Incorporation.................. (b)
3.4 + Bylaws of the Company incorporated by reference to
Exhibit 3.3 of the Company's Registration Statement on
Form S-1 (Registration No. 33-59505) as filed with the
Securities and Exchange Commission on July 21, 1998
4.9 + Specimen Common Stock Certificate of the Company....... (b)
10.12+ Amended and Restated Registration Agreement dated
October 17, 1996, by and between the Company, Primus
Capital Fund III Limited Partnership, The Prudential
Insurance Company of America, BancOne Capital Partners
II, LLC, BancOne Capital Partners II, Limited
Partnership, David G. Moore, Paul St. Pierre, Frank J.
McCord, Dennis L. Devereux and Lloyd W. Holland........ (a)
10.13+ First Amendment to the Amended and Restated
Registration Agreement dated as of November 24, 1997,
by and between the Company, Primus Capital Fund III
Limited Partnership, BOCP II Limited Liability Company,
BancOne Capital Partners II, LLC, David G. Moore, Paul
St. Pierre, Frank J. McCord, Dennis L. Devereux, Lloyd
W. Holland and The Prudential Insurance Company of
America ............................................... (a)
10.14+ Amended and Restated Executive Stock Agreement, dated
November 24, 1997, between Corinthian Schools, Inc. and
Dennis L. Devereux..................................... (c)
10.15+ Amended and Restated Executive Stock Agreement, dated
November 24, 1997, between Corinthian Schools, Inc. and
Lloyd W. Holland....................................... (c)
10.16+ Amended and Restated Executive Stock Agreement, dated
November 24, 1997, between Corinthian Schools, Inc. and
Frank J. McCord........................................ (c)
10.17+ Amended and Restated Executive Stock Agreement, dated
November 24, 1997, between Corinthian Schools, Inc. and
David G. Moore......................................... (c)
10.18+ Amended and Restated Executive Stock Agreement, dated
November 24, 1997, between Corinthian Schools, Inc. and
Paul St. Pierre........................................ (c)
10.35+ Rights Agreement dated October 17, 1996, between the
Company, Corinthian Schools, Inc., Primus Capital Fund
III Limited Partnership, BOCP II, Limited Liability
Company, BancOne Capital Partners II, Limited
Partnership and David G. Moore, Paul St. Pierre, Frank
J. McCord, Dennis L. Devereux and Lloyd W. Holland..... (a)
10.36+ Amendment to the Rights Agreement, dated November 24,
1997, by and between the Company, Primus Capital Fund
III Limited Partnership, BOCP II Limited Liability
Company, BancOne Capital Partners II, LLC, David G.
Moore, Paul St. Pierre, Frank J. McCord, Dennis L.
Devereux and Lloyd W. Holland ......................... (a)
10.52+ 1998 Performance Award Plan of the Company............. (a)
10.53+ Agreement Regarding Registration Rights and Amendment
to Warrant dated as of January 7, 1999, by and among
the Company, Primus Capital Fund III Limited
Partnership, BancOne Capital Partners II, LLC and BOCP
II, Limited Liability Company, The Prudential Insurance
Company of America, David G. Moore, Paul St. Pierre,
Frank J. McCord, Dennis L. Devereux and Lloyd W.
Holland................................................ (c)
10.54+ Amended and Restated Loan Agreement, dated February 1,
2000 by and between Union Bank of California, N.A. and
the Company............................................ (g)
10.55+ Promissory Note dated August 31, 1999, by David G.
Moore in favor of the Company.......................... (e)
63
Exhibit Incorporation
Number Description of Exhibit Reference
------- ---------------------- -------------
10.56+ Pledge Agreement dated August 31, 1999, by and between
David G. Moore and the Company......................... (e)
10.57+ Asset Purchase Agreement, dated as of September 4,
2000, by and among Corinthian Schools, Inc., Educorp,
Inc. and Dr. Rashed B. Elyas and Ken Boyle............. (h)
10.58 Asset Purchase Agreement, dated as of September 10,
2000 by and Among Corinthian Schools, Inc., Computer
Training Academy, Inc., and Sam Shirazi, Bahman Imani,
Marilyn Emel, Mahammed Tahmasebi and Peter Tsuda.......
21.1 + List of Subsidiaries................................... (f)
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (see signature page)
27.1 Financial Data Schedule
- --------
+ Previously filed with the Securities and Exchange Commission as set forth
in the following table:
(a) Incorporated by reference to the like-numbered exhibit of the Company's
Registration Statement on Form S-1 (Registration No. 333-59505), as filed
with the Securities and Exchange Commission on July 21, 1998.
(b) Incorporated by reference to the like-numbered exhibit of the Company's
Amendment No. 3 to Registration Statement on Form S-1 (Registration No.
333-59505), as filed with the Securities and Exchange Commission on January
11, 1999.
(c) Incorporated by reference to the like-numbered exhibit of the Company's
Amendment No. 4 to Registration Statement on Form S-1 (Registration No.
333-59505), as filed with the Securities and Exchange Commission on
February 1, 1999.
(d) Incorporated by reference to Exhibit 99.1 of the Company's report on Form
8-K, as filed with the Securities and Exchange Commission on March 4, 1999.
(e) Incorporated by reference to the like-numbered exhibit of the Company's
Annual Report on Form 10-K, as filed with the Securities and Exchange
Commission on September 27, 1999.
(f) Incorporated by reference to Exhibit 1.1 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (Registration No. 333-59505), as
filed with the Securities and Exchange Commission on February 1, 1999.
(g) Incorporated by reference to Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q, for the quarter ended March 31, 2000, as filed with the
Securities and Exchange Commission on May 12, 2000.
(h) Incorporated by reference to the like-numbered exhibit of the Company's
Registration Statement on Form S-3 (Registration No. 333-45510), as filed
with the Securities and Exchange Commission on September 11, 2000.
64
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Corinthian Colleges, Inc.
/s/ David G. Moore
By: _________________________________
David G. Moore
President, Chief Executive
Officer and Director (Principle
Executive Officer)
September 18, 2000
/s/ Dennis N. Beal
By: _________________________________
Dennis N. Beal
Executive Vice President and
Chief Financial Officer
(Principle Financial and
Accounting Officer) September 18,
2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes and appoints David G. Moore and
Dennis N. Beal, or either of them, as attorneys-in-fact and agents to execute
and file with the applicable regulatory authorities any amendment to this
report on his or her behalf individually and in each capacity stated below.
Signature Title Date
--------- ----- ----
/s/ David G. Moore President, Chief Executive September 18, 2000
_________________________________ Officer and Director
David G. Moore (Principal Executive
Officer)
/s/ Paul St. Pierre Executive Vice President and September 18, 2000
_________________________________ Director
Paul St. Pierre
/s/ Loyal Wilson Director September 18, 2000
_________________________________
Loyal Wilson
/s/ Jack D. Massimino Director September 18, 2000
_________________________________
Jack D. Massimino
/s/ Linda Arey Skladany Director September 18, 2000
_________________________________
Linda Arey Skladany
/s/ Dr. Carol D'Amico Director September 18, 2000
_________________________________
Dr. Carol D'Amico
65
CORINTHIAN COLLEGES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning Costs and End of
of Year Expenses Deductions Year
---------- ---------- ---------- ----------
(In thousands)
Allowance for doubtful accounts
Accounts receivable:
Year ended June 30, 1998....... $2,763 $4,255 $(3,499) $3,519
Year ended June 30, 1999....... 3,519 7,013 (7,274) 3,258
Year ended June 30, 2000....... 3,258 7,874 (6,769) 4,363
Student notes receivable:
Year ended June 30, 1998....... 861 1,708 (283) 2,286
Year ended June 30, 1999....... 2,286 660 (1,048) 1,898
Year ended June 30, 2000....... $1,898 $ 886 $(1,603) $1,181
66
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corinthian Colleges, Inc.
We have audited in accordance with auditing standards generally accepted in
the United States, the financial statements of Corinthian Colleges, Inc. (a
Delaware corporation) and subsidiaries included in this Form 10-K and have
issued our report thereon dated August 17, 2000. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index above is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
Orange County, California
August 17, 2000
67