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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
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, 1999
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 of (I.R.S. Employer
incorporation or organization) Identification No.)
6 Hutton Centre Drive, Suite 400, Santa Ana, California
(Address of principal executive offices)
92707
(Zip Code)
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Registrant's telephone number, including area code: (714) 427-3000
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
----------------
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 15, 1999, the aggregate market value of voting and non-
voting common equity held by non-affiliates of the registrant was approximately
$86.8 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 15, 1999, the
number of outstanding shares of voting and non-voting common equity of the
registrant was approximately 10,345,627.
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CORINTHIAN COLLEGES, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
Page No.
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INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS;
DOCUMENTS INCORPORATED BY REFERENCE.................... 1
PART I
ITEM 1 BUSINESS............................................... 2
ITEM 2. DESCRIPTION OF PROPERTY................................ 24
ITEM 3. LEGAL PROCEEDINGS...................................... 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... 25
SPECIAL ITEM. EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES......... 25
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.................................... 28
ITEM 6. SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER
DATA................................................... 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK................................................... 37
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA................................................... 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................... 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..... 56
ITEM 11. EXECUTIVE COMPENSATION................................. 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K............................................... 57
i
INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS
Corinthian Colleges, Inc. (hereinafter the "Company" or "Corinthian") is a
Delaware corporation; its principle executive offices are located at 6 Hutton
Centre Drive, Suite 400, Santa Ana California, 92707.
This Annual Report on Form 10-K contains statements that may constitute
"forward-looking statements" as defined by the U.S. Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes"
"estimates," "anticipates," "continues," "contemplates," "expects," "may,"
"will," "could," "should," or "would," or the negatives thereof. Those
statements are based on the intent, belief or expectation of the Company as of
the date of this Annual Report. Any such forward-looking statements are not
guarantees of future performance and may involve risks and uncertainties that
are outside the control of the Company. Results may differ materially from the
forward-looking statements contained herein as a result of changes in
governmental regulations, including those governing student financial aid, the
effect of competitive pressures on the Company's tuition pricing, and other
factors, including those discussed under the heading entitled "Risk Factors" in
the Company's Registration Statement on Form S-1, as amended (File No. 333-
59505), filed with the Securities and Exchange Commission, and the heading
entitled "Additional Risks Related to the Business" in Item 1 of this Report on
Form 10-K. The Company expressly disclaims any obligation to release publicly
any updates or revisions to any forward-looking statement contained herein to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for the 1999 Annual
Meeting of Stockholders, to be held on November 18, 1999, have been
incorporated by reference into Part III of this report.
1
PART I
ITEM 1. BUSINESS
The Company is one of the largest private, for-profit post-secondary
education companies in the United States, with 16,012 students as of June 30,
1999. The Company operates 37 colleges in 16 states, including nine in
California and eight in Florida, and serves the large and growing segment of
the population seeking to acquire career-oriented education to become more
qualified and marketable in today's increasingly demanding workplace
environment.
The Company was founded in February of 1995 by David Moore, Paul St. Pierre,
Frank McCord, Dennis Devereux and Lloyd Holland, the five senior managers of
what was then National Education Centers, Inc. ("NECI"), a subsidiary of
National Education Corporation ("NEC") to capitalize on opportunities in career
oriented post-secondary education. Between June and December of 1995, the
Company acquired 16 of NECI's colleges, each of which was a diploma-granting
school with a focus on healthcare and electronics technology. In July and
September of 1996, the Company completed two single campus acquisitions of
additional diploma-granting schools. These 18 colleges (one of which has since
been closed) today comprise the Company's diploma-granting colleges. In October
of 1996, the Company completed its second multi-campus acquisition through the
purchase of 18 campuses from Phillips Colleges, Inc. Each of these colleges are
degree-granting schools with a primary focus on business education.
Operating Strategy
The Company has steadily improved enrollment and profitability through the
application of its operating strategy. Key elements of the Company's operating
strategy include:
Focus on Attractive Markets. The Company selects its schools and designs its
educational programs to exploit favorable demographic and economic trends. The
Company's diploma-granting colleges provide programs in healthcare and
technology related fields, allowing the Company to capitalize on the growth in
entry-level positions in these industries. The Company's degree-granting
colleges, with their business focus and the modern facilities and equipment and
excellent faculty, seek to provide students with specific knowledge and skills
necessary to advance in business and industry. The Company's geographic
strategy is to build a strong competitive position in attractive and growing
local markets where the Company can take advantage of operating efficiencies
and benefit from demographic shifts. For example, the Company is well
positioned, with nine schools in California and eight 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.
Centralization of Key Functions. In order to capitalize on the experience of
its senior management, the Company has established a regional management
organization to divide responsibilities among school administrators, regional
administrators and senior management. 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 the Company
believes enables it to achieve significant operating efficiencies. For example,
the Company controls the advertising function at the corporate level and
utilizes its Schools Automation System ("SAS") to analyze the effectiveness of
its marketing efforts and make timely and efficient decisions regarding the
allocation of marketing resources at individual colleges.
Emphasizing Student Outcomes. The Company believes that strong student
outcomes are a critical driver of its long-term success and devotes substantial
resources to maintaining and improving its retention and placement rates.
Modest increases in student retention can have a significant impact on the
Company's profitability and high graduation and placement rates enhance a
school's reputation and marketability, increase referrals and improve cohort
default rates. The Company has studied attrition patterns and implemented a
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variety of programs including tutoring, counseling, ride-sharing and referral
programs, all of which are designed to improve student retention. The Company
utilizes a curriculum development team and advisory boards comprised of local
business professionals to help maintain its current, market driven curricula
that provide the foundation of its placement effort. The Company additionally
maintains 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 the Company's efforts in this area, 82% of its
graduates in calendar 1998 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.
Creating a Supportive Learning Environment. The Company views its students
as customers and seeks to provide a supportive and convenient learning
environment where student satisfaction is achieved. The Company offers a
flexible schedule of classes, providing its 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. The Company limits class sizes and focuses the efforts of its faculty
on teaching students rather than research. Personal interaction between
students and faculty is encouraged and the Company offers several support
programs, such as on-campus counseling and tutoring, which are designed to help
students successfully complete their course of study. The Company also
maintains a toll-free student hotline to address and help resolve student
concerns.
Growth Strategy
The Company's strategy is to grow its revenues and improve its profitability
by pursuing the following growth strategies:
Enhance Growth at Existing Campuses. The Company has enhanced growth at
existing campuses through the following measures:
Curriculum Expansion and Development. The Company has developed and
expanded its curricula based on market research and the recommendations of
its faculty, employees, industry advisory board members and a dedicated
curriculum development team. The Company believes considerable
opportunities exist for curriculum expansion and expects to continue
developing and adding new curricula and selectively replicating existing
programs at new locations, including introducing its longer-term programs
more broadly. In fiscal 1999, the Company replicated existing programs at
eight campuses and initiated completely new programs at nine campuses.
Integrated and Centralized Marketing Program. The Company has increased
student enrollment at its existing and newly opened or acquired schools by
employing an integrated marketing program utilizing an extensive direct
response advertising campaign delivered through television, radio,
newspaper, direct mail and the internet. In addition, the Company began a
significant sales and marketing effort directed at high school guidance
counselors in fiscal 1999 and began to directly target potential government
and corporate clients. A professional marketing staff at the Company's
headquarters coordinates marketing efforts through an in-bound call center
and the sophisticated real-time leads tracking capability of its SAS
system.
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, the Company has relocated, and will continue to
systematically relocate, selected colleges within their respective markets
to larger, enhanced facilities upon lease expiration. Fourteen colleges
have been relocated since 1995. Since the Company acquired its various
colleges, it has increased the total square footage of leased space by
approximately 53,000 square feet over that existing at the time the various
schools were acquired.
Establish Additional Locations. During fiscal 1999, the Company opened
additional branch locations in Houston, Texas and Chesapeake, Virginia.
Establishing additional locations of an existing college, rather than
3
opening an entirely new college, allows the new location to become eligible for
Title IV funding and accreditation more expeditiously. The Company believes
that opening additional branch locations of its existing institutions allows it
to enter new geographic markets, create additional capacity in existing markets
and effectively leverage its infrastructure and curriculum library. The Company
has established demographic and market criteria for evaluating other cities as
potential sites for additional locations.
Expand Service Areas and Delivery Models. The Company has enhanced its
growth by pursuing contract training and distance learning opportunities.
Contract Training. The Company employs a full-time contracts
administrator and actively pursues training opportunities through the Job
Training Partnership Act (the "JTPA") and other state and federal programs.
To date, thirteen of the Company's schools have obtained contracts under
these programs. Additionally, the Company believes that the corporate
training arena is an attractive market and that its curriculum and national
market presence address the needs of a variety of employers.
Distance Learning. The Company believes that distance learning will
become an increasingly important component of the higher education market.
During fiscal 1999, the Company began offering selected courses over the
Internet to students at five of its Florida Metropolitan University
campuses. The Company expects to continue to expand these offerings at
selected campuses in fiscal 2000 and is actively pursuing relationships
with technology providers to capitalize on additional distance learning
opportunities.
Selectively Acquire Accredited Proprietary Colleges. Since its formation the
Company has completed and integrated several acquisitions, including two
multicampus acquisitions, and selectively seeks to acquire additional
institutions that can benefit from its operational expertise. The Company
generally seeks to acquire schools that possess: (i) complimentary or
attractive new curricula, (ii) locations in or near metropolitan areas, and
(iii) strong franchise value (name recognition or marketability).
Programs of Study
The Company's diploma programs are intended to provide students with the
requisite knowledge and job skills for entry-level positions in their chosen
career field. The Company's degree programs are primarily designed to help
career-oriented adults advance in business and industry. The Company's
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.
Among the diploma-granting colleges, the curriculum principally includes
medical assisting, dental assisting, medical office management, ophthalmic
technician, business operation, medical administrative assistant, 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. The four National Institute
of Technology ("NIT") colleges also offer electronics technology and network
administration. 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 ("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 8-15 months, while the
electronics and computer technology programs last 13-19 months. Associate's
degree programs have a duration of 18-24 months,
4
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, 1999, 6,784 students were enrolled in associate's programs, 1,745
were enrolled in bachelor's programs, 453 were enrolled in master's programs
and 7,030 were enrolled in diploma programs.
Marketing and Recruitment
The Company employs a variety of methods to attract qualified applicants who
will benefit from the Company's programs and achieve success in their chosen
career fields. The Company believes that one of the principal attractions for
prospective students is the excellent reputation which the Company's schools
enjoy in their respective communities, where nine have been operating for more
than 80 years and all but four have been operating for more than 15 years. The
Company believes 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 the Company to generate
significant new student enrollments from referrals. For the year ended June 30,
1999, the Company generated approximately 27% of its new student enrollments
from referrals.
The Company also employs a variety of direct response advertising techniques
to generate leads on candidates for its schools. The Company's 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, the
Company operates a Call Center at its 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 the SAS computer system during the call and immediately transmit the lead
to the appropriate college. The college admissions department receives the lead
instantaneously and the local admissions representative phones the prospect to
begin the admissions process.
This leads tracking capability allows the Company to identify leads
generated by specific commercials and spot time. The Company's four advertising
agencies are networked into the Company's SAS data base 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 the Company's
advertising department to adjust schedules for ads depending on the Company's
needs and the effectiveness of particular ads. Since more than 80% of the
Company's 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, 1999,
approximately 54% of the Company's new student enrollments were generated
through television, newspaper and yellow pages advertising, 27% were generated
through referrals, 12% were generated through direct mail, and 7% were
generated through a variety of other methods. Television and referrals combined
generate approximately two-thirds of all the Company's new student enrollments.
In fiscal 1999, the Company initiated a significant marketing effort directed
at the high school market.
Admissions
The Company employs approximately 195 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 the
Company's effort to generate interest in its educational services. In
satisfaction surveys conducted quarterly, students have consistently given high
marks to the Company's admissions personnel for helpfulness, courtesy and
accuracy of information. Because the Company's success is highly dependent on
the efficiency and effectiveness of its admissions process, the Company spends
considerable time and energy training its representatives to improve their
product knowledge and customer service. The Company also employs 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 by its staff with government regulations and Company policy.
5
One of the Company's primary objectives in the admissions process is to
identify students who have appropriate qualifications to succeed in its
schools. All candidates for admission to colleges in the Company's 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
the Company's diploma-granting colleges. In addition, fifteen diploma-granting
colleges accept non-high school graduates who can demonstrate an ability to
benefit ("ATB") from the program by passing certain tests required by the U. S.
Department of Education (the "DOE"). The Company believes that ATB students can
successfully complete many of its diploma programs and the Company's colleges
have demonstrated success in graduating and placing these students over the
years. As of June 30, 1999, ATB students accounted for approximately 4.5% of
total enrollments in the Company's schools.
Placement
The Company's placement success is critical to its colleges' reputations and
their ability to continue successfully recruit new students. The Company
maintains a placement department at each college and, in the aggregate, employs
approximately 74 professionals in this capacity. Placement staff work with
students from the time they begin their courses of study to prepare them for
the job search they will conduct at the end of their programs. The Company
views its 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 devoted by the Company's colleges to place their students have
achieved excellent results. Based on information received from graduating
students and employers for calendar year 1999, 82% of the Company's 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 the Company's diploma programs range from $6,000 to
$18,000, 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 $195 per undergraduate credit hour, depending
upon the program of study and the number of courses taken per quarter. Tuition
for graduate programs is $275 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 $6,400 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 the Company's schools must
also typically purchase textbooks and other supplies as part of their
educational programs. The Company anticipates increasing tuition based on the
market conditions prevailing at its individual colleges. Over the last fiscal
year, the Company initiated tuition increases averaging approximately 7.5%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Tuition Price Increases." The Company's 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 regulations, if a student fails to complete the initial period of
enrollment (i.e., quarter, trimester, semester, academic year, or program, as
applicable), the institution must refund the larger of an amount calculated
under each of the following: (i) the federal pro rata refund policy (calculated
through 60% of the period of enrollment); (ii) the state refund policy (in
California, a pro rata refund may be required for the duration of the program);
or (iii) the accrediting agency refund policy. 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.
6
Management and Employees
The Company's management is led by David Moore, Paul St. Pierre, Frank
McCord and Dennis Devereux, each of whom has significant experience in the
private, for-profit post-secondary education industry. Lloyd Holland, the
Company's Executive Vice President, Business Analysis and Financial Aid, and
one of the Company's founders, has announced his retirement from the Company
effective September 30, 1999. Mr. Holland's duties will be assumed by other
executives of the Company, including Tom Netting, who was named as the
Company's Director of Governmental Relations on June 18, 1999. The Company
believes the extensive experience of its executives is a significant factor in
its rapid growth. Beyond the senior management level, the Company structure
includes a Vice President of Operations, a Vice President of Education, four
regional operations directors and four regional admissions directors. As of
June 30, 1999, the Company had approximately 2,470 employees, of whom
approximately 98 were employed at the Company's headquarters and regional
offices.
Campus Administration
The Company sets policy for all of the schools and implements these policies
through the coordination of a Vice President of Operations and four 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: (i) an academic dean or
education director, (ii) an admissions director, (iii) a placement director and
(iv) 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 the Company, in
cooperation with regional and college managers, is the annual budget process.
The budget process establishes goals for each college and sets performance
incentives for achieving targeted results. The Company's senior management have
daily access to operational data through its SAS system and conduct 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 the Company's colleges are expected to be industry
professionals and hold appropriate credentials in their respective disciplines.
The Company chooses faculty carefully and provides support for these
professionals to pursue professional development activities. The Company
believes the skill and dedication of its faculty have the single greatest
impact on the placement and success of its students following their graduation.
As of June 30, 1999, the Company employed 1,433 faculty, 344 of whom were full
time employees. Faculty represent 58% of all employees in the Company.
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
the Company's 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 charged by the Company for comparable programs because public
institutions receive state tax subsidies, donations, and government grants that
are not available to the Company's colleges. However, tuition at private non-
profit institutions is typically higher than that at the Company's colleges.
The Company competes in most markets with other private, for-profit
institutions offering similar programs. The Company believes that the franchise
value of its colleges, the qualifications of its faculty, its facilities, and
its emphasis on student services allow the Company to compete effectively. In
addition, most of
7
the Company's 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 a commanding presence 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
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 75.5% of its students, as of June 30,
1999, received some federal Title IV financial aid. For fiscal 1999,
approximately 78% 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 is an
additional location 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; 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.
9
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 the Company's 37 colleges are
accredited by an accrediting agency recognized by the DOE. Twenty-one of the
Company's schools are accredited by the Accrediting Council for Independent
Colleges and Schools ("ACICS") and the remaining sixteen are accredited by the
Accrediting Commission of Career Schools and Colleges of Technology
("ACCSCT").
The following table specifies the accrediting agency and the expiration of
accreditation for each college:
Accrediting
College Location Agency Expiration
------- -------------------- ----------- ----------
Degree-Granting Colleges
- ------------------------
Blair College...................... Colorado Springs, CO ACICS 12/31/2002
Duff's Business Institute.......... Pittsburgh, PA ACICS 12/31/2000
FMU--Ft. Lauderdale College........ Fort Lauderdale, FL ACICS 12/31/2003
FMU--Orlando College, North........ Orlando, FL ACICS 12/31/2001
FMU--Orlando College, South........ Orlando, FL ACICS 12/31/2001
FMU--Orlando, Melbourne............ Melbourne, FL ACICS 12/31/2001
FMU--Tampa College................. Tampa, FL ACICS 12/31/2001
FMU--Tampa College, Brandon........ Brandon, FL ACICS 12/31/2001
FMU--Tampa College, Lakeland....... Lakeland, FL ACICS 12/31/2003
FMU--Tampa College, Pinellas....... Clearwater, FL ACICS 12/31/2003
Las Vegas College.................. Las Vegas, NV ACICS 12/31/2000
Mountain West College.............. Salt Lake City, UT ACICS 12/31/2000
Parks College North................ Thorton, CO ACICS 12/31/2000
Parks College South................ Aurora, CO ACICS 12/31/2000
Rochester Business Institute....... Rochester, NY ACICS 12/31/2000
Springfield College................ Springfield, MO ACICS 12/31/2000
Western Business College........... Portland, OR ACICS 12/31/2001
Western Business College........... Vancouver, WA ACICS 12/31/2001
Diploma-Granting Colleges
- -------------------------
Bryman College..................... Los Angeles, CA ACCSCT 4/30/2000
Bryman College..................... New Orleans, LA ACCSCT 11/18/2001
Bryman Institute................... Brookline, MA ACCSCT 2/12/2002
National Institute of Technology... Cross Lanes, WV ACCSCT 10/10/2001
Bryman College..................... Orange, CA ACCSCT 4/30/2002
Bryman College..................... El Monte, CA ACCSCT 5/21/2004
Bryman College..................... San Francisco, CA ACCSCT 5/1/2001
Bryman College..................... SeaTac, WA ACCSCT 12/3/2002
Bryman College..................... Gardena, CA ACCSCT 12/1/2002
Bryman College..................... Reseda, CA ACCSCT 3/11/2001
Bryman College North............... San Jose, CA ACCSCT 3/25/2003
Bryman College South............... San Jose, CA ACCSCT 11/18/2001
Kee Business College............... Newport News, VA ACICS 12/31/2004
Kee Business College............... Chesapeake, VA ACICS 12/31/2004
National Institute of Technology... San Antonio, TX ACCSCT 11/14/2001
National Institute of Technology... Houston, TX ACCSCT 11/14/2001
National Institute of Technology... Southfield, MI ACCSCT 12/31/2003
National Institute of Technology... Wyoming, MI ACCSCT 12/31/2002
Skadron College.................... San Bernardino, CA ACICS 12/31/2001
10
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, which may include
unannounced site visits to institutions that perform career oriented education
and training. In addition to periodic accreditation reviews, institutions
undergoing a change of ownership must be reviewed by the accrediting agency.
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, located in New Orleans, Louisiana is on reporting
status with respect to placement outcomes and submitted its final report with
the accrediting agency in August 1999.
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 1998-99 award year, Pell grants ranged from $400
to $3,000 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 1998-99 award year under the Pell program equaled
approximately 23% of the Company's net revenue.
11
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 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 1998-99 award year, the
Company's required 25% institutional match was met by approximately $455,569 in
funds from its institutions and approximately $50,329 in 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 1998-99 award year equaled
approximately 1.2% 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. None of the Company's institutions have elected to
participate in the FDL 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 1998-99 award year equaled approximately 45.5% 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 1998-99 award year equaled approximately 2.0% 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. Four 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. One of these colleges will be eligible to reapply for
participation in October 1999 and the remaining three 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 an aggregate maximum of
$15,000, at a 5% interest rate and 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 1998-99 award
year, the Company collected approximately $779,735 from its former students in
repayment of Perkins loans. In the 1998-99 award year, the Company had no
required
12
matching contribution. The Perkins loans disbursed to students in the Company's
institutions in the 1998-99 award year equaled approximately 0.7% 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 1998-99 award year, the Company's
institutions and other organizations provided matching contributions totaling
approximately $162,469. At least 5% of an 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 1998-99 award year, the
federal share of FWS earnings equaled 0.4% 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 1997, the DOE published new regulations with respect to
financial responsibility standards which took effect on July 1, 1998) 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
13
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.
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.
All of the Company's colleges participate in Title IV Programs. Currently,
four of the diploma-granting colleges are ineligible to participate in FFEL as
a result of previous Cohort Default Rates relating to fiscal years prior to the
acquisition of the schools by the Company. For federal fiscal year 1996, the
published Cohort Default Rates for the Company's institutions ranged from a low
of 4.9% to a high of 29.3. One of the Company's diploma-granting institutions,
Skadron College in San Bernardino, California, had a default rate in excess of
25% for each of the most recent three consecutive federal fiscal years
published (1994, 1995, 1996). The published 1996 rate for this college has been
successfully appealed based on mitigating circumstances. This college, along
with six additional campuses, NIT in Wyoming, Michigan, Bryman Institute in
Brookline, Massachusetts, and the Bryman Colleges in El Monte, California, Los
Angeles, California, San Jose (South), California and New Orleans, Louisiana
also had default rates in excess of 25% for the 1992, 1993, and 1994 federal
fiscal years. As a result, six of these colleges became ineligible to
participate in the FFEL programs beginning in May 1997. The seventh, Skadron
College in San Bernardino, California, had 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 Brookline, 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 reinstated
three of the seven colleges. Of the remaining four, NIT in Wyoming, Michigan
will be eligible for reinstatement in 1999 and the other three (Bryman Colleges
in San Jose, California and New Orleans, Louisiana and Skadron College in San
Bernardino, California) will be eligible for reinstatement in 2000, based on
published rates for fiscal 1995 and 1996, respectively.
14
The following table sets forth the Cohort Default Rates for the Company's
institutions for federal fiscal years 1994, 1995 and 1996:
Cohort Default
Rate
----------------
Institution 1994 1995 1996
----------- ---- ---- ----
Degree-Granting Colleges
Blair College, Colorado Springs, CO........................... 13.3% 15.5% 13.2%
Duff's Business Institute, Pittsburgh, PA..................... 24.5% 17.1% 20.1%
FMU--Orlando (North, South, Melbourne), FL*................... 18.8% 16.7% 20.0%
FMU--Pinellas (Lakeland), FL*................................. 24.1% 21.5% 21.7%
FMU--Tampa (Brandon), FL*..................................... 19.9% 17.4% 20.4%
FMU--Ft. Lauderdale College, FL............................... 23.9% 19.8% 19.5%
Las Vegas College, NV......................................... 23.7% 28.8% 18.9%
Mountain West College, Salt Lake City, UT..................... 18.0% 14.8% 16.5%
Parks College North and South, CO*............................ 21.8% 19.3% 15.8%
Rochester Business Institute, Rochester, NY................... 24.4% 24.6% 22.7%
Springfield College, Springfield, MO.......................... 14.8% 16.5% 18.8%
Western Bus. College (Portland, OR and Vancouver, WA)*........ 23.0% 24.8% 21.7%
Diploma-Granting Colleges
Bryman Institute , Brookline, MA.............................. 29.6% 23.4% 23.0%
Bryman College, El Monte, CA.................................. 31.5% 26.2% 14.7%
Bryman College, Gardena, CA................................... 23.9% 25.8% 29.3%
Bryman College, Los Angeles, CA............................... 33.6% 25.1% 18.8%
Bryman College, Orange CA..................................... 18.0% 19.5% 18.5%
Bryman College, San Francisco, CA............................. 22.6% 21.0% 24.5%
Bryman College, San Jose No., CA.............................. 22.5% 30.5% 22.3%
Bryman College, San Jose South, CA (New Orleans, LA)*......... 31.1% 32.6% 20.2%
Bryman College, Sea Tac, WA................................... 8.5% 7.5% 4.9%
Bryman College, Reseda, CA.................................... 24.2% 21.4% 19.2%
Kee Business College, Newport News, VA**...................... 15.4% 2.6% 12.3%
NIT, Cross Lanes, WV.......................................... 11.7% 20.7% 19.1%
NIT, San Antonio, TX**........................................ 24.3% 24.5% 17.6%
NIT, Southfield, MI........................................... 23.6% 18.9% 17.7%
NIT, Wyoming, MI.............................................. 25.9% 22.1% 14.7%
Skadron College, San Bernardino, CA***........................ 28.2% 25.1% 27.2%
- --------
* Indicates additional location wherein cohort default rates are blended with
the main campus.
** 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.
*** 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. The Perkins Program Cohort Default Rates for these
institutions ranged from 37.5% to 70.5%. Default rates in excess of 15% could
result in provisional certification status.
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
15
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. As a result, the accrediting agencies which review and
accredit the Company's campuses have increased the breadth of such reviews and
have expanded their examinations in 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 tightened 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 were required to undergo such a recertification review by
the DOE by 1997 and are required to undergo such a recertification review every
six years thereafter. Under these standards, each of the Company's institutions
will be evaluated by the DOE more frequently than in the past. A denial of
recertification would preclude an institution from continuing to participate in
the Title IV Programs.
A third part of the Triad required each state to establish a State Post-
Secondary Review Entity ("SPRE") to review certain institutions within that
state to determine their eligibility to continue participating in the Title IV
Programs. However, no SPREs have ever actively functioned, and Congress
eliminated the authorization for the SPREs in the 1998 Amendments.
Nevertheless, 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 will calculate three financial ratios
for an institution, an equity ratio, a primary reserve ratio, and a net income
ratio, each of which will be scored separately and which will then be 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 will be required to post a letter of credit
in favor of the DOE.
For fiscal 1999, the Company's calculations show that all of its schools
exceed the requirements for financial responsibility on an individual basis,
with composite scores from 1.8 to 3.0. Also, the Company, on a consolidated
basis, meets the requirements with a composite score of 2.98.
16
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 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. Alternatively, an institution may
demonstrate, with the support of a statement from a certified public accountant
and other information specified in the regulations, that it was previously in
compliance with the numeric standards and that its continued operation is not
jeopardized by its financial condition.
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 upon the Company's
annual audited financial statements. 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.
Based on the Company's audited financial statements for the fiscal year
ended June 30, 1999, the Company intends to petition for release of the letter
of credit upon submission of its financial statements to the DOE in the second
quarter of fiscal 2000. In accordance with applicable law, the Company believes
the DOE will be required to rescind the letter of credit and any related
requirements when the Company and its colleges demonstrate that they satisfy
the standards of financial responsibility, using accounting treatments that are
acceptable to the DOE.
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 six
outstanding letters of credit in the aggregate amount of approximately
$150,000. Additionally, six colleges have been cited for late refunds in their
annual audits. The DOE has accepted that the existing $1.5 million letter of
credit satisfies this standard of financial responsibility. If the Company's
petition to rescind the $1.5 million letter of credit is accepted, the Company
may be required to post letters of credit in an aggregate amount of up to
$185,000 on behalf of those six colleges. 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
17
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 have been provisionally certified.
The 1998 Amendments allow for the provisional recertification 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 provisional certification, the institution must submit a "materially
complete" application for recertification within 10 business days of the
transaction. Such provisional certification would continue until the
application is acted upon by the DOE. This provision of the 1998 Amendments is
not self-executing and will be subject to the promulgation of regulations by
the DOE which are not likely to take effect until July 1, 2000.
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.
Generally, if an institution 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, 1999, ATB students represented
approximately 4.5% 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
18
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 is 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. To date, the
Company has not received a final determination from the IG regarding its
review. The Company believes that its institutions were and are in compliance
with the 85/15 Rule and the 90/10 Rule, as applicable, and all other federal
regulations.
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.
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.
19
ADDITIONAL RISKS RELATED TO THE BUSINESS
Possible Investigations or Claims by Regulatory Agencies or Third Parties.
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. The Company believes that it has taken effective steps to monitor
compliance with governmental regulations and other legal requirements. However,
there can be no assurance that 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.
Risk That Legislative Action Will Reduce Financial Aid Funding or Increase
Regulatory Burden.
The Title IV Programs are subject to significant political and budgetary
pressures. The process of reauthorizing the student financial assistance
programs of the HEA by the U.S. Congress, which takes place approximately every
five years, was most recently completed in 1998.
The 1998 Amendments continued many of the current requirements for student
and institutional participation in the Title IV Programs. The 1998 amendments
also changed or modified some requirements. These changes and modifications
include increasing the revenues that an institution may derive from Title IV
funds from 85% to 90% and revising the requirements pertaining to the manner in
which institutions must calculate refunds to students. The 1998 Amendments also
contain a provision that prohibits institutions that are ineligible for
participation in Title IV loan programs due to student default rates in excess
of applicable thresholds from participating in the Pell Grant program. The
Company does not believe that the 1998 Amendments will adversely or materially
affect its business operations. Regulations to implement the 1998 amendments
are subject to negotiated rulemaking and may not become effective until July 1,
2000. Although Congress has not declined to reauthorize the Title IV Programs,
there can be no assurance that government funding for the Title IV Programs
will continue to be available or maintained at current levels. A reduction in
government funding levels could lead to lower enrollments at the Company's
schools and require the Company to seek alternative sources of financial aid
for students enrolled in its schools. Given the significant percentage of the
Company's revenue that is derived from the Title IV Programs, the loss of or
reduction in Title IV Program funds available to students at the Company's
schools would have a material adverse effect on the Company's business, results
of operations and financial condition.
In addition, there can be no assurance that the current requirements for
student and institutional participation in the Title IV Programs will not
change or that one or more of the present Title IV Programs will not be
replaced with other programs with materially different student or institutional
eligibility requirements. If the Company cannot comply with the provisions of
the HEA, as revised during the reauthorization process, or with new regulations
promulgated to implement the 1998 Amendments, or if the cost of such compliance
is excessive, the Company's business, results of operations and financial
condition would be materially adversely affected. There can be no assurance
that in the future there will not be enacted other different legislation
amending the HEA or otherwise impacting institutions, guaranty agencies or
lenders. The DOE may also impose additional regulations based on its
interpretation of HEA.
The Internal Loan Program.
The Company has routinely afforded relatively short-term installment payment
plans to many of its students to supplement their financial aid. The terms of
this program require the student to make monthly payments throughout their in-
school period, plus a period generally not exceeding six months after
graduation. In late 1997, the Company expanded its internal loan program to
assist students in those colleges which lost access to FFEL loans during that
year. The loans to these students are intended to replace the loss of the FFEL
loans, and thus are generally initiated for greater amounts (averaging
approximately $3,200) and longer periods
20
of time (ranging typically from 6-84 months) than the shorter term installment
payment plans mentioned earlier. In an effort to minimize the financial impact
on new students, the Company elected to match, as closely as possible, the
standards of eligibility for the FFEL loan program. For example, in order to
qualify for an FFEL loan, a student must meet all admissions requirements and
be admitted into one of the college's programs. In addition, the prospective
student must meet with a financial aid officer at the college and complete all
the appropriate applications required by the Title IV regulations. At the four
colleges that are currently ineligible to participate in the FFEL program,
prospective students who met all eligibility requirements were offered an
internal loan. As with the FFEL loan program, no independent credit evaluations
are performed. However, students participating in the Company's internal loan
program are required to make monthly payments while in school and may be
dropped from school for failing to remain current in their payments.
As of June 30, 1999, the combined internal loan programs were assisting more
than 5,500 students (approximately 50% were active students and approximately
50% were graduates or dropped students). The earned balances were approximately
$9.0 million, of which $1.9 million, or 21%, was reserved for bad debts. While
these internal loans are unsecured, the Company believes it has adequate
reserves against these loan balances, given that the loans are earned over the
student's in-school period, during which time a payment pattern is established.
The Company believes that the payment pattern established by the student while
in school is a reasonable predictor of future collectibility. The loss rates on
the shorter-term loans are similar to the Company's loss rates on accounts
receivable in general, and they are reserved at approximately 19%. The Company
has relatively limited repayment history on the longer-term loans, but
preliminary information from third party servicers of these loans indicates
that the risk of loss is greater on these longer-term loans and the Company has
adjusted its reserve levels accordingly (currently approximately 22%). While
the Company believes it has adequate reserves against these loan balances,
there can be no assurance that losses will not exceed reserves. Material losses
in excess of reserves would have an adverse effect on the Company's business,
results of operations and financial condition.
In May of fiscal 1999, Sallie Mae and the Company entered into an
arrangement whereby Sallie Mae purchased certain existing loans the Company had
previous originated in its internal loan program. Additionally, new loans from
Sallie Mae will now be available to some of the Company's entering students who
qualify for such loans who would otherwise have participated in the Company's
internal loan program. The Company anticipates to benefit from the Sallie Mae
arrangement through a reduction of costs associated with administering its own
internal loan program.
Regulatory Consequences of a Change in Ownership Resulting in a Change of
Control.
Upon a "change of ownership" of an institution resulting in a "change in
control," as defined in the HEA and applicable regulations, that institution
becomes ineligible to participate in Title IV Programs. In such event, an
institution may receive and disburse only previously committed Title IV Program
funds to its students until it has applied for and received recertification
from the DOE to participate under such institution's new ownership. Approval of
an application for recertification must be based upon a determination by the
DOE that the institution under its new ownership is in compliance with the
requirements for institutional eligibility. The time required to act on such an
application can vary substantially and may take several months. As a result of
the change in ownership at the time the Company acquired each of its schools,
all of the Company's schools are currently under provisional certification
status pursuant to standard DOE procedure when an institution undergoes a
change of control. Provisional certification does not limit an institution's
access to Title IV Program funds, but does subject the institution to closer
review by the DOE and may subject the institution to summary adverse action if
it violates other Title IV Program requirements.
The 1998 Amendments to the HEA allow for the provisional certification of an
institution that undergoes 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 provisional certification, the institution must submit a "materially
complete" application for recertification within 10 business days of the
transaction. Such provisional certification would continue until
21
the application is acted upon by the DOE. This provision of the 1998 Amendments
is not self-executing and will be subject to the promulgation of regulations by
the DOE which are not likely to take effect until July 1, 2000.
Under the HEA and its implementing regulations, a change of ownership
resulting in a change in control would occur upon the transfer of a controlling
interest in the voting stock of an institution or such institution's parent
corporation. With respect to a publicly traded corporation, such as the
Company, a change of ownership resulting in a change in control occurs when
there is an event that would obligate the corporation to file a Current Report
on Form 8-K with the Securities and Exchange Commission (the "SEC") disclosing
a change of control. A change of ownership and control also could require an
institution to reaffirm its state authorization and accreditation. The
requirements of states and accrediting agencies with jurisdiction over the
Company's schools vary widely in this regard.
The potential adverse implications of a change of ownership resulting in a
change in control may influence decisions by the Company and its stockholders
regarding the sale, purchase, transfer, issuance or redemption of the Company's
capital stock. However, the Company believes that any such future transaction
having an adverse effect on state authorization, accreditation or participation
in Title IV Programs of any of the Company's schools is not likely to occur
without the prior knowledge of the Company's Board of Directors.
Reliance on and Risks of Acquisition Strategy, Including Lack of Available
Financing.
The Company expects to continue to rely on acquisitions as a component of
its strategy for growth. The Company regularly engages in evaluations of
possible acquisition candidates, including evaluations relating to acquisitions
that may be material in size and/or scope. There can be no assurance that the
Company will continue to be able to identify educational institutions that
provide suitable acquisition opportunities or to acquire any such institutions
on favorable terms. Furthermore, there can be no assurance that any acquired
institutions can be successfully integrated into the Company's operations or be
operated profitably. Acquisitions involve a number of special risks and
challenges, including the diversion of management's attention, assimilation of
the operations and personnel of acquired companies, adverse short-term effects
on reported operating results, possible loss of key employees and difficulty of
presenting a unified corporate image. Continued growth through acquisition may
also subject the Company to unanticipated business or regulatory uncertainties
or liabilities. No assurance can be given that the Company will be able to
obtain adequate funding to complete any potential acquisition or that such an
acquisition will succeed in enhancing the Company's business and will not
ultimately have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company's acquisition of a school would constitute a change in ownership
resulting in a change of control with respect to such school for purposes of
eligibility to participate in the Title IV Programs. Generally, the Company
intends to acquire schools subject to the condition that they be recertified
promptly for such eligibility by the DOE. The 1998 Amendments allow for the
provisional certification of an institution that has undergone a change of
ownership that results in a change of control so that Title IV Program Funds
are not interrupted. To qualify for such provisional certification, the
institution must submit a "materially complete" application for recertification
within ten business days of the transaction. Such provisional certification
would continue until the application is acted upon by the DOE. The failure of
the Company to manage its acquisition program effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition.
Dependence on a Limited Number of Key Personnel
The Company's success to date has depended in large part on the skills and
efforts of David Moore, Paul St. Pierre, Frank McCord, Dennis Devereux, Lloyd
Holland and the Company's other key personnel. Additionally, the Company's
success depends, in large part, upon its ability to attract and retain highly
qualified faculty, school presidents and administrators and corporate
management. Due to the nature of the
22
Company's business and the tight labor market, it may be difficult to locate
and hire qualified personnel, and to retain such personnel once hired.
Mr. Holland has announced his retirement from the Company effective as of
September 30, 1999. The Company believes that Mr. Holland's duties have been
effectively transferred to other Company personnel. Any failure by the Company
to attract and retain other qualified and experienced personnel as may be
required from time to time, could have a material adverse effect on the
Company's business, results of operations and financial condition.
Highly Competitive Market
The post-secondary education market is highly competitive. The Company's
schools compete for students and faculty with traditional public and private
two-year and four-year colleges and universities and other proprietary schools,
many of which have greater financial resources than the Company. Certain public
and private colleges and universities, as well as other private career-oriented
schools, may offer programs similar to those of the Company's schools, as well
as programs not currently offered by the Company. Although tuition at private
nonprofit institutions is, on average, higher than tuition at the Company's
schools, most public institutions are able to charge lower tuition than the
Company's schools, due in part to government subsidies, government and
foundation grants, tax-deductible contributions and other financial sources not
available to proprietary schools.
Geographic Concentration
While the Company's 37 colleges are dispersed among 16 states, 17 of those
colleges are located in the states of Florida and California (eight in Florida
and nine in California). As a result of this geographic concentration, any
material change in general economic conditions in California or Florida could
have a material adverse effect on the Company's business, results of operations
or financial conditions. In addition, the legislatures in the states of Florida
and California could change the law in those states or adopt regulations
regarding private, for-profit post-secondary education institutions which could
place significant additional burdens on the Company. If the Company were unable
to meet those burdens, it could have a material adverse effect on the Company's
business, results of the operations or financial condition.
23
ITEM 2. DESCRIPTION OF PROPERTY
The Company's 37 colleges are located in metropolitan and suburban areas in
16 states. Facilities among the colleges vary considerably in both size and
type. The Company's headquarters and 32 of its schools are located in leased
facilities; five of the Company's schools are located in facilities owned by
the Company. As lease expirations approach in its various facilities, the
Company assesses the existing space in terms of current needs, prospects for
future growth, condition of the facility, desirability of the location and
financial terms. Based on the above criteria, the Company decides whether or
not to relocate its schools. Since acquiring the colleges, the Company has
relocated fourteen colleges and opened two additional locations. 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 June 30, 1999:
Approx. Approx.
Square Square
Degree-Granting Colleges Footage Diploma-Granting Colleges Footage
------------------------ ------- ------------------------- -------
Blair College, Colorado Springs, CO*....... 22,300 Bryman, Brookline, MA 6,700
Duff's, Pittsburgh, PA..................... 40,000 Bryman, El Monte, CA 27,057
FMU, Brandon, FL........................... 35,250 Bryman, Gardena, CA 14,356
FMU, Ft. Lauderdale, FL.................... 34,500 Bryman, Los Angeles, CA 13,824
FMU, Lakeland, FL.......................... 23,717 Bryman, New Orleans, LA 14,443
FMU, Melbourne, FL*........................ 16,500 Bryman, Orange, CA 11,081
FMU, Orlando North, FL..................... 39,424 Bryman, San Francisco, CA 18,500
FMU, Orlando South, FL..................... 31,680 Bryman, San Jose, CA North 14,624
FMU, Pinellas, FL.......................... 30,344 Bryman, San Jose, CA South 3,054
FMU, Tampa, FL*............................ 30,000 Bryman, Reseda, CA 14,200
Las Vegas College, Las Vegas, NV........... 16,664 Bryman, Sea Tac, WA 12,239
Mountain West College, Salt Lake City, UT.. 19,620 Kee Business College, Newport News, VA 16,126
Parks College, Thornton, CO ............... 24,000 Kee Business College, Chesapeake, VA 14,396
Parks College, Aurora, CO ................. 30,000 NIT, Cross Lanes, WV 18,000
RBI, Rochester, NY......................... 29,300 NIT, Houston, TX 20,585
Springfield College, Springfield, MO....... 23,012 NIT, San Antonio, TX 37,300
Western Business College, Vancouver, WA.... 10,243 NIT, Southfield, MI 22,260
Western Business College, Portland, OR..... 26,800 NIT, Wyoming, MI 24,000
Skadron College, San Bernardino, CA 21,600
Corporate Offices
-----------------
Santa Ana, CA........................... 21,957
Gulfport, MS............................ 1,580
- --------
* Indicates owned property.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to disputes, claims and litigation in the ordinary
course of its business. On August 2, 1999, approximately thirty-six current or
former students in the Company's Duff's Business Institute court reporting
program filed suit against the Company and certain of its subsidiaries,
alleging inadequacies in the Duff's Business Institute court reporting program.
All such students have since voluntarily dismissed their suit against the
Company and its subsidiaries, without prejudice, and the Company has agreed to
engage in non-binding mediation in an attempt to resolve the students'
complaints. The Company does not believe that such students have valid legal
claims against it and, if the mediation process is unsuccessful, the Company
will vigorously defend itself against any lawsuits filed against it. The
Company does not believe that this matter, or any other currently pending legal
proceeding against the Company, is likely to result in a material adverse
effect on the Company's financial condition, results of operations or
liquidity.
24
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, 1999.
SPECIAL ITEM. EXECUTIVE OFFICERS AND OTHER KEY EMPLOYEES
The following table sets forth certain information with respect to the
Company's executive officers and selected key employees:
Name Age Position
---- --- --------
Executive Officers
David G. Moore...... 60 President, Chief Executive Officer, Director
Paul R. St. Pierre.. 54 Executive Vice President, Marketing and Admissions,
Secretary, Director
Frank J. McCord..... 56 Executive Vice President and Chief Financial Officer
Lloyd W. Holland.... 61 Executive Vice President, Business Analysis and
Financial Aid, Assistant Treasurer
Dennis L. Devereux.. 52 Executive Vice President, Human Resources, Assistant
Secretary
Other Key Employees
Mary H. Barry....... 50 Vice President, Education
Beth A. Wilson...... 47 Vice President, Operations
Nolan Miura......... 44 Director of Business Analysis, Treasurer
Executive Officers
David G. Moore has served as President and Chief Executive Officer and a
Director of the Company since its inception in July 1995. Immediately prior to
forming the 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 operation and its growth strategy for the 11
western states. From 1980 to 1992 he was employed by Mott Community College in
Flint, Michigan, where he was President from 1984 to 1992. Mr. Moore served as
Dean, Management from 1982 to 1984 and Dean, Management Information Systems
from 1980 to 1982. 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 Vice President, Marketing & Admissions and
a Director of the Company since its 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.
25
Frank J. McCord has served as Vice President & Chief Financial Officer for
the Company since its inception in July 1995. He was promoted to Executive Vice
President in April 1998. He was employed by National Education Centers, Inc. as
Vice President, Finance & Administration from 1994 to 1995. From 1980 to 1994,
Mr. McCord was employed by Atlantic Richfield Company ("ARCO"). From 1989 to
1994, he was Business Manager/Controller and Director for ARCO Marine, Inc.
During the period 1980 to 1989 his assignments at ARCO ranged from Senior
Internal Auditor to Audit Manager. From 1976 to 1980, Mr. McCord served in the
U.S. Army as Management Analyst, Internal Review Officer and Budget Officer,
attaining the rank of Captain. He received a Bachelor's Degree in Business
Administration (Accounting) from North Texas State University. Mr. McCord is
also a Certified Public Accountant and Certified Internal Auditor.
Lloyd W. Holland has served as Vice President, Business Analysis & Financial
Aid for the Company since its inception in July 1995. He was promoted to
Executive Vice President in April 1998. He was employed by National Education
Centers, Inc. from 1987 to 1995 in financial positions including Regional
Controller, Group Controller, Vice President, Finance & Administration and
Director of Finance. Mr. Holland was employed by Bonney Forge Corporation from
1984 to 1987 as Division Controller, then Corporate Controller. From 1978 to
1979, he was Controller for SMC Corporation. Mr. Holland was employed by
Rockwell International Corporation at various Midwest plant locations during
the period 1969 to 1978, in positions ranging from Manager, General Accounting
to Division Controller. From 1963 to 1969, he was employed in various
accounting and cost accounting positions. Mr. Holland received a Bachelor of
Science in Accounting from Point Park College in Pittsburgh, Pennsylvania. Mr.
Holland has announced his retirement effective September 30, 1999.
Dennis L. Devereux has served as Vice President, Human Resources for the
Company since its 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 received a Bachelor of Science in Business Administration (Industrial
Relations) from California State University, Long Beach.
Other Key Employees
Mary H. Barry has served as Vice President, Education for the Company 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.
Beth A. Wilson has been employed by the Company since its inception in July
1995. She is currently Vice President, Operations for Corinthian Colleges, Inc.
Previously, she 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
26
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.
Nolan Miura has served as Director of Treasury and Business Analysis since
November 1997. He was promoted to Treasurer in December 1998. He was employed
by Atlantic Richfield Company ("ARCO") from 1990 to 1997 in 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.
27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Since February 5, 1999, the date of the Company's initial public offering,
the Company's Common Stock has been listed on the NASDAQ National Market under
symbol "COCO." The following table sets forth the high and low sale information
for the Common Stock reported by NASDAQ for the periods indicated.
Fiscal Year 1999 High Low
---------------- ------ ------
Third Quarter............................................... $25.00 $20.88
Fourth Quarter.............................................. $22.06 $12.50
The reported closing sales price of the Company's Common Stock on the NASDAQ
National Market on September 15, 1999 was $19.3125. As of September 15, 1999,
there were approximately 20 holders of record of the Company's Common Stock.
The Company estimates that, as of such time, there were approximately 750 total
holders of its Common Stock.
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future. It is the current
policy of the Company's Board of Directors to retain earnings to finance the
operations and expansion of the Company's business.
28
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, the
Company's 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 four years ended June 30, 1996, 1997, 1998 and 1999 and as of June
30, 1996, 1997, 1998 and 1999 are derived from the audited consolidated
financial statements of the Company. 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
-------- -------- --------- ---------
(Amounts in thousands, except per
share data)
Statement of Operations Data:
Net revenues (1).................... $ 31,498 $ 77,201 $ 106,486 $ 132,972
-------- -------- --------- ---------
Operating expenses:
Educational services............... 18,594 50,568 65,927 76,425
General and administrative......... 3,298 8,101 10,777 13,961
Marketing and advertising.......... 7,562 19,000 24,268 29,702
-------- -------- --------- ---------
Total operating expenses........... 29,454 77,669 100,972 120,088
-------- -------- --------- ---------
Income (loss) from operations....... 2,044 (468) 5,514 12,884
Interest expense, net............... 274 2,524 3,305 1,678
-------- -------- --------- ---------
Income (loss) before income taxes... 1,770 (2,992) 2,209 11,206
Provision (benefit) for income
taxes.............................. 722 (1,107) 988 4,703
-------- -------- --------- ---------
Net income (loss) before
extraordinary loss................. 1,048 (1,885) 1,221 6,503
Extraordinary loss, net of tax
benefit............................ -- -- -- 2,011
-------- -------- --------- ---------
Net income (loss)................... $ 1,048 $ (1,885) $ 1,221 $ 4,492
======== ======== ========= =========
INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Income (loss) before extraordinary
loss.............................. $ 1,048 $ (1,885) $ 1,221 $ 6,503
Less preferred stock dividends..... (111) (118) (365) (355)
-------- -------- --------- ---------
Income (loss) before extraordinary
loss attributable to common
stockholders...................... 937 (2,003) 856 6,148
Extraordinary loss................. -- -- -- (2,011)
-------- -------- --------- ---------
Net income (loss) attributable to
common stockholders............... $ 937 $ (2,003) $ 856 $ 4,137
======== ======== ========= =========
INCOME (LOSS) PER SHARE ATTRIBUTABLE
TO COMMON STOCKHOLDERS:
Basic--
Income (loss) before extraordinary
loss.............................. $ 0.21 $ (0.41) $ 0.16 $ 0.85
Extraordinary loss................. -- -- -- (0.28)
-------- -------- --------- ---------
Net income (loss).................. $ 0.21 $ (0.41) $ 0.16 $ 0.57
======== ======== ========= =========
Diluted--
Income (loss) before extraordinary
loss.............................. $ 0.15 $ (0.41) $ 0.12 $ 0.72
Extraordinary loss................. -- -- -- (0.24)
-------- -------- --------- ---------
Net income (loss).................. $ 0.15 $ (0.41) $ 0.12 $ 0.48
======== ======== ========= =========
Weighted average number of common
shares outstanding:
Basic.............................. 4,409 4,896 5,236 7,266
======== ======== ========= =========
Diluted............................ 6,339 4,896 7,125 8,549
======== ======== ========= =========
29
Years Ended June 30,
-------------------------------------
1996 1997 1998 1999
------- -------- -------- --------
(Dollars in thousands)
Other Data:
EBITDA (2)............................. $ 2,726 $ 1,602 $ 8,573 $ 16,329
Cash flow provided by (used in):
Operating activities.................. 997 995 (3,373) 5,794
Investing activities.................. (4,295) (30,973) (1,676) (16,140)
Financing activities.................. 3,903 30,975 4,630 9,731
Capital expenditures, net (3).......... 1,046 5,936 1,926 2,790
Number of colleges at end of period.... 16 36 35 37
Student population at end of period.... 4,938 12,820 13,992 16,012
Starts during the period (4)........... 5,834 13,673 18,261 21,008
Balance Sheet Data:
Cash, cash equivalents and restricted
cash (5).............................. $ 2,024 $ 3,831 $ 3,162 $ 1,797
Marketable investments................. -- -- -- 14,501
Working capital........................ 2,306 1,844 606 19,108
Total assets........................... 13,487 53,809 59,905 73,857
Long-term debt, net of current
maturities............................ 2,537 36,168 31,535 3,396
Redeemable preferred stock............. 1,924 2,042 2,167 --
Convertible preferred stock............ -- -- 5,174 --
Total stockholders' equity............. 2,124 121 977 53,536
- --------
(1) Represents student tuition and fees and book store sales, net of refunds.
Year ended June 30, 1996 includes a non-recurring management fee of
approximately $2.1 million earned by the Company for managing certain
colleges owned by NECI during the first six months of that year.
(2) EBITDA equals earnings before interest expense, 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 $2,011 (net of $1,518 tax
benefit). EBITDA is presented because the Company believes it allows for a
more compete analysis of the Company's 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 Phillips Acquisition.
(4) Represents the new students starting school during the periods presented.
(5) Includes approximately $200,000, $1.0 million, $760,000 and $10,000 of
restricted cash at June 30, 1996, 1997, 1998 and 1999, 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.
Background and Overview
As of the end of fiscal 1999, the Company operated 37 colleges, with more
than 16,000 students, in 16 states, including nine in California and eight in
Florida. During fiscal 1999, the Company had net revenues of $133.0 million.
The Company's revenue consists principally of student tuition, enrollment fees
and bookstore sales, and is presented as net revenue after deducting refunds.
30
Net revenue increased 24.9% to $133.0 million in 1999 from $106.5 million in
1998 mainly as a result of a 12.4% increase in the average student population
and an increase in the average tuition rate per student of approximately 9.7%
during the period. Tuition revenue, which represented 94.0% of fiscal 1999
total net revenue, fluctuates 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 (i.e., diploma, or
associate's, bachelor's or masters degree) and the specific curriculum.
The majority of students at the Company's colleges rely on funds received
under various government sponsored student financial programs, especially Title
IV Programs, to pay a substantial portion of their tuition and other education-
related expenses. In fiscal 1999, approximately 78% of the Company's net
revenue (on a cash basis) was indirectly derived from Title IV Programs.
The Company categorizes its 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 its inception, the Company has completed the following acquisitions,
each of which was accounted for as an asset purchase using purchase accounting:
On June 30, 1995, the Company acquired five colleges from National Education
Centers, Inc. ("NECI"). As part of the same transaction, the Company
subsequently acquired from NECI 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.
On July 1, 1996, the Company acquired one college from Repose, Inc. (the
"Repose Acquisition") for a purchase price of $0.3 million.
On August 31, 1996, the Company acquired one college from Concorde Career
Colleges, Inc. (the "Concorde Acquisition") for a purchase price of $0.4
million.
On October 17, 1996, the Company acquired 18 colleges from Phillips
Colleges, Inc. ("Phillips") for an adjusted purchase price of approximately
$23.6 million.
31
Results of Operations
The following table summarizes the Company's operating results as a
percentage of net revenue for the periods indicated.
Year Ended
June 30,
--------------------
1997 1998 1999
----- ----- -----
Statement of Operations Data:
Net revenue.............................................. 100.0% 100.0% 100.0%
----- ----- -----
Operating expenses:
Educational services.................................... 65.5 61.9 57.5
General and administrative.............................. 10.5 10.1 10.5
Marketing and advertising............................... 24.6 22.8 22.3
----- ----- -----
Total operating expenses.............................. 100.6 94.8 90.3
----- ----- -----
Income (loss) from operations............................ (0.6) 5.2 9.7
Interest expense, net.................................... 3.2 3.1 1.3
----- ----- -----
Income (loss) before income taxes........................ (3.8) 2.1 8.4
Provision (benefit) for income taxes..................... (1.4) 0.9 3.5
----- ----- -----
Net income (loss) before extraordinary item............... (2.4) 1.2 4.9
Extraordinary loss, net of tax benefit.................... -- -- 1.5
----- ----- -----
Net income (loss)......................................... (2.4)% 1.2% 3.4%
===== ===== =====
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998
Net Revenue. Net revenue 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 revenue, 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 the Company's performance, (iv)
increased travel and training, and (v) the one-time Year 2000 remediation
expenses. As a percentage of net revenue, 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 revenue 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 revenue, marketing and advertising
expense decreased from 22.8% to 22.3%.
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 the
Company's initial public offering in February 1999.
32
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 432.6%, 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 the Company 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 267.9%, from $1.2 million
in fiscal 1998 to $4.5 million in fiscal 1999 as a result of the factors
discussed above.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
Net Revenue. Net revenue increased $29.3 million, or 38%, from $77.2 million
in fiscal 1997 to $106.5 million in fiscal 1998. The increase was due primarily
to the inclusion of operating results related to the Phillips Acquisition for
the entire year in fiscal 1998 compared to approximately eight and one half
months for fiscal 1997. The schools acquired in the Phillips Acquisition
contributed revenues of $61.2 million in fiscal 1998 compared to $34.6 million
in the prior year. Also contributing to the increase was a 9% increase in the
student population from 12,820 at June 30, 1997 to 13,992 at June 30, 1998, and
the implementation of tuition increases averaging 3% to 7% in most colleges
during fiscal 1998.
Educational Services. Educational services expense increased $15.4 million,
or 30%, from $50.6 million in fiscal 1997 to $65.9 million in fiscal 1998. The
increase was primarily due to the inclusion of the operating results related to
the Phillips Acquisition for the entire year in fiscal 1998, versus only eight
and one half months for fiscal 1997. The schools acquired in the Phillips
Acquisition contributed educational services costs of $37.5 million in fiscal
1998 compared to $22.4 million in the prior year. A portion of the increase
also resulted from the increase in the average student population and wage
increases for employees. As a percentage of net revenue, educational services
expense decreased from 65.5% to 61.9%.
General and Administrative. General and administrative expense increased
$2.7 million, or 33%, from $8.1 million in fiscal 1997 to $10.8 million in
fiscal 1998, due principally to the increased headquarters and regional
operations staff and infrastructure necessary to support the colleges acquired
in the Phillips Acquisition. As a percentage of net revenue, general and
administrative expense decreased from 10.5% to 10.1%.
Marketing and Advertising. Marketing and advertising expense increased $5.3
million, or 28%, from $19.0 million in fiscal 1997 to $24.3 million in fiscal
1998. The increase was due primarily to the inclusion of the operating results
related to the Phillips Acquisition for the entire year in fiscal 1998, versus
eight and one half months for fiscal 1997. The schools acquired in the Phillips
Acquisition contributed marketing and advertising costs of $10.9 million in
fiscal 1998 compared to $6.6 million in the prior year. Also contributing to
the increase was additional spending on the production of updated television
commercials and printed advertising materials. As a percentage of net revenues,
marketing and advertising expense decreased from 24.6% to 22.8%.
Interest Expense, net. Interest expense increased $0.8 million, or 31%, from
$2.5 million in fiscal 1997 to $3.3 million in fiscal 1998, primarily due to
interest expense on increased borrowings used to finance the Phillips
Acquisition in October 1996.
Provision (Benefit) for Income Taxes. The provision for income taxes
increased $2.1 million from a benefit of $1.1 million in fiscal 1997 to a
provision of $1.0 million in fiscal 1998.
33
Net Income (Loss). Net income increased $3.1 million from a loss of $1.9
million in fiscal 1997 to income of $1.2 million in fiscal 1998.
Tuition Price Increases
The 9.7% increase in the average tuition rate per student for the year ended
June 30, 1999, resulted from a combination of (i) tuition price increases
averaging approximately 7.5% and (ii) the effect of graduation and attrition of
students in the degree granting colleges that had fixed tuition contracts
significantly below the prevailing rate being charged new students. Under prior
ownership, students in these colleges were guaranteed a fixed tuition price for
the duration of their programs. Thus, any subsequent tuition price increases
applied only to new students.
Subsequent to the Company's acquisition of these colleges, the pricing
mechanism has been changed so that tuition increases now affect both new
students and continuing students. However, the Company honored the fixed price
commitment to those students already in school when the Company acquired the
colleges. The result is a greater increase in the average tuition rate per
student than the actual period to period tuition price increase because of the
period to period mix impact of new to "grandfathered" students.
The Company expects that the majority of the remaining "grandfathered"
students will graduate or discontinue over the next 6 to 12 months. After that
time, the Company expects period to period increases in the average tuition
rate per student to more closely track the actual tuition price increases
implemented period to period. Additionally, the approximately 7.5% tuition
price increase implemented in the period is higher than the expected future
annual average increase due to some increases in certain markets and for
certain programs where the Company was under-priced relative to its
competition. Accordingly, the average tuition rate increases discussed herein
are not necessarily indicative of future increases.
Seasonality
The following table sets forth unaudited quarterly financial data for each
of the four fiscal quarters in the year ended June 30, 1999. The Company
believes that this information includes all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of such
quarterly information when read in conjunction with the consolidated financial
statements included elsewhere herein.
Fiscal Year Ended June 30, 1999
----------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
------- ------- ------- -------
(Dollars in millions)
Net revenue:
Amount................................... $ 30.3 $ 33.0 $ 34.9 $ 34.8
Percentage of fiscal year total.......... 22.8% 24.8% 26.2% 26.2%
Income from operations before interest, in-
come taxes and extraordinary loss:
Amount................................... $ 1.4 $ 3.6 $ 4.2 $ 3.7
Percentage of fiscal year total.......... 10.8% 27.9% 32.6% 28.7%
The Company's revenues normally fluctuate as a result of seasonal variations
in its business, principally in its total student population. Student
population varies as a result of new student enrollments and student attrition.
Historically, the Company's colleges have had lower student populations in the
first fiscal quarter than in the remainder of the year. The Company's expenses,
however, do not vary as significantly as student population and revenue. The
Company expects quarterly fluctuations in operating results to continue as a
result of seasonal enrollment patterns. Such patterns may change, however, as a
result of acquisitions, new school openings, 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.
34
Liquidity and Capital Resources
In February 1999, the Company issued and sold 2,700,000 shares of Common
Stock at a price of $18.00 per share in its initial public offering ("IPO").
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 are available for general corporate purposes.
In February 1999, the Company recorded a $2.0 million extraordinary loss,
net of tax benefit of $1.5 million, resulting from the prepayment penalty and
the write-off of deferred loan fees associated with the early extinguishment of
the indebtedness mentioned above. Also in February 1999, the Company received
$187,312 from five executive officers of the Company as full payment for notes
receivable from such executive officers, plus the accumulated interest thereon.
Concurrent with the consummation of the IPO, the Company entered into a
$10.0 million credit facility with Union Bank of California (the "Credit
Facility"). The Credit Facility is a one-year, secured revolving credit
facility, bears interest at LIBOR plus 200 basis points and includes a non-
usage fee of 1/8% per year on the unused portion. At maturity, any Acquisition
Advances (as defined in the Credit Facility) will convert to a three year fully
amortizing term loan. Under the Credit Facility, the Company will be required
to maintain certain financial and other covenants. Borrowings under the Credit
Facility will be secured by substantially all personal property of the Company.
At June 30, 1999 the Company had no outstanding borrowings under this credit
facility.
Cash provided by operating activities totaled $5.8 million in the fiscal
1999 compared to $3.4 million used in operating activities in fiscal 1998. The
Company had $19.1 million of working capital as of June 30, 1999 compared to
$0.6 million of working capital as of June 30, 1998. The increase in working
capital was due primarily to the receipt of proceeds from the IPO and favorable
operating results during the period, partially offset by debt repayment,
redemption of preferred stock, and payment of preferred stock dividends.
Included in working capital as of June 30, 1998 and June 30, 1999 is $760,000
and $10,000, respectively, of restricted cash. At June 30, 1998, $750,000 of
the restricted cash secured a letter of credit to the U.S. Department of
Education. Subsequent to the Offering in February 1999 the bank which provided
the letter of credit released the restricted funds to the Company.
Capital expenditures increased from $1.9 million in fiscal 1998 to $2.8
million in fiscal 1999. The increase was due to continued upgrading of school
equipment and facilities, purchases of additional equipment to accommodate the
increasing student population, and the opening of two new branch campuses.
Capital expenditures are expected to continue to increase as the student
population increases and the Company continues to upgrade and expand current
facilities and equipment and add new campuses.
The Company believes that the cash flow from operations, supplemented from
time to time by borrowings from the revolving credit facility with Union Bank
of California, will provide adequate funds for ongoing operations, planned
routine capital expenditures, planned expansion to new locations and debt
service during the term of the revolving credit agreement. As a result of
repayment of indebtedness subsequent to the IPO, the Company expects interest
expense to be lower and have a lesser impact on net income in comparison to
periods prior to the IPO.
The Company leases all of its facilities except five. The Company expects
that future commitments on existing leases will be paid from cash flow from
operations.
35
Year 2000 Compliance
Introduction. In 1997, the Company began the process of identifying
necessary changes to its computer programs and hardware and assessing the
progress of its significant vendors in their remediation efforts to address the
Year 2000 computer problem. The discussion below details the Company's efforts
to ensure Year 2000 compliance.
State of Readiness. The Company identified and evaluated the readiness of
its internal and third party information technology and non-information
technology systems which, if not Year 2000 compliant, could have a direct major
impact to the Company. This evaluation identified the following initial areas
of concern: (i) the Company's accounting and financial reporting system, (ii)
the Company's proprietary student database system (Schools Automation System or
"SAS"), (iii) the systems of third party vendors which process student
financial aid applications and loans for the Company, and (iv) the DOE's
systems for processing and disbursing student financial aid.
The Company's accounting and financial reporting system has been upgraded
with the provider's latest release which is certified to be Year 2000
compliant. The Company's SAS system was not initially compliant and a project
plan was developed to bring this system into compliance. The remediation
project is now essentially complete and the Company expects the system to be
fully tested by the end of the first quarter of fiscal 2000.
The Company also assessed the state of readiness of its major servers and
shared hardware devices and determined that its hardware systems are either
already Year 2000 compliant or can be made so through upgrades of operating
system software. The majority of required changes have been made and, where
necessary, additional upgrades will be completed by the end of the first
quarter of fiscal 2000.
Based on its assessment and its vendors' representations, the Company
believes that the systems of its significant third party vendors which provide
student financial aid and loan processing are already Year 2000 compliant.
The Company is highly dependent on student funding provided through Title IV
programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the DOE's computer systems. According to the DOE, their systems have now been
renovated, independently validated and verified, and certified to be Year 2000
compliant. However, the Company is not able to independently verify the DOE's
assertions, and any significant problems in the DOE's systems could result in
interruption of funding for the Company's students and have a material adverse
impact on the Company, its business and results of operations.
Year 2000 Costs. The Company estimates that it will not incur material
expenses to complete its remediation process in the first half of fiscal 2000.
These efforts have been, and are expected to continue to be, funded through
cash from operations. The Year 2000 compliance project has not resulted in the
deferral of any significant information systems initiatives by the Company.
Risks from Year 2000 Issues. The Company believes the greatest Year 2000
compliance risk, in terms of magnitude of risk, is that the DOE's systems
experience a failure, despite its public pronouncement that its systems are now
Year 2000 compliant, and Title IV funding for the Company's students could be
interrupted for a period of time. Other than public comments provided by the
DOE, the Company is unable to predict the likelihood of this risk occurring.
Any significant interruption of this funding could have a material adverse
effect on the Company's results of operations, liquidity or financial
condition. As mentioned earlier, the Company is dependent upon DOE assertions
as to the completion of their remediation efforts. As of the date of this
Annual Report, the latest public pronouncement by the DOE indicated its
remediation work was completed and implemented prior to the end of March 1999.
36
Contingency Plans. At this time, the Company believes its system are
materially Year 2000 compliant and is satisfied that its significant vendors
are already compliant. As such, the Company has not developed any specific
contingency plans to address an unforeseen Year 2000 computer failure. Based on
the DOE's assertion that it is Year 2000 compliant, the Company also has not
developed a contingency plan to deal with a failure of the DOE's systems
because of the Year 2000 problem.
Inflation
The Company does not believe its operations have been materially affected by
inflation.
New Accounting Pronouncements
For fiscal 2000, the Company will be 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". For fiscal 2001, the Company will be required to adopt SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
adoptions of SOP 98-1, SOP No. 98-5, and SFAS No. 133 are not expected to have
a material impact on the Company's presentation of financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not utilize interest rate swaps, forward or option
contracts on foreign currencies or commodities, or other types of derivative
financial instruments. Subsequent to the Company's public offering, and the
application of the proceeds therefrom (including repayment of certain debt),
the only assets or liabilities of the Company which are subject to risks from
interest rate changes are (i) the mortgage debt of the Company in the aggregate
amount of $3.5 million, (ii) notes receivable from students for the aggregate
amount of $7.1 million, and (iii) marketable investments with original maturity
dates of less than eight months of $14.5 million, all June 30, 1999. The
mortgage debt of the Company, the student notes receivable, and the marketable
investments are all at fixed interest rates. The Company does not believe it is
subject to material risks from reasonably possible near-term changes in market
interest rates.
37
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, 1998
and 1999 and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended June 30,
1999. 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 generally accepted auditing
standards. 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, 1998 and 1999, and the results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1999 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Orange County, California
August 20, 1999
38
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
June 30,
----------------
1998 1999
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 2,402 $ 1,787
Restricted cash............................................. 760 10
Marketable investments...................................... -- 14,501
Accounts receivable, net of allowance for doubtful accounts
of $3,519 and $3,258 at June 30, 1998 and 1999, respective-
ly......................................................... 10,077 11,385
Student notes receivable, net of allowance for doubtful ac-
counts of $457 and $463 at June 30, 1998 and 1999, respec-
tively..................................................... 1,776 1,959
Deferred income taxes....................................... 2,396 1,901
Prepaid expenses and other current assets................... 3,126 4,037
------- -------
Total current assets...................................... 20,537 35,580
PROPERTY AND EQUIPMENT, net................................... 10,332 10,981
OTHER ASSETS:
Intangibles, net of accumulated amortization of $2,010 and
$3,110 at June 30, 1998 and 1999, respectively............. 22,719 21,218
Student notes receivable, net of allowance for doubtful
accounts of $1,829 and $1,435 at June 30, 1998 and 1999,
respectively............................................... 4,408 5,175
Deposits and other assets................................... 1,909 903
------- -------
TOTAL ASSETS.............................................. $59,905 $73,857
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 4,727 $ 4,828
Accrued compensation and related liabilities................ 3,704 5,749
Accrued expenses............................................ 880 618
Accrued interest............................................ 1,295 34
Income tax payable.......................................... 1,739 1,848
Prepaid tuition............................................. 2,952 3,257
Current portion of long-term debt........................... 4,634 138
------- -------
Total current liabilities................................. 19,931 16,472
------- -------
LONG-TERM DEBT, net of current portion........................ 31,535 3,396
------- -------
DEFERRED INCOME TAXES......................................... 121 453
------- -------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK.................................... 2,167 --
------- -------
CONVERTIBLE PREFERRED STOCK................................... 5,174 --
------- -------
STOCKHOLDERS' EQUITY:
Common Stock, $0.0001 par value:
Common Stock, 40,000 shares authorized, 4,924 shares and
9,169 shares issued and outstanding at June 30, 1998 and
1999, respectively....................................... 1 1
Nonvoting Common Stock, 2,500 shares authorized, 1,415 and
1,777 shares issued and outstanding at June 30, 1998 and
1999, respectively....................................... -- --
Additional paid-in capital................................ 1,374 49,609
Notes receivable for stock.................................. (187) --
Retained earnings (accumulated deficit)..................... (211) 3,926
------- -------
Total stockholders' equity................................ 977 53,536
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $59,905 $73,857
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
39
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
Years Ended June 30,
------------------------------
1997 1998 1999
-------- --------- ---------
NET REVENUES................................... $ 77,201 $ 106,486 $ 132,972
-------- --------- ---------
OPERATING EXPENSES:
Educational services (including a provision
for bad debt expense of $3,554, $5,963 and
$7,673 for the years ended June 30, 1997,
1998 and 1999, respectively)................ 50,568 65,927 76,425
General and administrative................... 8,101 10,777 13,961
Marketing and advertising.................... 19,000 24,268 29,702
-------- --------- ---------
Total operating expenses................... 77,669 100,972 120,088
-------- --------- ---------
Income (loss) from operations.............. (468) 5,514 12,884
INTEREST EXPENSE, net.......................... 2,524 3,305 1,678
-------- --------- ---------
Income (loss) before provision (benefit)
for income taxes and extraordinary loss... (2,992) 2,209 11,206
PROVISION (BENEFIT) FOR INCOME TAXES........... (1,107) 988 4,703
-------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS........ (1,885) 1,221 6,503
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF
DEBT (net of tax benefit of $1,518)........... -- -- 2,011
-------- --------- ---------
NET INCOME (LOSS).............................. $ (1,885) $ 1,221 $ 4,492
======== ========= =========
INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Income (loss) before extraordinary loss....... $ (1,885) $ 1,221 $ 6,503
Less preferred stock dividends................ (118) (365) (355)
-------- --------- ---------
Income (loss) before extraordinary loss
attributable to common stockholders......... (2,003) 856 6,148
Extraordinary loss............................ -- -- (2,011)
-------- --------- ---------
Net income (loss) attributable to common
stockholders................................ $ (2,003) $ 856 $ 4,137
======== ========= =========
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Basic--
Income (loss) before extraordinary loss...... $ (0.41) $ 0.16 $ 0.85
Extraordinary loss........................... -- -- (0.28)
-------- --------- ---------
Net income (loss).......................... $ (0.41) $ 0.16 $ 0.57
======== ========= =========
Diluted--
Income (loss) before extraordinary loss...... $ (0.41) $ 0.12 $ 0.72
Extraordinary loss........................... -- -- (0.24)
-------- --------- ---------
Net income (loss).......................... $ (0.41) $ 0.12 $ 0.48
======== ========= =========
Weighted average number of common shares
outstanding:
Basic........................................ 4,896 5,236 7,266
======== ========= =========
Diluted...................................... 4,896 7,125 8,549
======== ========= =========
The accompanying notes are an integral part of these consolidated statements.
40
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Common Nonvoting Common
Stock Stock Retained
------------ ---------------- Additional Earnings Total
Par Par Paid-in Notes (Accumulated Stockholders'
Shares Value Shares Value Capital Receivable Deficit) Equity
------ ----- -------- ------- ---------- ---------- ------------ -------------
Balance at June 30,
1996................... 4,869 $ 1 1,195 $ -- $ 1,374 $(187) $ 936 $ 2,124
Exercise of warrants
for Common Stock..... 55 -- -- -- -- -- -- --
Exercise of warrants
for Nonvoting Common
Stock................ -- -- 220 -- -- -- -- --
Redeemable Preferred
Stock dividend
accrual.............. -- -- -- -- -- -- (118) (118)
Net loss.............. -- -- -- -- -- -- (1,885) (1,885)
----- --- -------- ------- ------- ----- ------ -------
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
===== === ======== ======= ======= ===== ====== =======
The accompanying notes are an integral part of these consolidated statements.
41
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Years Ended June 30,
---------------------------
1997 1998 1999
-------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ (1,885) $ 1,221 $ 4,492
Adjustments to reconcile net income (loss) to net
cash provided by (used in)
operating activities--
Depreciation and amortization................... 2,070 3,051 3,445
Deferred income taxes........................... (1,049) (1,083) 827
Write-off of deferred financing costs........... -- -- 911
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable........................... (1,505) (820) (1,308)
Student notes receivable...................... (476) (3,966) (950)
Income tax refund receivable.................. 551 195 --
Prepaid expenses and other assets............. 176 (2,184) (2,660)
Accounts payable.............................. 2,859 (420) 101
Accrued expenses.............................. 2,085 1,207 522
Income tax payable............................ -- 1,739 109
Prepaid tuition............................... (1,831) (2,313) 305
-------- ------- --------
Net cash provided by (used in) operating
activities..................................... 995 (3,373) 5,794
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of schools and colleges, net of cash
acquired........................................ (24,227) -- --
Change in restricted cash........................ (810) 250 750
Capital expenditures............................. (5,936) (1,926) (2,790)
Phillips College acquisition purchase price
adjustment...................................... -- -- 401
Increase in marketable investments............... -- -- (14,501)
-------- ------- --------
Net cash used in investing activities........... (30,973) (1,676) (16,140)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of convertible preferred
stock........................................... -- 4,934 --
Increase in deferred financing costs............. (963) (182) (256)
Borrowings under long-term debt.................. 36,252 3,000 3,200
Principal repayments on long-term debt........... (4,314) (3,122) (35,835)
Proceeds from initial public offering............ -- -- 45,198
Payment of redeemable preferred stock and accrued
dividends....................................... -- -- (2,253)
Payment of convertible preferred stock
dividends....................................... -- -- (510)
Proceeds from notes receivable for stock......... -- -- 187
-------- ------- --------
Net cash provided by financing activities....... 30,975 4,630 9,731
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 997 (419) (615)
CASH AND CASH EQUIVALENTS, beginning of year...... 1,824 2,821 2,402
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of year............ $ 2,821 $ 2,402 $ 1,787
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.................................... $ -- $ 334 $ 2,666
======== ======= ========
Interest........................................ $ 1,755 $ 3,192 $ 3,673
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock dividend accrual................ $ 118 $ 365 $ 355
======== ======= ========
Acquisitions of various schools and colleges--
Fair value of assets acquired................... $ 31,147 $ -- $ --
Net cash used in acquisitions................... (24,227) -- --
-------- ------- --------
Liabilities assumed or incurred................ $ 6,920 $ -- $ --
======== ======= ========
The accompanying notes are an integral part of these consolidated statements.
42
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 degree-granting and
diploma-granting private, for-profit post-secondary schools devoted to career
program training primarily in the medical, technical and business fields. The
Company operates 37 colleges located in 16 states: Virginia, West Virginia,
Texas, Michigan, Massachusetts, Louisiana, California, Oregon, Colorado,
Nevada, Utah, Missouri, Pennsylvania, New York, Washington 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 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, the unrealized loss on available-for-
sale securities was immaterial.
43
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Cash
Restricted cash primarily consists of amounts to secure a letter of credit
in favor of the U.S. Department of Education ("DOE").
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 percent 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 represents 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 tradenames 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
44
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
events or changes in circumstances occur, the Company will recognize an
impairment loss if the undiscounted 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.
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.
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 1999, the Company was required to adopt SFAS No. 130, "Reporting
Comprehensive Income." The adoption of this pronouncement did not have a
material impact on the Company's presentation of financial position or results
of operations.
For fiscal 1999, the Company was required to adopt SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
adoption of this pronouncement did not have a material impact on the Company's
disclosures.
For fiscal 2000, the Company will be 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". For fiscal 2001, the Company will be required to adopt SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." The
adoptions of SOP No. 98-1, SOP No. 98-5 and SFAS No. 133 are not expected to
have a material impact on the Company's presentation of financial position or
results of operations.
45
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 75 percent, 72 percent and 78 percent 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, 1997, 1998 and 1999, 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. 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.
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
46
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$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 are 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,
-------------
1998 1999
------ ------
(amounts in
thousands)
Course materials, net......................................... $1,463 $1,288
Prepaids...................................................... 1,227 2,549
Other current assets.......................................... 436 200
------ ------
$3,126 $4,037
====== ======
Property and equipment consist of the following:
June 30,
----------------
1998 1999
------- -------
(amounts in
thousands)
Furniture and equipment.................................... $ 6,462 $ 8,231
Computer hardware and software............................. 2,956 3,504
Leasehold improvements..................................... 980 1,453
Land....................................................... 2,249 2,249
Buildings.................................................. 1,178 1,178
------- -------
13,825 16,615
Less--accumulated depreciation and amortization............ (3,493) (5,634)
------- -------
$10,332 $10,981
======= =======
Depreciation and amortization expense associated with property and equipment
was $1,199,000, $1,778,000 and $2,141,000 for the years ended June 30, 1997,
1998 and 1999, respectively.
Intangible assets consist of the following:
June 30,
----------------
1998 1999
------- -------
(amounts in
thousands)
Goodwill................................................... $ 8,285 $ 7,884
Curriculum................................................. 11,405 11,405
Trade names................................................ 5,039 5,039
------- -------
24,729 24,328
Less--accumulated amortization............................. (2,010) (3,110)
------- -------
$22,719 $21,218
======= =======
Amortization expense associated with intangibles was $763,000, $1,120,000
and $1,100,000 for the years ended June 30, 1997, 1998 and 1999, respectively.
47
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 15.00 percent per annum.
The following reflects on analysis of student notes receivable at June 30,
1999:
Net Allowance Gross
Student for Student
Notes Doubtful Notes
Receivable Accounts Receivable
---------- --------- ----------
(amounts in thousands)
Current...................................... $1,959 $ 463 $ 2,422
Long-term.................................... 5,175 1,435 6,610
Add-unearned portion......................... 2,826
Add-unrecorded interest...................... 3,219
-------
Total...................................... $15,077
=======
Payments due under student notes receivable are as follows:
Years Ending June 30, (amounts in
--------------------- thousands)
2000........................................................ $ 5,603
2001........................................................ 3,000
2002........................................................ 2,252
2003........................................................ 1,535
2004........................................................ 1,351
Thereafter.................................................. 1,336
-------
Total..................................................... $15,077
=======
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
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 17 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.
Accounting for Acquisitions
All acquisitions have been accounted for under the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their estimated fair market values at
the dates of the acquisitions. The results of operations of each acquisition
are included in the consolidated results of the Company beginning on the
effective dates of the acquisitions.
48
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 6--LONG-TERM DEBT
Long-term debt consists of the following:
June 30,
---------------
1998 1999
------- ------
(amounts in
thousands)
Senior Secured Notes, as amended, due October 2004, with
interest at 11.02 percent per annum payable quarterly in
January, April, July and October of each year beginning
January 1997.............................................. $22,500 $ --
Senior Secured Revolving Note, as amended due October 2000,
with interest at the lenders' LIBOR rate, as defined, plus
3.50 percent.............................................. 5,000 --
Subordinated Notes, as amended, due October 2005, interest
at 12.00 percent per annum payable quarterly.............. 5,000 --
Promissory note due April 2007, with interest at 10.95
percent per annum, secured by certain land and
improvements.............................................. 3,646 3,528
Other...................................................... 23 6
------- ------
36,169 3,534
Less--current portion...................................... (4,634) (138)
------- ------
$31,535 $3,396
======= ======
As discussed in Note 2, the Company used a portion of the IPO proceeds to
pay the outstanding balances of the Senior Secured Notes, the Senior Secured
Revolving Note and the Subordinated Notes. During 1999, the Company entered
into a $10.0 million credit facility with Union Bank of California (the "Credit
Facility"). The Credit Facility is a one-year, secured revolving credit
facility, bears interest at LIBOR plus 200 basis points and includes a non-
usage fee of 1/8% per year on the unused portion. At maturity, any Acquisition
Advances (as defined in the Credit Facility) will convert to a three year fully
amortizing term loan. Under the Credit Facility, the Company will be required
to maintain certain financial and other covenants. Borrowings under the Credit
Facility will be secured by substantially all personal property of the Company.
At June 30, 1999, 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, (amounts in
--------------------- thousands)
2000........................................................ $ 138
2001........................................................ 148
2002........................................................ 164
2003........................................................ 184
2004........................................................ 203
Thereafter.................................................. 2,697
------
$3,534
======
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").
49
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Redeemable Preferred Stock
There were 18,125 shares of Redeemable Preferred Stock issued and
outstanding at June 30, 1998. The Redeemable Preferred stockholders were
entitled to dividends that accrued daily at 6 percent per annum until June 30,
2002 and 12 percent thereafter. These shares had a defined liquidation value of
$100 per share plus all accrued and unpaid dividends. Accrued dividends on the
Redeemable Preferred Stock at June 30, 1998 were $354,558 and are included in
Redeemable Preferred Stock in the accompanying consolidated balance sheets.
Upon the completion of a Qualified Initial Public Offering, as defined, or
based on other qualifying events, the holders were permitted to require the
shares to be redeemed. As discussed in Note 2, the Company redeemed the
Redeemable Preferred Stock including accumulated dividends thereon in
connection with the IPO.
Convertible Preferred Stock
There were 25,000 shares each of Series 2 and Series 3 Convertible Preferred
Stock outstanding at June 30, 1998. The Series 2 and Series 3 Convertible
Preferred Stockholders were entitled to dividends that accrued daily at 8
percent per annum. These shares had a defined Liquidation value of $100 per
share plus all accrued and unpaid dividends. Accrued dividends on the
Convertible Preferred Stock at June 30, 1998 were $240,000, and are included in
Convertible Preferred Stock in the accompanying consolidated balance sheets. As
discussed in Note 2, the Series 2 and Series 3 Convertible Preferred Stock were
converted into Nonvoting Common Stock and Common Stock, respectively, in
connection with the IPO.
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 vest over
time or based on certain qualifying events as defined. At June 30, 1998, 87.5
percent (1,929,135 shares) were vested. The remaining shares 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. Subject to the Agreements,
the executives paid cash of $0.00023 per share, for total consideration of
$188, with the remaining balance of $187,312 included in notes receivable for
stock on the accompanying consolidated balance sheets. At June 30, 1998 none of
these shares were vested. All of these shares vested concurrent with the
Company's IPO, and, pursuant to contractual obligations of the Company to the
executives, were exchanged for an equal number of shares of Common Stock (See
Note 2).
50
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
The following represents a summary of the warrant activity:
Years Ended June 30,
--------------------------------------------------------
1997 1998 1999
------------------ ------------------ ------------------
Wt. Average Wt. Average Wt. Average
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ ----------- ------ ----------- ------ -----------
(amounts in thousands, except Wt. Average Ex. Price)
Outstanding, beginning
of the year............ 276 $0.0007 525 $0.0005 968 $0.0004
Granted................. 525 0.0005 443 0.0002 -- --
Exercised............... (276) (0.0007) -- -- (530) (0.0002)
Forfeited/expired....... -- -- -- -- (438) (0.0005)
---- ------- --- ------- ---- -------
Outstanding, end of the
year................... 525 $0.0005 968 $0.0004 -- $ --
==== ======= === ======= ==== =======
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. As a result,
management believes the fair value of these warrants is nominal and therefore
no amount has been allocated to the warrants. As discussed in Note 2, 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. On June 30, 1998, the Company granted
121,039 stock options to various officers and employees at an exercise price of
$12.47 per share. The options vest 25 percent each year and expire ten years
from the date of grant. The exercise price of these options represented the
fair value of the Company's common stock as determined by an independent
valuation firm. During fiscal 1999, the Company granted 24,000 stock options
concurrent with the IPO at the IPO price of $18.00. Accordingly, no
compensation expense was recorded for the stock option grants pursuant to APB
Opinion No. 25.
Pursuant to SFAS No. 123, the fair value of each option granted on June 30,
1998 and during fiscal 1999 was $4.01 and $11.16, respectively. The fair value
was estimated using the Black-Scholes option pricing model using the following
assumptions for fiscal 1998 and 1999, respectively: no dividend yield, nominal
factor for volatility and 54 percent, weighted-average risk-free rate of 5.54
percent and 6.00 percent and expected life of seven years. 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 1988 fiscal year, the pro forma effect for 1998
is immaterial.
51
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is the pro forma effect for fiscal 1999 (amounts in thousands
except per share data):
Net income:
As reported...................................................... $4,492
Pro forma........................................................ 4,315
Diluted earnings per share:
As reported...................................................... $0.48
Pro forma........................................................ 0.46
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,
-----------------
1997 1998 1999
----- ----- -----
(amounts in
thousands)
Basic common shares outstanding............................ 4,896 5,236 7,266
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
----- ----- -----
Diluted common shares outstanding.......................... 4,896 7,125 8,549
===== ===== =====
For the year ended June 30, 1997, the effect of all common stock warrants
and non-vested executive Common and Nonvoting Common Stock was excluded from
the computation of diluted loss per common share as the effect of such
inclusion would be antidilutive. Additionally, 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 provisions (benefit) are as follows:
Years Ended June 30,
------------------------
1997 1998 1999
------- ------- ------
(amounts in thousands)
Current provision:
Federal........................................... $ (173) $ 1,562 $3,178
State............................................. 115 510 698
------- ------- ------
(58) 2,072 3,876
------- ------- ------
Deferred provision:
Federal........................................... (807) (857) 615
State............................................. (242) (227) 212
------- ------- ------
(1,049) (1,084) 827
------- ------- ------
Total provision (benefit) for income taxes...... $(1,107) $ 988 $4,703
======= ======= ======
52
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Actual income tax provision (benefit) differs from the income tax provision
(benefit) computed by applying the U.S. federal statutory tax rate of 34
percent to income (loss) before provision for income taxes as follows:
Years Ended June 30,
-----------------------
1997 1998 1999
-------- -------------
(amounts in thousands)
Provision (benefit) at the statutory rate.......... $ (1,017) $ 751 $ 3,810
State income tax provision (benefit), net of
federal benefit................................... (150) 187 822
Other.............................................. 60 50 71
-------- ----- -------
$(1,107) $ 988 $ 4,703
======== ===== =======
The components of the Company's deferred tax asset and liability are as
follows:
June 30
--------------
1998 1999
------ ------
(amounts in
thousands)
Current deferred tax asset:
Accounts receivable allowance for doubtful accounts........ $1,196 $1,108
Accrued vacation........................................... 374 429
Accrued bonuses............................................ 112 --
Other accrued liabilities.................................. 245 --
State taxes................................................ 469 364
------ ------
Current deferred tax asset............................... 2,396 1,901
------ ------
Non-current deferred tax liability:
Notes receivable allowance for doubtful accounts........... 564 490
Depreciation............................................... (303) (354)
Amortization............................................... (382) (589)
------ ------
Non-current deferred tax liability....................... (121) (453)
------ ------
$2,275 $1,448
====== ======
NOTE 10--COMMITMENTS AND CONTINGENCIES
Leases
The Company leases most of its operating facilities and various equipment
under noncancellable 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, (amounts in
--------------------- thousands)
2000........................................................ $10,285
2001........................................................ 8,968
2002........................................................ 7,781
2003........................................................ 5,290
2004........................................................ 4,076
Thereafter.................................................. 13,027
-------
$49,427
=======
53
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the years ended June 30, 1997, 1998 and 1999 amounted to
$7,835,000, $9,078,000 and $10,126,000, respectively, and is reflected in
educational services and general and administrative expense in the accompanying
consolidated statements of operations.
Legal Matters
On August 2, 1999, approximately thirty-six current or former students in
the Company's Duff's Business Institute court reporting program filed suit
against the Company and certain of its subsidiaries, alleging inadequacies in
the Duff's Business Institute court reporting program. All such students have
since voluntarily dismissed their suit against the Company and its
subsidiaries, without prejudice, and the Company has agreed to engage in non-
binding mediation in an attempt to resolve the students' complaints. The
Company does not believe that such students have valid legal claims against it
and, if the mediation process is unsuccessful, the Company will vigorously
defend itself against any lawsuits filed against it.
The Company is involved in various other legal proceedings which have been
routine and in the normal course of business. In the opinion of management,
after consultation with legal counsel, neither the resolution of the Duff's
Business Institute matter, nor any of these other matters, will have a material
adverse impact on the Company's financial position or results of operations.
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 $244,000, $293,000 and $333,000 for the years
ended June 30, 1997, 1998 and 1999, respectively.
NOTE 12--GOVERNMENTAL REGULATION
The Company and each school is 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, 1999, 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 percent to 90 percent
the portion a proprietary
54
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
school's cash basis revenue that may be derived each year from the Title IV
Programs, (iii) revising the refund standards that require an institution to
return a portion of the Title IV Program funds for students who withdraw from
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 percent 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 percent 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 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 percent 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, 1999, 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 will be eligible for reinstatement in 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
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 is 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. To date, the Company has not
received a response from the IG regarding its review. However, the Company
believes that its institutions are in compliance with the 85/15 rule and all
other federal regulations. The Company believes that it has taken effective
steps to monitor compliance with governmental regulations and other legal
requirements. However, there can be no assurance that 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.
55
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 18, 1999. Information concerning the
Company's executive officers is included in Part I.
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 18, 1999.
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 18, 1999.
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 18, 1999.
56
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:
Page
----
1. Index to Financial Statements
Report of Independent Public Accountants............................ 38
Consolidated Balance Sheets for the years ending June 30, 1998 and
1999............................................................... 39
Consolidated Statements of Operations for the years ending June 30,
1997, 1998 and 1999................................................ 40
Consolidated Statements of Stockholders' Equity for the years ending
June 30, 1997, 1998 and 1999....................................... 41
Consolidated Statements of Cash Flows for the years ended June 30,
1997, 1998 and 1999................................................ 42
Notes to Consolidated Financial Statements.......................... 43
2. Financial Statement Schedules
Report of Independent Public Accountants with Respect to Schedule
II--Valuation and Qualifying Accounts.............................. 61
Schedule II--Valuation and Qualifying Accounts...................... 62
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.
57
CORINTHIAN COLLEGES, INC
INDEX TO EXHIBITS
Exhibit Incorporation
Number Description of Exhibit Reference
------- ---------------------- -------------
3.3+ Restated Articles of Incorporation.................... (b)
3.4+ Bylaws of the Company................................. (a)
4.7+ Promissory Note (Secured) dated April 30, 1997, by
Corinthian Property Group, Inc. in favor of Banc One
Capital Partners VI, Ltd.............................. (a)
4.8+ Senior Secured Note, dated October 17, 1997, in the
principal amount of $22,500,000 from the Company to
The Prudential Insurance Company of America........... (a)
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, Banc One Capital
Partners II, LLC, Banc One 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, Banc One 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)
10.28+ Subordinated Note and Warrant Purchase Agreement dated
October 17, 1996, by and between the Company, Primus
Capital Fund III Limited Partnership and Banc One
Capital Partners II, LLC.............................. (a)
10.29+ Amendment dated November 24, 1997, to the Subordinated
Note and Warrant Purchase Agreement dated October 17,
1996, by and between the Company, Primus Capital Fund
III Limited Partnership and Banc One Capital Partners
II, LLC............................................... (a)
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, Banc One 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, Banc One Capital Partners II, LLC, David G.
Moore, Paul St. Pierre, Frank J. McCord, Dennis L.
Devereux and Lloyd W. Holland......................... (a)
10.42+ Note Purchase and Revolving Credit Agreement dated
October 17, 1996, by and between the Company and The
Prudential Insurance Company of America, in the amount
of $22,500,000........................................ (a)
58
Exhibit Incorporation
Number Description of Exhibit Reference
------- ---------------------- -------------
10.45+ Loan Agreement dated April 30, 1997, by and between
Corinthian Property Group, Inc. and Banc One Capital
Partners VI, Ltd. in the amount of $3,760,000.......... (a)
10.46+ Limited Guaranty and Indemnity Agreement dated as of
April 30, 1997, by the Company in favor of Banc One
Capital Partners VI, Ltd............................... (a)
10.47+ Default Waiver and Third Amendment dated October 31,
1997, under Note Purchase and Revolving Credit
Agreement dated October 17, 1996, from The Prudential
Insurance Company of America to the Company............ (a)
10.48+ Purchase Agreement, dated as of November 7, 1997, by
and between the Company, Primus Capital Fund III
Limited Partnership and Banc One Capital Partners II,
LLC.................................................... (a)
10.49+ Stock Subscription Warrant dated November 24, 1997, to
purchase Class B Common Stock, issued to Banc One
Capital Partners II, LLC............................... (a)
10.50+ Stock Subscription Warrant dated November 24, 1997, to
purchase Class A Common Stock, issued to Primus Capital
Fund III Limited Partnership........................... (a)
10.51+ Stock Subscription Warrant dated November 25, 1997, to
purchase Class A Common Stock, issued to The Prudential
Insurance Company of America........................... (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, Banc One 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+ Loan Agreement, dated February 10, 1999 by and between
Union Bank of California and the Company............... (d)
10.55 Promissory Note dated August 31, 1999, by David G.
Moore in favor of the Company..........................
10.56 Pledge Agreement dated August 31, 1999, by and between
David G. Moore and the Company.........................
10.57 Form of Corinthian Colleges, Inc. 1998 Performance
Award Plan Incentive Stock Option Agreement for Certain
Executive Officers of the Company......................
10.58 Form of Corinthian Colleges, Inc. 1998 Performance
Award Plan Non Qualified Stock Option Agreement for
Certain Executive Officers of the Company..............
21.1+ List of Subsidiaries................................... (e)
23.1 Consent of Arthur Andersen LLP.........................
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 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 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 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 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.
59
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 /s/ Frank J. McCord
By: _________________________________ By: _________________________________
David G. Moore Frank J. McCord
President, Chief Executive Officer Executive Vice President and
and Director (Principle Executive Chief Financial Officer(Principle
Officer) September 27, 1999 Financial and Accounting Officer)
September 27, 1999
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 Frank
J. McCord, 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 27, 1999
______________________________________ Officer and Director
David G. Moore (Principal Executive
Officer)
/s/ Paul St. Pierre Executive Vice President September 27, 1999
______________________________________ and Director
Paul St. Pierre
/s/ Loyal Wilson Director September 27, 1999
______________________________________
Loyal Wilson
/s/ Jack D. Massimino Director September 27, 1999
______________________________________
Jack D. Massimino
/s/ Linda Arey Skladany Director September 27, 1999
______________________________________
Linda Arey Skladany
/s/ Dr. Carol D'Amico Director September 27, 1999
______________________________________
Dr. Carol D'Amico
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Corinthian Colleges, Inc.
We have audited in accordance with generally accepted auditing standards,
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 20, 1999. 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 20, 1999
61
CORINTHIAN COLLEGES, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Additions
---------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
of Year Expenses Accounts Deductions Year
---------- ---------- ---------- ---------- ----------
(amounts in thousands)
Allowance for doubtful
accounts
Accounts receivable:
Year ended June 30,
1997................. $1,586 $3,665 $ 126 $(2,614) $2,763
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
Student notes
receivable:
Year ended June 30,
1997................. -- (111) 1,634 (662) 861
Year ended June 30,
1998................. 861 1,708 -- (283) 2,286
Year ended June 30,
1999................. 2,286 660 -- (1,048) 1,898
62