Form 10-K
Table of Contents

 

 

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, 2010

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-25283

 

 

CORINTHIAN COLLEGES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   33-0717312

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6 Hutton Centre Drive, Suite 400, Santa Ana, California

www.cci.edu

(Address of principal executive offices)

92707

(Zip Code)

(714) 427-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange on which registered

 

 

 

Common Stock, $0.0001 par value per share   Nasdaq National Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨            Smaller reporting company  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of December 31, 2009, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $1.2 billion, based upon the closing sales price of the Common Stock as reported on Nasdaq National Stock Market on such date. 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. This determination of affiliate status for purposes of this computation is not necessarily a conclusive determination for other purposes. As of August 18, 2010, the number of outstanding shares of voting and non-voting common equity of the registrant was approximately 88,195,781.

 

 

 


Table of Contents

CORINTHIAN COLLEGES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2010

 

          Page No.
   INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS    1
   EXPLANATORY NOTE    1
   DOCUMENTS INCORPORATED BY REFERENCE    1
PART I
ITEM 1.    BUSINESS    2
ITEM 1A.    RISK FACTORS    28
ITEM 1B.    UNRESOLVED STAFF COMMENTS    40
ITEM 2.    PROPERTIES    40
ITEM 3.    LEGAL PROCEEDINGS    41
ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS    43
PART II
ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES    43
ITEM 6.    SELECTED FINANCIAL DATA    46
ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS    47
ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    57
ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA    59
ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE    91
ITEM 9A.    CONTROLS AND PROCEDURES    91
ITEM 9B.    OTHER INFORMATION    91
PART III
ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE    92
ITEM 11.    EXECUTIVE COMPENSATION    92
ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS    92
ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE    92
ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES    92
PART IV
ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES    92
   SIGNATURES    96

 

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Table of Contents

INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS

Corinthian Colleges, Inc. (hereinafter the “Company” or “Corinthian”) is a Delaware corporation; its principal executive offices are located at 6 Hutton Centre Drive, Suite 400, Santa Ana, California 92707.

You should keep in mind the following points as you read this Report on Form 10-K:

 

   

the terms “we,” “us,” “our” or the “Company” refer to Corinthian Colleges, Inc. and its subsidiaries;

 

   

the terms “school,” “college,” “campus,” or “university” refer to a single location of any school;

 

   

the term “institution” means a main campus and its additional locations, as such are defined under the regulations of the U.S. Department of Education, which we sometimes refer to herein as the “ED”; and

 

   

our fiscal year ends on June 30; references to fiscal 2010, fiscal 2009 and fiscal 2008 and similar constructions refer to the fiscal year ended on June 30 of the applicable year.

This Annual Report on Form 10-K contains statements which, to the extent they do not recite historical fact, constitute “forward looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward looking statements are used under the captions “Business,” “Governmental Regulations and Financial Aid,” “Risk Factors,” “Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this Annual Report on Form 10-K. You can identify these statements by the use of words like “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue,” and variations of these words or comparable words. Forward looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward looking statements suggest for various reasons, including those discussed under the caption “Risk Factors.” These forward looking statements are made only as of the date of this Annual Report on Form 10-K. We do not undertake to update or revise the forward looking statements, whether as a result of new information, future events or otherwise.

EXPLANATORY NOTE

During the fourth quarter of 2008, the Company decided to divest the WyoTech Oakland campus, and the Company has since sold the capital assets of WyoTech Oakland. Additionally, during the fourth quarter of 2008, the Company completed the teach-out of its Lynnwood WA, Everett WA, and Atlanta GA campuses. Accordingly, the results of operations of the campuses are reflected as discontinued operations in our consolidated statements of operations for all prior periods presented. The Company expects to have no significant continuing involvement with these entities.

During the fourth quarter of fiscal 2007, the Company decided to divest all of its Canadian campuses outside of the province of Ontario, Canada, as well as the WyoTech Boston MA campus. The Company sold the non-Ontario Canadian campuses on February 29, 2008. The Company sold WyoTech Boston on May 1, 2008. The Company has no significant continuing involvement with these entities.

The information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement for the 2010 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2010, are incorporated by reference into Part III of this report.

 

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Table of Contents

PART I

ITEM 1. BUSINESS

Overview

Our Company is one of the largest for-profit post-secondary education companies in the United States and Canada, serving the large and growing segment of the population seeking to acquire career-oriented education. As of June 30, 2010, we had a student enrollment of 110,580 and operated 101 schools in 25 states, and 17 schools in the province of Ontario, Canada. We offer a variety of diploma programs and associate’s, bachelor’s and master’s degrees through a single operating segment (refer to Note 1 of the accompanying consolidated financial statements for more information). Our training program areas include healthcare, criminal justice, mechanical, trades, business and information technology.

On January 4, 2010 the Company completed its acquisition of Heald Capital, LLC, a Delaware limited liability company (“Heald”) for consideration of $395 million. Heald, through its subsidiaries, operates Heald College, a regionally accredited institution that prepares students for careers in healthcare, business, legal, information technology and other growing fields, primarily through associate degree programs. Heald College operates 11 campuses and its results are included in the Consolidated Financial Statements from the date of acquisition.

Historically, we have grown our business through acquisitions as well as through organic growth. Organic growth consists of opening new branch campuses, remodeling, expanding or relocating existing campuses and adopting curricula into existing colleges. Since the Company’s formation in 1995, we have acquired 85 colleges including the Heald acquisition, (net of closures, discontinued operations, and consolidations) and we have opened 33 branch campuses.

Operating Strategy

Key elements of our operating strategy include the following:

Emphasize Student Outcomes. We believe that positive student outcomes are a critical component of our long-term success. Accordingly, we devote substantial resources to maintaining and improving our retention and placement rates. Modest increases in student retention can have a significant impact on our profitability, and high graduation and placement rates enhance a school’s reputation and the marketability of its programs. We have implemented a variety of student service programs, including orientation and tutoring, academic advising, ride-sharing and referral programs, all of which are designed to help students complete their programs, graduate and achieve their career goals. We use a curriculum development team comprised of campus representatives, corporate program directors, instructional design professionals, and textbook publishers. For each program area, each campus also uses advisory boards comprised of local business professionals to help ensure that our curricula meet employer requirements. We also maintain full-time career services personnel at our schools who are responsible for helping our students obtain employment. Career services identifies prospective employers, helps students prepare resumes, conducts practice interviews, establishes externship programs and tracks students’ placement success.

Create an Effective Learning Environment. We view our students as customers and seek to provide a supportive learning environment where student satisfaction and success are achieved. We offer a flexible schedule of classes, providing our students with the opportunity to attend classes throughout the day, as well as nights and weekends. Schools operate year-round, permitting students to complete their course of study quickly. We maintain reasonable class sizes and offer support programs such as on-campus advising and tutoring. We also maintain a toll-free student hotline to address and help resolve student concerns.

Focus on Attractive Markets. We design our educational programs to benefit from favorable demographic and labor market trends. Our schools offer programs in industries which are growing and offer promising career opportunities, including healthcare, criminal justice, mechanical, trades, business and information technology. Our geographic strategy is to build a strong competitive position in attractive and growing markets where we can operate efficiently and benefit from favorable demographic trends.

Standardize Key Business Processes. To help ensure operational efficiency and a consistent student experience across our system of campuses, we are currently standardizing key business processes. Thus far, we have implemented a standard admissions and student finance process and we have nearly completed the process of implementing a new student information system. Additionally, we are beginning to bring in-house certain financial aid processing functions that have historically been handled for us by an external vendor.

Centralize Key Functions. In order to capitalize on the experience of our senior management team and to encourage best practices, we have established a divisional management organization consisting of local school administrators, regional vice presidents of operations and admissions, and division presidents. Local and divisional operations are supported by centralized functions supervised by senior management at our campus support center.

 

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Local school administrators retain control of the day-to-day operations of their individual schools. Local school administrators are assisted by and receive oversight from regional vice presidents and division presidents and their respective support teams. The campus support center management team controls key operational functions such as accounting, information technology, student financial services management, marketing, curriculum development, staff training, the call center, legal, treasury, internal audit, human resources, payroll, purchasing, real estate, and accreditation and licensing which we believe enables us to achieve significant operating efficiencies.

Growth Strategy

Our growth strategy consists of the following components:

Enhance Growth at Existing Campuses

Integrated and Centralized Marketing Program. We employ an integrated marketing program which includes an extensive direct response advertising campaign delivered through television, the Internet, newspaper, and direct mail. A professional staff at our campus support center manages the overall marketing program. The effectiveness of our marketing campaigns depends on timely and accurate lead tracking.

Maximizing Core Programs. Our program strategy leverages our core curricula in such disciplines as healthcare, trades, criminal justice and business. To maximize the adoption of core programs across our network of schools, we have developed detailed, campus-based plans that take into account each school’s program mix, facility capacity, and current and projected employer needs. In fiscal 2010, we implemented 70 such programs in our schools.

Facilities Enhancement and Expansion. We believe that modern and attractive facilities enhance the overall student learning experience. We remodel, expand and relocate our existing colleges to ensure we have sufficient capacity to meet our expected enrollment demand, as well as to improve the location and appearance of our facilities. We expect to continue to systematically remodel and relocate selected schools within their respective markets. During fiscal 2010 we remodeled, relocated, or expanded 43 colleges. As of June 30, 2010, the total square footage of all of our properties was approximately 5.6 million square feet.

Expand Online Education

Online education, or education delivered via the Internet, has become an increasingly important component of the higher education market. We offer online learning to two categories of students: those attending online classes exclusively, and those attending a blend of traditional classroom and online courses. The majority of our students participating in online learning are now registered in exclusively online programs.

We began enrolling exclusively online students through our Florida-based Everest University schools in fiscal 2002. In the fourth quarter of fiscal 2005, we started to offer exclusively online degrees through our regionally-accredited Everest College in Phoenix, Arizona. Online degree programs are offered in business, criminal justice, accounting, higher education management, criminal investigations, applied management, homeland security, computer information science, and medical insurance billing and coding. In total, 20 accredited degrees are available exclusively online at the master’s, bachelor’s, and associate’s levels.

During fiscal 2010, we experienced a significant increase in the number of students taking our online courses. Our online learning participation increased by approximately 44% to 261,679 course registrations in fiscal 2010. As of June 30, 2010, we offered 326 online courses through 44 campuses. We served approximately 23,396 exclusively online students as of June 30, 2010.

Make Strategic Acquisitions

Since our founding in 1995, acquisitions have been an important part of our growth strategy. Of the 118 campuses operated as of June 30, 2010, 85 colleges have been acquired (net of closures, consolidations, or locations sold). To evaluate acquisition opportunities, we have established several criteria, such as scale, geography, program offerings, accreditation and selected financial measurements.

 

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On January 4, 2010, Corinthian completed the acquisition of Heald Capital, LLC. The transaction was completed in accordance with a Securities Purchase and Sale Agreement, (“the Purchase Agreement”), dated October 19, 2009. Pursuant to the Purchase Agreement, Corinthian acquired, directly or indirectly, all of the limited liability company membership interests in Heald Capital, LLC (“Membership Interests”) by purchasing all of the outstanding capital stock of each of two holding companies and by purchasing Membership Interests directly from the previous owners of Heald Capital, LLC for total consideration of $395 million in cash, subject to adjustment as defined in the Purchase Agreement. The consideration paid was financed via existing cash and borrowings of Corinthian.

Corinthian believes the acquisition is strategic given the experienced management team, strong operating metrics, regional accreditation and diverse program offerings and through its expertise and financial commitments it will be able to continue to grow the student population and program offerings.

In addition to acquisition-related activity, we have developed an in-house capability to pursue other business development opportunities. In particular, we are focused on developing federal sources of revenue outside of Title IV. Such sources include programs sponsored by the Department of Defense and the Department of Labor.

Establish Additional Locations

Since our initial public offering in February 1999, we have opened 37 branch campuses, of which 33 remain a part of our operations. Of the 37 branch campuses we have opened since February 1999, 2 were opened in each of fiscal 1999 and fiscal 2000, 4 were opened in each of fiscal 2001 and fiscal 2002, 6 were opened in fiscal 2003, 10 were opened in fiscal 2004, 5 were opened in fiscal year 2005 and 3 were opened in fiscal 2006. During fiscal 2010, we opened 1 new branch campus, and, subject to regulatory constraints and other uncertainties, we expect to employ this growth strategy in fiscal 2011 and subsequent years. A key advantage of this strategy is that students attending new campuses branched from existing campuses have immediate access to federally funded student financial aid. We believe that opening new branch campuses allows us to enter new geographic markets, create additional capacity in existing markets and effectively leverage our infrastructure and our extensive investment in curricula.

Programs of Study

Our diploma programs are intended to provide students with the requisite knowledge and job skills for entry-level positions in their chosen career. Our degree programs are primarily designed for career-oriented adults and to assist them in enhancing their functional and professional skills. Our curriculum development team is responsible for maintaining high quality, market driven curricula. Our colleges also utilize advisory boards to help evaluate and improve the curriculum for each program offered. These advisory boards are required to meet at least twice a year and are comprised of local industry and business professionals. Advisory board members provide valuable insight regarding changes in programs and suggest new technologies and other factors that may enhance curriculum.

Our diploma curricula includes the following key programs: medical assisting, medical insurance billing and coding, massage therapy, dental assisting, pharmacy technician, medical administrative assisting, automotive and diesel technology, HVAC, surgical technology, plumbing, electrical, licensed practical nursing, electronics and computer technology. Our degree curriculum includes business administration, criminal justice, medical assisting, registered nursing, accounting, paralegal, marketing, computer information technology, legal assisting, hospitality management, applied service management, film and video. At our Everest locations in Florida, Phoenix, AZ, Mesa, AZ, Springfield, MO and Ontario Metro, CA campuses, many associate’s degree programs also articulate into a bachelor’s degree in the same course of study. Master’s degrees are also offered at Everest Florida in business administration and criminal justice.

Diploma programs generally have a duration of 8-24 months, depending on the course of study. Associate’s degree programs have a duration of 9-24 months, bachelor’s degree programs have a duration of 36-48 months and master’s degree programs have a duration of 21 months. As of June 30, 2010, we had approximately 50% of students enrolled in diploma programs, approximately 45% of students enrolled in associate’s programs, approximately 4% of students enrolled in bachelor’s programs and approximately 1% of students enrolled in master’s programs.

 

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The following table reflects our schools, locations, date acquired or opened, principal curricula, institutional accrediting agency, and square footage as of June 30, 2010. In the table below, programs offered are designated as follows: healthcare (HC), business (B), information technology and electronics (IT), criminal justice (CJ), trades and transportation (T), and other miscellaneous programs (OTH)(1).

 

U.S. Schools and Colleges

  

Date

Acquired/Opened

  

Principal Curricula

  

Accrediting

Agency

  

Square

Footage

Everest College, Alhambra, CA

   1/1/1996    B, HC    ACCSC(4)    42,200

Everest College, Anaheim, CA

   7/1/1995    CJ, HC    ACCSC    35,300

Everest College, Arlington (Mid Cities), TX

   6/9/2003    B, CJ, HC    ACICS(3)    51,400

Everest College, Arlington, VA

   1/2/2002    B, CJ, HC, OTH    ACICS    23,500

Everest College, Aurora, CO

   10/1/1996    B, CJ, HC    ACICS    33,000

Everest College, Bremerton, WA

   8/4/2003    B, HC    ACICS    18,900

Everest College, Burr Ridge, IL

   7/2/2002    HC    ACCSC    29,500

Everest College, Chesapeake, VA

   3/1/1999    B, HC, CJ    ACICS    39,200

Everest College, Chicago, IL

   6/26/2003    HC    ACCSC    47,300

Everest College, City of Industry, CA

   10/1/2000    B, CJ, HC    ACCSC    39,300

Everest College, Colorado Springs, CO

   10/1/1996    B, CJ, HC, IT, OTH    ACICS    30,500

Everest College, Dallas, TX

   2/3/2003    B, CJ, HC    ACICS    45,800

Everest College, Everett, WA

   8/4/2003    HC    ACICS    28,100

Everest College, Fife, WA

   8/4/2003    HC    ACICS    7,100

Everest College, Fort Worth, TX

   8/24/2004    B, CJ, HC    ACICS    32,800

Everest College, Fort Worth (South), TX

   3/22/2010    HC    ACICS    40,900

Everest College, Gardena, CA

   1/1/1996    HC    ACCSC    36,700

Everest College, Hayward, CA

   9/1/2001    HC    ACCSC    21,200

Everest College, Henderson, NV

   10/1/1996    HC, B, CJ    ACICS    31,500

Everest College, Los Angeles, CA

   1/1/1996    HC    ACCSC    22,500

Everest College, Merrillville, IN

   2/1/2001    B, HC    ACCSC    46,400

Everest College, Merrionette Park, IL

   10/19/2005    HC    ACICS    33,800

Everest College Phoenix, Mesa, AZ

   11/15/2005    B, CJ, HC    HLC/NCA(5)    21,400

Everest College, Newport News, VA

   10/1/1995    B, CJ, HC    ACICS    16,200

Everest College, North Aurora, IL

   2/1/2005    B, HC, T    ACCSC    38,500

Everest College, Ontario Metro, CA

   1/1/2001    B, CJ, HC    ACICS    40,800

Everest College, Ontario, CA

   10/1/2000    B, HC    ACCSC    34,000

Everest College Phoenix, Phoenix, AZ

   6/1/2000    B, CJ, HC    HLC/NCA    40,100

Everest College, Portland, OR

   10/1/1996    B, CJ, HC, IT, OTH    ACICS    35,400

Everest College, Renton, WA

   7/1/1996    HC    ACCSC    41,700

Everest College, Reseda, CA

   7/1/1995    HC    ACCSC    33,600

Everest College, Salt Lake City, UT

   10/1/1996    HC, B, IT, CJ    ACICS    40,100

Everest College, San Bernardino, CA

   7/1/1995    HC, B, CJ, T    ACICS    52,200

Everest College, San Francisco, CA

   10/1/1995    HC    ACCSC    30,600

Everest College, San Jose, CA

   10/1/1995    HC    ACCSC    20,300

Everest College, Seattle, WA

   8/4/2003    HC    ACICS    19,300

Everest College, Skokie, IL

   5/1/2001    HC, B    ACCSC    46,200

Everest College, Springfield, MO

   10/1/1996    HC, B, IT, CJ    ACICS    26,400

Everest College, St. Louis, MO

   3/31/2005    HC, B    ACICS    40,000

Everest College, Tacoma, WA

   8/4/2003    HC    ACICS    50,500

Everest College, Thornton, CO (2)

   10/1/1996    HC, B, CJ    ACICS    25,900

Everest College, Torrance, CA

   1/1/2000    HC    ACCSC    7,300

Everest College, Tyson’s Corner, VA

   6/2/2004    B, CJ, HC    ACICS    28,600

Everest College, Vancouver, WA

   8/4/2003    HC    ACICS    17,900

Everest College, Vancouver, WA

   10/1/1996    HC, B, CJ, OTH    ACICS    23,000

Everest College, West Los Angeles, CA

   10/1/2000    HC, CJ    ACCSC    31,300

Everest Institute, Austin, TX

   10/2/2002    HC, T    ACCSC    51,900

Everest Institute, Brighton, MA

   1/1/1996    HC    ACCSC    26,000

Everest Institute, Chelsea, MA

   3/30/2004    HC    ACCSC    30,500

Everest Institute, Columbus, OH

   9/7/2004    HC, B    ACCSC    28,300

Everest Institute, Cross Lanes, WV

   7/1/1995    HC, IT    ACCSC    26,700

Everest Institute, Dearborn, MI

   3/1/2001    HC    ACCSC    42,400

Everest Institute, Decatur, GA

   5/1/2000    HC, T    ACCSC    50,000

Everest Institute, Detroit, MI

   12/23/2003    HC    ACCSC    34,800

 

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Table of Contents

U.S. Schools and Colleges

 

Date

Acquired/Opened

 

Principal Curricula

 

Accrediting

Agency

 

Square

Footage

Everest Institute, Eagan, MN

  6/17/2004   HC   ACCSC   23,700

Everest Institute, Ft. Lauderdale, FL

  9/30/2003   HC   ACICS   30,700

Everest Institute, Grand Rapids, MI

  2/2/2001   HC, B   ACCSC   34,700

Everest Institute, Hialeah, FL

  4/1/2002   B, HC, CJ   ACICS   40,600

Everest Institute, Houston (Bissonet), TX

  6/30/2004   HC, IT, T   ACCSC   60,500

Everest Institute, Houston (Greenspoint), TX

  1/1/2000   HC   ACCSC   27,600

Everest Institute, Houston (Hobby), TX

  12/1/2001   HC   ACCSC   30,700

Everest Institute, Jonesboro, GA

  4/1/2000   HC   ACCSC   35,600

Everest Institute, Kalamazoo, MI

  2/1/2001   HC, B   ACCSC   28,400

Everest Institute, Kendall, FL

  4/1/2002   HC, CJ, B   ACICS   36,100

Everest Institute, Marietta, GA

  4/1/2000   HC   ACCSC   24,700

Everest Institute, Miami, FL

  4/1/2002   HC, CJ, B   ACICS   47,300

Everest Institute, Norcross, GA

  3/31/2003   HC   ACCSC   35,600

Everest Institute, Pittsburgh, PA

  10/1/1996   HC, B, CJ, OTH   ACICS   39,000

Everest Institute, Rochester, NY

  10/1/1996   B, IT, CJ, HC, OTH   ACICS   48,900

Everest Institute, San Antonio, TX

  7/1/1995   HC, OTH, T   ACCSC   60,200

Everest Institute, Silver Spring, MD

  2/8/2005   HC   ACICS   30,700

Everest Institute, South Plainfield, NJ

  12/13/2005   HC   ACCSC   35,000

Everest Institute, Southfield, MI

  1/1/1996   HC, IT   ACCSC   46,100

Everest Institute, Tigard, OR

  8/4/2003   HC   ACICS   20,600

Everest University, Brandon, FL

  10/1/1996   HC, B, IT, CJ   ACICS   49,300

Everest University, Jacksonville, FL

  7/1/2000   HC, B, CJ   ACICS   43,000

Everest University, Lakeland, FL

  10/1/1996   HC, B, IT, CJ   ACICS   30,400

Everest University, Largo, FL

  10/1/1996   HC, B, IT, CJ   ACICS   40,000

Everest University, Melbourne, FL (2)

  10/1/1996   HC, B, IT, CJ   ACICS   36,000

Everest University, Orange Park-Jacksonville, FL

  3/3/2004   HC, B, CJ, T   ACICS   46,500

Everest University, Orlando (North), FL

  10/1/1996   HC, B, IT, CJ, OTH   ACICS   55,700

Everest University, Orlando (South), FL

  10/1/1996   HC, B, IT, CJ   ACICS   59,900

Everest University, Pompano Beach, FL

  10/1/1996   HC, B, IT, CJ, OTH   ACICS   53,100

Everest University, Tampa, FL (2)

  10/1/1996   HC, B, IT, CJ, T   ACICS   58,100

WyoTech, Blairsville, PA (2)

  7/1/2002   T   ACCSC   261,200

WyoTech, Daytona Beach, FL

  8/4/2004   T   ACCSC   92,400

WyoTech, Fremont, CA

  8/7/2003   T   ACCSC   124,900

WyoTech, Laramie, WY

  7/1/2002   T   ACCSC   397,000

WyoTech, Long Beach, CA

  10/1/2000   T, HC   ACCSC   92,400

WyoTech, Sacramento, CA

  1/27/2004   T, CJ   ACCSC   248,500

Heald College, Concord, CA

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC(6)   66,000

Heald College, Fresno, CA (2)

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   37,600

Heald College, Hayward, CA

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   58,000

Heald College, Rancho Cordova, CA (2)

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   45,800

Heald College, Roseville, CA (2)

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   50,000

Heald College, Salinas, CA

  01/04/2010   HC, B, CJ, OTH   ACCJC/WASC   37,900

Heald College, San Francisco, CA

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   60,700

Heald College, San Jose, CA (2)

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   55,400

Heald College, Stockton, CA (2)

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   47,700

Heald College, Honolulu, HI

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   57,100

Heald College, Portland, OR

  01/04/2010   HC, B, IT, CJ, OTH   ACCJC/WASC   39,600

Campus Support Center Offices

       

Santa Ana, CA

        177,200

Gulfport, MS

        5,400

Tampa (Online), FL

        133,900

Tampa (Regional), FL

        7,300

 

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Square

Footage

Tempe (Online), AZ

  65,500

Washington, DC

  2,600

San Francisco, CA

  17,300

Colorado Springs (Online), CO

  93,500

New locations as of June 30, 2010 (unoccupied)

 

Santa Ana, CA

  30,900

Modesto, CA

  30,000
   

Total Square Footage for U.S. Properties

  5,333,300

 

Canadian Schools and Colleges

  

Opened/Acquired

  

Principal

Curricula

  

Square
Footage

Everest College of Business, Technology and Health Care, Barrie, Ontario

   08/19/2003    HC, B, CJ, IT    14,200

Everest College of Business, Technology and Health Care, Brampton, Ontario

   08/19/2003    HC, B, CJ, IT, OTH    16,400

Everest College of Business, Technology and Health Care, College Park, Ontario

   08/19/2003    HC, OTH    29,000

Everest College of Business, Technology and Health Care, Hamilton (Mountain), Ontario

   08/19/2003    HC, CJ    18,500

Everest College of Business, Technology and Health Care, Hamilton (City Center), Ontario

   08/19/2003    B, HC, IT, CJ    7,800

Everest College of Business, Technology and Health Care, Kitchener, Ontario

   08/19/2003    B, HC, CJ, IT    12,600

Everest College of Business, Technology and Health Care, London, Ontario

   08/19/2003    HC, IT, B    12,200

Everest College of Business, Technology and Health Care, Mississauga, Ontario

   08/19/2003    HC, B, IT, CJ, OTH    30,400

Everest College of Business, Technology and Health Care, Newmarket, Ontario

   08/19/2003    HC, B, CJ, IT    16,700

Everest College of Business, Technology and Health Care, North York Ontario

   08/19/2003    HC, B, CJ, OTH    17,900

Everest College of Business, Technology and Health Care, Ottawa (West-Nepean), Ontario

   08/19/2003    HC, B, IT, CJ    17,400

Everest College of Business, Technology and Health Care, Ottawa (East), Ontario

   08/19/2003    HC, B, IT, CJ    32,700

Everest College of Business, Technology and Health Care, Scarborough, Ontario

   08/19/2003    HC, B, IT, CJ    17,500

Everest College of Business, Technology and Health Care, Sudbury, Ontario

   08/19/2003    B, HC, CJ, IT    12,000

Everest College of Business, Technology and Health Care, Toronto (Central), Ontario

   08/19/2003    B, IT, CJ    25,100

Everest College of Business, Technology and Health Care, Thunder Bay, Ontario

   08/19/2003    HC, B, IT, CJ    10,800

Everest College of Business, Technology and Health Care, Windsor, Ontario

   08/19/2003    HC, B, CJ, IT    12,400

Everest College of Business, Technology and Health Care Campus Support Center

   08/19/2003       9,300
          

Total Square Footage for Canadian Properties

         312,900
          

Total Square Footage for All Properties

         5,646,200
          

 

(1) OTH means “Other” and includes programs such as, travel and hospitality, video/film production, and other miscellaneous programs.
(2) Indicates owned properties.
(3) Accrediting Council for Independent Colleges and Schools
(4) Accrediting Commission of Career Schools and Colleges
(5) The Higher Learning Commission – A Commission of the North Central Association of Colleges and Schools
(6) Accrediting Commission for Community and Junior Colleges (ACCJC) of the Western Association of Schools and Colleges (WASC)

 

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Marketing and Recruitment

We employ a variety of methods to attract applicants who will benefit from our programs and achieve success in their chosen careers. The methods include a variety of direct response marketing techniques to generate leads of potential applicants for our schools. Our marketing department generated approximately 2.7 million leads in the United States and Canada in fiscal 2010, primarily through television, internet, direct mail, newspaper, and yellow pages The effectiveness of these marketing campaigns is dependent upon timely and accurate lead tracking.

Our marketing agencies have access to our management information database and are provided with real time information on the effectiveness of individual campaigns. The agencies consult with our marketing department to adjust schedules for advertisements depending on our needs and the effectiveness of the particular advertisements. For the year ended June 30, 2010, approximately 20% of our new student enrollments were generated through television, newspaper and yellow pages marketing, 43% were generated from the Internet, 24% were generated through referrals, 3% were generated through direct mail, and 10% were generated through a variety of other methods.

National Branding

Over the last three fiscal years we have consolidated multiple brand names to increase our company’s overall visibility and gain the marketing efficiencies associated with national advertising. As of August 13, 2010 all of our schools operated under one of three national brands, Everest, WyoTech, or Heald. The Everest brand was recently developed by the Company, WyoTech is a well-established brand in automotive training, and Heald brings an increased presence in Northern California, Oregon and Hawaii, as well as a growth platform for campus-based and online regionally accredited programs. As of June 30, 2010, 101 out of 118 schools were operating under the Everest brand, 6 schools were operating under the WyoTech brand, and 11 schools were operating under the Heald brand.

Admissions

As of June 30, 2010, we employed approximately 2,100 admissions representatives who work directly with prospective students to facilitate the admissions process. These representatives interview and advise students interested in specific careers and are a key component of our effort to generate interest in our educational services. We conduct semi-annual student satisfaction surveys at our campuses in the United States in which students have consistently given high marks to our admissions personnel for helpfulness, courtesy and accuracy of information. Because our success is highly dependent on the efficiency and effectiveness of our admissions process, we invest considerable resources to train our admissions representatives in product knowledge, regulatory compliance, and customer service. We also employ various admissions supervisory and monitoring programs, and conduct student surveys which help us ensure compliance with both government regulations and our corporate policies.

One of our objectives in the admissions process is to identify students who have the ability to succeed in our schools. The majority of prospective students must pass a standardized admissions test. Most of our colleges in the United States have historically accepted non-high school graduates who can demonstrate an ability to benefit (“ATB students”) from the program by passing certain tests which are required by the ED. As of June 30, 2010, ATB students accounted for approximately 15.1% of total enrollments in our U.S. schools, down from 23.8% at June 30, 2009. However, ATB students are a higher risk population who complete their programs at a lower rate and default on their student loans at a higher rate than high school graduates. Accordingly, given the shift to a 3-year default measurement period, and the structural changes in student lending over the past two years, we intend to stop enrolling ATB students into our U.S. Everest and WyoTech institutions starting on September 1, 2010. We will continue to help our currently enrolled ATB students finish their programs and find employment. In addition, ATB students who dropped out of our programs will be allowed to re-enroll and continue their education.

Placement

Graduate placement outcomes are critical to our colleges’ reputations and their ability to continue to successfully recruit new students. We maintain a career services department at each college and, as of June 30, 2010, employed approximately 750 individuals in this capacity. We require our career services personnel to work with students from the time they begin their courses of study until they are successfully placed in jobs for which they are trained. Our career services departments assist students with resumes, help them develop a professional demeanor, conduct practice interview sessions, and identify prospective employers for the colleges’ graduates. Overall, we believe the efforts we devote to place our graduates have achieved solid results in a difficult economic environment.

 

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Our colleges endeavor to obtain information regarding their students’ employment following graduation. The reliability of that information depends, to a large extent, on the completeness and accuracy of the data provided to our colleges by graduates and their employers. Additionally, a dedicated team at the campus support center conducts a verification process to check the accuracy of the placement information gathered by our campuses. Based on information received from these groups of people, we believe that approximately 73.1% of our graduates in calendar year 2009 who were available for placement have been placed in a job for which they were trained by June 30, 2010 as calculated based on accrediting agency standards. The various accrediting agencies evaluate placement rates by individual institution and program, and have different requirements regarding which students are considered “available for placement.” In defining the graduate cohort group for the purpose of calculating placement rates, certain accrediting agencies may exclude, for example, graduates 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 U.S. after graduation. Where applicable, we have also excluded those graduates in our calculation of students available for placement and the graduate placement rate.

Tuition

Tuition rates for our diploma programs in the U.S. and Canada generally range from $7,250 to $36,100, 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 $204 to $457 per undergraduate credit hour, depending upon the program of study (except for Everest College Phoenix Online programs which are charged on a per quarter basis). Tuition for graduate programs ranges from $367 to $548 per credit hour. In addition to tuition, students may be required to purchase textbooks and other supplies as part of their educational programs. We anticipate increasing tuition based on the market conditions prevailing at our individual colleges.

If a student fails to complete the period of enrollment (such as a quarter, semester, academic year, or program), the institution may be required to refund tuition previously collected to the originating or disbursing agency or to the student directly, depending on the source of the funds. Refunds are calculated in accordance with the applicable federal, state, provincial or institutional refund policies.

Campus Administration

We establish policies at our campus support center office, implement these policies, and monitor the performance of our schools through the coordination of the president and chief operating officer, the division presidents, our regional vice presidents of operations, the regional vice presidents of admissions, and their respective support staffs and through our internal audit department. The college presidents have the responsibility for the day-to-day operation of the schools. Each U.S. college generally employs the following management personnel which report to the college president:

 

   

an academic dean or education director;

 

   

an admissions director;

 

   

a career services director;

 

   

a finance director, and

 

   

a student accounts director.

Our schools in Canada are typically smaller and thus employ a smaller management team. As each school’s enrollment grows, additional management may be added.

Campus support center personnel manage several key functions, including accounting, information technology, student financial services, financial aid, career services support, marketing, curriculum development, staff training, the call center, legal, treasury, internal audit, human resources, payroll, purchasing, real estate, and accreditation and licensing. Among the principal oversight functions performed by campus support center personnel (in cooperation with our division, region and college management) are the annual operating budget, strategic planning and forecasting processes. These processes establish goals for each college, assist in implementing strategies and establish performance expectations and corresponding incentives. Our senior management team monitors operating performance and profitability of each college and has established periodic communication with the college presidents to review key performance indicators such as lead flow, starts, student population, retention, placement, compliance and other operating results to determine the proper course of action.

As required by their respective regional accrediting agencies, Everest College Phoenix and Heald College are overseen by boards of trustees that include a majority of independent representation to review academic integrity and autonomy of the institutions. These governing boards have broad oversight over the schools’ programs and operations, set the strategic direction for the institutions, play an active role in policy-making, and review financial resources of their schools to ensure the institution is able to provide a sound educational program. In furtherance of that mission, each board of trustees develops policies appropriate to the needs of the school and works closely with the respective schools’ administrations to, among other things, establish a climate for articulating and promoting the educational vision of the schools.

 

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Competition

The post-secondary education market in the United States, consisting of approximately 7,000 accredited institutions, is highly fragmented and competitive, with no institution having a significant market share. Many of the programs offered by our colleges are also offered by public and private non-profit institutions, as well as by many of the approximately 2,900 private, for-profit colleges and schools. The post-secondary education market in Canada is also highly fragmented. Typically, the tuition charged by public institutions is less than tuition we charge for comparable programs because public institutions receive state subsidies, donations and government research and other grants that are not available to our colleges. However, tuition at other private non-profit institutions is often higher than the tuition charged at our colleges.

We compete in most markets with other private, for-profit institutions offering similar programs. We believe our supportive learning environment, smaller class sizes, large national scale, our faculty, facilities, and our emphasis on student services and placement allows us to compete effectively. In addition, many of our colleges have been operating in their markets for many years, which has led to a substantial number of graduates who are working in the community and validate the quality of the colleges’ programs.

Facilities

Our campus support center office is located in Santa Ana, California and our 118 campuses as of June 30, 2010, are located in 25 states and in the province of Ontario, Canada. Each campus provides our students with lecture halls, instructional labs, libraries, Internet access and other facilities.

We actively monitor the capacity at our facilities and the expected future facilities capacity required to accommodate campus growth initiatives. We provide for expansion and future growth at each campus through relocations to larger facilities and by expanding or remodeling existing facilities. From the beginning of fiscal 2006 through fiscal 2010, approximately 14% of the campuses have been relocated and an additional approximately 64% of total campuses have been either expanded or remodeled. The following table reflects the number of campuses added, closed or combined, and the number of campuses that have been relocated, enlarged or remodeled during each of the last five fiscal years ended and has been updated to reflect solely continuing operations:

 

     2010    2009    2008    2007    2006

Opened

              

Acquired

   11    0    0    0    0

Branched

   1    0    0    0    3

Closed, combined or sold

   0    0    0    2    17

Campuses at year end

   118    106    106    106    108

Relocated

   1    5    2    2    6

Enlarged or remodeled

   42    5    10    6    12

All but nine of our facilities are leased. In addition, we lease our campus support center offices. Most of our leases have primary terms between 5 and 10 years with options to extend the lease, at our election.

Management and Employees

Our company is led by Jack D. Massimino, Executive Chairman of the Board, Peter C. Waller, Chief Executive Officer and Matt A. Ouimet, President and Chief Operating Officer. They are assisted by the other executive officers of the Company: Kenneth S. Ord, Beth A. Wilson, William B. Buchanan, Mark L. Pelesh, Stan A. Mortensen, Robert C. Owen, and David A. Poldoian. In addition to the executive officers, our management team includes other vice presidents and senior vice presidents who provide supervision of various functional areas and the presidents of our operating divisions. As of June 30, 2010, we had approximately 15,900 employees in the U.S. and Canada, of whom approximately 4,400 were part-time and approximately 900 were employed at or assigned to our campus support center.

Faculty

The faculty members at our colleges are industry professionals and hold appropriate credentials in their respective disciplines. The recruitment of faculty occurs at the campus level. Local leadership is charged with identifying and retaining faculty who possess the requisite academic and experiential qualifications to be successful in working with our students. Faculty are required and encouraged to pursue professional development activities to enhance their functional and classroom skills. We believe the skill and dedication of our faculty is critical to the academic and professional success of our students. As of June 30, 2010, we employed approximately 5,600 faculty in the United States and Canada, approximately 1,840 of whom were full-time employees. Faculty represents approximately 35% of our employees.

 

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Available Information

Free copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports may be obtained through our website at www.cci.edu, or by contacting our investor relations department after such reports are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Our website address is provided solely for informational purposes. We do not intend, by this reference, that our website or any of the information contained therein should be deemed to be part of, or incorporated into, this Annual Report.

EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the name, ages, titles and present and past positions of the persons serving as executive officers of the Company as of August 20, 2010, as well as other “significant employees” of the Company as defined under Item 401(c) of Regulation S-K:

 

Names

   Ages   

Positions

Jack D. Massimino    61    Executive Chairman of the Board
Peter C. Waller    56    Chief Executive Officer
Matt A. Ouimet    52    President and Chief Operating Officer
Kenneth S. Ord    64    Executive Vice President and Chief Financial Officer
Beth A. Wilson    58    Executive Vice President, Operations
William B. Buchanan    44    Executive Vice President, Marketing
Mark L. Pelesh    56    Executive Vice President, Legislative and Regulatory Affairs
Stan A. Mortensen    43    Executive Vice President, General Counsel and Corporate Secretary
Robert C. Owen    49    Senior Vice President and Chief Accounting Officer
David A. Poldoian    57    Executive Vice President and Chief Business Development Officer

Jack D. Massimino, became our Executive Chairman of the Board in July 2009. He served as Chief Executive Officer of the company from November 2004 through June 2009. In addition, he was Chairman of the Board from August 2008 through June 2009. He was previously a member of the Board of Directors and a member of the Audit and Compensation Committees of the Board. Prior to joining our company, Mr. Massimino was retired and managed his personal investment portfolio. Previously, he was President and Chief Executive Officer of Talbert Medical Management Corporation, a publicly traded physician practice management company from 1995 through late 1997. Prior to his association with Talbert, Mr. Massimino was Executive Vice President and Chief Operations Officer of FHP International Corporation, a multi-state, publicly-traded HMO, with revenues of approximately $4 billion at the time of his service. He also served in other executive positions after joining FHP in 1988, including Senior Vice President and Vice President, Corporate Development. Prior to such time, Mr. Massimino held other executive positions in the healthcare field starting in the mid-1970’s. He received a Bachelor of Arts in Psychology from California Western University and earned a Master’s Degree in Management from the American Graduate School for International Management.

Peter C. Waller, became our Chief Executive Officer in July 2009. Mr. Waller served as President and Chief Operating Officer of Corinthian from February 2006 through June 2009. Mr. Waller has a 30-year career that includes expertise in marketing, operations and finance. Prior to joining the Company, he served as CEO and then as Executive Partner at ThreeSixty Sourcing, Inc. from 2001 to 2006. Previously he was President of Taco Bell from 1997 to 2000. He first joined Taco Bell in 1996. Prior to his experience at Taco Bell, Mr. Waller spent six years at Kentucky Fried Chicken of PepsiCo where he went from Managing Director for Western Europe, to Marketing Director for the South Pacific based in Sydney, Australia, and finally, to Chief Marketing Officer for KFC in the United States. He began his marketing career in 1975 at Procter and Gamble, United Kingdom, serving as a brand manager in the personal care products category and was later recruited to Gillette in 1981. Mr. Waller holds a Master of Arts degree in Modern History from St. Catherine’s College of Oxford University.

Matt A. Ouimet, became our President and Chief Operating Officer in July 2009. Mr. Ouimet joined Corinthian in January 2009 as Executive Vice President, Operations. Prior to joining Corinthian, Mr. Ouimet served as President, Hotel Group for Starwood Hotels & Resorts Worldwide, one of the world’s largest hotel and leisure companies. Prior to his association with Starwood, Mr. Ouimet served in a number of key roles of increasing responsibility between 1989 and 2006 at Walt Disney Parks and Resorts. Between 1998 and 2006, Mr. Ouimet held the executive positions of President, Disney Cruise Line; Senior Vice President, New Business Development; and President, Disneyland Resort. Mr. Ouimet holds a Bachelor of Science degree in Accounting from Binghamton University in New York.

 

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Kenneth S. Ord became our Executive Vice President and Chief Financial Officer in February 2005. Mr. Ord brings more than 30 years of financial experience to his position from publicly traded companies in the healthcare, staffing services and automotive industries. Mr. Ord was the Chief Financial Officer at Alliance Imaging, Inc. from 1998 to 2004. Previously he was the Chief Financial Officer of Talbert Medical Management Corporation during 1997 and he was the Chief Financial Officer of FHP International Corporation from 1994 to 1997. Prior to his experience at FHP, Mr. Ord held several successively responsible positions at Kelly Services Inc, including Treasurer, Controller and Vice President Finance. He began his career at Ford Motor Company, working in various financial roles, ranging from financial controls to profit analysis. Mr. Ord holds a Master’s in Business Administration from Brigham Young University.

Beth A. Wilson has been employed by us since our inception in July 1995. She was promoted to Executive Vice President in July 2001 and oversees all operational support for accreditation and licensure, curriculum development and quality control, career services, facilities and financial aid. Previously, Ms. Wilson was Vice President of Operations from June 1998 to June 2001. Ms. Wilson was Regional Operations Director for Rhodes Colleges, Inc. from May 1997 to June 1998. From July 1995 to May 1997 she was Operations Director and Regional Operations Director for Corinthian Schools, Inc. Ms. Wilson was employed by National Education Centers, Inc. from 1991 to 1995, initially as Executive Director of its Capital Hill campus, then as Area Operations Manager. From 1990 to 1991, she was Vice President, Branch Operations for National College. She was employed by United Education and Software from 1984 to 1990, initially as Executive Director of a business school, then as Group Manager for four to fifteen locations and finally as Vice President, Administration. She was Scholarship Administrator for National University from 1982 to 1984 and Assistant Director of American Business College from 1976 to 1981. Additionally, between 1999 and 2003, and again starting in July 2008 to the present, Ms. Wilson has served as a Commissioner for ACCSC. Ms. Wilson earned a Master’s of Business Administration from National University and a Bachelor of Arts degree from California State College, Sonoma.

William B. Buchanan became our Executive Vice President of Marketing in July 2004. From 2003 to 2004, Mr. Buchanan was employed by Greenpoint Mortgage, where he directed all retail marketing, with responsibility for direct marketing, internet marketing, advertising and branch marketing. From 1995 to 2002, Mr. Buchanan was employed by Providian Financial Corporation where he progressed through several senior marketing roles, including Vice President of Platinum Marketing, Senior Vice President of New Account Business, and Executive Vice President of New Channel and Product Development. Mr. Buchanan received a Bachelor of Arts in Political Science from the University of California, Berkeley.

Mark L. Pelesh became our Executive Vice President for Legislative and Regulatory Affairs in September 2003. Prior to joining our company, he was a partner in the firm of Drinker Biddle & Reath LLP in Washington, DC, where he was the head of the Education Law Group. His practice focused on federal and state laws and regulations and private accreditation requirements affecting postsecondary educational institutions. Prior to joining Drinker Biddle & Reath, Mr. Pelesh was a partner and associate in the firm of Cohn and Marks and an associate in the firm of Arnold & Porter, both of which are in Washington, DC. Mr. Pelesh received a Juris Doctorate degree from the Yale Law School in 1978 and a Bachelor of Arts degree with distinction and honors in History from Stanford University in 1975.

Stan A. Mortensen has served as our Executive Vice President, General Counsel and Corporate Secretary since May 2009. Prior to his appointment as Executive Vice President, Mr. Mortensen served as our Senior Vice President, General Counsel and Corporate Secretary from August 2002, and as Vice President, General Counsel and Corporate Secretary starting in January 2000. Prior to that time, Mr. Mortensen was an attorney at the law firm of O’Melveny & Myers LLP from 1997 through 1999, where his practice focused on securities law, corporate finance, mergers and acquisitions, and general corporate matters. From 1994 through 1996, Mr. Mortensen was an attorney at the law firm of Robins, Kaplan, Miller & Ciresi, where his practice focused on commercial litigation. Mr. Mortensen received a Juris Doctorate and a Bachelor of Arts in Political Science from Brigham Young University.

Robert C. Owen has served as our Senior Vice President and Chief Accounting Officer since February 2005. He joined Corinthian in 2004 as Vice President and Controller, and has more than 20 years experience in industry and public accounting. Previously, he served as Vice President, Controller for Princess Cruise Lines and as Assistant Controller for Royal Caribbean Cruises Ltd. Mr. Owen began his career at Deloitte & Touche, where he spent 11 years in successively responsible positions, both in the U.S. and Canada. Mr. Owen earned a B.B.A. degree in accounting from Florida Atlantic University. He obtained his license as a Certified Public Accountant in Florida in 1985 and as a Chartered Accountant in Ontario, Canada in 1994.

David A. Poldoian joined the Company in November 2004, as President and Chief Operating Officer of the Online Learning division. In January 2008, he was appointed Executive Vice President and Chief Business Development Officer. Prior to joining Corinthian, Mr. Poldoian spent nine years with the Anheuser-Busch Companies beginning in 1995, initially serving as President of its Eagle Snacks, Inc. division and later reporting directly to the Chairman and Chief Executive Officer. Mr. Poldoian was Vice President and Partner with Bain & Company, a strategic consulting firm, from 1986 to 1995. Mr. Poldoian completed a Bachelor of Arts degree at Tufts University, and earned a Master of Business Administration from Harvard Business School.

 

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GOVERNMENTAL REGULATIONS AND FINANCIAL AID

U.S. Regulations

Students attending our schools in the U.S. finance their education through a combination of family contributions, individual resources (including earnings from full or part-time employment), federal financial aid programs, and loans from the Company or third parties.

In connection with the receipt of federal financial aid by our students, we are subject to extensive regulation by governmental agencies and licensing and accrediting agencies. In particular, the Higher Education Act of 1965, as amended (the “HEA”), and the regulations issued thereunder by the Department of Education (“ED”), subject us to significant regulatory scrutiny in the form of numerous standards that schools must satisfy in order to participate in the various federal financial aid programs under Title IV of the HEA (“Title IV”). Under the HEA, regulatory authority is divided among each of the following components: (i) the federal government, which acts through the ED; (ii) the accrediting agencies recognized by the ED; and (iii) state higher education regulatory bodies. Among other things, the HEA and ED regulations require each of our U.S. institutions to: (i) maintain a rate of default by its students on federally guaranteed loans that are below a specified rate; (ii) limit the proportion of its revenue (on a cash basis) derived from the Title IV programs; (iii) comply with certain financial responsibility and administrative capability standards; (iv) prohibit the payment of certain incentives to personnel engaged in student recruiting, admissions activities or the award of financial aid; and (v) achieve prescribed 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 our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs and costs of doing business.

The HEA is required to be reauthorized on a periodic basis, which most recently occurred in August 2008. The 2008 reauthorization of the HEA, called the Higher Education Opportunity Act (“HEOA”), made significant changes to the requirements governing the Title IV Programs, including changes that, among other things:

 

   

revised the calculation of “cohort default rates” regarding federally guaranteed student loans and the threshold rate at which sanctions will be imposed against an institution;

 

   

adjusted the types of revenue that an institution is deemed to have derived from Title IV Programs for purposes of complying with the “90/10 Rule,” and modified the sanctions imposed on an institution that derives too much revenue from Title IV Programs;

 

   

Increased the annual maximum amount and availability of Pell grants;

 

   

regulated the relationship between institutions and lenders that make education loans;

 

   

increased the type and amount of information that an institution must disclose to current and prospective students and the public; and

 

   

increased the types of policies and practices that an institution must adopt and follow.

In addition, the U.S. Congress can change the laws affecting Title IV Programs in the annual federal appropriations bills and other laws it enacts between the HEA reauthorizations. In May 2008, the U.S. Congress enacted the Ensuring Continued Access to Student Loans Act of 2008 (“Continued Access Act”) which, among other things:

 

   

increased the annual and total amount of certain Title IV Program loans that students can receive;

 

   

expanded student eligibility for, and potentially increased the amount of funds available to fund grants under, certain Title IV Programs; and

 

   

expanded parent eligibility and created payment deferment options for parent loans under the Title IV Programs.

In February 2009, the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009 (“American Recovery Act”) which, among other things, further increased the annual amount of funds available to fund grants under the Pell program.

 

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We estimate that during fiscal 2010 approximately 84.7% of our students in the U.S. received some federal Title IV financial aid. For purposes of calculating compliance with the 90/10 Rule under the HEOA, an institution is permitted, for a limited period of time, to (i) count as non-Title IV program revenue the additional $2,000 of Stafford loans that became available starting in July 2008 under the Continued Access Act, and (ii) include more revenue derived from non-Title IV Programs, such as revenue from institutional loans under certain circumstances. The ability of institutions to count the additional $2,000 of Stafford loans as non-Title IV revenue expires on July 1, 2011; the ability of institutions to count institutional loans as non-Title IV revenue expires July 1, 2012. Under these modified 90/10 calculations for the 2010 fiscal year, the Company derived approximately 81.9% of its net U.S. revenue (on a cash basis) from Title IV Programs. Excluding such temporary relief, approximately 89.8% of our net U.S. revenues (on a cash basis) was derived from federal Title IV programs.

If any of our institutions were to lose its eligibility to participate in federal student financial aid programs, the students at that institution would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. Students in the U.S. obtain access to federal student financial aid through an ED-prescribed application and eligibility certification process. Student financial aid funds are generally made available to students at prescribed intervals throughout their predetermined expected length of study. Students typically use the funds received from the federal financial aid programs to pay their tuition and fees. The transfer of funds from the financial aid programs is to the students, who then apply those funds to the cost of their education. The receipt of funds from federal financial aid programs reduces the students’ amount due to the institution, but does not affect the Company’s revenue recognition.

Recently, Congress has increased its scrutiny of the for-profit educational sector. On June 17, 2010, the Education and Labor Committee of the U.S. House of Representatives held a hearing to examine the manner in which accrediting agencies review higher education institutions’ policies on credit hours and program length. On June 24, 2010, the Health, Education, Labor and Pensions Committee of the U.S. Senate (the “HELP Committee”) held the first in a series of hearings to examine the proprietary education sector and released a report, “Emerging Risk : An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education.” On August 4, 2010, the HELP Committee held the second hearing in its series, focusing on student recruitment at for-profit schools. Earlier, on June 21, 2010, the Chairmen of each of these education committees, together with other members of Congress, requested the Government Accountability Office (“GAO”) to conduct a review and prepare a report with recommendations regarding various aspects of the proprietary sector, including recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in federal student aid programs and the degree to which proprietary institutions’ revenue is composed of Title IV and other federal funding sources.

Prior to the HELP Committee’s hearing on August 4, 2010, the GAO conducted a series of undercover investigations into the enrollment and recruiting practices at fifteen for-profit institutions of higher education in which GAO investigators with hidden cameras posed as potential new student enrollees. We believe that two of our campuses, one of which was Everest College Phoenix, were among those visited by the GAO. At the HELP Committee hearing on August 4, 2010, the GAO provided testimony that characterized the interactions between our campus personnel and the GAO investigators as “deceptive or otherwise questionable.” We have requested copies of the videotaped interactions between the GAO investigators and our campus personnel, but our request was denied. Although impeded by this denial, we have nevertheless conducted a review of these allegations – assisted by outside counsel – and have not identified any intentional misconduct by our employees. We will continue to review any evidence provided by the GAO and will take appropriate actions based on any new evidence we obtain.

Additionally, on August 12, 2010, the President of Everest College Phoenix received a letter from HLC requesting a response to the allegations contained in the GAO report. In addition to seeking a response to the specific circumstances identified in the GAO report, HLC requested that Everest College Phoenix demonstrate that it has reasonable, sufficient, and effective systems in place to assure appropriate control of employees engaged in the recruiting, marketing or admissions process. Everest College Phoenix is in the process of responding to HLC’s requests.

On August 5, we received a request for information from the HELP Committee relating to the ongoing series of hearings. We believe this request was extended to approximately thirty proprietary educational companies, including all such publicly traded companies. The request seeks information regarding how we recruit and enroll students, set program price or tuition, determine financial aid including private or institutional loans, track attendance, handle withdrawal of students and return of Title IV dollars and manage compliance with the 90/10 rule. The request also seeks information regarding the number of students who complete or graduate from our programs, how many of those students find work in their educational area, the debt levels of students enrolling and completing programs and information regarding the number of students who risk default within the cohort default rate window.

In furtherance of this, the Committee has requested that we provide information about a broad spectrum of our business, including detailed information relating to financial results, management, operations, personnel, recruiting, enrollment, graduation, student withdrawals, receipt of Title IV Program funds, institutional accreditation, regulatory compliance and other matters. We intend to cooperate with the Committee. The Committee has requested that we produce a portion of the specified information by August 26, 2010 and the remainder of the information by September 16, 2010.

These hearings and the requested GAO review are not formally related to ED’s rulemaking process that is currently underway and described in “Federal oversight of the Title IV Programs in the U.S.” However, the hearings and the requested GAO review could affect the final rules or could lead to further investigations of proprietary schools and the proposal of additional new regulatory requirements by the ED.

We cannot predict the extent to which, or whether, these hearings and review will result in further investigations, legislation or rulemaking affecting our participation in Title IV Programs or other aspects of our business. If any laws or regulations are adopted that limit our participation in Title IV Programs or the amount of student financial aid for which our students are eligible, our business could be adversely and materially impacted.

 

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The ED regulations define an institution as a main campus and its additional locations, if any. As defined by the ED, our main campuses that have additional locations in the U.S. are as follows:

 

Main Campus(1)

  

Additional Locations

Everest College, Seattle, WA   

Everest College, Fife, WA

Everest College, Vancouver, WA

Everest College, Tigard, OR

Everest College, Alhambra, CA    Everest Institute, Chelsea, MA
Everest College, Bremerton, WA   

Everest College, Everett, WA

Everest College, Tacoma, WA

Everest College, St. Louis, MO

Everest College, Colorado Springs, CO   

Everest College, McLean, VA

Everest College, Fort Worth (South), TX

Everest College, Gardena, CA    Everest Institute, Norcross, GA
Everest College, Ontario, CA   

Everest Institute, Columbus, OH

Everest Institute, Jonesboro, GA

Everest College Phoenix, Phoenix, AZ    Everest College Phoenix, Mesa, AZ
Everest College, Portland, OR   

Everest College, Vancouver, WA

Everest College, Dallas, TX

Everest Institute, Silver Springs, MD

Everest College, Renton, WA   

Everest Institute, Houston (Bissonnet), TX

Everest College, Reseda, CA    Everest Institute, Marietta, GA
Everest College, Salt Lake City, UT    Everest College, Fort Worth, TX
Everest College, San Francisco, CA    Everest College, Chicago, IL
Everest College, Skokie, IL    Everest College, Burr Ridge, IL
Everest College, Springfield, MO    Everest College, Ontario Metro, CA
Everest College, Thornton, CO   

Everest College, Aurora, CO

Everest College, Arlington, VA

Everest Institute, Brighton, MA    Everest College, North Aurora, IL
Everest Institute, Cross Lanes, WV   

Everest Institute, Dekalb, GA

Everest Institute, Eagan, MN

Everest Institute, Grand Rapids, MI   

Everest Institute, Kalamazoo, MI

Everest College, Merrillville, IN

Everest Institute, Kendall, FL    Everest Institute, Ft. Lauderdale, FL
Everest Institute, Miami, FL    Everest Institute, Hialeah, FL
Everest Institute, Newport News, VA    Everest Institute, Chesapeake, VA

 

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Everest Institute, Rochester, NY    Everest College, Arlington (Mid-Cities), TX
Everest Institute, San Antonio, TX   

Everest Institute, Houston (Greenspoint), TX

Everest Institute, Houston (Hobby), TX

Everest Institute, Southfield, MI   

Everest Institute, South Plainfield, NJ

Everest Institute, Dearborn, MI

Everest Institute, Detroit, MI

Everest Institute, Austin, TX

Everest University, Largo, FL   

Everest University, Lakeland, FL

Everest University, Jacksonville, FL

Everest University, Orlando (North), FL   

Everest University, Melbourne, FL

Everest University, Orlando (South), FL

Everest University, Pompano Beach, FL    Everest College, Merrionette Park, IL
Everest University, Tampa, FL   

Everest University, Brandon, FL

Everest University, Orange Park, FL

WyoTech, Laramie, WY   

WyoTech, Blairsville, PA

WyoTech, Sacramento, CA

WyoTech, Long Beach, CA   

Everest College, City of Industry, CA

Everest College, West Los Angeles, CA

Heald College, San Francisco, CA   

Heald College, Portland, OR

Heald College, Honolulu, HI

 

(1) The above list includes only those main campuses which have one or more branch locations.

 

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Accreditation for U.S. Schools

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 without regard to geographical location; (ii) regional accrediting agencies, which accredit institutions within their geographic areas; and (iii) programmatic accrediting agencies, which accredit or approve 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. Accrediting agencies 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.

Pursuant to provisions of the HEA, the ED 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 ED as a condition of their continued recognition. All of our colleges located within the U.S. are accredited by an accrediting agency recognized by the ED as depicted in the table below:

 

Accrediting Agency

   Number  of
Campuses
Accredited
   %  of
Total
Campuses
 

Accrediting Commission of Career Schools and Colleges (ACCSC)

   44    44

Accrediting Council for Independent Colleges and Schools (ACICS)

   44    43

The Higher Learning Commission-A Commission of the North Central Association of Colleges and Schools (HLC)

   2    2

Accrediting Commission for Community and Junior Colleges (ACCJC) – Western Association of Schools and Colleges (WASC)

   11    11
           

Total U.S. Campuses as of June 30, 2010

   101    100
           

The HEA requires accrediting agencies recognized by the ED 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 reviews of the institutions they accredit. In addition to periodic accreditation reviews, institutions undergoing substantive changes, including a change of ownership, may be required to be reviewed by their accrediting agency. 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 require the institution to supply it with supplemental reports in order for the agency to monitor one or more specific areas of the institution’s performance, typically completion or graduate placement outcomes. This is commonly referred to as being on “reporting” status. Failure to demonstrate compliance with accrediting standards in any of these instances could result in loss of accreditation. Being on probation, show cause, or reporting status may cause an accreditor to deny an institution permission, or otherwise delay approval, to open and commence instruction at new locations or to add new programs.

Probation and Show Cause Orders. An accrediting agency probation or show cause order may be issued based upon the agency’s concerns that an accredited institution may be out of compliance with one or more accrediting standards. Probation or show cause orders afford the institution the opportunity to respond before the institution loses accreditation. The institution may demonstrate that the concern is unfounded, that it has taken corrective action to resolve the concern, or that it has implemented an ongoing plan of action which is deemed appropriate to resolve the concern. The accrediting agency may then vacate the probation or show cause order, continue the probation or show cause order or seek additional information through reports required of the institution. If the agency’s concerns are not resolved, it may act to withdraw accreditation from the institution. Institutions on probation or under show cause orders remain accredited while they are on probation. The institutions can continue to enroll new students, and students at the affected institutions remain eligible to receive federal student financial aid.

On May 1, 2009, the Company received notification from The Higher Learning Commission-A Commission of the North Central Association of Colleges and Schools (“HLC”) that Everest College Phoenix had been placed on probation. Everest College Phoenix consists of two ground campuses and an online learning division. At June 30, 2010, the combined enrollment for Everest College Phoenix was 5,774 students. The probation action was initiated primarily related to governance issues, and questions about the institution’s autonomy with respect to Corinthian’s ownership and control of the institution. The institution has made numerous changes to comply with HLC’s accreditation criteria and is committed to continuing this process to resolve HLC’s concerns. HLC indicated that the probationary process is a period during which it will verify that these changes have, in fact, occurred and effectively meet HLC’s standards. On May 17-19, 2010, Everest College Phoenix hosted an HLC evaluation team to verify whether these changes have occurred and effectively meet HLC’s standards. In its report on a Comprehensive Evaluation Visit dated August 19, 2010, the evaluation team noted that while there have been some positive developments, deficiencies in the institution’s compliance with HLC’s accreditation criteria remained unresolved. The evaluation team concluded that adverse action by HLC was warranted, and recommended withdrawal of accreditation of Everest College Phoenix. The evaluation team’s report is one of several steps in HLC’s process of evaluating the institution’s probationary status. Everest College Phoenix and the Company disagree with the evaluation team’s conclusions and intend to contest the team’s recommendations before the Commission. The Company cannot predict the outcome of this matter with certainty. Since accreditation is required for an institution to be eligible to participate in the federal student financial aid programs, the failure by Everest College Phoenix to satisfactorily resolve its probation with HLC could have a material adverse effect on our business, results of operations and financial condition.

 

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Supplemental Reports. As of June 30, 2010, nine of our colleges were on reporting status to their respective accrediting agencies. The required reports relate primarily to the completion, retention, and/or placement rates of the institutions’ students. In certain of these cases, the periodic supplemental reports are required only with respect to particular programs at an institution, and not to the institution’s overall completion or placement rates. We are working to improve these retention and placement rates in the identified programs at these schools.

Federal Support for Post-Secondary Education in the U.S.

The federal government provides substantial support for post-secondary education through grants and loans to students who can apply the funds received to pay for their educational costs at any institution certified by the ED as eligible to participate in the federally funded student financial aid programs. Since 1972, Congress has expanded the scope of the HEA by, among other things, (i) providing that students attending proprietary institutions, such as our 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. The Federal Direct Loan Program (“FDL”) was also enacted, enabling students to obtain loans directly from the federal government rather than from commercial lenders.

Congress must reauthorize the student financial assistance programs of the HEA approximately every five to six years. On July 31, 2008, Congress passed the HEOA, which reauthorized and made numerous changes to the HEA and its programs. President Bush signed the HEOA on August 14, 2008. The HEA, as reauthorized and amended by the HEOA, continues the access of our institutions and students to Title IV funds. In addition, changes made to the HEA will affect how our institutions comply with the requirement that they receive a certain proportion of their revenue from other than the Title IV programs and with the cohort default rate requirement. Prior to the enactment of the HEOA, changes made by Congress have expanded the access of our students and institutions to Title IV funds by increasing loan limits for first and second year students and lifting restrictions on on-line education programs and students.

Students at our U.S. institutions receive grants, loans and work opportunities to fund their education under several of the Title IV Programs, of which, prior to June 30, 2010, the two largest were the Federal Family Education Loan (“FFEL”) program and the Federal Pell Grant (“Pell”) program. Our institutions also participate in the Federal Supplemental Educational Opportunity Grant (“FSEOG”) program, and some of them participate in the Federal Perkins loan program and the Federal Work-Study (“FWS”) 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 both 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 ED 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 2009-2010 award year, the maximum Pell grant increased to $5,350. Amounts received by students enrolled in our institutions in the 2009-2010 award year under the Pell program equaled approximately 29.2% of our U.S. net revenue (on a cash basis). Effective July 1, 2010, the maximum Pell grant increased to $5,550.

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

 

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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. We are required to make a 25% contribution to students for all FSEOG awards 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 2009-2010 award year, our contribution was met by approximately $2.2 million in funds from our institutions, funds from state scholarships and grants, and funds from foundations and other charitable organizations. Amounts received by students in our institutions under the federal share (including the FSEOG match) of the FSEOG programs in the 2009-2010 award year equaled approximately 0.6% of our U.S. net revenue (on a cash basis).

FFEL AND FDL. Prior to June 30, 2010, the FFEL program consisted of Stafford Loans, which are subsidized (government pays the interest while the student is in school and during a six-month grace period) and unsubsidized, and PLUS loans, which are made available to parents of students classified as dependents. Under the William D. Ford Federal Direct Loan (“FDL”) program, students may obtain loans directly from the ED rather than commercial lenders. The conditions on FDL loans are generally the same as on loans that were made under the FFEL program. Under the Stafford Loan program, during fiscal years 2009 and 2010, students may borrow up to $3,500 for the first academic year, $4,500 for the second academic year and, in some educational programs, $5,500 for each of the third and fourth academic years in subsidized loans. 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. Students who are classified as independent, and dependent students whose parents are unable to obtain PLUS loans, can increase their borrowing limits and receive additional unsubsidized Stafford loans. During fiscal years 2009 and 2010, students could obtain an additional $4,000 in unsubsidized loans 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. Effective July 1, 2009, such students may obtain an additional $6,000 in unsubsidized loans for each of the first and second academic years, and an additional $7,000 for subsequent 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 our institutions under the Stafford program in the 2009-2010 award year equaled approximately 56.5% of our U.S. net revenue (on a cash basis). Amounts received by students in our institutions under the PLUS program in the 2009-2010 award year equaled approximately 3.5% of our U.S. net revenue (on a cash basis).

In March 2010, Congress passed, and the President signed, the Health Care and Education Reconciliation Act of 2010 (the “HCERA”). The HCERA eliminated the FFEL program in favor of the FDL program effective as of July 1, 2010. While our institutions and students have been eligible to participate in the FDL program, we have significantly more experience in participation in the FFEL program and the continuing transition to the FDL program for the majority of our students involves risks and uncertainty. Additionally, because HCERA eliminates the FFEL program, most private lenders have exited the student loan market and those private lenders remaining may be unwilling to make private loans to our students.

These changes may result in higher administrative costs for schools, including us, related to student loan administration. If the costs of Title IV loans increase and if availability of alternate student financial aid decreases, students may decide not to enroll in a postsecondary institution, which could have a material adverse effect on our enrollments, revenues, and results of operation. Any further actions by the Congress, ED or other regulatory bodies that significantly reduces funding for Title IV Programs or the ability of our students to participate in those program, reduces alternate sources of student financial aid, or establishes different or more stringent requirements for participation in Title IV Programs could have a material adverse effect on our student population, course offerings, financial condition, results of operations and cash flows.

Perkins. Eligible undergraduate students may borrow up to $5,500 under the Perkins program during each award year, with repayment delayed until nine months after the borrower ceases to be enrolled on at least a half-time basis. Perkins loans are made available to those students who demonstrate a financial need. Perkins loans are made from a revolving account, 75% of which was initially capitalized by the ED. Subsequent federal capital contributions, with an institutional contribution of one-third of the federal contribution, 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 2009-2010 award year, the amount of Perkins loan repaid by former students totaled approximately $3.6 million.

In the 2009-2010 award year, we had no required matching contribution. The Perkins loans disbursed to students in our institutions in the 2009-2010 award year equaled approximately 0.2% of Our U.S. net revenue (on a cash basis). Congress is currently considering legislative proposals to make major changes to the Perkins program. We cannot predict whether these proposals will be enacted and if they will be beneficial to our students.

FWS. Under the FWS program, federal funds are made available to pay up to 75% of the cost of compensation for 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. At least 7% of an institution’s FWS allocation must be used to fund student employment in community service positions. FWS earnings are given directly to the student for their own discretionary use.

 

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Federal Oversight of the Title IV Programs in the U.S.

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 the U.S. Congress to require the ED to engage in a substantial 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 ED both an audit by an independent accounting firm of that institution’s compliance with the Title IV Program requirements, and audited financial statements. The ED also conducts compliance reviews, which include on-site evaluations, 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 ED 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 our U.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 ED periodically revises its regulations and changes its interpretation of existing laws and regulations.

On June 18, 2010, ED issued a Notice of Proposed Rulemaking (the “June NPRM”) following a year-long negotiated rulemaking process between ED and the higher education community on 14 Title IV Program integrity issues, which include lender and general student loan issues, accreditation, discretionary grants, general and non-loan programmatic issues, safe harbors under incentive compensation rules for admissions representatives, and standards regarding state authorization for purposes of Title IV Program eligibility.

The June NPRM addressed 13 of 14 program integrity issues in their entirety and partially addressed the 14th issue, which involves the definition of “gainful employment;” the ED issued a separate NPRM on gainful employment requirements on July 26, 2010 (the “July NPRM”). Public comment was due on the June NPRM no later than August 2, 2010 and for the July NPRM is due no later than September 9, 2010. The ED has stated that it intends to review all comments it receives with the goal of publishing a final rule by November 1, 2010, which would take effect beginning July 1, 2011.

The two proposed rules that could have the most significant potential impact for our business are:

 

   

the elimination of certain “safe harbors” regarding the prohibition on the payment of incentive compensation to employees involved in student recruitment, enrollment, admissions, and financial aid; and

 

   

the adoption of a definition of “gainful employment” for purposes of the requirement for Title IV student financial aid that a program prepare students for gainful employment in a recognized occupation, with that definition linked to a two part test: measuring the relationship between the debt students incur and their incomes after program completion; and measuring the percentage of all enrollees, regardless of completion, who repay principal on their loans during a measurement period.

We cannot predict the outcome of this rulemaking process at this time, or predict with certainty the impact of any new regulations on our operations. These rules could affect the manner in which we conduct our business, and compliance with these rules, (which if adopted could be effective as early as July 1, 2011), could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Cohort Default Rates. A significant requirement imposed by Congress is a limitation 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”). Many institutions, including all of our institutions within the U.S., have responded by implementing aggressive student loan default management programs aimed at reducing the likelihood of students failing to repay their federally guaranteed loans in a timely manner. Currently, 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. Under the HEOA a separate calculation will be performed that will add an additional federal fiscal year of borrowers’ repayment performance. An institution that participates in both the FFEL and FDL programs 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 under the current method of calculation may be found by the ED to lack administrative capability, and on that basis, placed on provisional certification status for up to three years. Additionally, any such institution may be required by its accrediting agency to provide additional information or supplemental reports. 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 ED and possible summary adverse action if that institution commits violations of the Title IV Program requirements. Provisional certification may also impede an institution’s ability to grow by limiting its ability to add new programs and locations. Any institution whose Cohort Default Rates equal or exceed 25% for three consecutive years under the current calculation may lose eligibility to participate in the FDL and the Pell grant programs for the remainder of the federal fiscal year in which the ED determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. Pursuant to the HEOA, this percentage will increase to 30% after three years of Cohort Default Rates calculated with the additional federal fiscal year are available, and then become applicable to the imposition of sanctions. In addition, an institution whose Cohort Default Rate for any federal fiscal year exceeds 40% may have its eligibility to participate in the FDL program limited, suspended or terminated. 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 ED, the HEA provides a formal process for the review and appeal of the accuracy of Cohort Default Rates before the ED takes any action against an institution based on such rates.

In order to improve our overall default rates, we have implemented a multi-faceted cohort default management program in which we increased our overall spending in this area by more than $10 million in the fiscal year ended June 30, 2010. This program includes the following: a contact management system to assist in reaching students who are no longer in school; an internal department focused primarily on early stage delinquencies; an expanded program of entrance and exit counseling and financial literacy training for current students; and the use of outside firms and internal resources to reach borrowers and assist them in contacting their lenders and getting help with alternatives to default, including income-based repayment, forbearance and deferral.

 

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The following table sets forth the final Cohort Default Rates for our institutions included within total operations of the Company as of June 30, 2010 in the U.S. for federal fiscal years 2005, 2006 and 2007, and the draft rates for 2008:

 

Institution

   2008(2)     2007     2006     2005  

Everest College, Seattle, WA (Fife and Vancouver, WA, and Tigard, OR) (1)

   12.0   10.4   9.0   5.3

Everest College, Alhambra, CA (Everest Institute, Chelsea, MA) (1)

   18.6   13.5   12.2   10.2

Everest College, Anaheim, CA

   15.0   9.8   9.6   7.7

Everest College, Colorado Springs, CO (McLean, VA) (1)

   19.8   15.7   12.5   11.3

Everest College, Gardena, CA (Everest Institute, Norcross, GA) (1)

   18.3   18.1   14.1   10.5

Everest College, Hayward, CA (combined with former New Orleans, LA Campus) (1)

   20.3   14.7   16.1   8.4

Everest College, Henderson, NV (1)

   22.7   15.6   16.2   13.0

Everest College, Los Angeles, CA

   24.7   16.9   15.0   17.7

Everest College, Ontario, CA (Columbus, OH and Jonesboro, GA)

   16.9   14.1   16.6   12.1

Everest College, Phoenix, AZ (Mesa, AZ)

   20.5   13.0   10.5   13.2

Everest College, Bremerton, WA (Everett, and Tacoma, WA and St. Louis, MO) (1)

   13.5   13.0   12.4   9.6

Everest College, Portland, OR (Vancouver, WA, and Dallas, TX; Everest Institute, Silver Spring, MD) (1)

   23.4   18.5   15.0   14.5

Everest College, Renton, WA (Lynnwood, WA; Everest Institute, Bissonnet, TX) (1)

   25.4   16.8   12.4   6.4

Everest College, Reseda, CA (Marietta, GA)

   12.9   11.8   17.4   9.6

Everest College, Salt Lake City, UT (Fort Worth, TX)

   25.0   17.2   12.0   14.9

Everest College, San Bernardino, CA

   31.1   20.0   13.8   14.2

Everest College, San Francisco, CA (Chicago, IL) (1)

   19.4   15.5   12.5   11.3

Everest College, San Jose, CA

   12.4   10.1   12.8   10.5

Everest College, Skokie, IL (Burr Ridge, IL) (1)

   16.0   11.7   9.5   8.4

Everest College, Springfield, MO (Ontario Metro, CA) (1)

   28.0   16.8   16.9   15.0

Everest College, Thornton, CO (Aurora, CO, and Arlington, VA) (1)

   26.4   19.6   17.0   14.4

Everest College, Torrance, CA

   18.1   12.3   11.3   6.1

Everest Institute, Brighton, MA (Everest College, North Aurora, IL)

   18.1   13.4   10.1   12.5

Everest Institute, Cross Lanes, WV (Dekalb, GA and Eagan, MN) (1)

   20.2   14.8   15.5   13.7

Everest Institute, Grand Rapids, MI, (Kalamazoo, MI, and Everest College, Merrillville, IN) (1)

   19.4   12.8   9.8   8.6

Everest Institute, Kendall, FL (Ft. Lauderdale, FL) (1)

   27.7   20.0   13.6   4.0

Everest Institute, Miami, FL (Hialeah, FL) (1)

   22.5   18.1   13.0   4.5

Everest Institute, Newport News, VA (Chesapeake, VA) (1)

   20.7   14.6   15.7   13.6

Everest Institute, Pittsburgh, PA

   22.9   20.1   16.9   15.3

Everest Institute, Rochester, NY (Everest College, Arlington (Mid Cities), TX) (1)

   25.9   21.4   17.6   15.9

Everest Institute, San Antonio, TX (Greenspoint, and Hobby, TX) (1)

   35.2   22.3   18.9   7.8

Everest Institute, Southfield, MI (Dearborn and Detroit, MI, Austin, TX, and South Plainfield, NJ) (1)

   24.5   18.6   15.3   14.8

Everest University, Largo, FL (Lakeland and Jacksonville, FL) (1)

   23.6   18.6   12.4   10.2

Everest University, Orlando (North), FL (Orlando (South), and Melbourne, FL) (1)

   18.0   12.6   8.4   8.3

Everest University, Pompano Beach, FL (Everest College, Merrionette Park, IL)

   16.1   11.7   5.8   3.1

Everest University, Tampa, FL (Brandon and Orange Park, FL) (1)

   14.0   12.2   9.7   11.4

Heald College, San Francisco, CA (Portland, OR and Honolulu, HI) (1)

   10.7   N/A      N/A      N/A   

Heald College, Rancho Cordova, CA

   8.8   N/A      N/A      N/A   

Heald College, Fresno, CA

   15.3   N/A      N/A      N/A   

Heald College, Hayward, CA

   9.5   N/A      N/A      N/A   

Heald College, Concord, CA

   7.4   N/A      N/A      N/A   

Heald College, Roseville, CA

   8.9   N/A      N/A      N/A   

Heald College, Milpitas, CA

   9.3   N/A      N/A      N/A   

 

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Institution

  2008(2)     2007     2006     2005  

Heald College, Stockton, CA

  9.7   N/A      N/A      N/A   

Heald College, Salinas, CA

  8.5   N/A      N/A      N/A   

WyoTech, Daytona Beach, FL

  29.0   6.9   6.6   7.8

WyoTech, Fremont, CA (Oakland, CA) (1)

  17.6   13.9   11.8   11.6

WyoTech, Laramie, WY (Sacramento, CA and Blairsville, PA) (1)

  6.3   5.0   3.5   2.5

WyoTech, Long Beach, CA (Everest College, West Los Angeles and City of Industry, CA) (1)

  21.1   17.1   15.9   16.6

Consolidated Average Cohort Default Rate

  19.2   15.0   12.8   10.5

 

(1) Indicates additional locations wherein the Cohort Default Rates are blended with the main campus.
(2) Rates are based on the draft Cohort Default Rates issued in February 2010, and are subject to change when final rates are calculated.

Generally ED publishes draft cohort default rates in February of each year for the repayment period that ended the prior September 30. The preliminary rates are subject to review by the institution, after which the ED publishes final cohort default rates in the following September. On that schedule, the ED published draft cohort default rates for the students who entered repayment between October 1, 2007 and September 30, 2008 (the “2008 Cohort”) in February 2010. Of our 49 total institutions, 9 institutions exceeded the 25% threshold during the 2008 Cohort year, and no institutions exceeded the 40% threshold. The 2008 Cohort year was the first year since the Company went public in 1999 that any of our institutions exceeded the 25% threshold for any reporting period. The Company expects ED to publish final cohort default rates for the 2008 cohort in September 2010.

We monitor on an ongoing basis the preliminary data about cohorts which are in the process of repayment, and are currently monitoring the repayment and default status of students who entered repayment during the federal fiscal year ended September 30, 2009 (the “2009 Cohort”), and the federal fiscal year ending September 30, 2010 (the “2010 Cohort”). The draft cohort default rates for the 2009 Cohort will not be available until February 2011. However, based on currently available information, we believe the number of our institutions which could exceed ED’s 25% default rate threshold for the 2009 Cohort will be substantially higher than for the 2008 Cohort, in which nine of our institutions exceeded the 25% default rate threshold.

Prior to the credit crisis in 2008, three types of entities played a role in managing student loan defaults in the FFEL Program: lenders participating in the FFEL Program, such as Sallie Mae; guaranty agencies; and post-secondary institutions such as ours. Since the credit crisis in 2008, many student loan portfolios have been “put,” or sold, to the federal government by lenders that either went out of business or could no longer fund their FFEL program loans. Lenders still in existence became servicing agents for the loans held by the government. Accordingly, guaranty agencies no longer play a role in default management and lenders’ roles have been significantly reduced. In addition, since May 2008, ED has distributed “put loans” to multiple servicers, and many of our students have loans with more than one servicing organization. This has made our default prevention efforts more complicated and difficult. Taken together, the structural changes in student lending have significantly reduced the level of default management activity previously provided by lenders and guaranty agencies. These changes have also negatively affected the timeliness and accuracy of federal databases and thus hindered the Company’s efforts at data collection and analysis.

Because of the foregoing factors, and the fact that we expect some of our institutions to exceed the 25% threshold for both the 2008 Cohort and the 2009 Cohort, we can no longer predict that none of our institutions will exceed the 25% threshold for three consecutive years. Although the measurement periods for the 2009 Cohort and the 2010 Cohort do not end until September 30, 2010 and September 30, 2011, respectively, we now believe that up to three of our institutions that exceeded ED’s 25% default rate threshold for the 2008 Cohort could exceed the 25% threshold for three consecutive years. Under ED’s current two-year default measurement methodology, institutions which exceed the 25% threshold for three consecutive years, or 40% in one year, become ineligible to participate in Title IV programs. The three institutions most at risk of exceeding the 25% threshold for three years in a row had 6,258 students as of June 30, 2010, and represented 6.4% of our net revenues for the fiscal year ended June 30, 2010.

Additionally, we expect the higher two-year rates for the 2009 Cohort to translate into substantially elevated three-year rates for the same cohort, draft results for which we expect to receive in February 2012. Thus, we expect a majority of our institutions to exceed the 30% threshold under the new 3-year measurement for the 2009 Cohort. Sanctions do not become applicable for the 3-year measurement until 2014, at which time final rates will have been published under the three-year measurement for the 2009, 2010 and 2011 Cohorts. We expect to continue our default prevention efforts in order to attempt to improve default rates for the 2010 and 2011 Cohorts during their applicable repayment periods, but it is too early to make predictions about the success of those efforts. Accordingly, we can provide no assurances that our efforts will be successful, and we are unable to predict whether any, or how many, of our institutions will ultimately have cohort default rates in excess of 30% for three years in a row under the three-year measurement methodology.

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. Eleven of our institutions have Perkins program Cohort Default Rates in excess of 15% for students who were scheduled to begin repayment in the 2008/2009 federal award year, the most recent year for which such rates have been calculated. Of the eleven, only one has provisional certification status which was due to a high Perkins Cohort Default Rate. During fiscal 2010, Perkins loans amounted to a very small percentage of the total cash revenues of the corporation but were still a useful funding source for those schools that participate and make use of those funds. The Perkins program Cohort Default Rates for these institutions generally range from less than 10% to the mid-fifties. Historically, provisional certification due to excessive Perkins program Cohort Default Rates has not had a material adverse effect on our business.

Regulatory Oversight. The HEA provides for a three-part regulatory framework, generally referred to as the Triad, to provide regulatory oversight of post-secondary education institutions. The first part of the Triad consists of accrediting agencies which review and accredit our campuses. Their examinations pertain to such areas as student achievement, curriculum, faculty, facilities, equipment, admissions, financial responsibility and timeliness of student refunds. The Triad provisions also require each accrediting agency recognized by the ED to undergo comprehensive periodic reviews by the ED to ascertain whether such accrediting agency is adhering to required standards.

The second part of the Triad involves the standards to be applied by the ED in evaluating the financial responsibility and administrative capability of institutions participating in the Title IV Programs. In addition, the Triad mandates that the ED periodically review the eligibility and certification to participate in the Title IV Programs of every such eligible institution. By law, all institutions are required to undergo a recertification review at least every six years, although the ED may recertify an institution for a shorter time period. Under these standards, each of our institutions is evaluated by the ED on a routine basis. A denial of recertification would preclude an institution from continuing to participate in the Title IV Programs.

The third part of the Triad involves approvals by state education agencies with jurisdiction over educational institutions. State requirements are important to an institution’s eligibility to participate in the Title IV Programs since an institution must be licensed or otherwise authorized to operate in the state in which it offers education in order to be certified as eligible. The level of regulatory oversight varies substantially from state to state. 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 our ability to obtain authorization to operate in certain states, 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 ED. We believe that each of our campuses is in substantial compliance with state authorizing and licensure laws.

ED historically has determined that an institution is licensed or otherwise authorized in order to be certified as eligible to participate in Title IV Programs if the institution’s state does not require the institution to obtain licensure or authorization to operate in the state. In the June NPRM, ED proposed new regulations that would consider an institution to be legally authorized by a state if (1) the authorization is given to the institution specifically to offer programs beyond secondary education, (2) the authorization is subject to adverse action by the state and (3) the state has a process to review and appropriately act on complaints concerning an institution and enforces applicable state laws. The proposed regulations present ED’s view that a state is expected to take an active role in approving an institution, and that a state should not defer all, or nearly all, of its oversight responsibilities to accrediting agencies for approval of institutions. We cannot predict the form of the regulations which ED ultimately may adopt. If ED adopts these regulations as proposed, which could become legally effective as early as July 1, 2011, certain of our campuses may be required to obtain additional or revised state authorizations to remain certified as eligible to participate in Title IV Programs. If we are unable to obtain additional or revised state authorizations, students at certain of our campuses may be unable to access Title IV Program funds, which could have a material adverse effect on our business, financial condition and results of operations.

Our Everest College Phoenix is accredited by HLC. In December 2009, ED issued an “Alert Memorandum,” calling into question HLC’s compliance with the applicable ED regulations related to HLC’s status as recognized by ED. Specifically, ED’s Office of the Inspector General (“OIG”) asserted that HLC did not make appropriate assessments as to credit hours with respect to the distance education programs at an HLC-accredited institution. As such, the OIG recommended that ED take action to determine whether HLC is in compliance with federal regulations related to the recognition of accrediting agencies and, if ED determines that if HLC is not in compliance with such regulations, take action to limit, suspend, or terminate HLC’s recognition by ED. Thereafter, in May 2010, the OIG issued a management report to HLC in which the OIG found that HLC does not have an established definition of credit hour or minimum requirements for program length and the assignment of credit hours, which the OIG asserted could result in inflated credit hours, the improper designation of full-time student status, and the over-awarding of Title IV Program funds. We are unable to speculate if or how this matter will be resolved and whether it could impact us or other HLC-accredited institutions if ED were to limit, suspend, or terminate HLC’s recognition as an accrediting agency.

If any of our campuses were to lose their accreditation, the Company would continue to generate revenues from continuing students, but would consider teaching out these campuses as they would be significantly competitively disadvantaged compared to other schools where students are eligible to receive federal student financial aid. During any teach-out process, the Company’s revenue would decline more rapidly than operating expenses and the Company would expect to incur operating losses at those campuses. The Company could also expect to incur increased bad debt expense if students no longer have access to federal financial aid. Additionally, if the Company were to lose accreditation at one or more of its schools to which it has ascribed value for accreditation as part of purchase accounting, the Company would test the amounts it had allocated to such assets for impairment and would take an impairment charge, if necessary.

We must be licensed or otherwise authorized to operate in each state where we offer education in order to be certified as eligible to participate in Title IV Programs. ED historically has determined that an institution is licensed or otherwise authorized in order to be certified as eligible to participate in Title IV Programs if the institution’s state does not require the institution to obtain licensure or authorization to operate in the state. In the June NPRM, ED proposed new regulations that would consider an institution to be legally authorized by a state if (1) the authorization is given to the institution specifically to offer programs beyond secondary education, (2) the authorization is subject to adverse action by the state and (3) the state has a process to review and appropriately act on complaints concerning an institution and enforces applicable state laws. The proposed regulations present ED’s view that a state is expected to take an active role in approving an institution, and that a state should not defer all, or nearly all, of its oversight responsibilities to accrediting agencies for approval of institutions. We cannot predict the form of the regulations which ED ultimately may adopt. If ED adopts these regulations as proposed, which could become legally effective as early as July 1, 2011, certain of our campuses may be required to obtain additional or revised state authorizations to remain certified as eligible to participate in Title IV Programs. If we are unable to obtain additional or revised state authorizations, students at certain of our campuses may be unable to access Title IV Program funds, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Compliance with Regulatory Standards and Effect of Regulatory Violations. Our schools are subject to audits and program compliance reviews by various external agencies, including the ED, state authorizing agencies, student loan guaranty agencies and accrediting agencies. The HEA and its implementing regulations also require that an institution’s administration of Title IV Program funds be audited annually by an independent accounting firm. The resulting audit report must be submitted to the ED for review. If the ED or another regulatory agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the HEA or the ED’s regulations, that institution could be required to repay such funds, and could be assessed an administrative fine. The ED could also subject the institution to a heightened level of monitoring, under which the institution’s federal funding requests would be more carefully reviewed by the ED, or the ED could transfer the institution from the advance system of receiving Title IV Program funds to the reimbursement system, under which an institution must document the students’ eligibility for Title IV Program funds before receiving such funds from the ED. Violations of Title IV Program requirements could also subject us or our schools to other civil and criminal penalties.

On May 1, 2009, the Company received notification from The Higher Learning Commission–A Commission of the North Central Association of Colleges and Schools (“HLC”) that Everest College Phoenix had been placed on probation. Everest College Phoenix consists of two ground campuses and an online learning division. At June 30, 2010, the combined enrollment for Everest College Phoenix was 5,774 students, and combined revenue was approximately 5.8% of the Company’s total net revenues for the fiscal year ended June 30, 2010. The probation action was initiated primarily related to governance issues and questions about the institution’s autonomy with respect to Corinthian’s ownership and control of the institution. The institution has made numerous changes to comply with HLC’s accreditation criteria and is committed to continuing this process to resolve HLC’s concerns. HLC indicated that the probationary process is a period during which it will verify that these changes have, in fact, occurred and effectively meet HLC’s standards. On May 17-19, 2010, Everest College Phoenix hosted an HLC evaluation team to verify whether these changes have occurred and effectively meet HLC’s standards. In its report on a Comprehensive Evaluation Visit dated August 19, 2010, the evaluation team noted that while there have been some positive developments, deficiencies in the institution’s compliance with HLC’s accreditation criteria remained unresolved. The evaluation team concluded that adverse action by HLC was warranted, and recommended withdrawal of accreditation of Everest College Phoenix. The evaluation team’s report is one of several steps in HLC’s process of evaluating the institution’s probationary status. Everest College Phoenix and the Company disagree with the evaluation team’s conclusions and intend to contest the team’s recommendations before the Commission. The Company cannot predict the outcome of this matter with certainty. Since accreditation is required for an institution to be eligible to participate in the federal student financial aid programs, the failure by Everest College Phoenix to satisfactorily resolve its probation with HLC could have a material adverse effect on our business, results of operations and financial condition.

From time to time certain of our institutions have been the subject of program reviews by ED. During the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009, ED conducted site visits at our campuses in Fremont, CA, Reseda, CA, Tampa, FL (including its additional locations in Orange Park and Brandon, FL and its online operations), Gardena, CA and the online division of Everest College Phoenix. Also, in July 2010, ED conducted a site visit at our campus in Colorado Springs, CO, and, in August 2010, ED announced another site visit for the online operations of the Tampa, FL Campus. Site visits are the first step in the program review process. ED then prepares a program review report, the institution has the opportunity to respond, and ED issues a Final Program Review Determination, which may be appealed. We have received Final Determination letters regarding ED’s program reviews at the Reseda, CA campus, the Gardena, CA campus, the Tampa campuses and the Tampa online operations (with respect to the first site visit in the first quarter of fiscal 2009), all of which contained no material adverse findings and imposed no fines, penalties, or other liabilities. We have not yet received a program review report with respect to the site visit at our Fremont, CA and Colorado Springs, CO campuses, or the announced, but not yet complete, site visit to our Tampa online operation.

In April 2010, we received ED’s program review report (the “Report”) for Everest College Phoenix, including the online division and the two ground campuses in Phoenix and Mesa, AZ. The Report maintains that Everest College Phoenix has failed to make students aware of the total amounts of financial aid for which they were entitled, failed to accurately inform students of the program costs, and delayed

 

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disbursements of Title IV funds. The report also contains findings regarding inadequate documentation, verification and availability of records for ED review, and the failure to make certain disbursements. In the Report, ED characterizes certain of these findings as misrepresentations by Everest College Phoenix to its students, as a breach of fiduciary duty and as evidencing an intentional evasion of the 90/10 requirements. We disagree with these characterizations. We are in the process of conducting a factual investigation of the findings as well as responding to ED’s requests for additional information with respect to certain of the findings. Based upon our investigation and responses to date, we believe we have a reasonable basis to dispute certain of the findings. We have addressed our differences with respect to certain of the findings in an initial submission to ED, and we intend to address other findings in a subsequent submission to ED. We will continue to cooperate fully with ED in its review.

ED will review our response to the Report and ultimately will issue a Final Determination letter regarding the program review, setting forth its final findings as well as the action it intends to take based on those findings. If ED were to make significant findings of non-compliance in its Final Determination letter, it could result in the imposition of significant fines, penalties or other liabilities on Everest College Phoenix, including, without limitation, an action against Everest College Phoenix on the limitation, suspension or termination of its participation in Title IV programs, any of which could have a material adverse effect on our business, results of operations or financial condition. We are unable to predict when ED will complete its review, as program reviews may often take several months or years to reach final resolution.

We are continuing to cooperate with all of the outstanding program reviews. We do not believe that any of our currently pending program reviews with the ED are reasonably likely to have a material adverse effect on the Company. However, if the ED were to make significant findings of non-compliance by any of our schools in any ongoing or future program review, it could have a material adverse effect on our business, results of operations or financial condition.

Starting in late 2008, ED’s OIG began an audit of our Everest Institute in Brighton, MA, as well as the WyoTech Boston, MA campus that was sold during May 2008, to determine whether agreements between those institutions and lenders for the period of July 1, 2007 through September 30, 2008 were in compliance with the HEA. On April 26, 2010, we received draft audit reports from the OIG for each of these institutions. In these reports, the OIG did not identify any noncompliance by either institution with the HEA during our ownership, but did conclude that two lenders entered into agreements with us during the relevant period that did not comply with the HEA’s prohibitions on offering or paying inducements to institutions to secure loan applicants or offering FFELP loans as an inducement for a borrower to purchase another product from a lender. The draft audit reports indicate that both lenders have been provided with the results of the draft audit reports and both have responded that they do not concur with the results. On August 4, 2010, we received the OIG’s final audit report on the Everest Institute in Brighton, MA, and the OIG again identified no noncompliance with the HEA by that institution.

Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by the ED to limit, suspend, or terminate the participation of the affected institution in the Title IV Programs. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation. There is no proceeding pending to fine any of our institutions or to limit, suspend, or terminate any of our institutions’ participation in the Title IV Programs, and we have no reason to believe that any such proceeding is contemplated. Any such action that substantially limited our schools’ participation in the Title IV Programs could have a material adverse effect on our business, results of operations, cash flows, and financial condition.

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 ED’s recertification process and also annually as each institution submits its audited financial statements to the ED. As part of the evaluation of an institution’s financial responsibility, the ED calculates three financial ratios for an institution: an equity ratio, a primary reserve ratio, and a net income ratio. Each ratio is scored separately and then combined to determine the institution’s financial responsibility. If an institution’s composite score is below the minimum requirement for unconditional approval (which is a score of 1.5) but within a designated threshold level (the “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 but without having to post a letter of credit in favor of the ED. If an institution’s composite score falls below the minimum threshold level of 1.0 or is in the Zone for more than three consecutive years, the institution may be required to post a letter of credit in favor of the ED.

For fiscal 2010, our calculations reflect that all of our schools exceed the requirements for financial responsibility on an individual basis, with composite scores ranging from 1.5 to 3.0. For purposes of performing such calculations on an individual school basis, the Company makes certain allocations of corporate cash to the individual campuses. Also, our Company, on a consolidated basis, meets the requirements with a composite score of 1.7.

An institution that is determined by the ED not to have met the standards of financial responsibility is nonetheless entitled to participate in the Title IV Programs if it can demonstrate to the ED that it is financially responsible on an alternative basis. An institution may do so by posting a surety either in an amount equal to 50% (or greater, as the ED may require) of the total Title IV Program funds received by students enrolled at such institution during the prior year or in an

 

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amount equal to 10% (or greater, as the ED 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 ED has interpreted this surety condition to require the posting of an irrevocable letter of credit in favor of the ED.

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 ED 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 was modified to exempt an institution that 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, we currently have outstanding letters of credit in the aggregate amount of approximately $2.7 million because of late refunds at 4 of our institutions. There can be no assurance that, upon review by the ED, we will not be required to post additional letters of credit in favor of the ED 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 of the institutions that we have acquired or will acquire, must be reviewed and recertified for participation in the Title IV Programs under its new ownership. 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 ED and to summary adverse action for violations of Title IV Program requirements and may be impeded in expanding, but provisional certification does not otherwise limit an institution’s access to Title IV Program funds. Institutions can also be placed on provisional certification primarily as a result of late refunds, financial aid audit findings and other miscellaneous matters. As of June 30, 2010, nine of our institutions were included in an outstanding letter of credit of $15.8 million due to a change of ownership in 2007. The letter of credit was released in July 2010. Four institutions covering 10 campuses were on provisional certification for other reason.

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, as long as such additional location satisfies all other applicable Title IV Program participation eligibility requirements. Our expansion plans are based, in part, on our ability to acquire schools that can be recertified and to open additional locations of existing institutions.

Generally, if an institution is eligible to participate in the Title IV Programs and adds an educational program after it has been designated as an eligible institution, the institution must apply to the ED to have the additional program designated as eligible. However, an institution is not obligated to obtain ED approval of an additional program that leads to an associate’s, bachelor’s or master’s degree if the institution has already been approved to offer programs at that degree level or the institution 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. Further, 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 at least 70% of all students who enroll in such programs complete them within a prescribed time and at least 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 our campuses offer such short-term programs in compliance with ED regulations. Students enrolled in such programs represent a small percentage of the total enrollment at our campuses. In the event that an institution erroneously determines that an educational program is eligible for purposes of the Title IV programs without the ED’s express approval, the institution would likely be required to repay the Title IV program funds provided to students in that educational program. Certain of the state authorizing agencies and accrediting agencies with jurisdiction over our campuses also have requirements that may, in certain instances, limit our ability 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. Ninety-eight of our U.S. campuses 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 ED and independently administered in accordance with ED regulations. In addition to the testing requirements, the ED regulations prohibit enrollment of ATB students from constituting 50% or more of the total enrollment of the institution to qualify for Title IV funding. None of our colleges that accept ATB students has an ATB enrollment population that exceeds 50% of the total enrolled population. As of June 30, 2010, ATB students represented approximately 15.1% of our total student population, down from 23.8% at June 30, 2009. Serving ATB students has historically been part of the Company’s mission. However, ATB students are a higher risk population who complete their programs at a lower rate and default on their student loans at a higher rate than high school graduates. Accordingly, given the shift to a 3-year default measurement period, and the structural changes in student lending over the past two years, we intend to stop enrolling ATB students into our U.S. Everest and WyoTech institutions starting on September 1, 2010. We will continue to help our currently enrolled ATB students finish their programs and find employment. In addition, ATB students who dropped out of our programs will be allowed to re-enroll and continue their education.

 

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The “90/10 Rule”. Under a provision of the HEA commonly referred to as the “90/10 Rule,” a private, for-profit institution, such as each of our institutions, would cease being eligible to participate in the Title IV Programs if, on a cash accounting basis, more than 90% of its revenue was derived from the Title IV Programs. Prior to the enactment of the HEOA, any institution that violated the 90/10 Rule immediately became ineligible to participate in the Title IV Programs and was unable to apply to regain its eligibility until the following fiscal year. Since this requirement took effect, each of our U.S. institutions has met this requirement in each fiscal year. Under the HEOA, the 90/10 Rule has been modified to permit certain additional types of revenue, some on a temporary basis, to be counted as revenue from sources other than Title IV. In addition, the HEOA now specifies that an institution will not become ineligible until it has exceeded the 90% maximum for two consecutive fiscal years. These changes will afford our institutions additional flexibility in meeting the 90/10 Rule. The legislation, however, also provides that institutions that exceed the 90% limit may be placed on provisional certification and be subject to additional monitoring and that those which violate the 90/10 Rule will be ineligible for two fiscal years before they regain eligibility. Pursuant to the modified 90/10 calculations under the HEOA, the Company derived approximately 81.9% of its net U.S. revenue (on a cash basis) from Title IV Programs for the 2010 fiscal year. We regularly monitor compliance with this requirement in order to minimize the risk that any of our institutions would derive more than the applicable thresholds of its revenue from the Title IV Programs for any fiscal year.

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. Historically, there have been twelve “safe harbor” compensation arrangements that the ED has determined are not in violation of the incentive compensation prohibition, including the payment and adjustment of salaries, bonuses and commissions in certain circumstances. The ED’s regulations do not establish clear criteria for compliance in all circumstances, and the ED has announced that it will no longer review and approve individual schools’ compensation plans. Nonetheless, we believe that our current compensation plans are in compliance with current HEA standards and the ED’s regulations, although we cannot provide assurance that the ED will not find deficiencies in our compensation plans.

In the June NPRM, ED proposed to eliminate all twelve safe harbors, and in lieu of the safe harbors, to take the position that any adjustment to compensation based directly or indirectly on securing enrollments or awarding financial aid is inconsistent with the incentive payment prohibition in the HEA. As proposed in the June NPRM, this prohibition would extend all the way to the senior management of an institution or organization. ED states that an institution still would be able to make merit-based adjustments to employee compensation, but would not be permitted to consider nor base compensation directly or indirectly, in any part, on factors such as an employee’s success in securing student enrollments, the award of financial aid or institutional goals based on that success. If the final regulations are adopted as proposed, we may have to change some of our compensation practices for admissions representatives and others.

Return of Title IV Funds. In 1998, amendments to the HEA changed substantially the refund requirements regarding the disposition of Title IV funds when a recipient of Title IV funds withdraws from an institution. We believe our return of Title IV funds calculations are in compliance with current regulations to implement these requirements.

Canadian Regulations

Students attending our schools in Canada finance their education through a combination of family contributions, individual resources (including earnings from full or part-time employment) and federal and provincial financial aid programs.

The schools operated by our Everest Canada division are subject to extensive regulations in the province of Ontario. These schools currently hold the necessary registrations, approvals and permits and meet the eligibility requirements to participate in governmental financial aid program. If these schools cannot continue to meet eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our Canadian business, results of operations or financial condition.

Licensing/Registration. Our ability to provide private-for-profit post-secondary education and grant diplomas to graduates in Canada is regulated by Ontario government. In Ontario, the Ontario Ministry of Training, Colleges and Universities is responsible for registering and regulating private-for-profit educational institutions. The Private Career Colleges Act, 2005 (the “PCCA”) stipulates that an education provider, such as our Canadian schools, must register each of its diploma granting programs for approval as well as each of its campuses with the Ministry. Typical requirements for obtaining this registered status include the financial viability of the campus, the “integrity and honesty” of the applicant’s officers and directors, and the reasonable expectation that the program of study offered by the applicant will provide the skills requisite for employment in the vocation in which it is being trained. Registration must be renewed by the applicant annually. The Province of Ontario has the statutory power to deny, refuse to renew, suspend or revoke our registration if we are in breach of a term or condition of the registration.

Government-Sponsored Financial Aid. Financial aid programs are offered to our Canadian students by the Canadian federal government and the government of Ontario. The Province operates the provincial financial aid program for students and administers these loans in conjunction with the administration of the Canada Student Loans granted to students studying within the province. In order for students enrolled in a program of study at a private-for-profit educational institution to be eligible for public financial aid, the private-for-profit educational institution, as well as the specific program of study, must be registered in good standing under the applicable PCCA legislation in the Province. In addition, the Province typically requires that to be financial aid eligible, the specific program must be at the post-secondary level, be taught on a full-time

 

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basis, have a duration of not less than 12 weeks and lead to a diploma or certificate conferred upon the student at the completion of the program. The Province also typically requires that the private-for-profit educational institution maintain specific admissions requirements for entrance into eligible programs and retains specific documentation on each student receiving public financial aid.

Financial aid programs provide students with access to funds during their study period based on a needs assessment. The loans are administered through the National Student Loan Service Centre for the program. The funds are loaned interest-free to the student during the study period and interest begins to accrue once a student either completes his or her study or stops attending school. After six months, the student must begin repayment of his or her loan(s). During the student’s interest-free period, interest is paid by the federal and/or provincial governments to the National Student Loan Service Centre.

The Ontario government has an initiative to reduce the number of loan defaults in that province. In addition to several other facets of this initiative, the Ministry of Training, Colleges and Universities (the “Ministry”) has adopted a policy whereby the Ministry will only guarantee defaulted student loans to a certain capped amount, beyond which the applicable private career college is responsible for guaranteeing repayment. For the 2010/11 default cohort year, we have four Ontario locations that were required to issue a promissory note and/or collateral due to the default sharing program. If the default rate in 2013 is below 25%, no payment will be required. Two of these four locations have experienced a default rate exceeding the 25% threshold for the past three years and are required to contract a third party default management provider and participate in a default rate reduction plan for 2010/11.

ALTERNATIVE LOANS FOR OUR STUDENTS

Historically, we had developed several loan programs with origination and servicing providers such as Sallie Mae for students with low credit scores who otherwise would not qualify for loans. These loan programs required that we pay a discount fee to the origination and servicing providers of the loans as a reserve against future defaults on these loans. We have historically referred to these types of loans as “discount loans,” since we incurred a portion of the default risk related to these student loans by taking a discount on the disbursement. By accepting a reduced payment for these discounted loans from the servicing providers, we were not at risk for the amounts agreed to by them and the service providers but were not entitled to any proceeds collected by the service providers in excess of this amount. Therefore we had recorded this discount as a reduction to revenue.

In fiscal 2008 we were informed by Sallie Mae and two other origination and servicing providers that they would no longer make private loans available for students who present higher credit risks (i.e. subprime borrowers). In the face of this change in policy, we created a new lending program in the fourth quarter of fiscal 2008 with a different origination and servicing provider, Genesis Lending Services, Inc. (“Genesis”), who specializes in subprime credit. This new lending program has characteristics similar to our previous “discount loan” programs. As with our previous discount loan program, under this new Genesis program we pay a discount to the origination and servicing provider for any loans purchased by Genesis and record the discount as a reduction to revenue. However, unlike our previous discount loan programs, under our new discount program we have both the right and an obligation to acquire the related loan, except in certain limited circumstances where Genesis does not comply with the terms of our agreement. Since we initiated the new discount program, we have acquired all of the loans that have been originated. Therefore, we are currently exposed to any credit defaults by our students but retain all amounts collected from our students under the current program. Additionally, the new discount loan program has also replaced our legacy loan program, called STAR. We estimate loans funded under the Genesis program, net of estimated refunds, were approximately $120 million for both of the years ended June 30, 2010 and 2009. These amounts are an estimate, as some loans contain amounts that will be recognized during future periods. Accordingly, unrecognized loans amounts are subject to the Company’s refund policy.

Included within the Consolidated Statement of Operations, under the caption “Other (income) expense,” for the years-ended June 30, 2010 and 2009 is net other income of $3.9 million and ($0.6) million, associated with the Genesis notes program, respectively. The net other income primarily reflects the interest income and loan origination fees, partially offset by costs related to servicing loans. We defer and recognize both the loan origination income and direct loan origination costs as an adjustment to the yield over the life of the related loan. All other lending-related costs, including costs related to servicing fees are charged to expense as incurred.

Student notes receivable represent loans that have maturity dates that generally range between 12 months to 60 months from the loan origination date but can have terms as long as 15 years depending on amounts borrowed. The interest rate currently charged on all new loans is a fixed rate of 6.8% with an origination fee of 1 percent. Included in the consolidated balance sheet at June 30, 2010 and 2009 is $68.2 million and $41.5 million in notes receivable, respectively. As of June 30, 2010 the estimated unrecognized Genesis note balance is $13.0 million (net of discount). This amount is subject to the Company’s refund policy.

 

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ITEM 1A. RISK FACTORS

Risks Related To Extensive Regulation Of Our Business

If we fail to follow extensive regulatory requirements for our business, we could suffer severe fines and penalties, including loss of access to federal student loans and grants for our students.

We derive a majority of our revenues on a cash basis from federal student financial aid programs. In connection with the receipt of federal financial aid by our students, we are subject to extensive regulation by governmental agencies and licensing and accrediting agencies. In particular, the Higher Education Act of 1965, as amended (the “HEA”), and the regulations issued thereunder by the Department of Education (“ED”), subject us to significant regulatory scrutiny in the form of numerous standards that schools must satisfy in order to participate in the various federal financial aid programs under Title IV of the HEA (“Title IV”). As a result, our schools are subject to extensive regulations by these agencies that, among other things, require us to:

 

   

undertake steps to assure that our schools do not have Cohort Default Rates that exceed applicable limits;

 

   

limit the percentage of revenues (on a cash basis) derived at each of our institutions from federal student financial aid programs to less than 90%;

 

   

adhere to financial responsibility and administrative capability standards;

 

   

prohibit the payment of certain incentives to personnel engaged in student recruiting, admissions activities or awarding financial aid;

 

   

achieve stringent completion and placement outcomes for short-term programs; and

 

   

make timely refunds of tuition when a student withdraws from one of our institutions.

These regulatory agencies periodically revise their requirements and modify their interpretations of existing requirements. If one or more of our schools were to violate any of these regulatory requirements, we could suffer fines, penalties or other sanctions, including the loss of our ability to participate in federal student financial aid programs at those schools, any of which could have a material adverse effect on our business. We cannot predict how all of these requirements will be applied, or whether we will be able to comply with all of the requirements.

The recently-enacted Health Care and Education Reconciliation Act of 2010 eliminated the Federal Family Education Loan (“FFEL”) program so that our students may only receive federal student loans through the Federal Direct Loan program; the transition from the FFEL program to the FDL program involves risks and uncertainty for our institutions and students.

Students at our U.S. institutions are currently eligible to receive loans to fund their education under the FFEL program and the William D. Ford Federal Direct Loan (“FDL”) program. The FFEL program consists of Stafford Loans, which can be both subsidized and unsubsidized, and PLUS loans, which are made available to parents of students classified as dependents. Under the FDL program, students may obtain loans directly from ED rather than commercial lenders. The conditions on FDL loans are generally the same as on loans made under the FFEL program.

In March 2010, Congress passed, and the President signed, the Health Care and Education Reconciliation Act of 2010 (the “HCERA”). The HCERA eliminated the FFEL program in favor of the FDL program effective as of July 1, 2010. While our institutions and students have been eligible to participate in the FDL program, we have significantly more experience in participation in the FFEL program and the transition to the FDL program for the majority of our students involves risks and uncertainty. For instance, we are uncertain (i) whether our institutions will be able to interface with the FDL origination and servicing functions at the significantly higher expected volumes without interruption or delays; (ii) whether FDL origination and servicing functions will have sufficient capacity to administer the expected significantly higher volume as all higher education institutions in the United States which are currently participating in the FFEL program transition to the FDL program; (iii) whether we could experience delays in receiving disbursements in Title IV funds for our students; and (iv) whether the federal government’s direct administration of the Title IV programs through the FDL will involve changes in the availability of traditional measures we and other private sector institutions have used to manage cohort default rates by, among other things, assisting students with obtaining forbearances, deferments, and income-based repayment. Additionally, because HCERA eliminates the FFEL program, many private lenders have exited the student loan market and may be unwilling to make private loans to our students.

These changes may result in higher administrative costs for schools, including us, related to student loan administration. If the costs of Title IV loans increase and if availability of alternate student financial aid decreases, students may decide not to enroll in a postsecondary institution, which could have a material adverse effect on our enrollments, revenues, and results of operation. Any further actions by the Congress, ED or other regulatory bodies that significantly reduces funding for Title IV Programs or the ability of our students to participate in those program, reduces alternate sources of student financial aid, or establishes different or more stringent requirements for participation in Title IV Programs could have a material adverse effect on our student population, course offerings, financial condition, results of operations and cash flows.

 

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Congress may change eligibility standards or reduce funding for federal student financial aid programs, or other governmental or regulatory bodies may change similar laws or regulations relating to other student financial aid programs, which could adversely affect our business.

Political and budgetary concerns can significantly affect Title IV programs and other laws and regulations governing federal and state student financial aid programs. Title IV programs are made available pursuant to the provisions of the HEA, and the HEA must be reauthorized by Congress approximately every six years. Independent of reauthorization, Congress must annually appropriate funds for Title IV programs. In mid-2008, Congress passed and the President signed the HEOA in order to reauthorize the HEA. Future reauthorizations or appropriations may result in numerous legislative changes, including those that could adversely affect our ability to participate in the Title IV programs and the availability of Title IV and non-Title IV funding sources for our students. Congress also may impose certain requirements upon the state or accrediting agencies with respect to their approval of our schools. Any action by Congress or ED that significantly reduces funding for the federal student financial aid programs or the ability of our schools or students to participate in these programs would have a material adverse effect on our business. Legislative action also may increase our administrative costs and burdens and require us to modify our practices in order for our schools to comply fully with applicable requirements.

In September 2007, Congress passed, and the President signed, legislation which, among other things, decreased private lender and guaranty agency yields for participation in the FFEL programs, decreased student interest rates on FFEL loans, and limited repayment obligations for students who receive loans pursuant to Title IV programs. In the years that followed, many lenders discontinued their participation in the federally guaranteed Title IV loans program. The HEOA requires notification and certification requirements to private non-Title IV program educational loans and makes them subject to the Truth in Lending Act requirements and potential liabilities, which could adversely affect private lenders’ willingness and ability to make such loans and thereby affect our students’ ability to access private student loans.

Because a significant percentage of our revenue is derived from Title IV and alternative loan programs, any action by Congress that significantly reduces Title IV program funding, the availability or attractiveness of alternative loans, or the ability of our schools or students to participate in Title IV programs could have a material adverse effect on our business, results of operations or financial condition. Legislative action also could increase our administrative costs and burdens and require us to adjust our practices in order for our schools to comply fully with Title IV program requirements.

Congress recently has commenced hearings and other examinations of the for-profit education sector that could result in further investigations, legislation, ED rulemaking, restrictions on Title IV Program participation by proprietary schools, or other actions that may materially and adversely affect our business.

On June 17, 2010, the Education and Labor Committee of the U.S. House of Representatives held a hearing to examine the manner in which accrediting agencies review higher education institutions’ policies on credit hours and program length. On June 24, 2010, the HELP Committee held the first in a series of hearings to examine the proprietary education sector and released a report, “Emerging Risk?: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education.” On August 4, 2010, the HELP Committee held the second hearing in its series, focusing on student recruitment at for-profit schools. Earlier, on June 21, 2010, the Chairmen of each of these education committees, together with other members of Congress, requested the GAO to conduct a review and prepare a report with recommendations regarding various aspects of the proprietary sector, including recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards against waste, fraud and abuse in federal student aid programs and the degree to which proprietary institutions’ revenue is composed of Title IV and other federal funding sources.

Prior to the HELP Committee’s hearing on August 4, 2010, the GAO conducted a series of undercover investigations into the enrollment and recruiting practices at fifteen for-profit institutions of higher education in which GAO investigators with hidden cameras posed as potential new student enrollees. We believe that two of our campuses, one of which was Everest College Phoenix, were among those visited by the GAO. At the HELP Committee hearing on August 4, 2010, the GAO provided testimony that characterized the interactions between our campus personnel and the GAO investigators as “deceptive or otherwise questionable.” We have requested copies of the videotaped interactions between the GAO investigators and our campus personnel, but our request was denied. Although impeded by this denial, we have nevertheless conducted a review of these allegations – assisted by outside counsel – and have not identified any intentional misconduct by our employees. We will continue to review any evidence provided by the GAO and will take appropriate actions based on any new evidence we obtain.

Additionally, on August 12, 2010, the President of Everest College Phoenix received a letter from HLC requesting a response to the allegations contained in the GAO report. In addition to seeking a response to the specific circumstances identified in the GAO report, HLC requested that Everest College Phoenix demonstrate that it has reasonable, sufficient, and effective systems in place to assure appropriate control of employees engaged in the recruiting, marketing or admissions process. Everest College Phoenix is in the process of responding to HLC’s requests.

These hearings and the GAO investigation are not formally related to ED’s rulemaking process currently underway. However, the hearings and the requested GAO review could affect the final rules or could lead to further investigations of proprietary schools and the proposal of additional new regulatory requirements by the ED.

On August 5, we received a request for information from the HELP Committee relating to the ongoing series of hearings. We believe this request was extended to approximately thirty proprietary educational companies, including all such publicly traded companies. The request seeks information regarding how we recruit and enroll students, set program price or tuition, determine financial aid including private or institutional loans, track attendance, handle withdrawal of students and return of Title IV dollars and manage compliance with the 90/10 rule. The request also seeks information regarding the number of students who complete or graduate from our programs, how many of those students find work in their educational area, the debt levels of students enrolling and completing programs and information regarding the number of students who risk default within the cohort default rate window.

 

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In furtherance of this, the HELP Committee has requested that we provide information about a broad spectrum of our business, including detailed information relating to financial results, management, operations, personnel, recruiting, enrollment, graduation, student withdrawals, receipt of Title IV Program funds, institutional accreditation, regulatory compliance and other matters. We intend to cooperate with the HELP Committee. The HELP Committee has requested that we produce a portion of the specified information by August 26, 2010 and the remainder of the information by September 16, 2010.

We cannot predict the extent to which these hearings and review will result in further investigations, legislation or rulemaking affecting our participation in Title IV Programs or other aspects of our business. If any laws or regulations are adopted that limit our participation in Title IV Programs or the amount of student financial aid for which our students are eligible, our business could be adversely and materially impacted.

If any of our U.S. schools fails to maintain its accreditation or its state authorization, that institution may lose its ability to participate in federal student financial aid programs.

An institution that grants degrees, diplomas or certificates must be authorized by the relevant agencies of the state in which it is located and, in some cases, other states. Requirements for authorization vary substantially among the states. Additionally, both an approval to operate in a state and accreditation by an accrediting agency recognized by the ED are required for an institution to participate in the federal student financial aid programs. If any of our U.S. campuses were to lose its accreditation or its state authorization, it could have a material adverse effect on our business.

On May 1, 2009, the Company’s Everest College Phoenix received notification from HLC that it had been placed on probation. At June 30, 2010, the combined enrollment for Everest College Phoenix was 5,774 students, and combined revenue was approximately 5.8% of the Company’s total net revenues for the fiscal year ended June 30, 2010. The probation action was initiated primarily related to governance issues and questions about the institution’s autonomy with respect to Corinthian’s ownership and control of the institution. The institution has made numerous changes to comply with HLC’s accreditation criteria and is committed to continuing make progress forward resolving HLC’s concerns. HLC indicated that the probationary process is a period during which it will verify that these changes have, in fact, occurred and effectively meet HLC’s standards. On May 17-19, 2010, Everest College Phoenix hosted an HLC evaluation team to verify whether these changes have occurred and effectively meet HLC’s standards. In its Report on a Comprehensive Evaluation Visit dated August 19, 2010, the evaluation team noted that while there have been some positive developments, deficiencies in the institution’s compliance with HLC’s accreditation criteria remained unresolved. The evaluation team concluded that adverse action by HLC was warranted, and recommended withdrawal of accreditation of Everest College Phoenix. The evaluation team’s report is one of several steps in HLC’s process of evaluating the institution’s probationary status. The Company and Everest College Phoenix disagree with the evaluation team’s conclusions and intend to contest the team’s recommendations before the Commission. The Company cannot predict the outcome of this matter with certainty, including without limitation, whether HLC will act or the evaluation team’s recommendations to withdraw accreditation of Everest College Phoenix. Since accreditation is required for an institution to be eligible to participate in the federal student financial aid programs, the failure by Everest College Phoenix to satisfactorily resolve its probation with HLC could have a material adverse effect on our business, results of operation and financial condition.

Additionally, in December 2009, ED issued an “Alert Memorandum,” calling into question HLC’s compliance with the applicable ED regulations related to HLC’s status as an accrediting agency recognized by ED. Specifically, the OIG asserted that HLC did not make appropriate assessments as to credit hours with respect to the distance education programs at an HLC-accredited institution. As such, the OIG recommended that ED take action to determine whether HLC is in compliance with federal regulations related to the recognition of accrediting agencies and, if ED determines that if HLC is not in compliance with such regulations, take action to limit, suspend, or terminate HLC’s recognition by ED. Thereafter, in May 2010, the OIG issued a management report to HLC in which the OIG found that HLC does not have an established definition of credit hour or minimum requirements for program length and the assignment of credit hours, which the OIG asserted could result in inflated credit hours, the improper designation of full-time student status, and the over-awarding of Title IV Program funds. We are unable to predict if or how this matter will be resolved and whether it could impact us or other HLC-accredited institutions if ED were to limit, suspend, or terminate HLC’s recognition as an accrediting agency.

Pending rulemaking by ED could result in regulatory changes that could materially adversely affect our business.

The agencies that regulate our U.S. schools, including ED, periodically revise their requirements and modify their interpretations of existing requirements. On September 9, 2009, the Department published a notice in the Federal Register announcing its intent to establish two negotiated rulemaking committees to prepare proposed regulations under Title IV of the HEA. In November 2009, the U.S. Department of Education convened two new negotiated rulemaking teams related to Title IV program integrity issues and foreign school issues.

Under negotiated rulemaking, ED works to develop a Notice of Proposed Rulemaking in collaboration with representatives of the parties who will be affected significantly by the regulations through a series of meetings during which the representatives work with the ED to come to consensus on the ED’s proposed regulations. One of the negotiating rulemaking committees addressed the following issues, many of which are relevant to the Company: satisfactory academic progress; monitoring grade point averages; incentive compensation; gainful employment in a recognized occupation; state authorization as a component of institutional eligibility; definition of a credit hour; verification of information included on a Free Application for Federal Student Aid (FAFSA); definition of a high school diploma for purposes of establishing eligibility to participate in student financial aid programs; misrepresentation of information provided to students and prospective students; ability to benefit; agreements between institutions of higher education; retaking coursework; term-based module programs; institutions required to take attendance for purposes of the Return of Title IV Funds requirements; and timeliness and method of disbursement of Title IV funds. This negotiated rulemaking committee completed its work on January 29, 2010 without reaching consensus. Accordingly, under the negotiated rulemaking protocol, ED was free to propose rules without regard to the tentative agreement reached regarding certain of the rules.

On June 18, 2010, ED issued a Notice of Proposed Rulemaking (the “June NPRM”) following a year-long negotiated rulemaking process between ED and the higher education community on 14 Title IV Program integrity issues, which include lender and general student loan issues, accreditation, discretionary grants, general and non-loan programmatic issues, safe harbors under incentive compensation rules for admissions recruiters, and standards regarding state authorization for purposes of Title IV Program eligibility.

The June NPRM addressed 13 of 14 program integrity issues in their entirety and partially addressed the 14th issue, which involves the definition of “gainful employment;” the ED issued a separate NPRM on gainful employment metrics on July 26, 2010 (the “July NPRM”). Public comment was due on the June NPRM no later than August 2, 2010 and for the July NPRM is due no later than September 9, 2010. The ED has stated that it intends to review all comments it receives with the goal of publishing a final rule by November 1, 2010, which would take effect beginning July 1, 2011.

The two proposed program integrity rules that have the most significant potential impact for our business are the following:

 

   

the elimination of certain “safe harbors” regarding the prohibition on the payment of incentive compensation to employees involved in student recruitment and enrollment; and

 

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the adoption of a definition of “gainful employment” for purposes of the requirement for Title IV student financial aid that a program of study prepare students for gainful employment in a recognized occupation.

Incentive Compensation

A school participating in Title IV programs may not pay any commission, bonus or other incentive payments to any person involved in student recruitment or admissions or awarding of Title IV program funds, if such payments are based directly or indirectly on success in enrolling students or obtaining student financial aid. The statutory language of this prohibition does not establish clear criteria for compliance in all circumstances, but historically there have been twelve “safe harbors” that define specific types of compensation that are deemed not to constitute impermissible incentive compensation. Currently, we rely on several of these safe harbors to ensure that our compensation and recruitment practices comply with the statutory prohibition.

In the June NPRM, ED proposed to eliminate all twelve safe harbors, and in lieu of the safe harbors, to take the position that any adjustment to compensation based directly or indirectly on securing enrollments or awarding financial aid is inconsistent with the incentive payment prohibition in the HEA. As proposed in the June NPRM, this prohibition would extend all the way to the senior management of an institution or organization. ED states that an institution still would be able to make merit-based adjustments to employee compensation, but would not be permitted to consider nor base compensation directly or indirectly, in any part, on factors such as an employee’s success in securing student enrollments, the award of financial aid or institutional goals based on that success. If the final regulations are adopted as proposed, we may have to change some of our compensation practices for admissions representatives and others. This could adversely affect our ability to compensate our admissions representatives and other employees in a manner that appropriately reflects their job performance, which in turn could reduce their effectiveness and make it more difficult to attract and retain qualified and competent personnel.

In addition, a lack of certainty could increase the risk of future Federal False Claims Act qui tam lawsuits in which private plaintiffs assert that our compensation practices violate the incentive compensation rules and, therefore, that our receipt of Title IV funds constitutes a false claim. We have been the subject of three such qui tam lawsuits relating to our compensation practices, all of which have been dismissed at the district court level, but one of which is on appeal to the U.S. Ninth Circuit Court of Appeals.

Gainful Employment

Under the HEA, proprietary schools are eligible to participate in Title IV programs in respect of educational programs that lead to “gainful employment in a recognized occupation.” Historically, this concept has been interpreted and applied to focus on the objectives of the programs. In the July NPRM, ED proposed to adopt a definition of “gainful employment” for purposes of the requirement for Title IV student financial aid that a program of study prepare students for gainful employment in a recognized occupation, with that definition linked to a two part test: measuring the relationship between the debt students incur and their incomes after program completion; and measuring the rate at which all enrollees, regardless of completion, repay their loans on time.

If this regulation is adopted in a form similar to that proposed by ED, it could render some of our programs, as well as programs offered by other private sector educational institutions, ineligible for Title IV funding to the extent they do not meet these standards. In addition, the continuing eligibility of our educational programs for Title IV funding would be at risk due to factors beyond our control, such as changes in the income level of persons employed in specific occupations or sectors, increases in interest rates, changes in student mix to persons requiring higher amounts of student loans to complete their programs, changes in student loan delinquency rates and other factors. If a particular program ceased to be eligible for Title IV funding, in most cases it would not be practical to continue offering that course under our current business model. Regulations in the form proposed in the July NPRM could result in a significant realignment of the types of educational programs that are offered by us and by other private sector educational institutions in general, in order to comply with the rules or to avoid the uncertainty associated with compliance over time. This realignment could reduce our enrollment, perhaps materially.

In addition, for those programs that remain eligible only under an alternative basis of student loan repayment rates or other alternative standards, we may have to substantially increase our efforts to promote student loan repayment, course completion or job placement in order to ensure continued Title IV eligibility. This could materially increase our cost of doing business and/or cause us to further limit enrollment.

Potential Impact of Rulemaking

We cannot predict the form of any final rules that may be adopted by the ED. As presented by the ED in the NPRMs, the rules regarding incentive compensation and gainful employment could have a material impact on the manner in which we conduct our business. Compliance with these rules, which if adopted could be effective as early as July 1, 2011, could reduce our enrollment, increase our cost of doing business, and have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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Our U.S. schools may lose eligibility to participate in federal student financial aid programs if the percentage of their revenues derived from those programs is too high.

Prior to the enactment of the HEOA, a proprietary institution would lose its eligibility to participate in the federal student financial aid programs for a period of one year if it derived more than 90% of its revenues, on a cash basis, from these programs in any fiscal year. Any institution that violated this rule immediately became ineligible to participate in federal student financial aid programs and would be ineligible to reapply to regain its eligibility until the following fiscal year. Under the HEOA, an institution that derives more than 90% of its total revenue from the Title IV programs for two consecutive fiscal years would become immediately ineligible to participate in Title IV programs and would not be permitted to reapply for eligibility until the end of full two fiscal years. Effective July 1, 2008, the annual unsubsidized Stafford loans available for undergraduate students under the FFEL program increased by $2,000 which, coupled with recent increases in grants from the Pell program and other Title IV loan limits, will result in some of our schools experiencing an increase in the revenues they receive from Title IV programs. The HEOA contains relief from recent increases in the availability and amount of federal aid by, among other things, for all unsubsidized Stafford loans disbursed before July 1, 2011, permitting the $2,000 of additional Stafford loan availability to be counted as revenue not derived from Title IV programs. Additionally, for the Company’s fiscal years ending on or before June 30, 2012, the HEOA permits loans made by the Company to its students to count as non-Title IV revenue when earned, not when the loans are repaid as was the case for fiscal years 2009 and prior. Based on our calculations as required by the modified calculations under the HEOA, none of our institutions received more than 90% of its revenues, on a cash basis, in fiscal 2010, with our highest institution receiving 89.1% of its revenues, on a cash basis, from federal student financial aid programs. Pursuant to the modified calculation under the HEOA, on a consolidated basis we received 81.9% of our U.S. revenues, on a cash basis, from federal student financial aid programs in fiscal 2010. If Congress fails to extend the exclusion of the additional $2,000 of Stafford loans for periods beginning on or after July 1, 2011, or if Congress fails to extend the ability to count loans made by institutions to their students to be counted as non-Title IV revenue when earned (as opposed to when repaid) for periods beginning on or after July 1, 2012, it would adversely affect our ability to comply with the 90/10 Rule. A decrease in the availability of state grants could also adversely impact our ability to comply with the 90/10 Rule because state grants generally are considered cash payments for purposes of the 90/10 Rule. If any of our institutions, depending on its size, loses eligibility to participate in federal student financial aid programs, it could have a material adverse effect on our business.

As Congress increases available Title IV aid, we are often effectively required to increase tuition prices in order to maintain compliance with the 90/10 Rule; conversely, ED’s proposed “gainful employment” regulations could require us to reduce tuition prices in order to limit the debt burden of our students. If ED’s gainful employment regulation is adopted as proposed, our institutions may not be able to comply with both rules.

In order to comply with the 90/10 Rule, the Company’s institutions cannot receive more than 90% of their revenues (on a cash basis) from Title IV sources. When Congress has increased available aid to students through the Title IV Program, some of our institutions – especially those that serve the most disadvantaged students who are entitled to receive the most Title IV student financial aid – have effectively been required to raise their tuition and fees in order to maintain compliance with the 90/10 Rule by maintaining a 10% “gap” between tuition charges and the average student’s available Title IV funds. Under ED’s proposed “gainful employment” regulation, on the other hand, those programs where the average graduate’s debt repayment burden exceeds a particular percentage of the average graduate’s compensation would cease to be eligible for Title IV Program funds, or would face other restrictions imposed by ED. This requirement would generally put downward pressure on tuition prices so that students do not incur debt that would exceed ED’s prescribed levels. If ED’s proposed “gainful employment” regulation is adopted as proposed, some of our programs may not be able to comply with the gainful employment rule while we attempt to maintain compliance with the 90/10 Rule. If the gainful employment rule is adopted as proposed, our efforts to comply with both rules could have a material adverse effect on our business, financial condition, results of operation and cash flows.

Our U.S. schools may lose eligibility to participate in federal student financial aid programs if their current and former students’ loan default rates on federally guaranteed student loans are too high.

Under the HEA, an institution could lose its eligibility to participate in some or all of the federal student financial aid programs if defaults by its former students on their federal student loans equal or exceed 25% per year for three consecutive years, or 40% in a single year. The term “institution” means a main campus and its additional locations, as defined by ED’s regulations. ED generally publishes draft cohort default rates in February of each year for the repayment period that ended the prior September 30. We review all annually published cohort default rates and appeal the rates we believe are inaccurate. Draft rates do not result in sanctions and can change between February and the release of the official cohort default rates in September.

We monitor on an ongoing basis the preliminary data about cohorts which are in the process of repayment, and are currently monitoring the repayment and default status of students who entered repayment during the federal fiscal year ended September 30, 2009 (the “2009 Cohort”), and the federal fiscal year ending September 30, 2010 (the “2010 Cohort”). The draft cohort default rates for the 2009 Cohort will not be available until February 2011. However, based on currently available information, we believe the number of our institutions which could exceed ED’s 25% default rate threshold for the 2009 Cohort will be substantially higher than for the 2008 Cohort, in which nine of our institutions exceeded the 25% default rate threshold.

Prior to the credit crisis in 2008, three types of entities played a role in managing student loan defaults in the FFEL Program: lenders participating in the FFEL Program, such as Sallie Mae; guaranty agencies; and post-secondary institutions such as ours. Since the credit crisis in 2008, many student loan portfolios have been “put,” or sold, to the federal government by lenders that either went out of business or could no longer fund their FFEL program loans. Lenders still in existence became servicing agents for the loans held by the government. Accordingly, guaranty agencies no longer play a role in default management and lenders’ roles have been significantly reduced. In addition, since May 2008, ED has distributed “put loans” to multiple servicers, and many of our students have loans with more than one servicing organization. This has made our default prevention efforts more complicated and difficult. Taken together, the structural changes in student lending have significantly reduced the level of default management activity previously provided by lenders and guaranty agencies. These changes have also negatively affected the timeliness and accuracy of federal databases and thus hindered the Company’s efforts at data collection and analysis.

Because of the foregoing factors, and the fact that we expect some of our institutions to exceed the 25% threshold for both the 2008 Cohort and the 2009 Cohort, we can no longer predict that none of our institutions will exceed the 25% threshold for three consecutive years. Although the two-year measurement periods for the 2009 Cohort and the 2010 Cohort do not end until September 30, 2010 and September 30, 2011, respectively, we now believe that up to three of our institutions that exceeded ED’s 25% default rate threshold for the 2008 Cohort could exceed the 25% threshold for three consecutive years. Under ED’s current two-year default measurement methodology, institutions which exceed the 25% threshold for three consecutive years, or 40% in one year, become ineligible to participate in Title IV programs. The three institutions most at risk of exceeding the 25% threshold for three years in a row had 6,258 students at June 30, 2010, and represented 6.4% of our net revenues for the fiscal year ended June 30, 2010.

 

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The 2008 HEOA made significant changes to the requirements governing the Title IV Programs, including the provisions on cohort default rates. Under the HEOA, a separate calculation will be performed starting for the 2009 Cohort that will add an additional federal fiscal year of borrowers’ repayment performance to the applicable cohort year. Starting after rates for the 2011 Cohort are finalized in 2014, sanctions will be imposed if an institution has a cohort default rate, under the new calculation, of 30% or more per year for three consecutive federal fiscal years, or more than 40% for a single year. As this is a new requirement, we are extending our cohort default management efforts to cover the additional year of measurement under the HEOA. However, we expect the higher two-year rates for the 2009 Cohort to translate into substantially elevated three-year rates for the same cohort, draft results for which we expect to receive in February 2012. Thus, we expect a majority of our institutions to exceed the 30% threshold under the new 3-year measurement for the 2009 Cohort. Sanctions do not become applicable for the 3-year measurement until 2014, at which time final rates will have been published under the three-year measurement for the 2009, 2010 and 2011 Cohorts. We expect to continue our default prevention efforts in order to attempt to improve default rates for the 2010 and 2011 Cohorts during their applicable repayment periods, but it is too early to make predictions about the success of those efforts. Accordingly, we can provide no assurances that our efforts will be successful, and we are unable to predict whether any, or how many, of our institutions will ultimately have cohort default rates in excess of 30% for three years in a row under the three-year measurement methodology.

If any of our institutions, depending on its size, were to lose eligibility to participate in federal student financial aid programs because of high student loan default rates, it could have a material adverse effect on our business.

We intend to discontinue enrolling ATB Students beginning on September 1, 2010. The elimination of this population of potential new student enrollments could adversely affect our business.

Serving ATB students has historically been part of the Company’s mission. However, ATB students are a higher risk population who complete their programs at a lower rate and default on their student loans at a higher rate than high school graduates. Accordingly, given the shift to a 3-year default measurement period and the structural changes in student lending over the past two years, we intend to stop enrolling ATB students into our U.S. Everest and WyoTech institutions starting on September 1, 2010. At June 30, 2010, ATB students accounted for approximately 15.1% of our enrollments. The elimination of this population of potential students will negatively impact our expected new student enrollments, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our future financial condition and results of operations could be materially adversely affected if we are required to write down the carrying value of goodwill or other intangible assets.

Goodwill and other intangible assets are tested annually, or more frequently if circumstances indicate potential impairment, by comparing their fair value to the carrying amount at the reporting unit level as defined by the accounting guidance. We determined the fair value of our reporting units using the income approach that includes discounted cash flow as well as other generally accepted valuation methodologies. To the extent the fair value of a reporting unit is less that the carrying amount of its assets, we record an impairment charge in the consolidated statements of operations.

In connection with receipt of federal financial aid by the Company’s students, the Company is subject to extensive regulation by governmental agencies and licensing and accrediting agencies. Compliance with the regulations promulgated by these various bodies could have a material impact on the manner in which the Company conducts its business. To the extent known, the Company has incorporated the risks associated with regulatory compliance into the cash flow forecasts and discount rates used to estimate the fair value of each of its reporting units at June 30, 2010. However, should the Company need to take additional actions not currently foreseen to comply with current and future regulations, the assumptions used to calculate the fair value of our reporting units, including estimation of future cash flows, revenue growth, and discount rates, could be negatively impacted and could result in an impairment of goodwill or other intangible assets. At June 30, 2010, the fair value of one of our reporting units with approximately $198.5 million of goodwill exceeded its carrying amount by less than 10%. As a result, a relatively minor negative revision to the estimated future revenue growth or discount rate could result in an impairment to the carrying value of the related goodwill.

In the future, if we are required to significantly write down the value of our goodwill or other intangible assets, it could have a material adverse effect on our financial condition and results of operations.

If we do not meet specific financial responsibility ratios and tests established by the ED, our U.S. schools may lose eligibility to participate in federal student financial aid programs.

To participate in the federal student financial aid programs, an institution must either satisfy quantitative standards of financial responsibility, or post a letter of credit in favor of the ED and possibly accept other conditions on its participation in the federal student financial aid programs. Each year, based on financial information submitted by institutions that participate in federal student financial aid programs, the ED calculates three financial ratios for an institution: an equity ratio, a primary reserve ratio and a net income ratio. Each of these ratios is scored separately and then combined to determine the institution’s financial responsibility or “composite score.” If an institution’s score is above 1.5, it may continue its participation in federal student financial aid programs. For fiscal 2010, our calculations show that all of our schools exceed this requirement on an individual basis and are eligible to participate in the federal student financial aid programs, with composite scores ranging from 1.5 to 3.0. On a consolidated basis, we also exceed this requirement with a composite score of 1.7. We cannot assure you that we and our institutions will continue to satisfy the numeric standards in the future.

One or more of our institutions may have to post a letter of credit or be subject to other sanctions if they do not correctly calculate and timely return Title IV Program funds for students who withdraw before completing their program of study.

A school participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that was disbursed to students who withdrew from their educational programs before completing them, and must return those unearned funds in a timely manner, generally within 45 days of the date the school determines that the student has withdrawn. If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the ED or be otherwise sanctioned by the ED. An institution is required to post a letter of credit with the ED in an amount equal to 25% of the total dollar amount of unearned Title IV Program funds that the institution was required to return with respect to withdrawn students during its most recently completed fiscal year, if the institution was found in an audit or program review to have untimely returned unearned Title IV Program funds with respect to 5% or more of the students in the audit or program review sample of withdrawn students, in either of its two most recently completed fiscal years. The requirement to post a letter of credit or other sanctions by the ED could increase our cost of regulatory compliance and adversely affect our results of operations.

 

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If regulators do not approve our acquisitions, the acquired school(s) would not be permitted to participate in federal student financial aid programs.

When we acquire an institution that participates in federal student financial aid programs, we must seek approval from the ED and most applicable state agencies and accrediting agencies, because an acquisition is considered a change of ownership or control of the acquired institution under applicable regulatory standards. A change of ownership or control of an institution under the ED standards can result in the temporary suspension of the institution’s participation in the federal student financial aid programs unless a timely and materially complete application for recertification is filed with the ED and the ED issues a temporary certification document. If we are unable to obtain approvals from the state agencies, accrediting agencies or ED for any institution we may acquire in the future, depending on the size of that acquisition, such a failure to obtain approval could have a material adverse effect on our business.

If regulators do not approve transactions involving a change of control or change in our corporate structure, we may lose our ability to participate in federal student financial aid programs.

Additionally, if regulators do not approve transactions involving a change of control of the Company, we may lose our ability to participate in federal student financial aid programs. If we experience a change of control under the standards of applicable state agencies or accrediting agencies or the ED, we or the affected institutions must seek the approval of the relevant agencies. Some of these transactions or events, such as a significant acquisition or disposition of our common stock by third parties on the open market or through a tender offer, may be beyond our control. The adverse regulatory effect of a change of ownership resulting in a change of control could also discourage bids for our outstanding shares of common stock at a premium and could have an adverse effect on the market price of our common stock.

 

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If we fail to demonstrate “administrative capability” to the ED, our business could suffer.

ED regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in federal student financial aid programs. These criteria require, among other things, that the institution:

 

   

comply with all applicable federal student financial aid regulations;

 

   

have capable and sufficient personnel to administer the federal student financial aid programs;

 

   

have acceptable methods of defining and measuring the satisfactory academic progress of its students;

 

   

provide financial aid counseling to its students; and

 

   

submit all reports and financial statements required by the regulations.

If an institution fails to satisfy any of these criteria, the ED may:

 

   

require the repayment of federal student financial aid funds;

 

   

transfer the institution from the “advance” system of payment of federal student financial aid funds to the “reimbursement” system of payment or cash monitoring;

 

   

place the institution on provisional certification status; or

 

   

commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in federal student financial aid programs.

Should one or more of our institutions be limited in their access to, or lose, federal student financial aid funds due to their failure to demonstrate administrative capability, our business could be materially adversely affected.

Regulatory agencies or third parties may conduct compliance reviews, commence investigations, bring claims or institute litigation against us.

Because we operate in a highly regulated industry, we may be subject from time to time to program reviews, audits, investigations, claims of non-compliance, or lawsuits by governmental agencies or third parties, which may allege statutory violations, regulatory infractions, or common law causes of action. If the results of the investigations are unfavorable to us or if we are unable to successfully defend against third-party lawsuits, we may be required to pay money damages or be subject to fines, penalties, injunctions or other censure that could have a materially adverse effect on our business. We also may be limited in our ability to open new schools or add new program offerings and may be adversely impacted by the negative publicity surrounding an investigation or lawsuit. Even if we adequately address the issues raised by an agency review or investigation or successfully defend a third-party lawsuit, we may suffer interruptions in cash flows due to, among other things, transfer from the advance funding to the “reimbursement” or “heightened cash monitoring” method of Title IV program funding, and we may have to devote significant money and management resources to address these issues, which could harm our business. Additionally, we may experience adverse collateral consequences, including declines in the number of students enrolling at our schools and the willingness of third parties to deal with us or our schools, as a result of any negative publicity associated with such reviews, claims or litigation.

 

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Investigations, claims and actions against companies in our industry could adversely affect our business and stock price.

During the past decade, we and other companies in the for-profit postsecondary education industry have been subject to intense regulatory scrutiny. In some cases, allegations of wrongdoing have resulted in reviews or investigations by the Justice Department, state attorneys general, the Securities and Exchange Commission (the “SEC”), the ED, state agencies, accrediting agencies and other entities. These allegations, reviews and investigations and the accompanying adverse publicity could have a negative impact on the for-profit postsecondary education industry in general, our business and the market price of our common stock.

We are subject to sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admissions or financial aid activities.

An institution participating in Title IV Programs may not provide 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 or admission activity or in making decisions regarding the awarding of Title IV Program funds. The law and regulations governing this requirement do not establish clear criteria for compliance in all circumstances. If the ED determined that one of our institution’s compensation practices violated these standards, the ED could subject the institution to monetary fines, penalties, or other sanctions. Additionally, the Company has been, and may in the future be, the subject of qui tam actions in federal court by former employees on behalf of themselves and the federal government alleging violations of False Claims act because of alleged violations of the incentive compensation prohibitions in the HEA. See “Item 3. Legal Proceedings.” Any substantial fine or penalty or other sanction levied against one or more of our schools could have a material adverse effect on our financial condition, results of operations and cash flows.

Failure to comply with extensive Canadian regulations could affect the ability of our Canadian schools to participate in Canadian financial aid programs.

Our post-secondary schools in Canada derive a significant percentage of their revenue on a cash basis from Canadian governmental financial aid programs, and our Canadian students receive loans under student financial aid programs.

Our Canadian schools must meet eligibility standards to administer these programs and must comply with extensive statutes, rules, regulations and requirements. If our Canadian schools cannot meet these and other eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our business.

Additionally, the Canadian and Ontario provincial governments continuously review the legislative, regulatory and other requirements relating to student financial assistance programs due to political and budgetary pressures. Although we do not currently anticipate a significant reduction in the funding for these programs, any change that significantly reduces funding or the ability of our schools to participate in these programs could have a material adverse effect on our business and results of operations.

Operational Risks That Could Have a Material Adverse Effect on Our Business

If our students are unable to obtain private loans from third party lenders, our business could be adversely affected.

The education finance industry has experienced and may continue to experience problems that have resulted in fewer overall financing options for some of our students. Factors that could impact the general availability of loans to our students include:

 

   

changes in overall economic conditions or overall uncertainty or disruption in capital markets, in either case causing lenders to cease making student loans, limit the volume or types of loans made or impose more stringent eligibility or underwriting standards;

 

   

the financial condition and continued financial viability of student loan providers;

 

   

changes in applicable laws or regulations, such as provisions of the HEOA that impose disclosure and certification requirements with respect to private educational loans, that could have the effect of reducing the availability of education financing, including as a result of any lenders choosing to provide fewer loans or to stop providing loans altogether in light of increased regulation, or which could increase the costs of student loans; or

 

   

determinations by lenders to reduce the number of loans, or to cease making loans altogether, to students attending or planning to attend certain types of schools, particularly for-profit schools.

 

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The consumer credit markets in the United States have suffered over the past several years from increases in default rates and foreclosures on mortgages, which in some cases have called into question the continued financial viability of certain student loan providers and has resulted in fewer providers of student loans. Providers of federally guaranteed student loans and alternative student loans have also experienced increases in default rates. Adverse market conditions for consumer and federally guaranteed student loans have resulted in providers of alternative loans reducing the attractiveness and/or decreasing the availability of alternative loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based alternative loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs.

While we are taking steps to address the private loan needs of our students, the inability of our students to finance their education could cause our student population to decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Our Genesis discount student loan program could have a material adverse effect on our financial condition, results of operations and cash flows.

Our Genesis discount student loan program enables students who have exhausted all available government-sponsored or other aid and are ineligible for private loans from other financial institutions to borrow a portion of their tuition and other educational expenses at our schools if they or a co-borrower meet certain criteria. Historically, we had developed several loan programs with origination and servicing providers such as Sallie Mae for students with low credit scores who otherwise would not qualify for loans. These loan programs required that we pay a discount fee to the origination and servicing providers of the loans as a reserve against future defaults on these loans. We have historically referred to these types of loans as “discount loans,” since we incurred a portion of the default risk related to these students’ loans by taking a discount on the disbursement.

In early 2008 we were informed by Sallie Mae and two other origination and servicing providers that they would no longer make private loans available for students who present higher credit risks (i.e. subprime borrowers). In the face of this change in policy, we created a new student lending program with a different origination and servicing provider, Genesis, who specializes in subprime credit. This new Genesis loan program has characteristics similar to our previous “discount loan” programs. Under this Genesis loan program, we pay a discount to the origination and servicing provider. As with our previous discount loan program, we record the discount as a reduction to revenue, as the collectability of these amounts is not reasonably assured. However, unlike our previous discount loan programs, under our Genesis discount loan program we have both the right and the obligation (subject to certain limitations in our agreement with Genesis), to acquire the related loans. Since we initiated the program in the fourth quarter of fiscal 2008, we have acquired all of the loans that have been originated.

Federal, state and local laws and public policy and general principles of equity relating to the protection of consumers apply to the origination, servicing and collection of the loans that we purchase under this program. Any violation of the various federal, state and local laws, including, in some instances, violations of these laws by parties not under our control, may result in losses on the loans that we purchase or may limit our ability to collect all or part of the principal or interest on the loans that we purchase. This may be the case even if we are not directly responsible for the violations by such parties. Federal or state financial regulators also might delay or suspend the new student loan program for a variety of reasons. Additionally, depending on the terms of the loans, state consumer credit regulators may assert that our activities in connection with the new student loan program require us to obtain one or more licenses, registrations or other forms of regulatory approvals, any of which may not be able to be obtained in a timely manner, if at all.

For the Genesis discount loans that we acquire, we will bear the risks of collection. Therefore, even though we will record the discount as a reduction to revenue, to the extent collections are less than the net amount of revenue recorded, we may still experience increase in our allowance for doubtful accounts and our bad debt expense may increase. Factors that may impact our ability to collect these loans include general economic conditions, compliance with laws applicable to the origination, servicing and collection of loans, the quality of our loan servicers’ performance and the priority that borrowers, particularly students who did not complete or were dissatisfied with their programs of study, attach to repaying these loans as compared to other obligations. All of these factors could result in the Genesis discount loan program having a material adverse effect on our business, financial condition and results of operations.

 

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We rely on a single company to provide financial aid processing for our students. If that company fails or refuses to timely provide such service, or materially increases its fees, our business could be harmed.

We utilize a single company to provide the financial aid packaging and processing for our students’ financial aid. We have experienced periodic delays or backlogs of financial aid processing when this company’s resources have become overburdened. If this company were to cease doing business with us, we could experience an interruption in financial aid processing for our students. Although we believe we could find alternative service providers or we could begin to process financial aid in-house, we may be unable to establish relationships with alternative service providers that will be as favorable as the one we have now. For example, new service providers may have higher prices, lower capacity, lower quality standards or longer delivery times. Additionally, we are beginning to bring in-house some of these financial aid functions that have historically been performed for us by third parties. That transition also involves risks. If we are unable to provide financial aid processing for our students in a timely and accurate manner, or if such services are delayed or becomes more expensive, this could have a material adverse effect on our business and results of operations.

If students fail to pay their outstanding balances, our business will be harmed.

We offer a variety of payment plans to help students pay that portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed. Losses related to unpaid student balances in excess of the amounts we have reserved could have a material adverse effect on our business.

Our marketing and advertising efforts may not be effective in attracting prospective students.

In order to maintain and increase our revenues and margins, we must continue to attract new students in an effective and efficient manner. If we are unable to successfully advertise and market our schools, our ability to attract and enroll new students could be adversely impacted and, consequently, our financial performance could suffer. We use marketing tools such as the Internet, radio, television and print media advertising to promote our schools and programs. Our representatives also make presentations at high schools. If we are unable to utilize these advertising methods in a cost-effective manner or if our other costs limit the amount of funds we can contribute to advertising, our revenue and margins may suffer. Additionally, we rely on the general reputation of our schools and referrals from current students, alumni and employers as a source of new students. Among the factors that could prevent us from successfully marketing and advertising our schools and programs are the failure of our marketing tools and strategy to appeal to prospective students or current student and/or employer dissatisfaction with our program offerings or results and diminished access to high school campuses.

If we cannot effectively identify, acquire and integrate additional schools, it could harm our business.

We expect to continue to rely on acquisitions as a component of our growth strategy. We often engage in evaluations of, and discussions with, possible acquisition candidates. We cannot make assurances that we will be able to identify suitable acquisition candidates or that we will be able to acquire any of the acquisition candidates on favorable terms. Furthermore, we cannot make assurances that any acquired schools can be successfully integrated into our operations or be operated profitably. Acquisitions involve a number of risks that include:

 

   

diversion of management resources;

 

   

integration of the acquired schools’ operations;

 

   

adverse short-term effects on reported operating results; and

 

   

possible loss of key employees.

Continued growth through acquisitions may also subject us to unanticipated business or regulatory uncertainties or liabilities. When we acquire an existing school, we typically allocate a significant portion of the purchase price to fixed assets, curriculum, goodwill and intangibles, such as covenants not-to-compete, trade names and accreditations. The Company does not amortize goodwill, accreditation, or trade names as these assets meet the indefinite life criteria outlined in the accounting guidance. Curricula are amortized over their useful lives ranging generally from three to fifteen years and Student Relationships is being amortized over their useful life of one year. Goodwill is tested annually or more frequently for impairment. Indefinite-lived intangible assets are tested annually or more frequently if circumstances indicate potential impairment, by comparing their fair values to their carrying amounts. Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives. In addition, our acquisition of a school is a change of ownership of that school, which may result in the temporary suspension of that school’s participation in federal student financial aid programs until it obtains the ED’s approval. If we fail to successfully manage our acquisitions, our business would likely suffer.

 

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Failure to effectively manage opening new schools and adding new services could harm our business.

Establishing new schools requires us to make investments in management, capital expenditures, marketing expenses and other resources. To open a new school, we are also required to obtain appropriate state and accrediting agency approvals. In addition, to be eligible for federal student financial aid programs, the new school is required to be certified as eligible to receive Title IV funds by the ED. We cannot assure you that we will be able to successfully open new schools in the future. Our failure to effectively manage the operations of newly established schools could have a material adverse effect on our business.

Our success depends upon our ability to recruit and retain key personnel.

We depend on key personnel, including Jack D. Massimino, Peter C. Waller, Matt A. Ouimet, Kenneth S. Ord, Beth A. Wilson, William B. Buchanan, Mark L. Pelesh, Stan A. Mortensen, Robert C. Owen and David A. Poldoian, to effectively operate our business. If any of these people left our Company and we failed to effectively manage a transition to new people, our business could suffer.

Our success also depends, in large part, upon our ability to attract and retain highly qualified faculty, school presidents and administrators and campus support center management. We may have difficulty locating and hiring qualified personnel, and retaining such personnel once hired. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could cause our business to suffer.

Anti-takeover provisions in our charter documents and Delaware law could make an acquisition of our company difficult.

Our certificate of incorporation, our by-laws and Delaware law contain provisions that may delay, defer or inhibit a future acquisition of our Company not approved by our board of directors. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors. Our certificate of incorporation also permits our board of directors to issue shares of preferred stock with voting, conversion and other rights as it determines, without any further vote or action by our stockholders. By using preferred stock, we could:

 

   

discourage a proxy contest;

 

   

make the acquisition of a substantial block of our common stock more difficult; or

 

   

limit the price investors may be willing to pay in the future for shares of our common stock.

We face litigation that could have a material adverse effect on our business, financial condition and results of operations.

We and our schools are subject to various lawsuits, investigations and claims, covering a wide range of matters, including, but not limited to, claims involving our current and former students, alleged violations of federal and state laws, false claims made to the federal government and routine employment matters. It is possible that we may be required to pay substantial damages or settlement costs in excess of our insurance coverage or current reserves, which could have a material adverse effect on our financial condition or results of operation. We could also incur substantial legal costs, and management’s attention and resources could be diverted from our business. Please see Item 3, “Legal Proceedings,” for more detailed information on these litigation risks.

Failure to keep pace with changing market needs and technology could harm our business.

Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological skills. Educational programs at our schools, particularly programs in information technology, must keep pace with these evolving requirements. If we cannot respond to changes in industry requirements, it could have a material adverse effect on our business.

Competitors with greater resources could harm our business.

The post-secondary education market is highly competitive, and has become ever more so over the past several years. Our schools compete with traditional public and private two-year and four-year colleges and universities and other proprietary schools, including those that offer on-line learning programs. Some public and private colleges and universities, as well as other private career-oriented schools, may offer programs similar to those of our schools. Although tuition at many private non-profit institutions is higher than tuition at our schools, some public institutions are able to charge lower tuition than our schools, due in part to government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to proprietary schools. Some of our competitors in both the public and private sectors have substantially greater financial and other resources than us.

 

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Failure to obtain additional capital in the future could reduce our ability to grow.

We believe that funds from operations, cash, investments and access to our credit facility that expires in July 2010 will be adequate to fund our currently identified plans. However, we may need additional debt or equity financing in order to carry out our growth strategies. The amount and timing of such additional financing will vary depending on the timing and size of acquisitions, our availability to access credit markets, and the sellers’ willingness to provide financing themselves. To the extent that we require additional financing in the future and are unable to obtain such additional financing, we may not be able to fully implement our growth strategy.

If natural disasters, terrorist attacks, public transit strikes or economic downturns occur in specific geographic areas where we have a high concentration of schools, our business could be harmed.

We have large numbers of schools concentrated in certain geographic areas. For instance, we have a high concentration of schools in California, Florida, Texas, Georgia, Michigan, the Province of Ontario and other states and cities. We expect to continue to have high concentrations of schools in large metropolitan areas as we create new branch campuses and acquire new schools. These geographic concentrations may change or intensify over time. If natural disasters, terrorist attacks, public transit strikes, economic developments or other adverse events occur or are more intensively felt in some of these concentrated geographic areas, our business and results of operations could be disproportionately affected compared to the rest of the United States and Canada.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our campus support center office is located in Santa Ana, California and our 118 campuses, as of June 30, 2010, are located in 25 states and in the province of Ontario, Canada. Each campus provides our students with lecture halls, instructional labs, libraries, Internet access and other facilities.

We actively monitor the capacity at our facilities and the expected future facilities capacity required to accommodate campus growth initiatives. We provide for expansion and future growth at each campus through relocations to larger facilities and by expanding or remodeling existing facilities. From the beginning of fiscal 2006 through fiscal 2010, approximately 14% of the campuses have been relocated and an additional approximately 64% of total campuses have been either expanded or remodeled. The following table reflects the number of campuses added, closed or combined, and the number of campuses that have been relocated, enlarged or remodeled during each of the last five fiscal years ended and has been updated to reflect solely continuing operations:

 

     2010    2009    2008    2007    2006

Opened

              

Acquired

   11    0    0    0    0

Branched

   1    0    0    0    3

Closed, combined or sold

   0    0    0    2    17

Campuses at year end

   118    106    106    106    108

Relocated

   1    5    2    2    6

Enlarged or remodeled

   42    5    10    6    12

All but nine of our facilities are leased. In addition, we lease our campus support center offices. Most of our leases have primary terms between 5 and 10 years with options to extend the lease, at our election.

Square footage of our schools and colleges varies significantly based upon the type of programs offered and the market being served. Please see the section entitled “Programs of Study” in Item 1, “Business”, for square footage by location.

 

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ITEM 3. LEGAL PROCEEDINGS

Legal Matters

In the ordinary conduct of its business, the Company and its subsidiaries are subject to lawsuits, demands in arbitration, investigations and other claims, including, but not limited to, lawsuits and claims involving current and former students, employment-related matters, business disputes and regulatory demands. In some of the lawsuits and arbitrations pending against the Company, including matters not presently deemed to be material and which are not disclosed below, the plaintiffs seek certification of the matter as a class action in order to represent other similarly-situated persons. Except as disclosed below, none of the matters currently pending against the Company in which plaintiffs seek class certification has yet been certified as a class action. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company records a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. There can be no assurance that the ultimate outcome of any of the matters threatened or pending against the Company, including those disclosed below, will not have a material adverse effect on the Company’s financial condition or results of operations.

Between July 21, 2004 and July 23, 2004, two derivative actions captioned Collet, Derivatively on behalf of Corinthian Colleges, Inc., v. David Moore, et al., and Davila, Derivatively on behalf of Corinthian Colleges, Inc., v. David Moore, et al., were filed in the Orange County California Superior Court against David Moore, Dennis Beal, Dennis Devereux, Beth Wilson, Mary Barry, Stan Mortensen, Bruce Deyong, Loyal Wilson, Jack Massimino, Linda Skladany, Paul St. Pierre, Michael Berry, and Anthony Digiovanni, and against the Company as a nominal defendant. Each individual defendant is one of the Company’s current or former officers and/or directors. The lawsuits allege breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, unjust enrichment, and violations of the California corporations’ code, essentially based on the same allegations of conduct complained of in the initial federal securities class action complaints filed at the same time. The Collet and Davila cases have now been consolidated into one action. A memorandum of understanding was executed by the parties resolving these cases, pending court approval, for an immaterial amount of attorneys’ fees to be paid by the Company’s directors’ and officers’ insurance carrier to the plaintiffs’ lawyers, and with the Company agreeing to certain corporate governance matters. On October 29, 2009, the Court denied the parties’ motion for approval of the settlement, but the parties continue to explore avenues to resolve this matter.

On October 3, 2007, the Company was notified that a qui tam action had been filed in the U.S. District Court for the Central District of California by a former employee (the “relator”) on behalf of himself and the federal government. The case is captioned United States of America, ex rel. Steven Fuhr v. Corinthian Colleges, Inc. The Company subsequently learned of two other qui tam actions filed against the Company captioned United States of America, ex rel. Nyoka Lee and Talala Mshuja v. Corinthian Colleges, Inc., et al., and United States of America, ex rel. Stephen Backhus v. Corinthian Colleges, Inc., et al., filed in the United States District Courts for the Central District of California and the Middle District of Florida, respectively. These qui tam actions allege violations of the False Claims Act, 31 U.S.C. § 3729-33, by the Company for allegedly causing false claims to be paid, or allegedly using false statements to get claims paid or approved by the federal government, because of alleged Company violations of the Higher Education Act (the “HEA”) regarding the manner in which admissions personnel are compensated. The Lee complaint also alleges causes of action for common law fraud, unjust enrichment and payment under mistake of fact against the Company, Ernst & Young LLP (the Company’s Independent Registered Public Accounting Firm), and David Moore, Jack Massimino, Paul St. Pierre, Alice Kane, Linda Skladany, Hank Adler and Terry Hartshorn (all of whom are current or former directors of the Company). On March 4, 2009, the Company received written notices that the U.S. Department of Justice had declined to intervene in, or take over, these qui tam actions, and the United States District Courts in which the cases were filed unsealed the complaints. Although the government declined to intervene in these actions, the relators may continue to pursue the litigation on behalf of the federal government and, if successful, receive a portion of the federal government’s recovery. Additionally, upon a showing of good cause, the government has the right to intervene in the actions at a later time. The Backhus complaint has since been voluntarily dismissed and, on August 3, 2009, the U.S. District Court issued an order dismissing the Fuhr complaint with prejudice. That dismissal was appealed, but has since been voluntarily abandoned and dismissed by the relator in that case. The Lee complaint was dismissed with prejudice by the U.S. District Court on December 4, 2009. The Lee dismissal was also appealed. The Company believes these complaints are without merit and intends to defend itself and its current and former directors vigorously in these matters.

On May 28, 2008, a putative class action demand in arbitration captioned Rivera v. Sequoia Education, Inc. and Corinthian Colleges, Inc. was filed with the American Arbitration Association. The plaintiffs are nine current or former HVAC students from the Company’s WyoTech Fremont campus. The arbitration demand alleges violations of California’s Business and Professions Code Sections 17200 and 17500, fraud and intentional deceit, negligent misrepresentation, breach

 

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of contract and unjust enrichment/restitution, all related to alleged deficiencies and misrepresentations regarding the HVAC program at these campuses. The plaintiffs seek to certify a class composed of all HVAC students in the Company’s WyoTech Fremont and WyoTech Oakland campuses over the prior four years, and seek recovery of compensatory and punitive damages, interest, restitution and attorneys’ fees and costs. The Company never operated any HVAC programs at the Company’s WyoTech Oakland campus during its ownership of that campus. The Company believes the complaint is without merit and intends to vigorously defend itself against these allegations.

On September 4, 2009, the Company was served with a petition filed in Dallas County District Court entitled Miesha Daniels, et al. v. Rhodes Colleges, Inc., Rhodes Business Group, Inc., and Corinthian Colleges, Inc. The petition names thirteen former students of three Dallas-area Everest campuses as plaintiffs and does not seek certification as a class action. The plaintiffs allege violations of Texas’ Deceptive Trade Practices and Consumer Protection Act, breach of contract and fraud related to alleged pre-enrollment representations regarding credit transfer, quality of education and outcomes. The plaintiffs seek recovery of compensatory and exemplary damages and attorneys’ fees. The action has been ordered to arbitration where individual arbitration demands have been filed. The plaintiffs’ attorneys have also informed us of nearly one hundred additional current or former students they claim to represent, and upon whose behalf they may file arbitration or litigation claims. The Company believes the allegations are without merit and intends to vigorously defend itself.

On November 17, 2008, an action captioned Mary Credille and Roger Madden, on behalf of all similarly situated current and former employees, v. Corinthian Colleges et al., was filed in the U.S. District Court for the Northern District of Illinois. The two named plaintiffs are former employees of the Company’s Chicago campus, and allege failure to receive proper compensation for all overtime hours allegedly worked in violation of the Fair Labor Standards Act. Plaintiff Credille has voluntarily dismissed her claims against the Company. On December 8, 2009, the Court granted Plaintiff Madden’s motion to conditionally certify a collective action to include those current and former admissions representatives at the Company’s Chicago campus who also satisfy additional requirements. It is unknown whether any, or how many, of the prospective participants, estimated to be around 50 current and former employees, will choose to “opt in” to participate in the lawsuit. To date, we are aware of only one additional former employee who has elected to opt in to the lawsuit. The Company intends to challenge the conditional certification at the second stage of the certification process. The Company believes the allegations are without merit and intends to vigorously defend itself.

On April 20, 2010, a putative class action complaint captioned Reed, an individual, on behalf of himself and all others similarly situated v. Florida Metropolitan University, Inc. and Corinthian Colleges, Inc. was filed in the District Court of Travis County, Texas. Florida Metropolitan University, Inc. is a wholly-owned subsidiary of the Company. Plaintiff purports to be a former student in the Company’s Everest University Online operations. The complaint claims violations of Texas Education Code Sections 132.051(a) and 132.059(a) for alleged failure of Everest University Online to receive a Certificate of Approval or an exemption from the appropriate Texas state licensing bodies to offer online courses in the State of Texas and to register its admissions representatives with the State of Texas. The plaintiff seeks to certify a class composed of all persons who contracted to receive distance education from Everest University Online while residing in Texas, and seeks damages on behalf of such persons, pre- and post-judgment interest, declaratory and injunctive relief, cost of suit, and such other relief as the court deems proper. On July 26, 2010, the Court ordered the matter to binding arbitration. The Company believes the complaint is without merit and intends to defend itself and its subsidiary vigorously.

On December 17, 2009, an action captioned Mancuso, on behalf of himself and all others similarly situated v. Florida Metropolitan University, Inc and Corinthian Colleges, Inc, was filed in the U.S. District Court for the Southern District of Florida. The named plaintiff is an admissions representative of the Company’s Pompano Beach campus, and alleges failure to receive proper compensation for all overtime hours allegedly worked in violation of the Fair Labor Standards Act. On June 24, 2010, the Court granted Plaintiff’s motion to conditionally certify a collective action to include those current and former admissions representatives at the Company’s Pompano Beach campus who also satisfy additional requirements. The plaintiff has also filed a motion requesting the Court to broaden the collective action from the Pompano campus to all admissions representatives at every campus nationwide. The Company is opposing this motion. It is unknown whether any, or how many, of the prospective participants will choose to “opt in” to participate in the lawsuit. The Company intends to challenge the conditional certification of the Pompano Beach campus at the second stage of the certification process. The Company believes the allegations are without merit and intends to defend itself vigorously.

In addition to the legal proceedings and other matters described above, the Company is or may become a party to pending or threatened lawsuits related primarily to services currently or formerly performed by the Company. Such cases and claims raise difficult and complex factual and legal issues and are subject to many uncertainties and complexities, including, but not limited to, class action certification, governmental intervention, regulatory or administrative agency involvement, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is brought, and differences in applicable statutory and common law.

 

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As of June 30, 2010, the Company had established aggregate reserves for all of the matters disclosed above, as well as for those additional matters where the liabilities are probable and losses estimable but for which the Company does not believe the matters are reasonably likely to have a material impact on the results of operations or financial condition of the Company, which are immaterial to the Company’s financial position. The Company regularly evaluates the reasonableness of its accruals and makes any adjustments considered necessary. Due to the uncertainty of the outcome of litigation and claims, the Company is unable to make a reasonable estimate of the upper end of the range of potential liability for these matters. Upon resolution of any pending legal matters, the Company may incur charges in excess of presently established reserves. While any such charge could have a material adverse impact on the Company’s results of operations in the period in which it is recorded or paid, management does not believe that any such charge would have a material adverse effect on the Company’s financial position or liquidity.

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 fiscal year ended June 30, 2010.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Dividend Policy

We have never paid cash dividends on our common stock. Payment of dividends in the future, if at all, will depend upon our earnings and financial condition and various other factors our Board of Directors may deem appropriate at the time. Our amended credit agreement limits the payment of cash dividends.

Issuer Purchases of Equity Securities

On October 31, 2006, the Company’s Board of Directors approved a share repurchase of up to $50 million of the Company’s common stock. From November 2006 through May 2007, the Company purchased 2,256,638 shares at a total cost of $31.4 million (an average share price of $13.90 per share).

During July 2010, the Company’s Board of Directors approved a stock repurchase program under which the Company may purchase up to $200 million of its common stock.

Price Range of Common Stock

Our common stock is listed on the Nasdaq National Market System under the symbol “COCO.” The approximate number of holders of record of our common stock as of August 18, 2010 was 30. Our common stock was first listed on Nasdaq upon completion of our initial public offering in February 1999.

On August 18, 2010 the closing price per share of common stock was $5.32 and the range of high and low closing sales prices of our common stock, as reported by the Nasdaq National Market System, for each applicable quarter in fiscal 2009 and 2010, and the first quarter to date of fiscal 2011, is as follows:

 

     Price Range of
Common Stock
     High    Low

Fiscal Years Ended June 30:

     

2009:

     

First Quarter

   $ 17.09    $ 11.69

Second Quarter

     16.37      11.73

Third Quarter

     21.47      14.56

Fourth Quarter

     19.49      14.99

2010:

     

First Quarter

   $ 20.10    $ 14.63

Second Quarter

     18.39      13.13

Third Quarter

     19.10      13.06

Fourth Quarter

     19.22      9.85

2011:

     

First Quarter through August 18, 2010

   $ 10.48    $ 5.00

 

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Securities Authorized for Issuance Under Equity Compensation Plans as of June 30, 2010

As of June 30, 2010, our equity compensation plans consisted of the 1998 Performance Award Plan (the “1998 Plan”), the 2003 Performance Award Plan as amended (the “2003 Plan”), the 2004 New Hire Plan (the “New Hire Plan”) and the Employee Stock Purchase Plan (the “ESPP”). The 1998 Plan, the 2003 Plan and the ESPP have all been approved by our shareholders.

The New Hire Plan has not been approved by our shareholders. The Company’s ability to issue new stock-based awards under the New Hire Plan was terminated as of November 17, 2005.

 

Plan Category

   Number of securities to
be issued upon exercise of
outstanding  options,
warrants and rights
    Weighted-average exercise
price of outstanding
options, warrants,  and
rights
    Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected in
column (a))

Equity compensation plans approved by security holders

   10,693,259 (1)    $ 15.03 (3)    3,000,554

Equity compensation plans not approved by security holders

   100,900 (2)    $ 16.14 (3)    —  
                  

Total

   10,794,159      $ 15.04 (3)    3,000,554
                  
      

 

(1) Includes 467,020 shares to be issued upon the vesting of Restricted Stock Units (“RSUs”), for which no exercise price will be paid.
(2) Includes 10,000 shares to be issued upon the vesting of RSUs, for which no exercise price will be paid.
(3) For purposes of calculating weighted average exercise price, RSUs are assumed to have an exercise price of $0.

 

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Performance Graph

The following graph shows a comparison of cumulative total returns for Corinthian, the Russell 2000 Index and an index of peer companies selected by Corinthian during the period commencing on June 30, 2005 and ending on June 30, 2010. The comparison assumes $100 was invested on June 30, 2005 in the Common Stock, the Russell 2000 Index and the peer companies selected by Corinthian and assumes the reinvestment of all dividends, if any. The companies in the peer group, all of which are education companies, are weighted according to their market capitalization. Included in the peer group are: Apollo Group Inc., Career Education Corporation, DeVry, Inc., ITT Educational Services, Inc., Lincoln Educational Services Corporation, Universal Technical Institute, Inc. and Strayer Education, Inc.

LOGO

 

* $100 invested on 6/30/05 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

 

Date

   Corinthian
Colleges, Inc.
   Russell
2000
   Peer
Group
   Date    Corinthian
Colleges, Inc.
   Russell
2000
   Peer
Grou

p
   Date    Corinthian
Colleges, Inc.
   Russell
2000
   Peer
Group
  6/05    100.00    100.00    100.00    2/07    109.24    126.41    81.84    10/08    111.82    87.56    109.86
  7/05    107.52    106.34    98.83    3/07    107.67    127.77    81.10    11/08    125.92    77.20    118.14
  8/05    99.30    104.36    100.68    4/07    108.30    130.06    87.34    12/08    128.19    81.68    116.69
  9/05    103.92    104.69    89.72    5/07    114.41    135.39    93.01    1/09    146.28    72.60    125.78
10/05    97.42    101.44    88.75    6/07    127.56    133.41    101.94    2/09    154.27    63.78    114.48
11/05    94.83    106.37    97.49    7/07    105.48    124.28    98.79    3/09    152.31    69.47    119.86
12/05    92.17    105.88    86.44    8/07    110.10    127.10    100.04    4/09    120.60    80.21    102.96
  1/06    99.30    115.37    83.62    9/07    124.59    129.28    103.80    5/09    120.44    82.62    97.96
  2/06    101.49    115.06    79.94    10/07    128.35    132.99    129.17    6/09    132.58    83.84    115.11
  3/06    112.76    120.64    84.75    11/07    136.73    123.44    121.33    7/09    120.91    91.91    111.75
  4/06    116.60    120.62    86.26    12/07    120.60    123.36    108.76    8/09    150.12    94.55    111.52
  5/06    108.14    113.84    82.37    1/08    66.17    114.95    116.32    9/09    145.34    100.00    121.05
  6/06    112.45    114.58    79.70    2/08    62.26    110.69    88.39    10/09    124.20    93.21    102.47
  7/06    105.09    110.85    76.49    3/08    56.62    111.15    71.36    11/09    116.05    96.14    104.41
  8/06    94.91    114.13    74.49    4/08    88.88    115.81    92.42    12/09    107.83    103.88    108.65
  9/06    84.65    115.08    74.89    5/08    100.23    121.13    89.83    1/10    109.63    100.05    108.99
10/06    95.93    121.71    67.79    6/08    90.92    111.80    86.84    2/10    127.02    104.56    116.10
11/06    101.02    124.91    70.38    7/08    123.34    115.94    105.30    3/10    137.74    113.07    121.17
12/06    106.73    125.33    70.57    8/08    103.92    120.13    104.44    4/10    122.32    119.47    114.57
  1/07    102.27    127.42    78.04    9/08    117.46    110.56    97.31    5/10    104.86    110.41    108.99
                        6/10    77.13    101.85    91.79

 

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere in this Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected statement of operations data and the balance sheet data set forth below as of and for each of the 5 years ended June 30, 2010, 2009, 2008, 2007 and 2006 are derived from our audited consolidated financial statements. These historical results are not necessarily indicative of the results that may be expected in the future. The information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.

 

     Years Ended June 30,  
     2010(3)     2009     2008     2007     2006  
     (In thousands, except per share data)  

Statement of Operations Data:

          

Net revenues (1)

   $ 1,763,797      $ 1,307,825      $ 1,068,671      $ 919,224      $ 907,815   
                                        

Operating expenses:

          

Educational services

     972,910        753,707        625,481        528,125        507,832   

General and administrative

     192,579        135,747        114,938        110,654        92,677   

Marketing and admissions

     357,563        294,728        276,875        248,447        240,373   

Impairment, facility closing, and severance charges

     —          4,378        6,603        9,693        4,170   
                                        

Total operating expenses

     1,532,052        1,188,560        1,023,897        896,919        845,052   
                                        

Income from operations

     240,745        119,265        44,774        22,305        62,763   

Interest income

     (1,190     (1,763     (3,376     (6,244     (5,772

Interest expense, net

     5,009        2,715        1,793        2,811        3,162   

Other (income) expense, net

     (4,378     1,170        (1,387     (1,039     (1,137
                                        

Income before provision for income taxes

     241,304        117,143        47,744        26,777        66,510   

Provision for income taxes

     95,333        46,015        14,879        9,950        24,025   
                                        

Income from continuing operations

     145,971        71,128        32,865        16,827        42,485   

(Loss) income from discontinued operations, net of tax

     —          (2,368     (11,598     (9,595     (1,003
                                        

Net income

   $ 145,971      $ 68,760      $ 21,267      $ 7,232      $ 41,482   
                                        

Income per common share—basic:

          

Income from continuing operations

   $ 1.66      $ 0.82      $ 0.39      $ 0.19      $ 0.48   
                                        

(Loss) income from discontinued operations

   $ —        $ (0.02   $ (0.14   $ (0.11   $ (0.01
                                        

Income per common share—diluted:

          

Income from continuing operations

   $ 1.65      $ 0.81      $ 0.39      $ 0.19      $ 0.47   
                                        

(Loss) income from discontinued operations

   $ —        $ (0.02   $ (0.14   $ (0.11   $ (0.01
                                        

Weighted average number of common shares outstanding:

          

Basic

     87,696        86,121        84,954        85,887        88,627   
                                        

Diluted

     88,707        87,517        86,013        87,097        89,973   
                                        

 

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     Years Ended June 30,  
     2010     2009     2008     2007     2006  
     (Dollars in thousands)  
Other Data:           

Cash flow provided by (used in):

          

Operating activities

   $ 204,036      $ 198,677      $ 13,613      $ 38,804      $ 118,714   

Investing activities

     (430,787     (48,794     (36,568     (27,095     (51,588

Financing activities

     275,244        (21,420     (44,914     51,122        (89,829

Capital expenditures

     (83,488     (49,525     (54,880     (70,977     (56,054

Number of colleges/training centers at end of period

     118        106        106        106        108   

Student population at end of period

     110,580        86,088        69,211        61,332        59,924   

Starts during the period (2)

     137,831        117,352        100,210        88,699        86,521   

Balance Sheet Data:

          

Cash and cash equivalents

   $ 209,165      $ 160,276      $ 32,004      $ 99,789      $ 36,805   

Marketable securities

     —          —          —          15,000        55,900   

Working capital

     140,411        107,948        83,314        124,563        74,342   

Total assets

     1,389,420        798,871        695,966        737,976        670,006   

Long-term debt, net of current portion

     299,368        13,895        62,491        112,913        31,402   

Long-term capital lease obligations, net of current portion

     13,636        14,189        14,689        15,141        14,151   

Total stockholders’ equity

   $ 691,034      $ 517,668      $ 422,022      $ 385,422      $ 399,528   

 

(1) Represents student tuition and fees and bookstore sales, net of refunds.
(2) Represents the new students starting school during the periods presented.
(3) Included in the fiscal 2010 amounts are the Heald results for the six months ending June 30, 2010.

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 Financial 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 June 30, 2010, we operated 118 colleges with 110,580 students in 25 states and the province of Ontario, Canada. During the fiscal year ended June 30, 2010, the Company had net revenues of $1,763.8 million. Our revenues consist principally of student tuition and fees and are presented as net revenues after adjustments for refunds related to students who do not complete their courses. We recognize revenues pro-rata (on a straight-line basis) over the relevant period attended by the student of the applicable course or program.

Net revenues from continuing operations increased 34.9% to $1,763.8 million in 2010 from $1,307.8 million in 2009. The increase is primarily due to a 29.0% increase in the average student population and a 4.5% increase in the average revenue rate per student during the period. The revenue related to Heald for the six months ending June 30, 2010 was $121.0 million and the student population of Heald was 15,447 as of June 30, 2010. 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 typically occur several times per month 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 (diploma, associate’s, bachelor’s or master’s degree) and the specific curriculum. The majority of students at our colleges rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses.

Serving ATB students has historically been part of the Company’s mission. However, ATB students are a higher risk population who complete their programs at a lower rate and default on their student loans at a higher rate than high school graduates. Accordingly, given the shift to a 3-year default measurement period and the structural changes in student lending over the past two years, we intend to stop enrolling ATB students into our U.S. Everest and WyoTech institutions starting on September 1, 2010. At June 30, 2010, ATB students accounted for approximately 15.1% of our enrollments. The elimination of this population of potential students will negatively impact our expected new student enrollments, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and cash flows.

 

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Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts on those financial statements. Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended June 30, 2010 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to our allowance for doubtful accounts, insurance/self-insurance, goodwill and intangible assets, deferred taxes, discontinued operations, contingencies and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different conditions or if our assumptions change.

Our critical accounting estimates are those which we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates is as follows:

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments. We determine the adequacy of this allowance by regularly reviewing the accounts receivable aging and applying various expected loss percentages to certain student accounts receivable categories based upon historical bad debt experience and consideration of the current economic environment. We generally write off accounts receivable balances deemed uncollectible as they are sent to collection agencies. We offer a variety of payment plans to help students pay that portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed. We believe our reserves are adequate; however, losses related to unpaid student balances could exceed the amounts we have reserved for bad debts. The effect of an increase in our accounts receivable allowance of 3% of our outstanding receivables from 22.4% to 25.4% or $27.5 million to $31.2 million would result in a decrease in pre-tax income of $3.7 million for the year ended June 30, 2010. The effect of an increase in our student notes receivable allowance of 3% of our outstanding earned notes receivable from 47.1% to 50.1% or $60.8 million to $64.7 million would result in a decrease in pre-tax income of $3.9 million for the year ended June 30, 2010.

Many of our students in the U.S. participate in federally guaranteed student loan programs. The federally guaranteed student loans are authorized by the Higher Education Act (“HEA”) of 1965 and are guaranteed by an agency of the federal government. The guaranteed loans are not guaranteed by us, and the guaranteed student loans cannot become an obligation of ours. Accordingly, we do not record an obligation to repay any of the guaranteed loans that are not repaid by our former students and we do not record either a contingent obligation or an allowance for future obligations as a result of student defaults of federally guaranteed student loans.

However, if an institution’s former students’ default rate on guaranteed loans (Cohort Default Rate) equals or exceeds 25% for three consecutive years, the institution may lose participation eligibility in the guaranteed loan program and its students would be denied access to the guaranteed loan program. Our institutions’ Cohort Default Rates act as a gatekeeper to their eligibility to participate in the federal student financial aid programs. We have no obligation to repay any of the federally guaranteed loans that our former students default upon, even if the Cohort Default Rates of our students exceed permitted levels. Rather, if the Cohort Default Rates at a particular institution exceed 25% for three consecutive years under current calculations, the institution’s students may lose eligibility to receive federal student financial aid. Under the HEOA, a separate calculation will be performed that will add an additional federal fiscal year of borrowers’ repayment performance. This percentage will increase to 30% after three years of Cohort Default Rates calculated with the additional federal fiscal year are available, and then become applicable to the imposition of sanctions.

Insurance/Self-Insurance. We use a combination of insurance and self-insurance for a number of risks including claims related to employee heath care, workers’ compensation, general liability, and business interruption. Liabilities associated with these risks are estimated based on, among other things, historical claims experience, severity factors and other actuarial assumptions. The Company’s loss exposure related to self-insurance is limited by stop loss coverage. Our expected loss accruals are based on estimates, and while we believe the amounts accrued are adequate, the ultimate loss may differ from the amounts provided.

 

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Goodwill and Intangible Assets. We have significant goodwill and other intangible assets. Goodwill represents the excess of the cost over the fair market value of net assets acquired, including identified intangible assets. We consider a number of factors, including valuations and appraisals from independent valuation firms, in determining the amounts that are assignable to other intangible assets, such as curriculum, accreditation, and trade names. We, however, are ultimately responsible for the valuations. The fair value of identified intangible assets is derived using accepted valuation methodologies, including cost, market, and income approaches, as appropriate, following consultations with valuation firms and in accordance with the accounting guidance on Business Combinations and requirements set forth by the Uniform Standards of Professional Appraisal Practice.

The Company does not amortize goodwill, accreditation, or trade names as these assets meet the indefinite life criteria outlined in the accounting guidance on Accounting for Business Combinations. Curricula continue to be amortized over their useful lives ranging generally from three to fifteen years and Student Relationships is being amortized over their useful life of one year with all amortization expense included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

Goodwill is tested annually or more frequently if circumstances indicate potential impairment, by comparing its fair value to its carrying amount at the reporting unit level as defined by the accounting guidance. We determined the fair value of our reporting units using the income approach that includes discounted cash flow as well as other generally accepted valuation methodologies. To the extent the fair value of a reporting unit is less that the carrying amount of its assets, we record an impairment charge in the consolidated statements of operations.

In connection with receipt of federal financial aid by the Company’s students, the Company is subject to extensive regulation by governmental agencies and licensing and accrediting agencies. Compliance with the regulations promulgated by these various bodies could have a material impact on the manner in which the Company conducts its business, including the significant additional measures the Company has been implementing to address the Cohort Default Rates of its institutions and including the Company’s expectation that beginning on September 1, 2010, the Company will stop enrolling ATB students into its U.S. Everest and WyoTech institutions.

In addition, the Company’s business could also be negatively impacted by proposed and future regulations. As an example, on June 18, 2010, ED issued a Notice of Proposed Rulemaking (the “June NPRM”) following a year-long negotiated rulemaking process between ED and the higher education community on 14 Title IV Program integrity issues, which include lender and general student loan issues, accreditation, discretionary grants, general and non-loan programmatic issues, safe harbors under incentive compensation rules for admissions recruiters, and standards regarding state authorization for purposes of Title IV Program eligibility. The June NPRM addressed 13 of 14 program integrity issues in their entirety and partially addressed the 14th issue, which involves the definition of “gainful employment;” the ED issued a separate NPRM on gainful employment metrics on July 26, 2010 (the “July NPRM”). Public comment was due on the June NPRM no later than August 2, 2010 and for the July NPRM is due no later than September 9, 2010. ED has stated that it intends to review all comments it receives with the goal of publishing a final rule by November 1, 2010, which would take effect beginning July 1, 2011. The Company cannot predict the form of any final rules that may be adopted by ED. As presented by ED in the NPRMs, the rules regarding incentive compensation and gainful employment could have a material impact on the manner in which the Company conducts its business. Compliance with these rules, which, if adopted could be effective as early as July 1, 2011, may cause the Company to take actions beyond those the Company is already taking in connection with its compliance with existing regulations, and could reduce enrollment, increase the cost of doing business, and have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. To the extent known, the Company has incorporated the risks discussed above into the cash flow forecasts and discount rates used to estimate the fair value of each of its reporting units at June 30, 2010. However, should the Company need to take additional actions not currently foreseen to comply with current and future regulations, the assumptions used to calculate the fair value of our reporting units, including estimation of future cash flows, revenue growth, and discount rates, could be negatively impacted and could result in an impairment of goodwill.

At June 30, 2010, the fair value of one of our reporting units with approximately $198.5 million of goodwill exceeded its carrying amount by less than 10%. As a result, a relatively minor negative revision to the estimated future revenue growth or discount rate could result in an impairment to the carrying value of the related goodwill.

Indefinite-lived intangible assets are tested annually or more frequently if circumstances indicate potential impairment, by comparing their fair values to their carrying amounts. To the extent the fair value of an intangible asset is less than its carrying amount, we record an impairment charge in the consolidated statements of operations. For instance, if we were to discontinue the use of a trade name or lose accreditation at one or more of our acquired schools to which we have ascribed value for trade names and accreditation, we would test the amounts we have allocated to such assets for impairment. Such testing would include estimating the future cash flows expected to be received from the trade names and accreditation and comparing them to their carrying values. If our estimate of the present value of these future cash flows were below the carrying values of the related assets, we would consider the assets to be impaired and take a charge against the amounts we had allocated to trade names and accreditation.

 

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The determination of related estimated useful lives of intangible assets and whether or not these intangible assets are impaired involves significant judgment. Although we believe our goodwill and intangible assets are fairly stated, changes in strategy or market conditions could significantly impact these judgments and require adjustments to asset balances.

Deferred Taxes. We currently have deferred income tax assets which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of our deferred income tax assets is principally dependent upon achievement of projected future taxable income offset by deferred income tax liabilities. We evaluate the realizability of our deferred income tax assets annually. In addition, we review our income tax filing positions quarterly and update our tax contingency reserves as necessary. See Note 9—Income Taxes.

Contingencies. In the ordinary conduct of the business, we are subject to occasional lawsuits, investigations and claims, including, but not limited to, claims involving students and graduates and routine employment matters. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can reasonably estimated, we record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. There can be no assurance that the ultimate outcome of any of the lawsuits, investigations or claims pending against us will not have a material adverse effect on our financial condition or results of operations.

Acquisitions/Dispositions

Since our inception, we have completed the following acquisitions and disposals. Each acquisition has been accounted for using the purchase method of accounting. The results of operations related to the transactions are included in our consolidated results of operations since their respective dates:

On June 30, 1995, we acquired five colleges from National Education Corporation. As part of the same transaction, we subsequently acquired from National Education Corporation a second group of five colleges on September 30, 1995 and an additional six colleges on December 31, 1995. The adjusted purchase price for all 16 colleges was approximately $4.7 million in cash.

From July 1, 1996 through October 17, 1996, we acquired a total of 20 colleges in 3 separate transactions for a purchase price of $24.2 million in cash.

On January 18, 2000, we acquired substantially all of the assets of Harbor Medical College, which operated one college in Torrance, California, for approximately $300,000 in cash.

On April 1, 2000, we acquired substantially all of the assets of the Georgia Medical Institute, which operated three colleges in the greater Atlanta, Georgia metropolitan area, for approximately $7.0 million in cash.

On June 1, 2000, we acquired substantially all of the assets of Academy of Business College, Inc. which operated one college in Phoenix, Arizona, for approximately $1.0 million in cash.

On October 23, 2000, we acquired substantially all of the assets of Educorp, Inc. which operated four colleges in California, for approximately $12.6 million in cash.

On November 1, 2000, we acquired substantially all of the assets of Computer Training Academy, Inc. which operated two colleges in Northern California, for approximately $6.1 million in cash. We closed one campus in April 2002 and combined the second campus with another campus in close proximity in June 2004.

On February 1, 2001, we acquired all of the outstanding stock of Grand Rapids Educational Center, Inc., which operated three campuses in Michigan and Illinois, for approximately $2.8 million in cash.

 

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On April 1, 2002, we acquired all of the outstanding stock of National School of Technology, Inc., which operated three campuses in the greater Miami, Florida area, for approximately $14.4 million in cash.

On July 1, 2002, we acquired all of the outstanding stock of WyoTech Acquisition Corporation, which operated two colleges in Laramie, Wyoming and Blairsville, Pennsylvania. The cash purchase price was $84.4 million and was funded through cash on hand and approximately $43 million provided from our credit facility.

On January 2, 2003, we acquired substantially all of the assets of Learning Tree University, Inc. and LTU Extension, Inc., which operated two training centers in Southern California, for approximately $3.3 million in cash, plus the possibility of an additional $2.0 million if the acquired operations achieved certain operating performance targets. We closed the two LTU training centers in May 2004.

On August 1, 2003, we acquired all of the outstanding stock of Career Choices, Inc., which operated 10 campuses in California, Washington and Oregon, for approximately $56.3 million, financed through a combination of available cash and borrowings from our credit facility. We combined one of the campuses in Washington with other campuses in close proximity in June 2004. Additionally, in the fourth quarter of fiscal 2008 the Company completed the teach-out of its Everett, WA campus.

On August 6, 2003, we acquired substantially all of the assets of East Coast Aero Tech, LLC, which operated one campus in Massachusetts, for approximately $3.2 million plus or minus certain balance sheet adjustments, financed through a combination of available cash and borrowings from our credit facility.

On August 19, 2003, we acquired approximately 89% of the outstanding shares of common stock of CDI Education Corporation (“CDI”) through a tender offer to acquire all of the outstanding shares of common stock. As of October 7, 2003, we had acquired all shares of CDI for approximately $42.1 million and the assumption of approximately $10 million of debt and other liabilities. We funded the acquisition with available cash and borrowings from our credit facility. CDI operated 45 post-secondary colleges and 15 corporate training centers throughout Canada. In October 2003, we completed the acquisition of CMA Careers, Inc. located in Kitchener, Ontario, Canada. The intent to acquire this campus by CDI had been agreed to prior to our acquisition of CDI. We combined one of the CDI campuses with another campus in close proximity in April 2004 and closed 11 campuses and one training center in fiscal 2005. During fiscal 2006 we completed the sale of substantially all the assets of CDI’s corporate training division, CDI Education, whereby we sold the remaining training centers. The Company recognized a gain of approximately $1.4 million (pre-tax) which is included within other (income) expense on the Consolidated Statement of Operations.

On August 4, 2004, we acquired substantially all of the assets of A.M.I., Inc. (“AMI”) for approximately $11 million, plus the assumption of certain liabilities of approximately $0.5 million. We funded the acquisition with available cash. AMI operates one campus in Daytona Beach, Florida that offers accredited diploma programs to prepare students for jobs as motorcycle, marine, and personal watercraft technicians.

Effective February 29, 2008 we completed the sale of the 12 Canadian schools located outside the province of Ontario to a wholly-owned subsidiary of the Eminata Group, for a cash payment of CAD $3.0 million. This payment consists of the purchase price of CAD $7.4 million less preliminary negative working capital and other adjustments equal to CAD $4.4 million. This cash payment was subject to a final working capital adjustment that was finalized during the third quarter of fiscal 2009. The final working capital adjustment resulted in a payment to the buyer of $0.1 million.

Effective May 1, 2008, we completed the sale of the WyoTech Boston campus. The transaction was subject to a final working capital adjustment that was finalized during the third quarter of fiscal 2009. The final working capital adjustment resulted in a payment to the buyer of $0.1 million.

On January 4, 2010 we completed the acquisition of Heald Capital, LLC, a Delaware limited liability company (“Heald”) for consideration of $395 million and a preliminary working capital adjustment of $22.2 million. Heald, through its subsidiaries, operates Heald College, a regionally accredited institution that prepares students for careers in healthcare, business, legal, information technology and other growing fields, primarily through associate degree programs. Heald College operates 11 campuses and its results are included in the Condensed Consolidated Financial Statements from the date of acquisition.

Results of Operations

During the fourth quarter of 2008, we decided to divest the WyoTech Oakland campus. During the fourth quarter of fiscal 2009, we sold the capital assets of WyoTech Oakland for $0.2 million. Additionally, during the fourth quarter of 2008, we completed the teach-out of our Lynnwood WA, Everett WA, and Atlanta GA campuses.

 

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Accordingly, the results of operations of these campuses are reflected as discontinued operations in the Company’s consolidated statements of income for all prior periods presented. The net assets held for sale are required to be recorded on the balance sheet at estimated fair value, less costs to sell. Accordingly, during the fourth quarter of 2008, the Company recorded a charge of approximately $2.6 million, net of income tax benefit of $1.2 million, to accrue future rental payments related to the closed campuses and to reduce the carrying value of the net assets of the Company’s campuses held for sale and closed to estimated fair value, less costs to sell, as of June 30, 2008 (primarily related to the accrued rent of $2.8 million and the impairment of fixed assets in the amount of $1.0 million). Additionally, during the fourth quarter of fiscal 2009 and 2008, the Company recorded an additional reserve of approximately $0.9 million and $2.2 million (net of tax), respectively, taken against receivables related to the Atlanta campus. These charges are reflected as a component of loss from discontinued operations on the Company’s Consolidated Statements of Operations for the year ended June 30, 2008. The Company expects to have no significant continuing involvement with these entities.

During the fourth quarter of 2007, the Company decided to divest all of its CDI campuses outside of the province of Ontario, Canada, as well as the WyoTech Boston campus (the “Sale Group”). The schools were sold in fiscal year 2008. Accordingly, the results of operations of the campuses within the Sale Group are reflected as discontinued operations in our consolidated statements of income for all periods presented. Effective February 29, 2008 the Company completed the sale of its 12 Canadian schools located outside the province of Ontario to a wholly-owned subsidiary of the Eminata Group, for a cash payment of CAD $3.0 million. This payment consists of the purchase price of CAD $7.4 million less preliminary negative working capital and other adjustments equal to CAD $4.4 million. This cash payment was subject to a final working capital adjustment that was finalized during the third quarter of fiscal 2009. The final working capital adjustment resulted in a payment to the buyer of $0.1 million.

On January 4, 2010 the Company completed its acquisition of Heald Capital, LLC, a Delaware limited liability company (“Heald”) for consideration of $395 million and a preliminary working capital adjustment of $22.2 million. Heald, through its subsidiaries, operates Heald College, a regionally accredited institution that prepares students for careers in healthcare, business, legal, information technology and other growing fields, primarily through associate degree programs. Heald College operates 11 campuses and its results are included in the Condensed Consolidated Financial Statements from the date of acquisition.

We categorize our expenses as educational services, general and administrative, and marketing and admissions. Educational services expenses primarily consist of those costs incurred to deliver and administer the education programs at the colleges, including faculty and college administration compensation; college facility rent and other occupancy costs; bad debt expense; education materials and supplies; bookstore and classroom expenses; depreciation and amortization of college property and equipment; default management expenses and financial aid processing costs.

General and administrative expenses consist principally of those costs incurred at the campus support center and regional level in support of college operations, except for marketing and admissions related costs. Included in general and administrative expenses are costs relating to executive management, campus support center staff and regional operations management compensation; depreciation and amortization of corporate property and equipment and certain intangibles; rent and other occupancy costs for campus support center; and other expenses incurred at campus support center. Additionally, all bonus and other incentive compensation expenses are included in general and administrative expenses.

Marketing and admissions expenses include compensation for college admissions staff, regional admissions personnel, compensation expenses for marketing management, and all direct marketing and production costs.

 

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The following table summarizes our operating results as a percentage of net revenues for the periods indicated.

 

     Years Ended June 30,  
   2010     2009     2008  

Statement of Operations Data:

      

Net revenues

   100.0   100.0   100.0
                  

Operating expenses:

      

Educational services

   55.2      57.6      58.5   

General and administrative

   10.9      10.4      10.8   

Marketing and admissions

   20.3      22.6      25.9   

Impairment, facility closing, and severance charges

   0.0      0.3      0.6   
                  

Total operating expenses

   86.4      90.9      95.8   

Income from operations

   13.6      9.1      4.2   

Interest income

   (0.1   (0.1   (0.3

Interest expense, net

   0.3      0.1      0.1   

Other (income) expense, net

   (0.3   0.1      (0.1
                  

Income from continuing operations before provision for income taxes

   13.7      9.0      4.5   

Provision for income taxes

   5.4      3.6      1.4   
                  

Income from continuing operations

   8.3      5.4      3.1   

Loss from discontinued operations, net of tax

   (0.0   (0.1   (1.1
                  

Net income

   8.3   5.3   2.0
                  

Year Ended June 30, 2010 Compared to Year Ended June 30, 2009

Net Revenues. Net revenues increased $456.0 million, or 34.9%, from $1,307.8 million in fiscal 2009 to $1,763.8 million in fiscal 2010. The increase is primarily due to a 29.0% increase in the average student population and a 4.5% increase in the average revenue rate per student during the period. At June 30, 2010, student population was 110,580, compared with 86,088 at June 30, 2009. Total student starts increased 17.5% to 137,831 for the year ended June 30, 2010 when compared to the prior year. As of June 30, 2010 and 2009, we operated 118 and 106 colleges, respectively.

Educational Services. Educational services expenses include direct operating expenses of the schools consisting primarily of payroll and payroll related expenses, rents, occupancy, supplies expenses, bad debt expense and other educational related expenses. Educational services expenses increased $219.2 million, or 29.1%, from $753.7 million in fiscal 2009 to $972.9 million in fiscal 2010. As a percentage of net revenues, educational services expenses decreased from 57.6 % of revenues in fiscal 2009 to 55.2% of revenues in fiscal 2010. The decrease as a percentage of revenue was primarily due to a reduction in bad debt expense and facility costs. Bad debt expense amounted to $94.6 million and 5.4% of net revenue in fiscal 2010 compared to $106.7 million and 8.2% of net revenue in fiscal 2009. The improvement in bad debt expense was primarily the result of higher student retention and continued efficiencies in packaging students with financial aid. The reduction in facility costs as a percentage of revenue is primarily attributable to the amounts being generally fixed in nature.

General and Administrative. General and administrative expenses include corporate compensation expenses, headquarters office rents and occupancy expenses, professional fees and other support related expenses. General and administrative expenses increased $56.9 million, or 41.9%, from $135.7 million in fiscal 2009 to $192.6 million in fiscal 2010. As a percentage of net revenues, general and administrative expenses increased from 10.4% in fiscal 2009 to 10.9% in fiscal 2010. The increase as a percentage of revenue is primarily due to transaction costs of $4.0 million related to the Heald acquisition incurred during fiscal 2010.

 

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Marketing and Admissions. Marketing and admissions expenses consist primarily of direct-response and other advertising expenses, payroll and payroll related expenses, promotional materials and other related marketing costs. Marketing and admissions expenses increased $62.9 million, or 21.3%, from $294.7 million in fiscal 2009 to $357.6 million in fiscal 2010. As a percentage of net revenues, marketing and admissions expenses decreased from 22.6% in fiscal 2009 to 20.3% in fiscal 2010. The decrease as a percentage of revenue is primarily attributable to a decrease in advertising costs. The cost per start increased $82, or 3.3%, from $2,512 in fiscal 2009 to $2,594 in fiscal 2010.

Impairment, Facility Closing and Severance Charges. In fiscal 2009, we incurred impairment and severance charges of $4.4 million. Of that amount, approximately $2.5 million is related to a loss on student loan receivables associated with the Marietta and Jonesboro, Georgia campuses. These schools were branches of the Atlanta, Georgia campus during a portion of the previous fiscal year. In addition, the Company recorded a severance charge of $1.9 million. There were no impairment charges in fiscal 2010.

Provision for Income Taxes. The effective income tax rate was 39.5% of income before income taxes in fiscal 2010 compared to 39.3% of income before income taxes in fiscal 2009.

Year Ended June 30, 2009 Compared to Year Ended June 30, 2008

Net Revenues. Net revenues increased $239.1 million, or 22.4%, from $1,068.7 million in fiscal 2008 to $1,307.8 million in fiscal 2009. The increase is primarily due to a 15.1% increase in the average student population and a 6.3% increase in the average revenue rate per student during the period. At June 30, 2009, student population related to continuing operations was 86,088, compared with 69,211 at June 30, 2008. Total student starts related to continuing operations increased 17.1% to 117,352 for the year ended June 30, 2009 when compared to the prior year. As of June 30, 2009 and 2008, we operated 106 colleges.

Educational Services. Educational services expenses include direct operating expenses of the schools consisting primarily of payroll and payroll related expenses, rents, occupancy, supplies expenses, bad debt expense and other educational related expenses. Educational services expenses increased $128.2 million, or 20.5%, from $625.5 million in fiscal 2008 to $753.7 million in fiscal 2009. As a percentage of net revenues, educational services expenses decreased from 58.5% of revenues in fiscal 2008 to 57.6% of revenues in fiscal 2009. The decrease as a percentage of revenue was primarily due to a reduction in facility and personnel costs, partially offset by an increase in bookstore and bad debt expense. Bad debt expense amounted to $106.7 million and 8.2% of net revenue in fiscal 2009 compared to $72.8 million and 6.8% of net revenue in fiscal 2008. The increase in bad debt expense was primarily due to additional exposure the Company incurred to student receivables as a result of the contraction of liquidity in the credit markets for subprime borrowers. The reduction in facility and personnel costs as a percentage of revenue is primarily attributable to the amounts being generally fixed in nature.

General and Administrative. General and administrative expenses include corporate compensation expenses, headquarters office rents and occupancy expenses, professional fees and other support related expenses. General and administrative expenses increased $20.8 million, or 18.1%, from $114.9 million in fiscal 2008 to $135.7 million in fiscal 2009. As a percentage of net revenues, general and administrative expenses decreased from 10.8% of net revenues in fiscal 2008 to 10.4% of net revenues in fiscal 2009.

Marketing and Admissions. Marketing and admissions expenses consist primarily of direct-response and other advertising expenses, payroll and payroll related expenses, promotional materials and other related marketing costs. Marketing and admissions expenses increased $17.8 million, or 6.4%, from $276.9 million in fiscal 2008 to $294.7 million in fiscal 2009. As a percentage of net revenues, marketing and admissions expenses decreased from 25.9% of net revenues in fiscal 2008 to 22.6% of net revenues in fiscal 2009. The decrease is primarily attributable to a decrease in advertising costs. The cost per start decreased $251, or 9.1%, from $2,763 in fiscal 2008 to $2,512 in fiscal 2009.

Impairment, Facility Closing and Severance Charges. In the fourth quarter of fiscal 2009, we incurred impairment and severance charges of $4.4 million. Of that amount, approximately $2.5 million is related to a loss on student loan receivables associated with the Marietta and Jonesboro, Georgia campuses. These schools were branches of the Atlanta, Georgia campus during a portion of the previous fiscal year. Due to accreditation issues, the Atlanta campus was closed during fiscal 2008 and placed in discontinued operations. In addition, the Company recorded a severance charge of $1.9 million.

Provision for Income Taxes. The effective income tax rate was 39.3% of income before income taxes in fiscal 2009 compared to 31.2% of income before income taxes in fiscal 2008. The lower effective rate in fiscal 2008 was due to a reduction in the liability for uncertain tax positions following the completion of the IRS exam for fiscal years 2004 through 2006 and the filing of an application for a change in accounting method with the IRS during the third quarter of fiscal 2008. Additionally, during the fourth quarter of fiscal 2008, we recognized a benefit related to the Pennsylvania ‘Keystone Opportunity Zone Credit’ for taxes paid during fiscal years 2004 to 2007.

 

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Discontinued Operations. The loss of $2.4 million in discontinued operations includes the operating results of the campuses closed and a reserve of approximately $0.9 million (net of tax) taken against receivables related to the Atlanta campus.

Seasonality and Other Factors Affecting Quarterly Results

Our revenues normally fluctuate as a result of seasonal variations in our business. Student population varies as a result of new student enrollments and student attrition. Historically, our colleges, schools and training centers have had lower student populations in the first fiscal quarter than in the remainder of the year. Our expenses, however, do not vary as significantly as student population and revenues. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change, however, as a result of acquisitions, new branch openings, new program adoptions and increased enrollments from recent high school graduates. The operating results for any quarter are not necessarily indicative of the results for any future period. See the footnote entitled “Selected Quarterly Financial Summary (Unaudited)” of the Consolidated Financial Statements included elsewhere herein.

Liquidity and Capital Resources

On September 30, 2009, the Company entered into a Third Amended and Restated Credit Agreement (the “Credit Facility”) with aggregate borrowing capacity of $280 million, of which $260 million was a domestic facility and $20 million, was a Canadian facility. On February 22, 2010, the Company increased by $35 million the aggregate capacity under the Credit Facility. The aggregate borrowing capacity under the Credit Facility is now $315 million, of which $295 million is a domestic facility and $20 million, is a Canadian facility. The Credit Facility expires on October 1, 2012. The Credit Facility has been established to provide available funds for acquisitions, to fund general corporate purposes, and to provide for letters of credit issuances of up to $50 million for domestic letters of credit and $15 million for Canadian letters of credit. Borrowings under the agreement bear interest at several pricing alternatives available to us, including Eurodollar and adjusted reference or base rates. The domestic base rate is defined as the higher of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the Bank of America prime rate, or (c) the one-month Eurodollar Rate plus 1.00%. The Canadian base rate is defined as the higher of (a) the average rate for 30 day Canadian Dollar bankers’ acceptances plus 3/4 of 1%, (b) the Bank of America Canada prime rate or (c) the one-month Eurodollar Rate plus 1.00%. The agreement contains customary affirmative and negative covenants including financial covenants requiring the maintenance of consolidated net worth, fixed charge coverage ratios, leverage ratios, and a U.S. Department of Education (“ED”) financial responsibility composite score ratio. As of June 30, 2010, the Company was in compliance with all of the covenants. As of June 30, 2010, the credit facility had borrowings outstanding of $284.3 million and approximately $26.3 million to support standby letters of credit. A $15.8 million letter of credit was released in July 2010. The third amended and restated credit agreement is secured by the stock of the Company’s significant operating subsidiaries and it is guaranteed by the Company’s present and future significant operating subsidiaries. Average daily borrowings outstanding amounted to $57.8 million in fiscal 2010, $25.1 million in fiscal 2009 and $31.8 million in fiscal 2008.

Long-term debt also includes a term loan credit facility (the “Mortgage Facility”) dated March 24, 2009 between the Company’s wholly-owned subsidiary, Heald Real Estate, LLC (“Heald Real Estate”), and Bank of America, N.A. (“B of A”) that is secured by real estate of Heald Real Estate and guaranteed by Heald Capital, LLC and Heald Education, LLC (the “Heald Guarantors”). On January 4, 2010, Heald Real Estate, the Heald Guarantors and B of A entered into an amendment and waiver to the Mortgage Facility (the “1st Amendment and Waiver”), pursuant to which B of A waived compliance with all covenants and defaults under the Mortgage Facility except for the requirement that Heald Real Estate continue making regularly scheduled payments under the Mortgage Facility. Also on January 4, 2010, Corinthian entered into a Continuing and Unconditional Guaranty to guarantee the obligations of Heald Real Estate under the Mortgage Facility. The parties also agreed that any defaults under Corinthian’s syndicated Third Amended and Restated Credit Agreement (the “Credit Facility”) will constitute a default under the Mortgage Facility. On March 31, 2010, Heald Real Estate, entered into an Amended and Restated Credit Agreement (the “Amended Heald Credit Agreement”) with B of A as administrative agent for the lenders, and each lender from time to time party thereto. Pursuant to the terms of the Amended Heald Credit Agreement, the parties amended and restated the covenants and default provisions under the Mortgage Facility to substantially parallel those provisions in the Company’s Credit Facility. All other material provisions of the Mortgage Facility remained substantially unchanged. As a condition precedent to the effectiveness of the Amended Heald Credit Agreement, Bank of the West agreed to assume approximately $8 million, and Heald Real Estate prepaid approximately $7 million, of the loans outstanding under the Mortgage Facility. The total outstanding principal and interest under the Amended Heald Credit Agreement as of June 30, 2010 was approximately $15.8 million. The outstanding term loans under the Amended Heald Credit Agreement bear interest, at Heald Real Estate’s option, either (a) at the Base Rate (as defined in the Amended Heald Credit Agreement) or (b) at the Eurodollar Rate (as defined in the Amended Heald Credit Agreement) for the applicable interest period plus 3.00% per annum. The minimum interest rate is 4.00% per annum. The Amended Heald Credit Agreement matures on March 24, 2012. The Amended Heald Credit Agreement has a related fixed interest rate swap agreement with B of A that is guaranteed by the Heald Guarantors and secured by the same collateral that secures the Amended Heald Credit Agreement. The fair value of the fixed interest rate swap is not material at June 30, 2010.

 

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Working capital amounted to $140.4 million as of June 30, 2010 and $107.9 million as of June 30, 2009 and the current ratio was 1.5:1 in fiscal 2010 and 1.5:1 in fiscal 2009. Average daily borrowings outstanding amounted to approximately $57.8 million in fiscal 2010, $25.1 million in fiscal 2009, and $31.8 million in fiscal 2008. The increase in working capital compared to June 30, 2009 is primarily due to an increase in cash balances resulting from cash borrowed for purposes of calculating our composite score at year-end of $165 million, an increase in student receivables, and prepaid expenses, partially offset by cash paid to acquire Heald, an increase in accrued expenses, accounts payable, and prepaid tuition.

Cash flows provided by operating activities amounted to $204.0 million in fiscal 2010 compared to $198.7 million in fiscal 2009 and to $13.6 million in fiscal 2008. The increase in cash provided by operating activities in fiscal 2010 compared to fiscal 2009 was primarily due to an increase in earnings before depreciation, amortization, and stock-based compensation of $93.3 million and a decrease in the excess tax benefit from share-based compensation of $3.1 million, partially offset by a decrease in cash provided by working capital and deferred taxes of $73.1 million and $18.7 million, respectively. Included in cash flows from operating activities is $1.2 million and $2.6 million of net cash used in operating activities related to discontinued operations for fiscal 2009 and fiscal 2008 respectively. There were no cash flows from discontinued operations for fiscal 2010.

Cash flows used in investing activities amounted to $430.8 million in fiscal 2010, $48.8 million in fiscal 2009 and $36.6 million in fiscal 2008. The increase in cash used in investing activities during fiscal 2010 compared to fiscal 2009 is attributable to net cash paid to acquire Heald of $347.3 million and an increase in capital expenditures of $34.0 million. The net proceeds from the sale of marketable securities in fiscal 2008 was $15.0 million. There were no sales of marketable securities in fiscal 2010 and 2009.

Capital expenditures amounted to $83.5 million in fiscal 2010, $49.5 million in fiscal 2009 and $54.9 million in fiscal 2008. Capital expenditures were incurred to relocate, remodel and enlarge campuses. During fiscal 2010, we incurred capital expenditures to relocate 1 campus and to enlarge or remodel 42 campuses. During fiscal 2009, we incurred capital expenditures to relocate 5 campuses and to enlarge or remodel 5 campuses and during fiscal 2008, we incurred capital expenditures to relocate 2 campuses and to enlarge or remodel 10 campuses. Capital expenditures of approximately $15.6 million, $13.3 million, $25.2 million were incurred to purchase and to integrate software in fiscal 2010, fiscal 2009 and fiscal 2008, respectively. Included in cash flows from investing activities are capital expenditures of $0.1 million related to discontinued operations in fiscal 2008. There were no capital expenditures related to discontinued operations for fiscal 2010 and 2009.

Cash flows provided by (used in) financing activities amounted to $275.2 million in fiscal 2010 and ($21.4) million in fiscal 2009, and ($44.9) million in fiscal 2008. During fiscal 2010, cash provided by financing activities consisted of net borrowings of $262.2 million, proceeds from the exercise of stock options and the Employee Stock Purchase Plan of $11.5 million, and the excess tax benefit from share-based compensation of $1.6 million. During fiscal 2009, cash used in financing activities consisted of net repayment of borrowings of $45.4 million, partially offset by proceeds from the exercise of stock options and the Employee Stock Purchase Plan of $19.2 million and the excess tax benefit from share-based compensation of $4.7 million. During fiscal 2008, cash used in financing activities consisted of repayment of borrowings of $52.2 million, partially offset by proceeds from the exercise of stock options and the Employee Stock Purchase Plan of $7.3 million.

Historically, we had developed several loan programs with origination and servicing providers such as Sallie Mae for students with low credit scores who otherwise would not qualify for loans. These loan programs required that we pay a discount fee to the origination and servicing providers of the loans as a reserve against future defaults on these loans. We have historically referred to these types of loans as “discount loans,” since we incurred a portion of the default risk related to these student loans by taking a discount on the disbursement. By accepting a reduced payment for these discounted loans from the servicing providers, we were not at risk for the amounts agreed to by them and the service providers but were not entitled to any proceeds collected by the service providers in excess of this amount. Therefore we had recorded this discount as a reduction to revenue.

In fiscal 2008 we were informed by Sallie Mae and two other origination and servicing providers that they would no longer make private loans available for students who present higher credit risks (i.e. subprime borrowers). In the face of this change in policy, we created a new lending program in the fourth quarter of fiscal 2008 with a different origination and servicing provider, Genesis Lending Services, Inc. (“Genesis”), who specializes in subprime credit. This new lending program has characteristics similar to our previous “discount loan” programs. As with our previous discount loan program,

 

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under this new Genesis program we pay a discount to the origination and servicing provider for any loans purchased by Genesis and record the discount as a reduction to revenue. However, unlike our previous discount loan programs, under our new discount program we have both the right and an obligation to acquire the related loan, except in certain limited circumstances where Genesis does not comply with the terms of our agreement. Since we initiated the new discount program, we have acquired all of the loans that have been originated. Therefore, we are currently exposed to any credit defaults by our students but retain all amounts collected from our students under the current program. Additionally, the new discount loan program has also replaced our legacy loan program, called STAR. We estimate loans funded under the Genesis program, net of estimated refunds have been approximately $120.0 million, $120.0 million and $10.0 million, for the years ended June 30, 2010, 2009 and 2008, respectively. These amounts are an estimate as some loans contain amounts that will be recognized during future periods. Accordingly, unrecognized loans amounts are subject to the Company’s refund policy.

Included within the Consolidated Statement of Operations, under the caption “Other (income) expense,” for the years ended June 30, 2010 and 2009 is a net other income (loss) of $3.9 million and ($0.6) million, respectively, associated with the Genesis notes program, respectively. The net other income primarily reflects the interest income and loan origination fees, partially offset by costs related to servicing loans. In accordance with accounting guidance “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases,” we defer and recognize both the loan origination income and direct loan origination costs as an adjustment to the yield over the life of the related loan. All other lending-related costs, including costs related to servicing fees are charged to expense as incurred.

We believe that our working capital, cash flow from operations, access to operating leases and borrowings available from our amended credit agreement will provide us with adequate resources for our ongoing operations and planned capital expenditures through fiscal 2011.

Off-Balance Sheet Arrangements and Contractual Obligations

As of June 30, 2010, future minimum cash payments due under contractual obligations, including our credit agreement, mortgages, and non-cancelable operating and capital lease agreements, are as follows:

 

      Payments due by period (in thousands)

Contractual Obligations

   Total    Less than
1 year
   1-3 years    4-5 years    More than
5 years

Long-Term Debt (1)

   $ 300,098    $ 730    $ 299,368    $ —      $ —  

Capital Lease Obligations

     25,059      1,996      4,096      4,140      14,827

Operating Lease Obligations

     635,853      98,750      175,286      128,224      233,593
                                  

Total

   $ 961,010    $ 101,476    $ 478,750    $ 132,364    $ 248,420
                                  

 

(1) Long-term debt consists of a revolving credit facility and mortgage facility obligation. The related obligations of $300.1 million do not reflect interest amounts due under the credit facility. See Note 6 for additional information related to the Company’s credit facility.

The United States ED requires that Title IV Program funds collected in advance of student billings be kept in a separate cash or cash equivalent account until the students are billed for the program portion related to those funds. In addition, all Title IV Program funds received by our schools through electronic funds transfer are subject to certain holding period restrictions. These funds are also deposited into a separate account until the restrictions are satisfied. As of June 30, 2010, we held nominal amounts of such funds in separate accounts. The restrictions on any cash held have not significantly affected our ability to fund daily operations.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest rate changes and foreign currency fluctuations. We do not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments to manage these risks.

Interest Rate Exposure. As of June 30, 2010, our only assets or liabilities subject to risks from interest rate changes are (i) debt under the credit facility in the aggregate amount of $300.1 million and capital lease obligations of $14.2 million, and (ii) student notes receivable, net, in the aggregate amount of $68.2 million. Our capital lease obligations and student notes receivable are all at fixed interest rates. We do not believe we are subject to material risks from reasonably possible near-term changes in market interest rates.

 

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Foreign Currency Exposure. A portion of our operations consists of an investment in a foreign subsidiary whose functional currency is the Canadian dollar. Our investment in our foreign operations as of June 30, 2010 was approximately CAD $35.8 million and we had borrowings outstanding under the credit facility of approximately CAD $15 million. As a result, the consolidated financial results have been and could continue to be affected by changes in foreign currency exchange rates.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements of the Company and its subsidiaries are included below on pages 60-90 of this report:

 

      10-K
Report Page

Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting

   60

Report of Independent Registered Public Accounting Firm

   61

Consolidated Balance Sheets as of June 30, 2010 and 2009

   62

Consolidated Statements of Operations for the years ended June 30, 2010, 2009 and 2008

   63

Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2010, 2009 and 2008

   64

Consolidated Statements of Cash Flows for the years ended June 30, 2010, 2009 and 2008

   65

Notes to Consolidated Financial Statements

   66

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and stockholders of

Corinthian Colleges, Inc. and Subsidiaries

We have audited Corinthian Colleges, Inc. and subsidiaries internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Corinthian Colleges, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Heald Capital LLC, which is included in the June 30, 2010 consolidated financial statements of Corinthian Colleges, Inc. and subsidiaries and constituted $89.1 million of total assets and $23.5 million of net assets, excluding intangible assets of $351.0 million as of June 30, 2010 and $121.0 million and $8.1 million of revenue and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Corinthian Colleges, Inc. and subsidiaries also did not include an evaluation of the internal control over financial reporting of Heald Capital LLC.

In our opinion, Corinthian Colleges, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Corinthian Colleges, Inc. and subsidiaries as of June 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2010 and our report dated August 20, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Orange County, California

August 20, 2010

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Corinthian Colleges, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of Corinthian Colleges, Inc. and subsidiaries (the Company) as of June 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended June 30, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corinthian Colleges, Inc. and subsidiaries at June 30, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Corinthian Colleges, Inc. and subsidiaries internal control over financial reporting as of June 30, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated August 20, 2010 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Orange County, California

August 20, 2010

 

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     As of June 30,  
     2010     2009  
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 209,165      $ 160,276   

Accounts receivable, net of allowance for doubtful accounts of $27,533 and $25,416 at June 30, 2010 and 2009, respectively

     95,526        65,976   

Student notes receivable, net of allowance for doubtful accounts of $18,496 and $8,203 at June 30, 2010 and 2009, respectively

     20,743        11,532   

Deferred income taxes

     47,591        32,369   

Prepaid expenses and other current assets

     64,697        37,946   

Assets held for sale from discontinued operations

     —          432   
                

Total current assets

     437,722        308,531   

PROPERTY AND EQUIPMENT, net

     298,083        227,553   

OTHER ASSETS:

    

Goodwill

     400,204        186,644   

Other intangibles, net

     189,676        38,647   

Student notes receivable, net of allowance for doubtful accounts of $42,339 and $20,975 at June 30, 2010 and 2009, respectively

     47,480        29,938   

Deposits and other assets

     13,211        3,709   

Deferred income taxes

     3,044        3,849   
                

TOTAL ASSETS

   $ 1,389,420      $ 798,871   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

CURRENT LIABILITIES:

    

Accounts payable

   $ 74,906      $ 39,159   

Accrued compensation and related liabilities

     110,972        79,989   

Accrued expenses

     29,289        13,048   

Prepaid tuition

     80,889        66,656   

Current portion of capital lease obligations

     525        474   

Current portion of long-term debt

     730        —     

Liabilities held for sale from discontinued operations

     —          1,257   
                

Total current liabilities

     297,311        200,583   

LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion

     13,636        14,189   

LONG-TERM DEBT, net of current portion

     299,368        13,895   

DEFERRED INCOME TAXES

     22,608        14,922   

OTHER LONG-TERM LIABILITIES

     65,463        37,614   

COMMITMENTS AND CONTINGENCIES (Note 11)

    

STOCKHOLDERS’ EQUITY:

    

Common Stock, $0.0001 par value:

    

Common Stock, 120,000 shares authorized: 90,386 issued and 88,129 shares outstanding at June 30, 2010 : 89,341 issued and 87,085 shares outstanding at June 30, 2009

     9        9   

Additional paid-in capital

     232,623        208,331   

Treasury stock

     (31,368     (31,368

Retained earnings

     489,168        343,197   

Accumulated other comprehensive income (loss)

     602        (2,501)   
                

Total stockholders’ equity

     691,034        517,668   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,389,420      $ 798,871   
                

The accompanying notes are an integral part of these consolidated financial statements.

 

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

      Years Ended June 30,  
     2010     2009     2008  

NET REVENUES

   $ 1,763,797      $ 1,307,825      $ 1,068,671   
                        

OPERATING EXPENSES:

      

Educational services (including bad debt expense of $94,557, $106,702 and $72,757 for the years ended June 30, 2010, 2009 and 2008, respectively)

     972,910        753,707        625,481   

General and administrative

     192,579        135,747        114,938   

Marketing and admissions

     357,563        294,728        276,875   

Impairment, facility closing and severance charges

     —          4,378        6,603   
                        

Total operating expenses

     1,523,052        1,188,560        1,023,897   
                        

INCOME FROM OPERATIONS

     240,745        119,265        44,774   

Interest income

     (1,190     (1,763     (3,376

Interest expense (net of capitalized interest of $1,291, $486, and $2,054 for the years ended June 30, 2010, 2009 and 2008, respectively)

     5,009        2,715        1,793   

Other (income) expense, net

     (4,378     1,170        (1,387
                        

INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES

     241,304        117,143        47,744   

Provision for income taxes

     95,333        46,015        14,879   
                        

INCOME FROM CONTINUING OPERATIONS

     145,971        71,128        32,865   

LOSS FROM DISCONTINUED OPERATIONS, net of tax benefit of $0, ($1,603), and ($5,346) for the years ended June 30, 2010, 2009 and 2008, respectively

     —          (2,368     (11,598
                        

NET INCOME

   $ 145,971      $ 68,760      $ 21,267   
                        

INCOME PER SHARE—BASIC:

      

Income from continuing operations

   $ 1.66      $ 0.82      $ 0.39   

Loss from discontinued operations

     —          (0.02     (0.14
                        

Net income

   $ 1.66      $ 0.80      $ 0.25   
                        

INCOME PER SHARE—DILUTED:

      

Income from continuing operations

   $ 1.65      $ 0.81      $ 0.39   

Loss from discontinued operations

     —          (0.02     (0.14
                        

Net income

   $ 1.65      $ 0.79      $ 0.25   
                        

Weighted average number of common shares outstanding:

      

Basic

     87,696        86,121        84,954   
                        

Diluted

     88,707        87,517        86,013   
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

     Common Stock    Additional          Accumulated
Other
             
     Shares    Par
Value
   Paid-in
Capital
   Treasury
Stock
    Comprehensive
Income (Loss)
    Retained
Earnings
    Stockholders’
Equity
 

Balance at June 30, 2007

   86,773    $ 9    $ 160,312    $ (31,368   $ 875      $ 255,594      $ 385,422   

Adoption of new tax accounting guidance (See Note 9)

   —        —        —        —          —          (2,424     (2,424
                                                   

Balance as of July 1, 2007 upon adoption of tax accounting guidance

   86,773      9      160,312      (31,368     875        253,170        382,998   

Comprehensive income

                 

Net income

   —        —        —        —          —          21,267        21,267   

Foreign currency translation

   —        —        —        —          (185     —          (185

Other post employment benefit adjustment

   —        —        —        —          (288     —          (288
                       

Total comprehensive income

                    20,794   
                       

Issuance of common stock from employee stock purchase plan and exercise of stock options, including tax benefit

   702      —        7,338      —          —          —          7,338   

Stock based compensation expense

   —        —        10,892      —          —          —          10,892   
                                                   

Balance at June 30, 2008

   87,475    $ 9    $ 178,542    $ (31,368   $ 402      $ 274,437      $ 422,022   

Comprehensive income

                 

Net income

   —        —        —        —          —          68,760        68,760   

Foreign currency translation

   —        —        —        —          (3,080     —          (3,080

Other post employment benefit adjustment

   —        —        —        —          177        —          177   
                       

Total comprehensive income

                    65,857   
                       

Issuance of common stock from employee stock purchase plan and exercise of stock options, including tax benefit

   1,866      —        18,013      —          —          —          18,013   

Stock based compensation expense

   —        —        11,776      —          —          —          11,776   
                                                   

Balance at June 30, 2009

   89,341    $ 9    $ 208,331    $ (31,368   $ (2,501   $ 343,197      $ 517,668   

Comprehensive income

                 

Net income

   —        —        —        —          —          145,971        145,971   

Foreign currency translation

   —        —        —        —          2,850          2,850   

Other post employment benefit adjustment

   —        —        —        —          253        —          253   
                       

Total comprehensive income

                    149,074   
                       

Issuance of common stock from employee stock purchase plan and exercise of stock options, including tax benefit

   1,045      —        10,288      —          —          —          10,288   

Stock based compensation expense

   —        —        14,004      —          —          —          14,004   
                                                   
   90,386    $ 9    $ 232,623    $ (31,368   $ 602      $ 489,168      $ 691,034   
                                                   

The accompanying notes are an integral part of these consolidated financial statements.

 

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Years Ended June 30,  
     2010     2009     2008  

CASH FLOWS FROM OPERATING ACTIVITIES:

      

Net income

   $ 145,971      $ 68,760      $ 21,267   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     66,035        52,155        44,777   

Stock based compensation

     14,004        11,776        10,892   

Deferred income taxes

     (26,975 )     (11,344     (14,257

Loss on disposal of assets

     809        16        821   

Impairment charge

     —          —          977   

Changes in assets and liabilities, net of effects from acquisitions:

      

Accounts receivable, net

     (29,780     48,569        (40,294

Student notes receivable, net

     (21,561     (24,436     (7,107

Prepaid expenses and other assets

     (16,204     (4,777     12,411   

Accounts payable

     21,905        5,430        (11,350

Accrued expenses and other liabilities

     16,298        34,918        10,808   

Income taxes payable

     9,173        24        (9,111

Prepaid tuition

     10,437        22,242        (5,199

Other long-term liabilities

     13,924        (4,656     (1,022
                        

Net cash provided by operating activities

     204,036        198,677        13,613   
                        

CASH FLOWS FROM INVESTING ACTIVITIES:

      

Disposals of schools, colleges and training centers

     —          —          2,941   

Capital expenditures

     (83,488     (49,525     (54,880

Proceeds from sale of assets

     —          731        371   

Sales of marketable securities

     —          —          94,450   

Purchases of marketable securities

     —          —          (79,450

Acquisition of Heald, net of cash acquired

     (347,299)       —          —     
                        

Net cash used in investing activities

     (430,787     (48,794     (36,568
                        

CASH FLOWS FROM FINANCING ACTIVITIES:

      

Proceeds from borrowings

     512,062        12,924        —     

Principal repayments on capital lease obligations and long-term debt

     (249,898     (58,291     (52,196

Proceeds from exercise of stock options and employee stock purchase plan (including tax benefit of $3,858, $7,612, and $1,527 for the years ended June 30, 2010, 2009, and 2008, respectively)

     11,480        19,246        7,282   

Excess tax benefit from share-based compensation

     1,600        4,701        —     
                        

Net cash (used in) provided by financing activities

     275,244        (21,420     (44,914
                        

EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

     396        (191     84   
                        

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     48,889        128,272        (67,785

CASH AND CASH EQUIVALENTS, beginning of year

     160,276        32,004        99,789   
                        

CASH AND CASH EQUIVALENTS, end of year

   $ 209,165      $ 160,276      $ 32,004   
                        

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

      

Cash paid during the year for:

      

Income taxes

   $ 99,429      $ 51,215      $ 18,509   
                        

Interest paid, net of capitalized interest

   $ 4,801      $ 2,736      $ 3,320   
                        

The accompanying notes are an integral part of these consolidated financial statements.

 

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010

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.

As of June 30, 2010, the Company operated 101 colleges in 25 states and 17 colleges in the Ontario, Canada province in the for-profit, post-secondary education industry. All of the Company’s U.S. schools are accredited and grant either diplomas or degrees (associate’s, bachelor’s and master’s) and offer educational opportunities from an extensive and diverse curricula library with an emphasis on four primary concentrations: allied health, business, technology, and criminal justice. All of the Canadian schools grant diplomas and are regulated by the provincial ministry of education responsible for registering or licensing the for-profit educational institutions. Through its On-Line Learning division, the Company also offers an online learning alternative available to students pursuing education exclusively online. Revenues generated from the Company’s 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 the footnote describing Governmental Regulation.

On January 4, 2010 the Company completed its acquisition of Heald Capital, LLC, a Delaware limited liability company (“Heald”) for consideration of $395 million. Heald, through its subsidiaries, operates Heald College, a regionally accredited institution that prepares students for careers in healthcare, business, legal, information technology, and other growing fields, primarily through associate degree programs. Heald College operates 11 campuses and its results are included in the Consolidated Financial Statements from the date of acquisition.

Fiscal Year

Each fiscal year ends June 30.

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.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Financial Statement Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. Such estimates and assumptions affect the amounts reported and disclosed in the financial statements. Actual results could differ from estimated amounts.

Cash and Cash Equivalents

The Company invests cash in excess of operating requirements in short-term time deposits, money market instruments and other investments. Securities with maturities of three months or less at the date of purchase are classified as cash equivalents.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, and accounts payable approximates their f