CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007
Note 1The
Company and Basis of Presentation
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 Company will continue to operate and invest in the campuses within the Sale Group until the schools are sold. Each of the campuses within the
Sale Group has been made available for immediate sale in its present condition, and we expect to complete the sale of these schools in fiscal 2008. The Company has entered into an asset purchase agreement to sell its Canadian schools located outside
the Province of Ontario with an estimated closing date during the third quarter of fiscal 2008. We expect to have no significant continuing involvement with the entities after they have been sold. The information contained throughout this document
is presented on a continuing operations basis, unless otherwise stated.
Corinthian Colleges, Inc. (the Company) is one of the
largest post-secondary career education companies in North America. As of December 31, 2007, the Company had more than 67,700 students and operated 93 schools in 24 states and 17 colleges in the province of Ontario, Canada. The Company offers a
variety of diploma programs and associates, bachelors and masters degrees, concentrating on programs in allied health, criminal justice, business, vehicle repair and maintenance, construction trades and information technology. The
Company also offers exclusively online degrees, primarily in business and criminal justice.
The accompanying unaudited condensed
consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with U.S. generally accepted accounting principles. Certain information and
footnote disclosures normally included in annual financial statements have been omitted or condensed pursuant to such regulations. The Company believes the disclosures included in the unaudited condensed consolidated financial statements, when read
in conjunction with the June 30, 2007 consolidated financial statements of the Company included in the Companys 2007 Annual Report on Form 10-K and notes thereto, are adequate to make the information presented not materially misleading.
In managements opinion, the unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary to summarize fairly the consolidated financial position, results of
operations, and cash flows for such periods. The results of operations for the three and six months ended December 31, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2008.
The unaudited condensed consolidated financial statements as of December 31, 2007 and for the three and six months ended
December 31, 2007 and 2006 and the audited condensed consolidated financial statements as of June 30, 2007 include the accounts of the Company and its subsidiaries that it directly or indirectly controls through majority ownership. All
significant intercompany balances and transactions have been eliminated in consolidation.
The financial position and results of operations
of the Companys Canadian subsidiaries are measured using the local currency as the functional currency. Assets and liabilities of the Canadian subsidiaries are translated to U.S. dollars using exchange rates in effect at the balance sheet
dates. Income and expense items are translated at monthly average rates of exchange. The resultant translation adjustments are included as a component of Stockholders Equity designated as accumulated other comprehensive income. Exchange gains
and losses arising from transactions denominated in a currency other than the functional currency are immediately included in earnings.
Note
2Weighted Average Number of Common Shares Outstanding
Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted net income per share reflects the assumed conversion of all dilutive securities, consisting of stock options and restricted stock units.
The table below reflects the calculation of the weighted average number of common shares outstanding used in computing basic and diluted net income per
common share for the three and six months ended December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Basic common shares outstanding
|
|
84,898
|
|
86,327
|
|
84,764
|
|
86,326
|
Effects of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
|
1,452
|
|
1,147
|
|
1,308
|
|
1,160
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding
|
|
86,350
|
|
87,474
|
|
86,072
|
|
87,486
|
|
|
|
|
|
|
|
|
|
6
During the six-month period ended December 31, 2007, the Company issued approximately
0.5 million shares of common stock related to the Companys employee stock purchase plan, exercise of stock options and delivery of restricted stock units.
Share Repurchase
On October 31, 2006, the Companys Board of Directors approved a share
repurchase of up to $50.0 million of the Companys 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).
Note 3Discontinued Operations
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 Company will continue to operate and invest in the
campuses within the Sale Group until the schools are sold. Each of the campuses within the Sale Group has been made available for immediate sale in its present condition, and we expect to complete the sale of the campuses in fiscal 2008. We expect
to have no significant continuing involvement with the schools after they have been sold.
We believe that the campuses within the Sale
Group meet the criteria necessary for such entities to qualify as assets held for sale under the specific provision of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). 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. Additionally, in accordance with SFAS 144, as we expect to complete the Sale
Plan within a year, assets and liabilities of the campuses within the Sale Group are reflected as current assets held for sale and current liabilities held for sale on our consolidated balance sheets as of December 31, 2007 and June 30,
2007.
Under SFAS 144, 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 2007, we recorded a charge of approximately $5.4 million, net of income tax benefit of $0.3 million, to reduce the carrying value of the net assets of our campuses held for sale to estimated fair
value, less costs to sell, as of June 30, 2007 (primarily related to the impairment of goodwill in the amount of $5.0 million for the divested CDI Schools).
During the first quarter of 2008, the Company recognized and paid severance costs of approximately $1.1 million related to employees terminated as a result of the pending divestitures. During the second quarter of
2008, the Company recognized additional severance costs of approximately $1.2 million related to employees terminated as a result of the pending divestitures. The Company estimates that the employee retention and severance costs associated with this
transaction will be approximately $2.7 million, of which approximately $2.3 million has been incurred as of December 31, 2007.
The table below summarizes the liability and activity for the month period ended December 31, 2007, relating to the discontinued operations severance charges (in thousands):
|
|
|
|
|
|
|
Severance
and Benefits
|
|
Balance at June 30, 2007
|
|
$
|
|
|
Charges
|
|
|
2,325
|
|
Adjustments
|
|
|
|
|
Cash payments
|
|
|
(1,133
|
)
|
|
|
|
|
|
Balance at December 31, 2007 (Unaudited)
|
|
$
|
1,192
|
|
|
|
|
|
|
On December 14, 2007, the Company announced that it had entered into an asset purchase
agreement to sell its Canadian schools located outside the province of Ontario to a wholly owned subsidiary of the Eminata Group, in a cash transaction valued at CAD $7.4 million. The agreement is subject to a negative working capital adjustment to
be made at closing. The closing of the transaction is conditioned upon receipt of regulatory approvals, landlord consents, and other customary closing conditions. Corinthian currently expects the transaction to close in its third fiscal quarter of
this year.
7
Combined summary results of operations for the Sale Group reflected as discontinued operations in our
consolidated statements of operations for the three and six months ended December 31, 2007 and 2006 (in thousands), are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Total Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
9,738
|
|
|
$
|
9,928
|
|
|
$
|
18,115
|
|
|
$
|
19,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax, including estimated loss on disposal
|
|
|
(1,627
|
)
|
|
|
(872
|
)
|
|
|
(5,071
|
)
|
|
|
(2,096
|
)
|
Income tax benefit
|
|
|
(593
|
)
|
|
|
(196
|
)
|
|
|
(1,810
|
)
|
|
|
(483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss from discontinued operations
|
|
$
|
(1,034
|
)
|
|
$
|
(676
|
)
|
|
$
|
(3,261
|
)
|
|
$
|
(1,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
Combined summary of assets and liabilities of the Sale Group at December 31, 2007 and June 30, 2007, are as
follows:
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
(Unaudited)
|
|
|
|
|
(in thousands)
|
Assets
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts of $1,408 and $1,320 at December 31, 2007 and June 30, 2007,
respectively
|
|
$
|
1,566
|
|
$
|
557
|
Student notes receivable, net of allowance for doubtful accounts of $0 and $2 at December 31, 2007 and June 30, 2007, respectively
|
|
|
10
|
|
|
11
|
Prepaids & other current
|
|
|
965
|
|
|
1,080
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
2,541
|
|
|
1,648
|
Property, and equipment, net
|
|
|
5,636
|
|
|
5,446
|
Goodwill
|
|
|
2,041
|
|
|
1,907
|
Other Intangibles, net
|
|
|
1,711
|
|
|
1,599
|
Deposits & other assets
|
|
|
16
|
|
|
40
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
11,945
|
|
$
|
10,640
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
354
|
|
$
|
343
|
Accrued compensation and related liabilities
|
|
|
773
|
|
|
1,023
|
Accrued expenses
|
|
|
1,370
|
|
|
219
|
Prepaid tuition
|
|
|
9,162
|
|
|
5,072
|
Other liabilities
|
|
|
2,928
|
|
|
2,973
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
14,587
|
|
|
9,630
|
|
|
|
|
|
|
|
Note 4Marketable Securities
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting For Certain Debt and Equity Securities requires that all
applicable investments be classified as trading securities, available-for-sale securities or held-to-maturity securities. The Company does not currently have any trading securities or held-to-maturity securities.
Securities classified as available-for-sale may be sold in response to changes in interest rates, liquidity needs and for other purposes.
Available-for-sale securities are carried at fair value and include all debt and equity securities not classified as held-to-maturity or trading. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and
reported, net of any income tax effect, as a separate component of stockholders equity. Realized gains and losses for securities classified as available-for-sale are reported in earnings based on the adjusted cost of the specific security
sold. At December 31, 2007 and June 30, 2007, there were no unrealized gains or losses on available-for-sale securities.
Note
5Comprehensive Income (from continued and discontinued operations)
Comprehensive income (loss) is defined as the total of net
income (loss) and all changes that impact stockholders equity other than transactions involving stockholders ownership interests. The following table details the components of comprehensive income for the three and six month periods
ended December 31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
|
Six Months Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
2007
|
|
2006
|
|
Net income
|
|
$
|
8,112
|
|
$
|
2,583
|
|
|
$
|
10,065
|
|
$
|
3,983
|
|
Foreign currency translation adjustments
|
|
|
20
|
|
|
(474
|
)
|
|
|
631
|
|
|
(482
|
)
|
Post employment benefits
|
|
|
18
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
8,150
|
|
$
|
2,109
|
|
|
$
|
10,731
|
|
$
|
3,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Note 6Impairment, Facility Closing, and Severance Charges
The table below summarizes the liability and activity for the six month period ended December 31, 2007, relating to the impairment, facility closing
and severance charges (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and
Benefits
|
|
|
Facility
Related
|
|
|
Total
|
|
Balance at June 30, 2007
|
|
$
|
477
|
|
|
$
|
3,626
|
|
|
$
|
4,103
|
|
Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
(135
|
)
|
|
|
(1,118
|
)
|
|
|
(1,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 (Unaudited)
|
|
$
|
342
|
|
|
$
|
2,508
|
|
|
$
|
2,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7Segment Information
The Companys operations are aggregated into a single reportable operating segment based upon similar economic and operating characteristics as well
as similar markets. The Companys operations are also subject to similar regulatory environments. The Company conducts its operations in the U.S. and Canada. Revenues and long-lived assets by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31,
|
|
Six Months Ended
December 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Revenues from unaffiliated customers
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
$
|
255,612
|
|
$
|
220,874
|
|
$
|
488,201
|
|
$
|
429,756
|
Canadian operations
|
|
|
16,952
|
|
|
14,245
|
|
|
31,884
|
|
|
27,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
272,564
|
|
$
|
235,119
|
|
$
|
520,085
|
|
$
|
457,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
June 30,
2007
|
|
|
|
|
|
|
(unaudited)
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. operations
|
|
|
|
|
|
|
|
$
|
413,774
|
|
$
|
391,713
|
Canadian operations
|
|
|
|
|
|
|
|
|
58,095
|
|
|
67,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
$
|
471,869
|
|
$
|
459,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No one customer accounted for more than 10% of the Companys consolidated revenues. Revenues
are attributed to regions based on the location of customers.
Note 8Commitments and Contingencies
Legal Matters
In the ordinary conduct
of its business, the Company and its colleges are subject to lawsuits, investigations and claims, including, but not limited to, claims involving students, graduates and employment-related matters. 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 disclosed below will not have a material adverse effect on the Companys financial condition or results of operations.
On March 8, 2004, the Company was served with two virtually identical putative class action complaints entitled
Travis v. Rhodes Colleges, Inc., Corinthian Colleges, Inc., and Florida Metropolitan University,
and
Satz v.
Rhodes Colleges, Inc., Corinthian Colleges, Inc., and Florida Metropolitan University
. Additionally, on April 15, 2005, the Company received another complaint entitled
Alan Alvarez, et al. v. Rhodes Colleges, Inc., Corinthian Colleges,
Inc., and Florida Metropolitan University, Inc
. The
Alvarez
first amended and supplemental complaint named ninety-nine plaintiffs. Additionally, the court in the
Alvarez
case granted the plaintiffs motion to add an additional
seven plaintiffs to the first amended and supplemental complaint. The named plaintiffs in these lawsuits are current and former students in the Companys Florida Metropolitan University (FMU) campuses, now known as Everest
University, in Florida and online. The plaintiffs allege that FMU concealed the fact that it is not accredited by the Commission
10
on Colleges of the Southern Association of Colleges and Schools and that FMU credits are not transferable to other institutions. The
Satz
and
Travis
plaintiffs seek recovery of compensatory damages and attorneys fees under common law and Floridas Deceptive and Unfair Trade Practices Act for themselves and all similarly situated people. The
Alvarez
plaintiffs seek
damages on behalf of themselves under common law and Floridas Deceptive and Unfair Trade Practices Act. The arbitrator in the
Satz
case found for the Company on all counts in an award on the Companys motion to dismiss. The
arbitrator also found that Mr. Satz breached his agreement with FMU by filing in court rather than seeking arbitration and is therefore responsible to pay FMUs damages associated with compelling the action to arbitration. The arbitrator
also declared FMU the prevailing party for purposes of the Deceptive and Unfair Trade Practices Act. The Company is continuing to pursue its remedies against Mr. Satz related to these findings. Additionally, the Company affirmatively filed an
arbitration action against Ms. Travis seeking damages for breach of her obligations to file in arbitration rather than in court and declaratory relief regarding her allegations. The arbitrator ruled against the Company in its affirmative claims
against Ms. Travis and the Company has appealed that ruling. The Company has filed motions to compel arbitration in Alvarez, and the Travis court compelled that case to arbitration. Ms. Travis has lost her appeal regarding the order
compelling the matter to arbitration, the arbitration process has begun, and another named plaintiff has also been added to the claim. The Company believes the plaintiffs claims in all of these matters are without merit and will vigorously
defend itself, Rhodes Colleges, Inc., and FMU against these allegations.
From July 8, 2004 through August 31, 2004, various
putative class action lawsuits were filed in the United States District Court for the Central District of California by certain alleged purchasers of the Companys common stock against the Company and certain of its current and former executive
officers, David Moore, Dennis Beal, Paul St. Pierre and Anthony Digiovanni. On November 5, 2004, a lead plaintiff was chosen and these cases were consolidated into one action. A first consolidated amended complaint was filed in February 2005.
The consolidated case is purportedly brought on behalf of all persons who acquired shares of the Companys common stock during a specified class period from August 27, 2003 through July 30, 2004. The consolidated complaint alleges
that, in violation of Section 10(b) of the Securities Exchange Act of 1934 (the Act) and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission, the defendants made certain material misrepresentations and failed
to disclose certain material facts about the condition of the Companys business and prospects during the putative class period, causing the plaintiffs to purchase the Companys common stock at artificially inflated prices. The plaintiffs
further claim that Messrs. Moore, Beal, St. Pierre and Digiovanni are liable under Section 20(a) of the Act. The plaintiffs seek unspecified amounts in damages, interest, and costs, as well as other relief. On April 24, 2006, the Court
granted the Companys motion to dismiss the plaintiffs third consolidated amended complaint with prejudice. The plaintiff has appealed the dismissal to the Federal Ninth Circuit Court of Appeals. Oral argument is currently scheduled to be
heard on that appeal on February 11, 2008. The Company intends to continue vigorously defending itself and its current and former officers in this matter.
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 Companys 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. The
Collet
and
Davila
cases have now been consolidated into one action. A memorandum of understanding was executed by the parties resolving the
Collet
and
Davila
cases, pending court
approval, for an immaterial amount of attorneys fees to be paid by the Companys directors and officers insurance carrier to the plaintiffs lawyers, and with the Company agreeing to certain corporate governance matters.
In February 2005, the Company received a putative class action demand in arbitration entitled
Michelle Sanchez v. Corinthian Colleges,
Inc.
, filed by a former diagnostic medical sonography student from the Companys Bryman College campus in West Los Angeles, alleging violations of the California Education Code and of Californias Business and Professions Code
Section 17200. The Company believes the demand is without merit and intends to vigorously defend itself against these allegations.
In
January 2006, the Company was served with a lawsuit captioned
Mercidita Garcia, et al. v. Corinthian Colleges, Inc.
, filed by fourteen current or former surgical technologist students from the Companys Parks College located in Thornton,
Colorado. The counsel for the plaintiffs claimed to represent additional former surgical technologist students at this campus. The plaintiffs alleged negligent/intentional misrepresentations/omissions and violations of the state consumer protection
act regarding alleged misrepresentations about the program. The complaint did not seek certification as a class action. The Company removed this case to federal court and, on October 20, 2006, the court dismissed the complaint and compelled the
plaintiffs to binding arbitration. In August 2007, approximately 30 former students filed claims in arbitration regarding the foregoing matters. The Company intends to vigorously defend itself in this matter.
11
On August 2, 2006, the Company was served with two virtually identical derivative complaints
captioned
Adolf, Derivatively on
behalf of nominal defendant Corinthian Colleges, Inc., v.
David Moore, et al.
, and,
Gunkel, Derivatively on behalf of nominal
defendant Corinthian Colleges, Inc., v. David Moore, et
al
. The complaints were filed in the Orange County California Superior Court against David Moore, Paul St. Pierre, Frank McCord, Dennis Devereux, Beth Wilson, Dennis Beal, Jack Massimino, Linda Skladany, and Hank Adler. Each individual defendant
is one of the Companys current or former officers and/or directors. The lawsuits allege breach of fiduciary duty and unjust enrichment by the individual defendants related to the Companys past option grant practices. Three other similar
derivative actions were filed in Federal District Court for the Central District of California, one entitled
Pfeiffer, derivatively on behalf of Corinthian Colleges, Inc., v. David Moore, et al.
, the second entitled
M. Alvin Edwards, III,
derivatively on behalf of Corinthian Colleges, Inc., v. David Moore, et al
. and the third entitled
Lori Close, derivatively on behalf of Corinthian Colleges Inc., v. David Moore et al
. The federal cases allege violation of the Securities
and Exchange Act of 1934, violation of the California Corporations Code, unjust enrichment and return of unearned compensation, and breach of fiduciary duties, based on similar factual allegations to the
Adolph
and
Gunkel
cases. The
Pfeiffer
case is filed against the same defendants as the two state court cases. The
Close
and
Edwards
cases name the following individual defendants, all of whom are current and former directors and officers of the Company:
Dave Moore, Jack Massimino, Ken Ord, William Murtagh, William Buchanan, Robert Owen, Stan Mortensen, Mark Pelesh, Mary Barry, Beth Wilson, Dennis Devereux, Paul St. Pierre, Alice Kane, Terry Hartshorn, Linda Skladany, Hank Adler, Loyal Wilson and
Mike Berry. The federal derivative actions have since been consolidated in federal court; the state derivative actions have also been consolidated in state court. The defendants have filed a motion with the federal court to dismiss that consolidated
case and have filed a motion to stay the state court consolidated case pending resolution of the federal action.
The Company is aware of
several state attorneys general who have opened inquiries or investigations into arrangements between lenders and institutions of higher education. In this regard, the Company has received requests for information from the Attorneys General of the
states of Illinois, Arizona and Nevada regarding our relationships with student loan providers. The Company has also received a similar request from the U.S. Department of Education. The Company believes these governmental authorities are conducting
wide-ranging inquiries of student lending practices generally, and that the Company is not the sole recipient of this type of information request. The Company has responded, or is in the process of responding, to these information requests and
intends to cooperate fully with these inquiries.
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
qui tam
action alleges 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 regarding the manner in which admissions personnel are compensated. The federal government has the right to intervene in, or take over, a
qui
tam
action. If the government declines to intervene, the relator may elect to pursue the litigation on behalf of the federal government and, if he is successful, receive a portion of the federal governments recovery. The Company believes
its compensation practices regarding admissions personnel have been in compliance with applicable law and intends to defend itself vigorously in this matter.
On October 17, 2007, the Office of the Inspector General of the United States Department of Education, assisted by other federal and local authorities, served a search warrant at the Companys National
School of Technology campus in Fort Lauderdale, Florida. The search warrant sought a broad range of documents and records. The Company has not been informed as to why this action has been taken. The Company provided documents in response to the
search warrant and intends to cooperate with the governments investigation.
On November 14, 2007, the Company was served with a
putative class action complaint filed in the United States District Court for the Central District of California captioned
Hardwick, et al. v. Corinthian Colleges, Inc.
The plaintiff is a former instructor at the Companys Merrionette
Park, Illinois campus. Her complaint seeks certification of a class composed of all campus instructors nationwide, alleging wage and hour violations of the Fair Labor Standards Act, as well as a class of Illinois instructors alleging violations of
the Illinois Wage Payment and Collection Act and Illinois Eight-Hour Work Day Act. The complaint seeks monetary damages, declaratory and injunctive relief and attorneys fees. The Company believes the complaint is without merit and
intends to vigorously defend itself against these allegations.
The Company was notified that on December 31, 2007, a putative class
action complaint entitled
Leask v. Corinthian Colleges, Inc., and Corinthian Schools, Inc., et al.
, was filed in the Santa Clara, California Superior Court. Plaintiffs are a former medical assisting student from the Companys Everest
College (formerly Bryman College) campus in San Jose and her mother. The complaint alleges violations of the California Education Code and of Californias Business and Professions Code Section 17200 related to allegedly missing or
inadequate student disclosures and seeks declaratory and injunctive relief, attorneys fees, and an unspecified amount of damages. Additionally, the complaint seeks to certify a class composed of all medical assisting students in California
over the last four years. The Company believes the complaint is without merit and intends to vigorously defend itself against these allegations.
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, the facts and circumstances of each particular case or claim, the jurisdiction in which each suit is
brought, and differences in applicable law.
12
As of December 31, 2007, 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 Companys 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 Companys 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 Companys financial position or liquidity.
Note 9New Accounting Pronouncements
Effective July 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 prescribes a
more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of income tax assets and liabilities,
classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. The cumulative effects of
applying this interpretation have been recorded as a decrease of $2.4 million to retained earnings, an increase of $21.1 million to the net deferred income tax asset and an increase of $23.5 million to income taxes payable as of July 1, 2007.
In conjunction with the adoption of FIN 48, we have classified uncertain tax positions as non-current income tax liabilities unless
expected to be paid in one year. We also began reporting income tax-related interest income in Income tax expense in our Condensed Consolidated Statement of Operations. In prior periods, such interest income was reported in other income. Penalties
and tax-related interest expense are now reported as a component of income tax expense. During the second quarter of fiscal 2008, the Company recognized income tax-related interest of $0.3 million in accordance with FIN 48. As of December 31 and
July 1, 2007, the total amount of accrued income tax-related interest and penalties included in the Condensed Consolidated Statement of Financial Position was $4.4 million and $3.6 million, respectively.
As of December 31 and July 1, 2007, we were subject to examination in the U.S. federal tax jurisdiction for the fiscal 2005 and 2006 tax years. We were
also subject to examination in various state and foreign jurisdictions for the 2003-2006 tax years, none of which were individually material. We are in the final stages of an IRS examination for the fiscal 2005 and 2006 years. During the current
quarter, the Company settled and closed the IRS examination related to fiscal 2004 in the amount of $0.7 million, excluding accrued interest of $0.2 million.
As of December 31 and July 1, 2007, the total amount of unrecognized tax benefits was $21.2 million. As of December 31 and July 1, 2007, the total amount of unrecognized tax benefits that would affect the effective
tax rate, if recognized was $0.4 million and $1.1 million, respectively. The amount of unrecognized tax benefits that are expected to be settled within the next twelve months with the IRS is approximately $0.4 million.
Note 10Subsequent Events
Student Lending
The Company has been informed by Sallie Mae and two other lenders that they will no longer make private loans available for students
who present higher credit risks (i.e. subprime borrowers). The Company understands that this change in policy applies to subprime borrowers at post-secondary institutions in general.
Effective October 1, 2007, Congress reduced subsidies for all Federal Title IV student financial aid lenders. Those subsidy reductions, coupled
with the challenging subprime credit market, have caused lenders to re-evaluate their contractual arrangements with post-secondary institutions, including Corinthian.
The largest of these lenders, Sallie Mae, provided 90% of private loans for Corinthians students in the United States in fiscal 2007. Private loans constituted approximately 13% of the Companys U.S.
revenue (on a cash basis) in fiscal 2007. On January 18, 2008, the Company received a letter from Sallie Mae indicating that it was exiting the subprime lending business for private student loans. Thus, effective March 1, 2008, Sallie Mae
will no longer provide private loans for Corinthian students in the subprime credit category. In fiscal 2007, approximately 75% of private loans issued to Corinthians students were subprime. We understand that Sallie Maes intention is to
honor its loan obligations to current students, continue providing private loans to students with prime credit scores; and continue providing federal Title IV loans.
In addition to Sallie Mae, two other contract lenders had been providing private loans for Corinthians students, College Loan Corporation and Student Loan Express. College Loan Corporation (CLC) has notified us
that they will no longer offer either Title IV or private loans to the career college sector. Student Loan Express has notified us that they will no longer offer private loans, but will continue to offer Title IV loans to our students.
The Company is considering several alternatives for replacing the student financing formerly provided by Sallie Mae and other lenders.
These include: changing the mix of funding sources to reduce reliance on third-party loans; expanding the Companys own lending program; using third party lenders to issue the loans, which Corinthian would guarantee against default; seeking new
lenders who will make private loans available to Corinthians students in both the prime and subprime credit categories. These alternatives involve risks and uncertainties. Increasing the amount that new students pay in cash and instituting
stricter underwriting guidelines may slow the Companys rate of enrollment growth. In addition, expanding the Companys own lending program and guaranteeing third-party lenders against default may increase bad debt from current levels and
decrease liquidity.
For the first six months of fiscal 2008, for the Companys U.S. operations, approximately 80% of our revenue was
derived from Title IV and 20% from other sources.