CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 8Long-Term Debt and Capital Lease Obligations (Continued)
Principal
payments due under the long-term debt arrangements and future minimum lease payments under the capital lease obligations discussed above are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ending June 30,
|
|
Capital Lease
Obligations
|
|
Borrowings
Under
Student Notes
Receivable
Sale
Agreement(1)
|
|
Other
Debt
|
|
Credit Facility
Obligations
|
|
Total
|
|
|
|
(In thousands)
|
|
2014
|
|
$
|
2,070
|
|
$
|
1,841
|
|
$
|
2,260
|
|
$
|
|
|
$
|
6,171
|
|
2015
|
|
|
2,070
|
|
|
5,269
|
|
|
550
|
|
|
|
|
|
7,889
|
|
2016
|
|
|
2,070
|
|
|
|
|
|
945
|
|
|
116,073
|
|
|
119,088
|
|
2017
|
|
|
2,116
|
|
|
|
|
|
330
|
|
|
|
|
|
2,446
|
|
2018
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
2,131
|
|
Thereafter
|
|
|
8,510
|
|
|
|
|
|
|
|
|
|
|
|
8,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,967
|
|
|
7,110
|
|
|
4,085
|
|
|
116,073
|
|
|
146,235
|
|
Lessportion representing interest
|
|
|
(6,775
|
)
|
|
|
|
|
(375
|
)
|
|
|
|
|
(7,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
12,192
|
|
|
7,110
|
|
|
3,710
|
|
|
116,073
|
|
|
139,085
|
|
Lesscurrent portion
|
|
|
(803
|
)
|
|
(1,841
|
)
|
|
(2,260
|
)
|
|
|
|
|
(4,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,389
|
|
$
|
5,269
|
|
$
|
1,450
|
|
$
|
116,073
|
|
$
|
134,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
Company received $8.7 million and $17.6 million of proceeds from ASFG related to the sale of notes during fiscal years 2013 and 2012,
respectively. The recourse provisions of the sale prevent the Company from derecognizing the underlying notes sold. Accordingly, the proceeds have been recorded as debt on the Consolidated Balance
Sheets. The debt and underlying student notes will be derecognized as ASFG receives principal payments. As of June 30, 2013 and June 30, 2012, the remaining obligations are approximately
$7.1 million and $13.0 million, respectively. The Company has classified the debt between short-term and long-term in proportion to the classification of the related student notes
receivable.
On
May 17, 2012, the Company entered into a Fourth Amended and Restated Credit Agreement (the "Credit Facility") with Bank of America, N.A., which replaced the credit facility
that was set to expire in October 2012. The amended Credit Facility, which expires July 1, 2015, provides aggregate commitments including borrowings and letters of credit of up to
$145 million, of which $135 million is a domestic facility, and $10 million is a Canadian facility. 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 $7.5 million for Canadian letters
of credit. The Credit Facility is secured by guaranties from the Company and each of its subsidiaries, as well as a first priority lien on substantially all of the tangible and intangible assets of
the Company and its subsidiaries, including real property, and the stock of the Company's operating subsidiaries.
114
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 8Long-Term Debt and Capital Lease Obligations (Continued)
The
following table summarizes the terms of the Credit Facility and its status as of June 30, 2013:
|
|
|
Borrowing limit
|
|
$145 million
|
Interest Rate
|
|
At the Company's discretion, the base ("prime") rate plus 1.50% - 2.00% or a LIBOR rate plus 2.50% - 3.00%, depending upon the Company's Consolidated Leverage Ratio.
|
Maturity
|
|
July 1, 2015
|
Outstanding borrowings at June 30, 2013
|
|
$116.1 million.
|
Weighted Average Interest Rate at June 30, 2013
|
|
4.7%
|
Outstanding letters of credit at June 30, 2013
|
|
$23.9 million domestic, $4.6 million Canadian.
|
The
Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of consolidated net worth, fixed charge coverage
ratios, leverage ratios, and the U.S. Department of Education ("ED") financial responsibility composite score. With respect to the requirement that the Company maintain a composite score of no less
than 1.5, ED's determination that the Company's fiscal 2011 score was 0.9 could be considered an event of default under the Credit Facility. The Company provided its lenders with the letter from ED
dated August 16, 2013, and they have granted a waiver for fiscal 2011 (the "Waiver"). As of June 30, 2013, the Company was in compliance with all of the covenants (after giving effect to
the Waiver).
Note 9Common Stockholders' Equity
The Company is authorized to issue 500,000 shares of preferred stock. As of June 30, 2013 and 2012, there were no outstanding
shares of preferred stock.
The Company's issued and outstanding common stock is entitled to one vote per share on all matters.
Effective
November 20, 2003, the Company amended and restated its certificate of incorporation to increase the number of authorized shares of common stock with a par value of
$0.0001 per share to a total of 120,000,000 shares.
In August 2000, the Company adopted the Corinthian Colleges, Inc. Employee Stock Purchase Plan ("ESPP"). Under the terms of the
ESPP, eligible employees, as defined by the plan to include such criteria as length of employment, are permitted to purchase shares of common stock at a price equal to 90% of the fair market value on
the first or last day, whichever is lower, of each six month
115
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 9Common Stockholders' Equity (Continued)
offering
period. A total of 2,000,000 shares of common stock were initially reserved for sale under the ESPP. Effective August 16, 2012, the ESPP was amended and restated to increase the
maximum number of shares of Common Stock that may be issued under the ESPP from 2,000,000 to 6,000,000. Additionally, under the amended and restated ESPP, the Company can grant new awards under the
ESPP until August 15, 2020. At June 30, 2013, employees had purchased 1,998,216 shares and 4,001,784 shares were still available for purchase under the ESPP.
The Company maintains the Corinthian Colleges, Inc. 1998 Performance Award Plan, as amended, (the "1998 Plan"), which has been
approved by the Company's stockholders. On November 20, 2003, the Company's stockholders approved the Company's 2003 Performance Award Plan, amendments and restatements of which were approved
by the Company's stockholders on November 17, 2005 and November 15, 2010 and November 15, 2011 (as amended and restated, the "2003 Plan"), which authorized the issuance by the
Company of up to the sum of (a) 20,550,000 additional shares of the Company's Common Stock, plus (b) the number of any shares subject to stock options granted under the 1998 Plan which
expire or for any reason are canceled or terminated without being exercised after the adoption of the 2003 Plan, plus (c) the number of any shares subject to stock options granted under the
2004 Plan which expire or for any reason are canceled or terminated without being exercised after the termination of the 2004 Plan. When the 2003 Plan was approved by the Company's stockholders, the
Company's ability to grant new awards under the 1998 Plan terminated, but did not affect awards then outstanding under the 1998 Plan. On November 17, 2004, the Company's Board of Directors also
approved the Company's 2004 New Hire Plan (the "2004 Plan") (the 1998 Plan, the 2003 Plan and the 2004 Plan are collectively referred to as the "Plans"), which authorized the issuance of up to 265,000
additional shares of the Company's Common Stock, but only as an inducement material to the award recipient's entering into employment with the Company and only if the recipient was not previously an
employee or director of the Company (or following a bona fide period of non-employment). When the 2003 Plan amendment and restatement was approved in November 2005,
a resolution was passed by the Board of Directors that terminated the Company's ability to grant new awards under the 2004 Plan, but did not affect awards then outstanding under the 2004 Plan.
As
of June 30, 2013, the number of stock options, stock units, stock appreciation rights or other common stock-based securities available for future grant to directors, officers,
employees and other eligible persons were 3,104,689 under the 2003 Plan. Options granted under the Plans were issued at exercise prices ranging from $1.89 - $33.83 per share and have expiration
dates not longer than 10 years. RSUs can be settled only by delivery of the Company's Common Stock. Options and RSUs generally vest over a period of 1 to 4 years.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected
volatilities are based on combining and weighting implied market volatilities and the Company's historical volatility. The Company uses historical data to estimate forfeitures and years until exercise
within the valuation model. The Company's estimate of forfeitures is adjusted if actual forfeitures differ from its estimates, resulting in the recognition of compensation costs only for those awards
that actually vest. If factors
116
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 9Common Stockholders' Equity (Continued)
change
and different assumptions are employed in future periods, the stock-based compensation expense that the Company records may differ from what was recorded in the previous period.
Stock-based
compensation expense of $7.6 million, $8.9 million and $10.3 million (pre-tax) were recorded for fiscal years 2013, 2012 and 2011, respectively. The tax
benefit related to stock-based compensation recognized in fiscal 2013, 2012 and 2011, was $3.0 million, $3.6 million and $4.1 million, respectively.
The
impact of stock-based compensation (net of tax) for basic EPS is $0.05, $0.06 and $0.07 for fiscal years 2013, 2012 and 2011, respectively. The impact of stock-based compensation
(net of tax) for diluted EPS is $0.05, $0.06 and $0.07 for fiscal years 2013, 2012 and 2011, respectively.
The
expected life of options granted represents the period of time for which the options are expected to be outstanding. The risk-free interest rate is derived from the U.S. treasury
yield curve in effect at the date of grant. The Company's policy is not to pay cash dividends on its common stock. Consequently, the Company uses an expected dividend yield of zero in the
Black-Scholes option pricing model.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Risk-free rate
|
|
|
0.7
|
%
|
|
0.9
|
%
|
|
1.6
|
%
|
Expected years until exercise
|
|
|
4.5 years
|
|
|
4.4 years
|
|
|
4.7 years
|
|
Expected stock volatility
|
|
|
98.1
|
%
|
|
74.5
|
%
|
|
56.7
|
%
|
Expected forfeiture rate
|
|
|
23.4
|
%
|
|
23.7
|
%
|
|
14.0
|
%
|
Expected dividend rate
|
|
|
|
|
|
|
|
|
|
|
A
summary of the status of the Company's stock options is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Aggregate
Intrinsic
Value
(in thousands)
|
|
Outstanding at July 1, 2012
|
|
|
10,564
|
|
$
|
12.91
|
|
|
|
|
|
|
|
Stock options granted during the year
|
|
|
2,015
|
|
|
2.26
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures or expired
|
|
|
(948
|
)
|
|
15.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2013
|
|
|
11,631
|
|
|
10.82
|
|
|
3.1
|
|
$
|
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2013
|
|
|
8,221
|
|
$
|
14.26
|
|
|
2.1
|
|
$
|
153
|
|
The
aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company's closing stock price of $2.24 as of the end of fiscal 2013, which
would have been received by the option holders had all option holders exercised their options as of that date.
The
weighted-average fair value of stock options granted during fiscal 2013, 2012 and 2011 was $1.60, $1.08, and $2.24 per share, respectively.
117
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 9Common Stockholders' Equity (Continued)
As of June 30, 2013, there was $6.5 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements. That cost is expected to be
recognized over a weighted-average period of 1.4 years. The total fair value of shares vested during fiscal year fiscal 2013, 2012 and 2011, was $7.2 million, $8.5 million and
$9.7 million, respectively.
During
fiscal year 2013, the Company issued no shares in connection with the exercise of stock options. The stock options exercisable at June 30, 2013, 2012 and 2011 were
8,221,054, 7,682,172, and 7,493,844 respectively.
During
fiscal 2013, the Company granted 2,226,082 RSUs with a weighted average fair value of $2.23. As of June 30, 2013, there were 3,357,551 RSUs outstanding.
At June 30, 2013, the Company has reserved the following shares of its Common Stock for issuance upon conversion of the issued
and outstanding shares of the ESPP and future issuances of stock options under the 2003 Plan:
|
|
|
|
|
|
|
Fiscal Year Ended
June 30, 2013
|
|
|
|
(in thousands)
|
|
Reserved for ESPP stock
|
|
|
4,002
|
|
Reserved for stock options and RSUs outstanding and available for grant
|
|
|
3,105
|
|
|
|
|
|
Total
|
|
|
7,107
|
|
|
|
|
|
Note 10Weighted Average Number of Common Shares Outstanding
Basic net income per share is calculated by dividing net income available to common shareholders 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In thousands)
|
|
Basic common shares outstanding
|
|
|
85,881
|
|
|
84,982
|
|
|
85,388
|
|
Effects of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock units
|
|
|
987
|
|
|
599
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted common shares outstanding
|
|
|
86,868
|
|
|
85,581
|
|
|
85,388
|
|
|
|
|
|
|
|
|
|
The
Company had 15.0 million, 12.4 million, and 11.3 million shares that were anti-dilutive for the fiscal years ended June 30, 2013, 2012 and 2011,
respectively.
118
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 10Weighted Average Number of Common Shares Outstanding (Continued)
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. The Company
plans to repurchase shares on the open market or in private transactions from time to time, depending on the company's cash balances, general business and market conditions, and other factors,
including alternative investment opportunities. As of June 30, 2013 the Company had repurchased 3,917,200
shares at an average price of $6.38 under this program during fiscal year 2011. No shares were repurchased in fiscal years 2013 or 2012.
From
November 2006 through May 2007, the Company purchased 2,256,600 shares at a total cost of $31.4 million at an average price of $13.90 per share under a previous stock
repurchase agreement.
Note 11Income Taxes
Geographic sources of income (loss) from continuing operations before income tax are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In thousands)
|
|
U.S. operations
|
|
$
|
20,022
|
|
$
|
26,827
|
|
$
|
(36,472
|
)
|
Canadian operations
|
|
|
3,186
|
|
|
(1,764
|
)
|
|
(48,089
|
)
|
|
|
|
|
|
|
|
|
Total income (loss) from continuing operations before income taxes
|
|
$
|
23,208
|
|
$
|
25,063
|
|
$
|
(84,561
|
)
|
|
|
|
|
|
|
|
|
The
components of the income tax provision from continuing operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In thousands)
|
|
Current provision
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(12,641
|
)
|
$
|
15,785
|
|
$
|
11,361
|
|
State
|
|
|
571
|
|
|
(171
|
)
|
|
6,626
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,070
|
)
|
|
15,614
|
|
|
17,987
|
|
|
|
|
|
|
|
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
20,963
|
|
|
(4,734
|
)
|
|
9,546
|
|
State
|
|
|
(2,951
|
)
|
|
(2,216
|
)
|
|
(3,992
|
)
|
Foreign
|
|
|
(1,346
|
)
|
|
(1,054
|
)
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
16,666
|
|
|
(8,004
|
)
|
|
5,505
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
4,596
|
|
$
|
7,610
|
|
$
|
23,492
|
|
|
|
|
|
|
|
|
|
119
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 11Income Taxes (Continued)
Actual
income tax provision differs from the income tax provision from continuing operations computed by applying the U.S. federal statutory tax rate of 35% for fiscal 2013, 2012 and
2011 to income before provision for income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
(In thousands)
|
|
Provision at the statutory rate
|
|
$
|
8,122
|
|
$
|
8,772
|
|
$
|
(29,596
|
)
|
State income tax provision, net of federal benefit
|
|
|
(434
|
)
|
|
695
|
|
|
2,003
|
|
Permanent items
|
|
|
705
|
|
|
955
|
|
|
1,465
|
|
Change in unrecognized tax benefits
|
|
|
(1,089
|
)
|
|
217
|
|
|
(677
|
)
|
Goodwill write-down
|
|
|
|
|
|
|
|
|
48,416
|
|
Foreign taxes
|
|
|
(271
|
)
|
|
75
|
|
|
2,840
|
|
State tax and credits
|
|
|
(962
|
)
|
|
(1,972
|
)
|
|
|
|
State refund claim
|
|
|
|
|
|
(902
|
)
|
|
|
|
State rate change
|
|
|
|
|
|
709
|
|
|
|
|
Canadian loss carryover
|
|
|
(921
|
)
|
|
|
|
|
|
|
Other
|
|
|
(554
|
)
|
|
(939
|
)
|
|
(959
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
4,596
|
|
$
|
7,610
|
|
$
|
23,492
|
|
|
|
|
|
|
|
|
|
120
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 11Income Taxes (Continued)
The
components of the Company's deferred tax asset and liability are as follows:
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2013
|
|
2012
|
|
|
|
(In thousands)
|
|
Current deferred tax asset (liability):
|
|
|
|
|
|
|
|
Accounts receivable allowance for doubtful accounts
|
|
$
|
7,324
|
|
$
|
7,901
|
|
Accrued vacation
|
|
|
6,791
|
|
|
9,594
|
|
State taxes
|
|
|
(4,000
|
)
|
|
(2,348
|
)
|
Workers' compensation accrual
|
|
|
2,733
|
|
|
2,604
|
|
Notes receivable allowance for doubtful accounts
|
|
|
3,042
|
|
|
8,096
|
|
Prepaids
|
|
|
(2,935
|
)
|
|
(4,207
|
)
|
Bonus accrual
|
|
|
4,458
|
|
|
7,780
|
|
NOL
|
|
|
4,342
|
|
|
|
|
Other
|
|
|
7,205
|
|
|
7,822
|
|
|
|
|
|
|
|
Current deferred tax asset
|
|
|
28,960
|
|
|
37,242
|
|
Non-current deferred tax asset (liability):
|
|
|
|
|
|
|
|
Deferred rent
|
|
|
259
|
|
|
320
|
|
Depreciation
|
|
|
4,816
|
|
|
4,377
|
|
Other
|
|
|
(54
|
)
|
|
(79
|
)
|
|
|
|
|
|
|
Non-current deferred tax asset
|
|
|
5,021
|
|
|
4,618
|
|
|
|
|
|
|
|
Notes receivable allowance for doubtful accounts
|
|
|
9,549
|
|
|
24,315
|
|
Stock compensation cost
|
|
|
16,828
|
|
|
15,523
|
|
Deferred rent
|
|
|
11,856
|
|
|
7,619
|
|
Accrued rent
|
|
|
10,059
|
|
|
10,532
|
|
Depreciation
|
|
|
(18,830
|
)
|
|
(20,375
|
)
|
Acquisition intangibles
|
|
|
(41,518
|
)
|
|
(28,883
|
)
|
Capital assets
|
|
|
(15,085
|
)
|
|
(17,644
|
)
|
NOL
|
|
|
5,729
|
|
|
|
|
Other
|
|
|
5,376
|
|
|
3,954
|
|
|
|
|
|
|
|
Non-current deferred tax liability
|
|
|
(16,036
|
)
|
|
(4,959
|
)
|
|
|
|
|
|
|
Net Deferred Tax Asset
|
|
$
|
17,945
|
|
$
|
36,901
|
|
|
|
|
|
|
|
The
Company has acquired various companies which had net operating loss carryovers at acquisition. As of June 30, 2013, the Company has federal and state net operating loss carry
forwards of approximately $12.4 million and $75.6 million, respectively. The federal and state loss carry forwards begin to expire in 2034 and 2024, respectively. As of June 30,
2013 , the Company has federal and state credit carryforwards of $1.5 million and $5.8 million, respectively. Approximately $1.3 million of federal credits and $0.2 million
of state credits do not expire. The remaining federal and state credits begin expiring in fiscal 2031 and 2017, respectively.
The
Company's current intent is to re-invest in Canada all earnings from Everest Canada. Accordingly, no deferred taxes have been provided on the Canadian un-remitted earnings.
121
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 11Income Taxes (Continued)
As of June 30, 2013 and 2012, the Company has tax deductible goodwill of $140.4 million and $155.3 million, respectively.
The
Company has adopted the recognition and measurement principles related to tax benefits in accordance with generally accepted accounting principals. Under the standard, the Company
employs 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 standard also provides guidance on
de-recognition 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
following table summarizes the activity related to our unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal years ended June 30,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Balances at beginning of year
|
|
$
|
3,598
|
|
$
|
3,015
|
|
$
|
3,437
|
|
Increase (decrease) in unrecognized tax benefits
|
|
|
(1,375
|
)
|
|
583
|
|
|
(422
|
)
|
|
|
|
|
|
|
|
|
Balances at end of year
|
|
$
|
2,223
|
|
$
|
3,598
|
|
$
|
3,015
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2013, 2012 and 2011, the total amount of unrecognized tax benefits that would affect the effective tax rate, if recognized, is $1.7 million,
$3.0 million, and $2.7 million, respectively. The Company does not presently anticipate settlement of any uncertain tax positions matters within the next twelve months.
The
Company has classified uncertain tax positions as non-current income tax liabilities unless expected to be paid in one year. The Company reports income tax-related interest expense
and penalties in income tax expense in its Consolidated Statement of Operations. For the years ended June 30, 2013, 2012 and 2011, the interest on uncertain tax positions included in the
Consolidated Statement of Operations was not material. As of June 30, 2013 and 2012, the total amount of accrued income tax-related interest and penalties included in the Consolidated Balance
Sheets are not material.
The
Company may be subject to examination by the Internal Revenue Service ("IRS") for fiscal year 2011. The Company is also subject to examination in various state and foreign
jurisdictions for the 2005-2011 fiscal years.
During
June 2010, the IRS contacted the Company regarding an examination of fiscal 2007, 2008 and 2009. The Company settled the examination during fiscal 2012. During fiscal 2012, the
Company was examined by the IRS for fiscal 2010. During the third quarter of fiscal 2011, the Company settled a California FTB examination which included fiscal years 1999-2006. The examinations
resulted in no material impact on the financial statements. There were no IRS examinations open during fiscal 2013. During fiscal 2013, the Company settled a California FTB examination
which included fiscal years 2007 to 2009. The result was an immaterial refund of tax and interest.
122
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 12Impairment, Facility Closing, and Severance Charges
In fiscal 2013, the Company incurred impairment and severance charges of $3.6 million. The charge includes severance charges of $3.6 million. In fiscal 2012, the Company
incurred impairment and severance charges of $15.6 million, which includes intangible asset impairment charges of $7.1 million (see Note 4Goodwill and Intangible
Assets for further discussion) and severance costs of $8.5 million. In fiscal 2011, the Company incurred impairment and severance charges of $220.1 million. Of that amount, the Company
incurred a goodwill impairment charge of $203.6 million (see Note 4Goodwill and Intangible Assets for further discussion). Additionally, in fiscal 2011, the Company incurred
severance costs of $9.6 million as well as an impairment of $6.9 million related to the sale of Genesis notes sold to ASFG (see Note 5Student Notes Receivable for
further discussion).
The
components of the charges and the related balance sheet accounts for fiscal years 2013 and 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill &
Intangible
Asset
Impairment
|
|
Severance
and
Benefits
|
|
Facility
Related
|
|
Total
|
|
Balance at June 30, 2011
|
|
$
|
|
|
$
|
437
|
|
$
|
401
|
|
$
|
838
|
|
Charges
|
|
|
7,074
|
|
|
8,570
|
|
|
|
|
|
15,644
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
|
|
|
(9,007
|
)
|
|
(401
|
)
|
|
(9,408
|
)
|
Asset writedowns
|
|
|
(7,074
|
)
|
|
|
|
|
|
|
|
(7,074
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2012
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Charges
|
|
|
|
|
|
3,565
|
|
|
|
|
|
3,565
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments
|
|
|
|
|
|
(3,565
|
)
|
|
|
|
|
(3,565
|
)
|
Asset writedowns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 13Commitments and Contingencies (Continuing and Discontinued Operations)
The Company leases most of its operating facilities and certain equipment under non-cancelable operating leases expiring at various
dates through 2027. In most cases, the facility leases require the Company to pay various operating expenses of the facilities in addition to base monthly lease payments. In certain cases, the Company
has renewable options and or leases containing ordinary rental
123
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
escalations
on the space. Future minimum lease payments under operating leases are as follows for the twelve months ending June 30:
|
|
|
|
|
|
|
Operating
Leases
|
|
|
|
(In thousands)
|
|
2014
|
|
$
|
122,172
|
|
2015
|
|
|
98,821
|
|
2016
|
|
|
87,902
|
|
2017
|
|
|
77,437
|
|
2018
|
|
|
69,160
|
|
Thereafter
|
|
|
220,473
|
|
|
|
|
|
|
|
$
|
675,965
|
|
|
|
|
|
Lease
expense (facility and equipment) for the fiscal years ended June 30, 2013, 2012 and 2011 amounted to $94.0 million, $98.3 million and $91.9 million,
respectively, and is reflected in educational services and general and administrative expense in the accompanying Consolidated Statements of Operations.
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 disclosed below, the plaintiffs seek certification of the matter as a class
action or collective 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 or collective action. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. Information is
provided below regarding the nature of each potentially material claim where the likelihood of loss is probable or reasonably possible. If it is probable that a loss will result and the amount of the
loss can be reasonably estimated, the Company has accrued a liability for the loss. When a loss is not both probable and estimable, the Company does not accrue a liability. Where a loss is not
probable but is reasonably possible, including if a loss in excess of an accrued liability is reasonably possible, the Company determines whether it is possible to provide an estimate of the amount of
the loss or range of possible losses for the claim. For the matters described below, the Company has either established an accrual that is immaterial, or has determined that a loss is reasonably
possible but that it is not possible to provide a reasonable estimate of the amount of loss or the range of possible losses with respect to the matter. 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.
124
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
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 was 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 alleged 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 alleged 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, and, on August 12, 2011, the Ninth Circuit
Court of Appeal reversed the district court's dismissal and remanded with instructions to permit the relators to amend the complaint. On December 15, 2011, the first amended
Lee
complaint was filed
in U.S. District Court alleging violations of the False Claims Act, 31 U.S.C. § 3729 against the Company,
Ernst & Young LLP, David Moore and Jack Massimino. The Company moved the U.S. District Court to dismiss the amended
Lee
complaint, and, on
April 12, 2013, the District Court dismissed with prejudice the action in its entirety. The relators have appealed the dismissal to the U.S. Ninth Circuit Court of Appeal.
Additionally,
the Company has received inquiries from the Department of Justice and the same Assistant U.S. Attorney initially involved in reviewing the
Lee
matter regarding the Company's attendance procedures. The
Company infers, but has been unable to confirm, that these inquiries may relate to one or
more additional
qui tams
filed under seal that are pending the government's investigation and intervention decision. The Company is cooperating and
responding to these requests.
Separately,
on April 24, 2012, a complaint captioned
United States of America ex rel. Carolina Marion v. Heald College Inc. and Corinthian Colleges
Inc
. was filed under seal in the U.S. District Court for the Northern District of California. Since the
Marion
complaint was
filed under seal, the Company
125
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
has
not been able to obtain a copy of the complaint, but infers that this too is a
qui tam
action brought under the False Claims Act. The Company has
also received an inquiry from the Assistant U.S. Attorney apparently involved in reviewing the
Marion
matter regarding attendance procedures at the
Heald Salinas campus.
On August 31, 2010, a putative class action complaint captioned
Jimmy Elias Karam v. Corinthian
Colleges, Inc., et al.
was filed in the U.S. District Court for the Central District of California. The complaint is purportedly brought on behalf of all persons who
acquired shares of the Company's common stock from October 30, 2007 through August 19, 2010, against the Company and Jack Massimino, Peter Waller, Matthew Ouimet and Kenneth Ord, all of
whom are current or former officers of the Company. The 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 Company's business and prospects during the
putative class period, causing the Company's common stock to trade at artificially inflated prices at the time when plaintiffs purchased their stock. The plaintiffs further claim that
Messrs. Massimino, Waller, Ouimet and Ord are liable under Section 20(a) of the Act. The plaintiffs seek unspecified amounts in damages, interest, attorneys' fees and costs, as well as
other relief. On October 29, 2010, another putative class action complaint captioned
Neal J. Totten v. Corinthian Colleges, Inc., et al.
was filed by the same law firm that filed the
Karam
matter described above in the U.S. District Court for the Central District of California. The
Totten
complaint is substantively identical to the
Karam
complaint. Several other plaintiffs intervened
in the lawsuit and petitioned the Court to appoint them to be the lead plaintiffs. On March 30, 2011, the Court appointed the Wyoming Retirement System and Stichting Pensioenfonds Metaal en
Technieklead as lead plaintiffs, and Robbins Geller Rudman & Dowd LLP as counsel for lead plaintiffs, in the consolidated action. Lead plaintiffs thereafter filed a second amended
consolidated complaint, and the Company moved to dismiss the second amended consolidated complaint. On January 30, 2012, the U.S. District Court granted the Company's motion to dismiss, with
leave to amend. On February 29, 2012, the plaintiffs filed a third amended complaint in U.S. District Court, and, on March 30, 2012 the Company and the individual defendants filed a
motion to dismiss. On August 20, 2012, the U.S. District Court granted the Company's and the individual defendants' motion to dismiss, with prejudice. The plaintiffs have appealed that
dismissal to the U.S. Ninth Circuit Court of Appeals, and the Company will continue to defend itself and its current and former officers vigorously.
On
June 20, 2013, a putative class action complaint captioned
Frank Erickson, Individually and On Behalf of All Others Similarly Situated v. Corinthian
Colleges, Inc., et al.
was filed in the U.S. District Court for the Southern District of New York. The complaint is purportedly brought on behalf of all persons who
acquired shares of the Company's common stock from August 23, 2011 through June 10, 2013, against the Company and Jack Massimino, Robert Owen and Kenneth Ord, all of whom are officers of
the Company. The complaint alleges that, in violation of Section 10(b) and 20(a) 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 Company's business and prospects
during the
126
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
putative
class period, causing the Company's common stock to trade at artificially inflated prices at the time when plaintiff purchased his stock. The plaintiff seeks unspecified amounts in damages,
interest, attorneys' fees and costs, as well as other relief on behalf of a class of similarly situated persons. The Company believes the complaint is without merit and intends to vigorously defend
itself and its officers and directors against these allegations.
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 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 arbitrator ruled that the
arbitration provision in the former students' enrollment agreement is not susceptible to class-wide resolution. On November 22, 2011, a California state court judge refused to confirm the
arbitrator's clause construction decision and remanded the matter to the arbitrator for further consideration. The Company has appealed the state court order. The Company believes the complaint is
without merit and intends to vigorously defend itself against these allegations.
On
November 23, 2010, a putative class action complaint captioned
Alisha Montgomery, et al., on behalf of themselves and all others similarly situated, v.
Corinthian Colleges, Inc. and Corinthian Schools, Inc. d/b/a Everest College and Olympia College,
was filed in the Circuit Court of Cook County, Illinois.
Corinthian Schools, Inc. is a wholly-owned subsidiary of the Company. Plaintiffs were thirty-three individuals who purport to be current and/or former students of the Company's Medical
Assistant Program at the Everest College campus in Merrionette Park, Illinois. The complaint alleged breach of contract, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act
and unjust enrichment, all related to alleged deficiencies and misrepresentations regarding the Company's medical assisting program at the Merrionette Park campus. The plaintiffs sought to certify a
class composed of all persons who enrolled in the Company's Medical Assisting program at the Everest College Merrionette Park campus during the four years preceding the filing of the lawsuit, and
sought actual and compensatory damages on behalf of such persons, costs and attorneys' fees, punitive damages, disgorgement and restitution of wrongful profits, revenue and benefits to the extent
deemed appropriate by the court, and such other relief as the court deemed proper. The Company removed the case to federal court and moved to compel individual arbitrations, which the court granted.
Thirty-two plaintiffs filed individual demands in arbitration, and individual arbitration hearings commenced during the quarter ended June 30, 2012. The Company and the plaintiffs agreed to
hold the hearings in abeyance to engage in settlement discussions, which were unsuccessful. These matters are now again being scheduled for individual arbitrations, although the Company and plaintiffs
are still discussing potential settlement agreements in amounts that would not be material to the Company's results of
127
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
operations
and financial condition. The Company continues to believe these matters are without merit and, if reasonable settlements cannot be reached, will continue to defend itself vigorously.
During
fiscal 2011, the Company experienced an unprecedented increase in putative class action lawsuits by former students. In many of these cases, the plaintiffs and their counsel
sought to represent a class of "similarly situated" people as defined in the complaint. The Company believes these lawsuits are largely the result of negative publicity and aggressive lawyer
recruitment of potential clients surrounding the Department of Education's ("ED's") rulemaking efforts, the Senate HELP Committee hearings, the Government Accountability Office ("GAO") report, and
other related matters that occurred during that time period. Most of the cases filed during that time have since been dismissed. In virtually all of the following remaining cases, the plaintiffs cite
testimony from the HELP Committee hearings, the GAO report, public statements by elected officials and/or other negative media coverage in their complaints, although the locations of the students, the
specific allegations, and the nature of their claims differ. The Company believes all of the following complaints are contractually required to
128
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
be
resolved in individual arbitrations between the named students and the Company, and the Company has moved to compel these cases to arbitration. The following is a brief summary of such matters:
|
|
|
|
|
|
|
|
|
|
|
Dated Filed
|
|
Named Plaintiff(s)
and Campus
|
|
Venue
|
|
Nature and Basis of
Alleged Claims;
Relief Sought
|
|
Description of
Putative Class
|
|
Status Update
|
January 24, 2011 and February 17, 2011
|
|
Kevin Ferguson; Everest Institute in Miami, Florida; and Sandra Muniz; Heald College campuses in Rancho Cordova and Roseville, California (initially filed as separate actions, but now consolidated)
|
|
U.S. District Court, Central District of California
|
|
Alleged misrepresentations by specific admissions representative at a specific campus regarding accreditation, transferability of credits, cost of attendance, eligibility for certifications, and career placement
opportunities; Causes of action alleging breach of implied contract, breach of implied covenant of good faith and fair dealing, violation of California's Business and Professions Code, violation of California's Consumer Legal
|
|
All persons who attended any Everest institution in the United States or Canada from January 2005 to the present; all persons who attended any Heald institution from January 2009 to the present
|
|
District court compelled all non-injunctive claims to arbitration and permitted all injunctive claims to remain before the court; the Company appealed the order as it relates to the injunctive claims, and the court of
appeal stayed the district court action pending the appeal.
|
March 11, 2011
|
|
Noravel Arevalo and fourteen former students at the Company's Everest College location in Alhambra, California
|
|
American Arbitration Association
|
|
Alleged misrepresentations by specific admissions representatives at a specific campus and unlawful business practices in the
licensed vocational nursing program in Alhambra, CA; Causes of action alleging violation of the California Consumer Legal Remedies Act, fraud, breach of contract, violation of California's former Private Postsecondary and Vocational Education Reform
Act, violation of the Racketeer Influenced and Corrupt Organizations Act,
|
|
All persons who enrolled in the Everest College, Alhambra, CA Vocational Nursing classes of 2007-08 and 2008-09; putative class
action has since been dismissed and refiled on behalf of fifteen individuals
|
|
Individual arbitration demands have been filed, and arbitration hearings began during the quarter ending March 31, 2013. The
Company obtained complete defense verdicts in the first two hearings and resolved five others for a non-material amount. The other hearings are proceeding as currently scheduled.
|
The Company intends to defend itself and its subsidiaries vigorously in all of these matters.
129
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
On September 13, 2011, an action captioned
Michael Harrington, individually and on behalf of all persons
similarly situated, v. Corinthian Schools, Inc., et al.
, was filed in California's Alameda Superior Court. A virtually identical action with the same caption was filed
by different plaintiff's counsel on September 15, 2011, in California's Orange County Superior Court. The plaintiff is a former admissions representative at the Company's Fremont and Hayward
campuses and the two actions allege violations of California's Business and Professions Code Section 17200 and the California Labor Code for alleged failure to pay for all hours worked,
purported denial of meal periods, and alleged failure to pay wages upon termination. The Alameda complaint has since been voluntarily dismissed. While the scope of the putative class is not clear, the
remaining Orange County action appears to seek certification of a class of current and former admissions representatives over the last four years at the Company's California campuses. The Company
believes the allegations are without merit and intends to vigorously defend itself.
On October 19, 2010, the Company became aware of news stories which reported that the Florida Attorney General's Office (the "FL
AG's Office") had begun an investigation into certain private sector education companies in Florida, including the Company, seeking information on potential misrepresentations in financial aid,
recruitment and other areas. On October 21, 2010, the
Company received a subpoena from the FL AG's Office seeking a wide range of documents from January 1, 2006 to the present. The Company's attorneys have met with representatives of the FL AG's
Office multiple times and the Company has provided voluminous materials in response to the subpoena. Additionally, the Company has filed a motion to quash portions of the subpoena and for a protective
order with respect to certain confidential and proprietary information. The Company expects to continue to provide reasonable cooperation to the FL AG's Office.
On
April 29, 2011, the Company's Everest Institute campuses in Brighton and Chelsea, Massachusetts received civil investigative demands from the Massachusetts Attorney General's
Office (the "MA AG") seeking (i) information about past students who have enrolled in each institution, (ii) the identity of recruiters, (iii) recruiting and enrollment documents,
(iv) documentation related to analyses of delinquency, default, drop out, refund, loan forgiveness or reduction, placement, student income, and/or any student's ability to repay loans, and
(v) cohort default and graduation rates. The Company has cooperated, and continues to cooperate, with the MA AG's reasonable requests for information, including a request for additional
information received on July 20, 2012.
On
April 11, 2011 the Company's Everest Institute in Jonesboro, Georgia was sent a subpoena from the Atlanta office of ED's Office of Inspector General (the "OIG") requesting
documents related to the Jonesboro campus's employment and placement rates reported to its accrediting agency, as well as correspondence with the accrediting agency. The Company has become aware that
this matter is being supervised by an Assistant United States Attorney (the "AUSA") for the Northern District of Georgia who focuses primarily on civil false claims act matters, including
qui tams
. The
Company does not know whether a
qui tam
action has been filed under seal or whether the
United States Attorney's Office has made a determination about whether to file a false claims act lawsuit in this matter. The
130
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
Company
has provided documents to the OIG, met with the OIG and the AUSA supervising this matter, and is continuing to cooperate with the OIG's request.
On
May 19, 2011, along with other private sector education companies, the Company received a subpoena from the New York Attorney General's Office (the "NY AG") seeking information
on potential issues related to financial aid, admissions, students, securities and other areas. The Company is cooperating with the NY AG's requests for information.
On
December 15, 2011, after other private sector education companies had received similar requests, the Company received a civil investigative demand from the Illinois Attorney
General's Office (the "IL AG") seeking information on potential issues related to financial aid, admissions, students and other areas. The Company has obtained protection of its confidential and
sensitive business information and is cooperating with the IL AG's reasonable requests for information.
On
April 3, 2012, the Company was served with a Civil Investigative Demand ("CID") from the U.S. Consumer Financial Protection Bureau ("CFPB"). The CID stated that its purpose is
to "determine whether for-profit postsecondary companies, student loan origination and servicing providers, or other unnamed persons, have engaged or are engaging in unlawful acts or practices
relating to the advertising, marketing, or origination of private student loans." The CID contains extensive interrogatories and document production demands related to the Company's involvement with
student loans and many other aspects of the Company's business. The Company has objected to the inquiry by filing a petition with the CFPB to set aside or modify the CID, but has voluntarily provided
documents and other information to the CFPB while the petition is pending. The Company believes that its acts and practices relating to student loans are lawful and essential to preserving our
students' access to post-secondary education. Recently, the CFPB indicated an intention to withdraw the existing CID and issue a new CID to the Company.
During
the quarter ended December 31, 2012, the Company received an investigative subpoena from the California Attorney General's Office (the "CA AG's Office") captioned "In the
Matter of the Investigation of For-Profit Educational Institutions," seeking business records and responses to interrogatories related to the Company's cohort default rates, the identity of the
Company's California security holders, the placement rate of graduates, completion times, graduation rates, advertisements and admissions, the announcement of the Company's intention to sell certain
campuses, enrollment processes, financial aid processes, call center policies and practices, lead generation, and other matters. The Company is providing reasonable cooperation to the CA AG's Office.
In
January 2013, the Company received a request from the Wisconsin Department of Justice (the "WI AG's Office") for information and documents regarding the Company's Milwaukee, WI campus
that we decided to teach out. The request seeks records regarding the Company's students enrolled at the Milwaukee campus since August 2009, including the enrollment process and outcomes achieved by
the students, documents related to employers, externships, placement, completion, graduation, loans, marketing, advertisements, communications with state regulators and accrediting agencies, employees
during the period, and other matters. The Company is providing reasonable cooperation to the WI AG's Office.
In
June 2013, the Company received correspondence and subpoenas from the Securities and Exchange Commission ("SEC") indicating that the SEC is conducting an investigation of the Company.
131
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 13Commitments and Contingencies (Continuing and Discontinued Operations) (Continued)
The
SEC has requested the production of documents and communications that, among other things, relate to student information in the areas of recruitment, attendance, completion, placement, defaults on
federal loans and on alternative loans, as well as compliance with U.S. Department of Education financial requirements, standards and ratios (including the effect of certain borrowings under the
Company's credit facility on the Company's composite score, and 90/10 compliance), and other corporate, operational, financial and accounting matters. The Company is cooperating with the SEC in its
investigation.
On
July 8, 2013, the Company received a civil investigative demand from the Minnesota Attorney General's Office (the "MN AG") seeking information on potential issues related to
financial aid, admissions, students and other areas. The Company understands the MN AG is conducting inquiries into several other private sector colleges as well. The Company has obtained protection
of its confidential and sensitive business information and is cooperating with the MN AG's reasonable requests for information.
In addition to the 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.
As
of June 30, 2013, the Company had established aggregate reserves for all matters, including those disclosed above and for all other 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, collectively, 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 and
cash flows during 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.
Note 14Employee Benefit Plans
The Company has established an employee savings plan under Section 401(k) of the Internal Revenue Code (the "Plan"). Employees classified as "regular" status as defined and who
are regularly scheduled to work at least 30 hours per week (20 hours per week for instructors) are eligible to participate in the Plan beginning the first of the month following one
month of employment. Company contributions begin the first of the month following 12 months of employment and 1,000 hours worked. Contributions to the plan by the Company are
discretionary. The plan provides for vesting of Company
132
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 14Employee Benefit Plans (Continued)
contributions
over a five-year period from the date of employment. Company contributions to the plan for both continuing and discontinued operations were approximately $10.8 million,
$11.5 million and $10.5 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively.
Note 15Governmental Regulation
The Company and each institution are subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, HEA, and the regulations
promulgated thereunder by ED subject the institutions to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy in order to participate in the various federal
student financial assistance programs under Title IV of the HEA.
To
participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the state in which it is located, accredited
by an accrediting agency recognized by the ED and certified as eligible by the ED. The ED will certify an institution to participate in the Title IV Programs only after the institution has
demonstrated compliance with the HEA and the ED's extensive regulations regarding institutional eligibility. An institution must also demonstrate its compliance to the ED on an ongoing basis. As of
June 30, 2013, management believes the Company's institutions were in compliance with the applicable regulations in all material respects.
As previously disclosed and as updated elsewhere in this Report on Form 10-K, ED periodically conducts program reviews of
institutions that participate in federal student financial aid programs. Program reviews begin with site visits at the relevant locations. ED then prepares a program review report and the institution
has the opportunity to respond. After the institution responds, ED issues a final program review determination, which may be appealed. The Company has program reviews at the following stages:
(i) Everest College Phoenix ("ECP") has received program review reports and provided written responses regarding the site visits ED conducted at ECP in 2008 and 2010, but has not yet received
final determinations for either program review, (ii) site visits occurred at the Company's WyoTech Laramie, WY campus and its two additional locations in Blairsville, PA and Sacramento, CA in
February 2012, ED issued a program review report, the Company provided a written response, and ED issued a final determination letter assessing immaterial
liabilities, which the Company has paid, (iii) a site visit occurred at the Company's Everest College campus in Crosslanes, WV in April 2012, ED issued a program review report, the Company
provided a written response, and ED issued a final determination letter assessing immaterial liabilities, which the Company has paid, (iv) a site visit occurred at the Company's Everest College
campus in Rochester, NY, ED issued a program review report, the Company provided a written response, and ED issued a final determination letter with no liabilities assessed, and (v) ED has
conducted site visits at the Company's campuses in Largo, FL in August 2012, Pompano Beach, FL in September 2012, Renton, WA in September 2012, Salinas, CA in June 2013, Southfield, MI in June 2013,
Stockton, CA in July 2013, and Long Beach, CA in August 2013, but has not yet issued program review reports with respect to any of those site visits. The Company will continue to cooperate with ED in
its ongoing reviews.
ED
will review all responses to program review reports and ultimately issue final determination letters setting forth its final findings, as well as the actions it intends to take based
on those findings. If
133
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 15Governmental Regulation (Continued)
ED
were to make significant findings of non-compliance against any of the Company's institutions in any final determination letters regarding ongoing program reviews, it could result in the imposition
of significant fines, penalties or other liabilities, including, without limitation, an action on the limitation, suspension or termination of the institution's participation in Title IV programs, any
of which could have a material adverse effect on the Company's business, results of operations or financial condition.
Under the now defunct Federal Family Education Loan ("FFEL") Program, which has since been replaced by the Federal Direct Loan ("FDL")
program, nonprofit and state guaranty agencies were established to guarantee student loans made by lenders and perform certain administrative and oversight functions under the FFEL program. Under the
FFEL program, ED provided reinsurance to the guaranty agencies. The Health Care and Education Reconciliation Act of 2010 ended the FFEL program effective June 30, 2010, and all federal student
loans since July 1, 2010 have been made through the FDL program. Despite the end of the FFEL program, however, guaranty agencies are still involved in guaranteeing the existing FFEL loan
portfolios against default and will continue in this role until all FFEL loans are paid.
Guaranty
agencies perform occasional program reviews at schools to ensure that schools are meeting all regulatory requirements and guarantor policies in the FFEL program. Eleven guaranty
agency program review site visits were conducted in our institutions during fiscal year 2013, and nine program review reports have been issued. The Company is in the process of responding to these
reports,
including conducting file reviews with respect to findings identified in the reports. No final determinations have been made, and in several cases the Company is contesting the underlying findings.
The Company will continue to cooperate with the guaranty agencies in their ongoing reviews.
The
guaranty agencies will review the Company's responses to program review reports and ultimately issue final determination letters setting forth their final findings. If the guaranty
agencies were to make significant findings of non-compliance against any of the Company's institutions in any final determination letters, it could result in the imposition of liabilities, fines or
penalties, which, if large enough, could have a material adverse effect on the Company's results of operations and financial condition.
The HEA requires accrediting agencies to review many aspects of an institution's operations in order to ensure that the training
offered is of sufficiently high quality to achieve satisfactory outcomes. Failure to demonstrate compliance with accrediting standards may result in the imposition of probation or show cause orders,
or the requirements of periodic reports, and ultimately the loss of accreditation if deficiencies are not remediated.
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
134
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 15Governmental Regulation (Continued)
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. In December 2011, the Company received notification that ACCSC had voted to direct the Company's Everest Institute campus in Jonesboro, GA to show cause why its accreditation should not
be withdrawn for failure to demonstrate compliance with ACCSC's required student achievement outcomes. The institution worked to resolve ACCSC's concerns, and, at its meeting in May 2013 ACCSC removed
the institution from show cause.
As
of June 30, 2013, thirty-four of the Company's colleges were on reporting to their respective accrediting agencies, primarily with respect to the completion, retention, and/or
placement rates of their 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. The Company is working to improve these retention and placement rates in the identified programs at these schools.
Political and budgetary concerns significantly affect the Title IV Programs. Congress must reauthorize the student financial assistance
programs of the HEA approximately every five to six years, and the last reauthorization took place in 2008.
A
significant component of Congress' initiative to reduce abuse in the Title IV Programs has been the imposition of limitations on institutions whose former students default on the
repayment of their federally guaranteed or funded student loans above specific rates (cohort default rate). Although the Company is not obligated to repay any of its students' or former students'
defaults on payments of federally guaranteed student loans, if such default rates equal or exceed 25% (under the old rules) or 30% (under the new rules) for three consecutive years, the institution
may lose participation eligibility in the guaranteed loan program and its students will be denied access to the federally guaranteed student loan programs. An institution whose cohort default rate
under certain Title IV Programs for any federal fiscal year exceeds 40% may have its eligibility to participate in all of the Title IV Programs limited, suspended or terminated by the ED.
Because
the Company operates in a highly regulated industry, it, like other industry participants, may be subject from time to time to investigations, claims of non-compliance, or
lawsuits by governmental agencies or third parties, which allege statutory violations, regulatory infractions, or common law causes of action.
There
can be no assurance that other regulatory agencies or third parties will not undertake investigations or make claims against the Company, or that such claims, if made, will not
have a material adverse effect on the Company's business, results of operations or financial condition.
135
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 16Department of Education Composite Score
In order to remain eligible to participate in the federal student financial aid programs ("Title IV Programs"), institutions must satisfy specific standards of financial responsibility.
Each fiscal year, the Company submits its annual audited financial statements to ED to demonstrate compliance with the financial responsibility standards, and ED calculates a "composite score" for the
Company. If the Company has a composite score of 1.5 or above, the Company is considered to be financially responsible without further qualification. If the composite score is 1.0 to 1.4 (the "Zone"),
the Company's institutions may continue to participate in Title IV programs for up to three years, but are subject to additional monitoring and reporting procedures. If the Company's composite score
(i) falls below the minimum threshold level of 1.0, or (ii) is in the Zone for more than three consecutive years, we may be subject to additional monitoring and reporting procedures, and
also be required to post a letter of credit in favor of ED in order to continue to participate in the Title IV Programs.
On
August 16, 2013, the Company received a letter from ED regarding its review of the Company's composite score for the fiscal years ended June 30, 2011 and June 30,
2012 (the "ED Letter"). The ED Letter stated that ED had determined the Company's composite scores for fiscal 2011 and fiscal 2012 were 0.9 and 1.5, respectively, and that the Company would not be
required to post a letter of credit with respect to the composite score below 1.0 in fiscal 2011.
With
respect to the Company's composite score for the fiscal year ended June 30, 2012, ED determined that the Company's composite score was 1.5. However, ED advised that it is
continuing to review the portion of the Company's long-term debt balance at June 30, 2012 relating to "$16.3 million in Borrowings Under Student Notes Receivable Sale Agreement" as
described in Note 6 to the Company's 2012 audited financial statements. (The Company notes that the gross amount of "Borrowings under student notes receivable sale agreement" in Note 6
of the Company's 2012 audited financial statements is actually $13.0 million, including current portion of $3.4 million. It appears from the ED Letter that ED may have inadvertently
double-counted the current portion of that borrowing in arriving at the $16.3 million figure cited in the letter.) ED indicated that its review of this transaction's effect on the Company's
2012 composite score is "expected to take some time," but noted that in the interim "no further adjustments to the CCI financial score for FY 2012 are anticipated." The Company will cooperate with ED
in its review.
ED
has not made a final determination of the Company's composite score for the fiscal year ended June 30, 2012. If ED were to conclude that the Company achieved a financial
responsibility of less than 1.0 in any given year, or that the Company was in the "zone" for three years in a row, the Company could be required to satisfy the standards of financial responsibility on
an alternative basis, including potentially by posting an irrevocable letter of credit equal to at least 10 percent of the Company's prior year's Title IV receipts. Additionally, any definitive
determination by ED that the Company's composite score is less than 1.5 in fiscal years 2012 or 2013 could be a default under our credit agreement. The Company cannot provide assurance that ED will
agree with its calculations, or that the Company's institutions will continue to satisfy the financial responsibility standards in the future. If the Company were found by ED to have not satisfied the
financial responsibility standards, or if the Company fails to satisfy such standards in the future, it could have an adverse impact on the Company's access to Title IV funds, financial condition,
cash flows and results of operations.
136
Table of Contents
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
Note 17Selected Quarterly Financial Summary (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarters
|
|
|
|
|
|
Fiscal
Year
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
(In thousands, except per share amounts)
|
|
Fiscal 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
408,161
|
|
$
|
412,032
|
|
$
|
402,511
|
|
$
|
377,501
|
|
$
|
1,600,205
|
|
Income from continuing operations
|
|
|
6,495
|
|
|
5,506
|
|
|
3,510
|
|
|
3,101
|
|
|
18,612
|
|
Loss from discontinued operations
|
|
|
(4,917
|
)
|
|
(5,574
|
)
|
|
(4,529
|
)
|
|
(5,252
|
)
|
|
(20,272
|
)
|
Net income (loss)
|
|
|
1,578
|
|
|
(68
|
)
|
|
(1,019
|
)
|
|
(2,151
|
)
|
|
(1,660
|
)
|
Income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
Diluted
|
|
$
|
0.02
|
|
$
|
|
|
$
|
(0.01
|
)
|
$
|
(0.02
|
)
|
$
|
(0.02
|
)
|
Fiscal 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
391,353
|
|
$
|
393,223
|
|
$
|
409,459
|
|
$
|
387,898
|
|
$
|
1,581,933
|
|
Income (loss) from continuing operations
|
|
|
(5,584
|
)
|
|
4,204
|
|
|
12,226
|
|
|
6,607
|
|
|
17,453
|
|
Loss from discontinued operations
|
|
|
(4,052
|
)
|
|
(2,410
|
)
|
|
(8,137
|
)
|
|
(13,099
|
)
|
|
(27,698
|
)
|
Net income (loss)
|
|
|
(9,636
|
)
|
|
1,794
|
|
|
4,089
|
|
|
(6,492
|
)
|
|
(10,245
|
)
|
Income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.11
|
)
|
$
|
0.02
|
|
$
|
0.05
|
|
$
|
(0.08
|
)
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
(0.11
|
)
|
$
|
0.02
|
|
$
|
0.05
|
|
$
|
(0.08
|
)
|
$
|
(0.12
|
)
|
Fiscal 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
466,872
|
|
$
|
449,920
|
|
$
|
433,152
|
|
$
|
400,790
|
|
$
|
1,750,734
|
|
Income (loss) from continuing operations
|
|
|
31,869
|
|
|
(163,449
|
)
|
|
16,809
|
|
|
6,718
|
|
|
(108,053
|
)
|
Income (loss) from discontinued operations
|
|
|
1,240
|
|
|
(263
|
)
|
|
(739
|
)
|
|
(3,350
|
)
|
|
(3,112
|
)
|
Net income (loss)
|
|
|
33,109
|
|
|
(163,712
|
)
|
|
16,070
|
|
|
3,368
|
|
|
(111,165
|
)
|
Income (loss) per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.38
|
|
$
|
(1.94
|
)
|
$
|
0.19
|
|
$
|
0.04
|
|
$
|
(1.30
|
)
|
Diluted
|
|
$
|
0.38
|
|
$
|
(1.94
|
)
|
$
|
0.19
|
|
$
|
0.04
|
|
$
|
(1.30
|
)
|
-
(1)
-
Basic
and diluted earnings per share are calculated independently for each of the quarters presented. Accordingly, the sum of the quarterly earnings per
share may not agree with the annual earnings per share amount for the corresponding year.
Note 18Subsequent Events
The Company has evaluated material transactions and events as of the filing date. No other events have occurred that require reporting in this Form 10-K, except as disclosed in
Note 13Commitments and Contingencies.
137
Table of Contents