| CORINTHIAN COLLEGES INC ITEM 1A RISK FACTORS Risks Related To Extensive Regulation Of Our Business If we fail to follow extensive regulatory requirements for our business, we could suffer severe fines and penalties, including loss of access to federal student loans and grants for our students |
| We derive a majority of our revenues on a cash basis from federal student financial aid programs |
| To participate in such programs an institution must obtain and maintain authorization by the appropriate state agencies, accreditation by an accrediting agency recognized by the DOE, and certification by the DOE As a result, our schools are subject to extensive regulation by these agencies that, among other things, requires us to: • undertake steps to assure that our schools do not have Cohort Default Rates of 25prca or more for three consecutive Cohort years; • limit the percentage of revenues (on a cash basis) derived at each of our institutions from federal student financial aid programs to less than 90prca; • adhere to financial responsibility and administrative capability standards; • prohibit the payment of certain incentives to personnel engaged in student recruiting, admissions activities or awarding financial aid; • achieve stringent completion and placement outcomes for short-term programs; and • make timely refunds of tuition when a student withdraws from one of our institutions |
| These regulations also affect our ability to acquire or open additional schools or change our corporate structure |
| These regulatory agencies periodically revise their requirements and modify their interpretations of existing requirements |
| If one or more of our schools were to violate any of these regulatory requirements, we could suffer fines, penalties or other sanctions, including the loss of our ability to participate in federal student financial aid programs at those schools, any of which could have a material adverse effect on our business |
| We cannot predict how all of these requirements will be applied, or whether we will be able to comply with all of the requirements in the future |
| Some of the most significant regulatory requirements and risks that apply to our schools are described in the following paragraphs |
| 26 ______________________________________________________________________ [53]Table of Contents The US Congress may change the law or reduce funding for federal student financial aid programs, which could harm our business |
| Congress regularly reviews and revises the laws governing the federal student financial aid programs and annually determines the funding level for each of these programs |
| Any action by Congress that significantly reduces funding for the federal student financial aid programs or the ability of our schools or students to participate in these programs could harm our business |
| Legislative action may also increase our administrative costs and burdens and require us to modify our practices in order for our schools to comply fully with applicable requirements, which could have a material adverse effect on our business |
| Congress has been reviewing the reauthorization of HEA, which provides for federal student financial aid 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 1998 |
| Approximately 75dtta3prca of our revenues (on a cash basis) are derived from federal student financial aid programs |
| It is uncertain when reauthorization will be completed and all of the changes Congress may ultimately make to the HEA as a result of reauthorization |
| As in previous reauthorizations, we believe that following reauthorization of HEA our students will have access to federal student financial aid programs |
| However, any action by Congress that significantly reduces funding for the federal student financial aid programs or the ability of our schools or students to participate in these programs could have a material adverse effect on our business |
| Legislative action may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with applicable requirements |
| If we do not meet specific financial responsibility ratios and tests established by the DOE, our US schools may lose eligibility to participate in federal student financial aid programs |
| To participate in the federal student financial aid programs, an institution must either satisfy quantitative standards of financial responsibility, or post a letter of credit in favor of the DOE and possibly accept other conditions on its participation in the federal student financial aid programs |
| Each year, based on financial information submitted by institutions that participate in federal student financial aid programs, the DOE calculates three financial ratios for an institution: an equity ratio, a primary reserve ratio and a net income ratio |
| Each of these ratios is scored separately and then combined to determine the institution’s financial responsibility |
| If an institution’s score is above 1dtta5, it may continue its participation in federal student financial aid programs |
| For fiscal 2006, our calculations show that all of our schools exceed this requirement on an individual basis and are eligible to participate in the federal student financial aid programs, with composite scores ranging from 1dtta5 to 3dtta0 |
| On a consolidated basis, we also exceed this requirement with the composite score of 1dtta8 |
| We cannot assure you that we and our institutions will continue to satisfy the numeric standards in the future |
| Our US schools may lose eligibility to participate in federal student financial aid programs if the percentage of their revenues derived from those programs is too high |
| A proprietary institution loses its eligibility to participate in the federal student financial aid programs for a period of one year if it derives more than 90prca of its revenues, on a cash basis, from these programs in any fiscal year |
| Any institution that violates this rule immediately becomes ineligible to participate in federal student financial aid programs and is ineligible to reapply to regain its eligibility until the following fiscal year |
| Based on our calculations, none of our institutions received more than 90prca of its revenues, on a cash basis, in fiscal 2006, with our highest institution receiving 85dtta1prca of its revenues, on a cash basis, from federal student financial aid programs |
| On a consolidated basis, we received 75dtta3prca of our revenues, on a cash basis, from federal student financial aid programs in fiscal 2006 |
| If any of our institutions, depending on its size, loses eligibility to participate in federal student financial aid programs, it could have a material adverse effect on our business |
| Our US schools may lose eligibility to participate in federal student financial aid programs if their current and former students’ loan default rates on federally guaranteed student loans made by third parties are too high |
| An institution may lose its eligibility to participate in some or all of the federal student financial aid programs if defaults by its former students on their federally guaranteed student loans funded by third parties equal or exceed 25prca per year for three consecutive years |
| For federal fiscal year 2004, the last year for which final rates have been published, default rates for our institutions range from a low of 3dtta7prca to a high of 17dtta5prca |
| We review all annually published Cohort Default Rates and appeal the rates we believe are inaccurate |
| If any of our institutions, depending on its size, were to lose eligibility to participate in federal student financial aid programs because of high student loan default rates, it could have a material adverse effect on our business |
| 27 ______________________________________________________________________ [54]Table of Contents One or more of our institutions may have to post a letter of credit or be subject to other sanctions if they do not correctly calculate and timely return Title IV Program funds for students who withdraw before completing their program of study |
| A school participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that was disbursed to students who withdrew from their educational programs before completing them, and must return those unearned funds in a timely manner, generally within 45 days of the date the school determines that the student has withdrawn |
| If the unearned funds are not properly calculated and timely returned, we may have to post a letter of credit in favor of the DOE or be otherwise sanctioned by the DOE An institution is required to post a letter of credit with the DOE in an amount equal to 25prca of the total dollar amount of unearned Title IV Program funds that the institution was required to return with respect to withdrawn students during its most recently completed fiscal year, if the institution was found in an audit or program review to have untimely returned unearned Title IV Program funds with respect to 5prca or more of the students in the audit or program review sample of withdrawn students, in either of its two most recently completed fiscal years |
| The requirement to post a letter of credit or other sanctions by the DOE could increase our cost of regulatory compliance and adversely affect our results of operations |
| If regulators do not approve our acquisitions, the acquired school(s) would not be permitted to participate in federal student financial aid programs |
| When we acquire an institution that participates in federal student financial aid programs, we must seek approval from the DOE and most applicable state agencies and accrediting agencies, because an acquisition is considered a change of ownership or control of the acquired institution under applicable regulatory standards |
| A change of ownership or control of an institution under the DOE standards can result in the temporary suspension of the institution’s participation in the federal student financial aid programs unless a timely and materially complete application for recertification is filed with the DOE and the DOE issues a temporary certification document |
| If we are unable to obtain approvals from the state agencies, accrediting agencies or DOE for any institution we may acquire in the future, depending on the size of that acquisition, such a failure to obtain approval could have a material adverse effect on our business |
| If regulators do not approve transactions involving a change of control or change in our corporate structure, we may lose our ability to participate in federal student financial aid programs |
| Additionally, if regulators do not approve transactions involving a change of control of the Company, we may lose our ability to participate in federal student financial aid programs |
| If we experience a change of control under the standards of applicable state agencies or accrediting agencies or the DOE, we or the affected institutions must seek the approval of the relevant agencies |
| Some of these transactions or events, such as a significant acquisition or disposition of our common stock, may be beyond our control |
| The adverse regulatory effect of a change of ownership resulting in a change of control could also discourage bids for our outstanding shares of common stock at a premium and could have an adverse effect on the market price of our common stock |
| If any of our US schools fails to maintain its accreditation or its state authorization, that institution may lose its ability to participate in federal student financial aid programs |
| An institution that grants degrees, diplomas or certificates must be authorized by the relevant agencies of the state in which it is located and, in some cases, other states |
| Requirements for authorization vary substantially among the states |
| Additionally, both an approval to operate in a state and accreditation by an accrediting agency recognized by the DOE are required for an institution to participate in the federal student financial aid programs |
| If any of our U S campuses were to lose its accreditation or its state authorization, it could have a material adverse effect on our business |
| In this regard, the Company has received show cause orders from the Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”) with respect to our National Institute of Technology campus in San Antonio, Texas, our Bryman College campus at LA Wilshire, and our National Institute of Technology campus in Dearborn, Michigan |
| Each of these locations represented less than 7prca of our fiscal 2006 operating profit individually and in the aggregate |
| If any of these campuses were to lose their accreditation, the Company would continue to generate revenues from continuing students, but would consider teaching out these campuses as they would be significantly competitively disadvantaged compared to other schools where students are eligible to receive federal student financial aid |
| During any teach-out process, the Company’s revenue would decline more rapidly than operating expenses and the Company would expect to incur operating losses at those campuses |
| The Company could also expect to incur increased bad debt expense if students no longer have access to federal financial aid |
| Additionally, if the Company were to lose accreditation at one or more of its schools to which it has ascribed value for accreditation as part of purchase accounting, the Company would test the 28 ______________________________________________________________________ [55]Table of Contents amounts it had allocated to such asset for impairment |
| If the estimate of the present value of these future cash flows were below the carrying values of the accreditation asset, the Company would consider its related accreditation asset to be impaired and take a charge against the amounts it had allocated to such accreditation |
| If we fail to demonstrate “administrative capability” to the DOE, our business could suffer |
| DOE regulations specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in federal student financial aid programs |
| These criteria require, among other things, that the institution: • comply with all applicable federal student financial aid regulations; • have capable and sufficient personnel to administer the federal student financial aid programs; • have acceptable methods of defining and measuring the satisfactory academic progress of its students; • provide financial aid counseling to its students; and • submit all reports and financial statements required by the regulations |
| If an institution fails to satisfy any of these criteria, the DOE may: • require the repayment of federal student financial aid funds; • transfer the institution from the “advance” system of payment of federal student financial aid funds to the “reimbursement” system of payment or cash monitoring; • place the institution on provisional certification status; or • commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in federal student financial aid programs |
| Should one or more of our institutions be limited in their access to, or lose, federal student financial aid funds due to their failure to demonstrate administrative capability, our business could be materially adversely affected |
| Regulatory agencies or third parties may commence investigations, bring claims or institute litigation against us |
| Because we operate in a highly regulated industry, we may be subject from time to time to investigations, claims of non-compliance, or lawsuits by governmental agencies or third parties, which may allege statutory violations, regulatory infractions, or common law causes of action |
| If the results of the investigations are unfavorable to us or if we are unable to successfully defend against third-party lawsuits, we may be required to pay money damages or be subject to fines, penalties, injunctions or other censure that could have a materially adverse effect on our business |
| Even if we adequately address the issues raised by an agency investigation or successfully defend a third-party lawsuit, we may have to devote significant money and management resources to address these issues, which could harm our business |
| In particular, the securities litigation currently pending against us and certain of our current and former officers and directors could demand significant management time and financial resources to defend and could adversely affect our business |
| Adverse publicity regarding litigation against us could also negatively affect our business |
| Investigations, claims and actions against companies in our industry could adversely affect our business and stock price |
| Starting in 2004 and continuing through 2006, several companies in the for-profit postsecondary education industry were subject to increased regulatory scrutiny |
| In some cases, allegations of wrongdoing have resulted in reviews or investigations by the Justice Department, the Securities and Exchange Commission (the “SEC”), the DOE, state agencies, accrediting agencies and other entities |
| These allegations, reviews and investigations and the accompanying adverse publicity could have a negative impact on the for-profit postsecondary education industry in general, our business and the market price of our common stock |
| 29 ______________________________________________________________________ [56]Table of Contents We are subject to sanctions if we pay impermissible commissions, bonuses or other incentive payments to individuals involved in certain recruiting, admissions or financial aid activities |
| An institution participating in Title IV Programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the awarding of Title IV Program funds |
| The law and regulations governing this requirement do not establish clear criteria for compliance in all circumstances |
| If the DOE determined that one of our institution’s compensation practices violated these standards, the DOE could subject the institution to monetary fines, penalties, or other sanctions |
| Any substantial fine or penalty or other sanction levied against one or more of our schools could have a material adverse effect on our financial condition, results of operations and cash flows |
| Failure to comply with extensive Canadian regulations could affect the ability of our Canadian schools to participate in Canadian financial aid programs |
| Our post-secondary schools in Canada derive a significant percentage of their revenue on a cash basis from Canadian governmental financial aid programs |
| Depending on their province of residence, our Canadian students may receive loans under various student financial aid programs |
| Our Canadian schools must meet eligibility standards to administer these programs and must comply with extensive statutes, rules, regulations and requirements |
| If our Canadian schools cannot meet these and other eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our business |
| Additionally, the Canadian and various provincial governments continuously review the legislative, regulatory and other requirements relating to student financial assistance programs due to political and budgetary pressures |
| Although we do not currently anticipate a significant reduction in the funding for these programs, any change that significantly reduces funding or the ability of our schools to participate in these programs could have a material adverse effect on our business and results of operation |
| Operational Risks That Could Have a Material Adverse Effect on Our Business If students fail to pay their outstanding balances, our business will be harmed |
| We offer a variety of payment plans to help students pay that portion of their education expense not covered by financial aid programs |
| These balances are unsecured and not guaranteed |
| Losses related to unpaid student balances in excess of the amounts we have reserved for bad debts could have a material adverse effect on our business |
| Failure to effectively grow our revenues or reduce our expenses could harm our business |
| From the inception of our business through fiscal 2004, we rapidly grew our company through both acquisitions and new branch campuses |
| Our rapid growth in capacity resulted in additional operating expenses that have not been offset by higher revenues during the last two fiscal years |
| Accordingly, our operating margins have been significantly compressed |
| If we are unable to effectively grow our revenues or reduce our expenses, our business could be materially adversely affected |
| If we cannot effectively identify, acquire and integrate additional schools, it could harm our business |
| We expect to continue to rely on acquisitions as a key component of our growth strategy |
| We often engage in evaluations of, and discussions with, possible acquisition candidates |
| We cannot make assurances that we will be able to identify suitable acquisition candidates or that we will be able to acquire any of the acquisition candidates on favorable terms |
| Furthermore, we cannot make assurances that any acquired schools can be successfully integrated into our operations or be operated profitably |
| Acquisitions involve a number of risks that include: • diversion of management resources; • integration of the acquired schools’ operations; • adverse short-term effects on reported operating results; and • possible loss of key employees |
| 30 ______________________________________________________________________ [57]Table of Contents Continued growth through acquisitions may also subject us to unanticipated business or regulatory uncertainties or liabilities |
| When we acquire an existing school, we typically allocate a significant portion of the purchase price to fixed assets, curriculum, goodwill and intangibles, such as covenants not-to-compete, trade names and accreditations |
| For our acquisitions through fiscal 2002, we amortized goodwill and trade names over a period of 40 years and curricula over 3 to 15 years |
| Effective July 1, 2002, we adopted SFAS Nodtta 142, “Accounting for Business Combinations, Goodwill and Other Intangible Assets,” in its entirety |
| Under SFAS 142, goodwill is no longer amortized on a periodic basis, but instead is subject to an impairment test to be performed at least on an annual basis |
| Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives |
| In addition, our acquisition of a school is a change of ownership of that school, which may result in the temporary suspension of that school’s participation in federal student financial aid programs until it obtains the DOE’s approval |
| If we fail to successfully manage our acquisitions, our business would likely suffer |
| Failure to effectively manage opening new schools and adding new services could harm our business |
| Establishing new schools requires us to make investments in management, capital expenditures, marketing expenses and other resources |
| To open a new school, we are also required to obtain appropriate state and accrediting agency approvals |
| In addition, to be eligible for federal student financial aid programs, the new school is required to be certified as eligible to receive Title IV funds by the DOE We cannot assure you that we will be able to successfully open new schools in the future |
| Our failure to effectively manage the operations of newly established schools could have a material adverse effect on our business |
| Our success depends upon our ability to recruit and retain key personnel |
| We depend on key personnel, including David G Moore, Jack D Massimino, Peter C Waller, Beth A Wilson, Kenneth S Ord , William B Buchanan, Mark L Pelesh, Richard L Cochran, Robert C Owen and Stan A Mortensen, to effectively operate our business |
| If any of these people left our company and we failed to effectively manage a transition to new people, our business could suffer |
| Our success also depends, in large part, upon our ability to attract and retain highly qualified faculty, school presidents and administrators and campus support center management |
| We may have difficulty locating and hiring qualified personnel, and retaining such personnel once hired |
| The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could cause our business to suffer |
| Anti-takeover provisions in our charter documents and Delaware law could make an acquisition of our company difficult |
| Our certificate of incorporation, our by-laws and Delaware law contain provisions that may delay, defer or inhibit a future acquisition of our company not approved by our board of directors |
| These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our board of directors |
| Our certificate of incorporation also permits our board of directors to issue shares of preferred stock with voting, conversion and other rights as it determines, without any further vote or action by our stockholders |
| By using preferred stock, we could: • discourage a proxy contest; • make the acquisition of a substantial block of our common stock more difficult; or • limit the price investors may be willing to pay in the future for shares of our common stock |
| We face litigation that could have a material adverse effect on our business, financial condition and results of operations |
| We and some of our current and former directors and executive officers have been named as defendants in private securities class action lawsuits |
| Between July 8, 2004 and August 31, 2004, several putative class action lawsuits were filed against us in the United States District Court for the Central District of California, alleging that we made certain material misrepresentations and failed to disclose certain material facts about our condition and prospects |
| Those cases have now been consolidated into one action |
| On April 24, 2006, the district court granted the Company’s motion to dismiss the plaintiff’s third complaint with prejudice |
| The plaintiff has appealed that ruling to the Ninth Circuit Court of Appeal |
| Although we believe this consolidated lawsuit is without merit, we cannot predict its outcome |
| Several of our current and former officers and directors have also been named as defendants in derivative actions in state and federal courts |
| Additionally, in the ordinary conduct of our 31 ______________________________________________________________________ [58]Table of Contents business, we and our schools are subject to various other lawsuits, investigations and claims, covering a wide range of matters, including, but not limited to, claims involving our current and former students and routine employment matters |
| It is possible that we may be required to pay substantial damages or settlement costs in excess of our insurance coverage or current reserves, which could have a material adverse effect on our financial condition or results of operation |
| We could also incur substantial legal costs, and management’s attention and resources could be diverted from |