<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to __________________
Commission file number 0-25283
CORINTHIAN COLLEGES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0717312
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
6 Hutton Centre Drive, Suite 400, Santa Ana, California
(Address of principal executive offices)
92707
(Zip Code)
(714) 427-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
At May 10, 1999, 10,345,623 shares of Common Stock and Nonvoting Common Stock of
the Registrant were outstanding.
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
June 30, 1998 and March 31, 1999.......................... 3
Condensed Consolidated Statements of Operations for the
quarter and nine months ended March 31, 1998 and 1999..... 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended March 31, 1998 and 1999................. 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 7
Item 3. Quantitative and Qualitative Disclosure about Market Risk. 12
PART II - OTHER INFORMATION
- ---------------------------
Item 2. Changes in Securities and Use of Proceeds................. 12
Item 6. Exhibits and Reports on Form 8-K.......................... 12
SIGNATURES.............................................................. 13
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, March 31,
1998 1999
---------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
---------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 2,402 $ 7,684
Restricted cash............................................................... 760 10
Marketable investments........................................................ - 4,459
Accounts receivable, net of allowance for doubtful accounts of
$3,519 and $2,855 at June 30, 1998 and March 31, 1999,
respectively .............................................................. 10,077 11,636
Student notes receivable, net of allowance for doubtful accounts of
$457 and $459 at June 30, 1998 and March 31, 1999, respectively............ 1,776 1,489
Deferred income taxes......................................................... 2,396 2,396
Prepaid expenses and other current assets..................................... 3,126 4,655
------- -------
Total current assets.................................................... 20,537 32,329
PROPERTY AND EQUIPMENT, net...................................................... 10,332 10,700
OTHER ASSETS:
Intangibles, net of accumulated amortization of $2,010 and $2,837 at
June 30, 1998 and March 31, 1999, respectively............................. 22,719 21,491
Student notes receivable, net of allowance for doubtful accounts of
$1,829 and $1,734 at June 30, 1998 and March 31, 1999, respectively........ 4,408 4,781
Deposits and other assets..................................................... 1,909 655
------- -------
TOTAL ASSETS............................................................ $59,905 $69,956
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 4,727 $ 4,642
Accrued compensation and related liabilities.................................. 3,704 3,697
Accrued expenses.............................................................. 880 2,023
Accrued interest.............................................................. 1,295 69
Income tax payable............................................................ 1,739 810
Prepaid tuition............................................................... 2,952 3,570
Current portion of long-term debt............................................. 4,634 139
------- -------
Total current liabilities............................................... 19,931 14,950
------- -------
LONG-TERM DEBT, net of current portion........................................... 31,535 3,431
------- -------
DEFERRED INCOME TAXES............................................................ 121 371
------- -------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK....................................................... 2,167 -
------- -------
CONVERTIBLE PREFERRED STOCK...................................................... 5,174 -
------- -------
STOCKHOLDERS' EQUITY:
Common Stock, $0.0001 par value:
Common Stock, 40,000 shares authorized, 4,924 shares and 9,169 shares
issued and outstanding at June 30, 1998 and March 31, 1999,
respectively............................................................ 1 1
Nonvoting Common Stock, 2,500 shares authorized, 1,415 shares and
1,177 shares issued and outstanding at June 30, 1998 and March 31, 1999,
respectively............................................................ - -
Additional paid-in capital.................................................... 1,374 49,615
Notes receivable for stock.................................................... (187) -
Retained earnings (Accumulated deficit)....................................... (211) 1,588
------- -------
Total stockholders' equity.............................................. 977 51,204
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $59,905 $69,956
======= =======
</TABLE>
See accompanying notes.
3
<PAGE>
CORINTHIAN COLLEGES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------
1998 1999 1998 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUE.......................................... $27,841 $34,939 $78,627 $98,209
------- ------- ------- -------
OPERATING EXPENSES:
Educational services............................... 16,978 19,791 48,271 56,480
General and administrative......................... 2,891 3,617 8,092 10,374
Marketing and advertising.......................... 6,139 7,306 18,286 22,163
------- ------- ------- -------
Total operating expenses........................ 26,008 30,714 74,649 89,017
------- ------- ------- -------
Income from operations.......................... 1,833 4,225 3,978 9,192
INTEREST EXPENSE, net................................ 809 190 2,479 1,884
------- ------- ------- -------
Income before provision for income taxes
and extraordinary loss........................ 1,024 4,035 1,499 7,308
PROVISION FOR INCOME TAXES........................... 410 1,683 600 3,143
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY LOSS..................... 614 2,352 899 4,165
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT
OF DEBT (net of tax benefit of $1,518).......... - 2,011 - 2,011
------- ------- ------- -------
NET INCOME........................................... $ 614 $ 341 $ 899 $ 2,154
======= ======= ======= =======
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
BEFORE EXTRAORDINARY LOSS:
Income before extraordinary loss................... $ 614 $ 2,352 $ 899 $ 4,165
Less preferred stock dividends..................... (172) (75) (233) (355)
------- ------- ------- -------
Income attributable to common stockholders
before extraordinary loss..................... $ 442 $ 2,277 $ 666 $ 3,810
======= ======= ======= =======
Income per common share before extraordinary loss
Basic.............................................. $ 0.09 $ 0.27 $ 0.13 $ 0.61
======= ======= ======= =======
Diluted............................................ $ 0.06 $ 0.25 $ 0.09 $ 0.48
======= ======= ======= =======
INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS FROM EXTRAORDINARY LOSS:
Income (loss) per common share from extraordinary
loss................................................
Basic.............................................. $ - $ (0.24) $ - $ (0.32)
======== ======= ======== =======
Diluted............................................ $ - $ (0.22) $ - $ (0.25)
======== ======= ======== =======
INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
AFTER EXTRAORDINARY LOSS:
Net income......................................... $ 614 $ 341 $ 899 $ 2,154
Less preferred stock dividends..................... (172) (75) (233) (355)
------- ------- ------- -------
Income attributable to common stockholders
after extraordinary loss...................... $ 442 $ 266 $ 666 $ 1,799
======= ======= ======= =======
Income per common share after extraordinary loss
Basic.............................................. $ 0.09 $ 0.03 $ 0.13 $ 0.29
======= ======= ======= =======
Diluted............................................ $ 0.06 $ 0.03 $ 0.09 $ 0.23
======= ======= ======= =======
Weighted average number of common shares
outstanding:
Basic.............................................. 4,961 8,302 4,961 6,243
======= ======= ======= =======
Diluted............................................ 7,301 9,178 7,067 7,940
======= ======= ======= =======
</TABLE>
See accompanying notes.
4
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................... $ 899 $ 2,154
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization.............................. 2,250 2,585
Deferred income taxes...................................... 405 250
Write-off of deferred financing costs...................... - 913
Changes in assets and liabilities:
Accounts receivable...................................... (1,104) (1,559)
Student notes receivable................................. (2,567) (86)
Income tax refund receivable............................. 195 -
Prepaid expenses and other assets........................ (2,016) (3,016)
Accounts payable......................................... (785) (85)
Accrued expenses......................................... 528 (90)
Income tax payable....................................... - (929)
Prepaid tuition.......................................... (1,830) 618
------- --------
Net cash provided by (used in) operating activities........ (4,025) 755
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Phillips Colleges acquisition purchase price adjustment...... - 402
Decrease in restricted cash.................................. 250 750
Increase in marketable investments........................... - (4,459)
Capital expenditures......................................... (1,707) (1,931)
------- --------
Net cash used in investing activities...................... (1,457) (5,238)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering........................ - 45,198
Proceeds from sale of convertible preferred stock............ 4,934 -
Payment of redeemable preferred stock and accrued dividends.. - (2,252)
Payment of convertible preferred stock dividends............. - (510)
Proceeds from stock subscription receivable.................. - 187
Increase in deferred financing costs......................... (183) (259)
Borrowings under long-term debt.............................. 1,000 3,200
Principal repayments on long-term debt....................... (3,090) (35,799)
------- --------
Net cash provided by financing activities.................. 2,661 9,765
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......... (2,821) 5,282
CASH AND CASH EQUIVALENTS, beginning of period................ 2,821 2,402
------- --------
CASH AND CASH EQUIVALENTS, end of period...................... $ - $ 7,684
======= ========
</TABLE>
See accompanying notes.
5
<PAGE>
CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - The Company and Basis of Presentation
Corinthian Colleges, Inc. (the "Company") is in the business of operating
degree and non-degree granting private, for-profit post-secondary schools
devoted to career program training primarily in the medical, technical and
business fields.
The accompanying unaudited consolidated financial statements have been
prepared on the same basis as the annual consolidated financial statements and,
in the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the financial condition and
results of operation of the Company. These consolidated financial statements
and notes thereto are unaudited and should be read in conjunction with the
Company's audited financial statements included in the Company's final
Prospectus, as filed with the Securities and Exchange Commission (the "SEC") on
February 5, 1999. The results of operations for the nine months ended March 31,
1999 are not necessarily indicative of results that could be expected for the
entire fiscal year.
The consolidated financial statements as of March 31, 1999 and for the
three and nine months then ended are consolidated and include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Note 2 - Marketable Investments
Statement of Financial Accounting Standards No. 115, "Accounting For
Certain Debt and Equity Securities" (SFAS No. 115) requires that all applicable
investments be classified as trading securities, available-for-sale securities
or held-to-maturity securities. The Company does not currently have any trading
securities or held-to-maturity securities.
Securities classified as available-for-sale may be sold in response to
changes in interest rates, liquidity needs and for other purposes. Available-
for-sale securities are carried at fair value and include all debt and equity
securities not classified as held-to-maturity or trading. Unrealized holding
gains and losses for available-for-sale securities are excluded from earnings
and reported, net of any income tax effect, as a separate component of
stockholders' equity. Realized gains and losses for securities classified as
available-for-sale are reported in earnings based on the adjusted cost of the
specific security sold. At March 31, 1999, the unrealized gain on available-for-
sale securities was immaterial.
Note 3 - Weighted Average Number of Common Shares Outstanding
The table below indicates the weighted average number of common share
calculations used in computing basic and diluted net income per common share
utilizing the treasury stock method (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------- ---------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic common shares outstanding..................... 4,961 8,302 4,961 6,243
Effects of dilutive securities:
Warrants.......................................... 962 387 728 777
Non-vested executive Common Stock................. 551 110 551 221
Non-vested executive Nonvoting Common
Stock........................................... 827 331 827 664
Stock options..................................... n/a 48 n/a 35
----- ----- ----- -----
Diluted common shares outstanding:.................. 7,301 9,178 7,067 7,940
===== ===== ===== =====
</TABLE>
6
<PAGE>
Note 4 - Initial Public Offering
On February 10, 1999 the Company completed an initial public offering of
Common Stock (the "Offering"). Prior to the Offering, on February 3, 1999 the
Company filed with the Delaware Secretary of State its Restated Certificate of
Incorporation, which was thereby amended, to provide for, among other things,
(i) an increase in the authorized capital stock of the Company to 43,000,000
shares, (ii) a 44.094522 for 1 split of all shares of the Common Stock and
Nonvoting Common Stock, and (iii) a change in par value for the Common Stock and
Nonvoting Common Stock to $0.0001 per share. All share and per share amounts
shown in the accompanying consolidated financial statements have been
retroactively adjusted to reflect this increase in authorized shares, stock
split and change in par value.
In connection with the Offering, the Company also caused the conversion of
all existing Series 2 Convertible Preferred Stock into 388,334 shares of
Nonvoting Common Stock and all existing Series 3 Convertible Preferred Stock
into 388,334 shares of Common Stock. The holders of 826,773 shares of Nonvoting
Common Stock exercised their contractual rights to exchange all such shares of
Nonvoting Common Stock for an equal number of shares of Common Stock. The
holders of all outstanding exercisable warrants to purchase Common Stock and
Nonvoting Common Stock exercised such warrants for an aggregate of 330,362
shares of Common Stock and 200,005 shares of Nonvoting Common Stock. Concurrent
with the Offering, the Company granted an option to purchase 6,000 shares of
Common Stock at $18.00 to each of its four directors who are not employees of
the Company. The options will vest at the rate of 50% on each of the first and
second anniversaries of the grant date.
In the Offering, the Company issued and sold 2,700,000 shares of Common
Stock at a price of $18.00 per share. The Company received total net proceeds,
after deduction of underwriting discounts, of approximately $45.2 million.
Subsequent to the Offering, the Company applied $1.9 million of the proceeds to
the expenses of the Offering, repaid $22.6 million of senior indebtedness,
including a prepayment penalty of $2.6 million, repaid $5.0 million of
subordinated indebtedness, repaid $3.0 million of outstanding credit facility
borrowings, redeemed $2.2 million in redeemable preferred stock including
accumulated dividends thereon, and paid accumulated dividends of $0.5 million on
convertible preferred stock. The remaining $10.0 million of proceeds are
available for general corporate purposes.
In February, 1999 the Company recorded a $2.0 million extraordinary loss,
net of tax benefit of $1.5 million, resulting from the prepayment penalty and
the write-off of deferred loan fees associated with the early extinguishment of
the indebtedness mentioned above. Also in February 1999, the Company received
$187,312 from five executive officers of the Company as full payment for notes
receivable from such executive officers, plus the accumulated interest thereon.
On February 22, 1999 the underwriters of the Offering exercised their over-
allotment option to purchase an additional 405,000 shares of Common Stock from
certain selling shareholders. The Company received no proceeds from sale of the
over-allotment shares.
Concurrent with the consummation of the Offering, the Company entered into
a $10.0 million credit facility with Union Bank of California (the "Credit
Facility"). The Credit Facility is a one-year, secured revolving credit
facility, bears interest at LIBOR plus 200 basis points and includes a non-
usage fee of 1/8 % per year on the unused portion. At maturity, any Acquisition
Advances (as defined in the Credit Facility) will convert to a three year fully
amortizing term loan. Under the Credit Facility, the Company will be required
to maintain certain financial and other covenants. Borrowings under the Credit
Facility will be secured by substantially all personal property of the Company.
At March 31, 1999 the Company had no outstanding borrowings under this credit
facility.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report on Form 10-Q contains statements that may constitute
"forward-looking statements" as defined by the U.S. Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"estimates,"
7
<PAGE>
"anticipates," "continues," "contemplates," "expects," "may," "will," "could,"
"should" or "would," or the negatives thereof. Those statements are based on
the intent, belief or expectation of the Company as of the date of this
Quarterly Report. Any such forward-looking statements are not guarantees of
future performance and may involve risks and uncertainties that are outside the
control of the Company. Results may differ materially from the forward-looking
statements contained herein as a result of changes in governmental regulations,
including those governing student financial aid, the effect of competitive
pressures on the Company's tuition pricing, and other factors, including those
discussed under the heading entitled "Risk Factors" in the Company's
Registration Statement on Form S-1, as amended (File No. 333-59505), filed with
the Securities and Exchange Commission. The Company expressly disclaims any
obligation to release publicly any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based. The following discussion of the Company's
results of operations and financial condition should be read in conjunction with
the interim unaudited condensed financial statements of the Company and the
notes thereto included herein and in conjunction with the information contained
in the aforementioned Registration Statement on Form S-1.
Results of Operations
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net revenues increased $7.1 million, or 25.5%, from $27.8 million in the
third quarter of fiscal 1998 to $34.9 million in the third quarter of fiscal
1999, due primarily to a 12.9% increase in the average student population during
the quarter and a 9.6% increase in the average tuition rate per student. At
March 31, 1999, the total student population was 16,467, compared with 14,398 at
March 31, 1998.
Educational services expense increased $2.8 million, or 16.6%, from $17.0
million in the third quarter of fiscal 1998 to $19.8 million in the third
quarter of fiscal 1999, due primarily to the increase in student population,
wage increases for employees, higher bad debt expense related to the colleges
which lost access to Title IV loan funds in the second quarter of fiscal 1997,
and higher rent from certain school relocations to larger upgraded facilities
and annual lease escalations. As a percentage of net revenue, educational
services expense decreased from 61.0% to 56.6%.
General and administrative expense increased $0.7 million, or 25.1%, from
$2.9 million in the third quarter of fiscal 1998 to $3.6 million in the third
quarter of fiscal 1999, primarily as a result of (i) additional headquarters
staff to support operations, (ii) wage increases for employees, (iii) increased
performance bonus accrual, (iv) increased travel and training, and (v) Year 2000
remediation expenses. As a percentage of net revenue, general and
administrative expense remained relatively constant at 10.4%.
Marketing and advertising expense increased $1.2 million, or 19.0%, from
$6.1 million in the third quarter of fiscal 1998 to $7.3 million in the third
quarter of fiscal 1999, primarily due to increased advertising expenditures
(both quantity and cost inflation) and increased staff costs resulting from wage
increases and additional high school admissions representatives. As a
percentage of net revenue, marketing and advertising expense decreased from
22.1% to 20.9%.
Net interest expense decreased $0.6 million, or 76.5%, from $0.8 million in
the third quarter of fiscal 1998 to $0.2 million in the third quarter of fiscal
1999, due primarily to the repayment of debt with a portion of the Offering
proceeds in February 1999. The Company expects interest expense to decrease
further in the fourth fiscal quarter as a result of that debt retirement in
connection with the Offering.
The Company's effective income tax rate increased from 40.0% in the third
quarter of fiscal 1998 to 41.7% in the third quarter of fiscal 1999 due to
increases in permanent differences and one-time separate state tax filing
issues.
Income before extraordinary loss increased $1.8 million, or 283.1%, from
$0.6 million in the third quarter of fiscal 1998 to $2.4 million in the third
quarter of fiscal 1999, due primarily to the factors discussed above.
8
<PAGE>
In the third quarter of fiscal 1999, the Company recorded an extraordinary
loss of $2.0 million (net of a $1.5 million tax benefit) related to a prepayment
penalty and the write-off of deferred loan fees associated with the early
extinguishment of debt with a portion of the Offering proceeds, compared to no
extraordinary items in the third quarter of fiscal 1998.
Net income decreased $0.3 million, or 44.5% from $0.6 million in the third
quarter of fiscal 1998 to $0.3 million in the third quarter of fiscal 1999, due
primarily to the factors discussed above.
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
Net revenues increased $19.6 million, or 24.9%, from $78.6 million in the
first nine months of fiscal 1998 to $98.2 million in the first nine months of
fiscal 1999, due primarily to an 11.9% increase in the average student
population during the nine month period and a 9.7% increase in the average
tuition rate per student.
Educational services expense increased $8.2 million, or 17.0%, from $48.3
million in the first nine months of fiscal 1998 to $56.5 million in the first
nine months of fiscal 1999, due primarily to the increase in student population,
wage increases for employees, higher bad debt expense related to the colleges
which lost access to Title IV loan funds in the second quarter of fiscal 1997,
and higher rent from certain school relocations to larger upgraded facilities
and annual lease escalations. As a percentage of net revenue, educational
services expense decreased from 61.4% to 57.5%.
General and administrative expense increased $2.3 million, or 28.2%, from
$8.1 million in the first nine months of fiscal 1998 to $10.4 million in the
first nine months of fiscal 1999, primarily as a result of (i) additional
headquarters staff to support operations, (ii) wage increases for employees,
(iii) increased performance bonus accrual, (iv) increased travel and training,
and (v) Year 2000 remediation expenses. As a percentage of net revenue, general
and administrative expense increased from 10.3% to 10.6%.
Marketing and advertising expense increased $3.9 million, or 21.2%, from
$18.3 million in the first nine months of fiscal 1998 to $22.2 million in the
first nine months of fiscal 1999, primarily due to increased advertising
expenditures (both quantity and cost inflation) and increased staff costs
resulting from wage increases and additional high school admissions
representatives. As a percentage of net revenue, marketing and advertising
expense decreased from 23.3% to 22.6%.
Net interest expense decreased $0.6 million, or 24.0%, from $2.5 million in
the first nine months of fiscal 1998 to $1.9 million for the same period in
fiscal 1999, due primarily to the retirement of $28.0 million of debt subsequent
to the Offering in February 1999.
The Company's effective income tax rate increased from 40.0% in the first
nine months of fiscal 1998 to 43.0% for the same period in fiscal 1999 due to
increases in permanent differences and one-time separate state tax filing
issues.
Income before extraordinary loss increased $3.3 million, or 363.3%, from
$0.9 million in the first nine months of fiscal 1998 to $4.2 million in the
first nine months of fiscal 1999, due primarily to the factors discussed above.
In the first nine months of fiscal 1999, the Company recorded an
extraordinary loss of $2.0 million (net of a $1.5 million tax benefit) related
to a prepayment penalty and the write-off of deferred loan fees associated with
the early extinguishment of debt with a portion of the Offering proceeds,
compared with no extraordinary items in the first nine months of fiscal 1998.
Net income increased $1.3 million, or 139.6%, from $0.9 million in the
first nine months of fiscal 1998 to $2.2 million in the first nine months of
fiscal 1999, due primarily to the factors discussed above.
Tuition Price Increases
The 9.6% and 9.7% increases in the average tuition rate per student for the
quarter and nine months ended March 31, 1999, respectively, resulted from a
combination of (i) tuition price increases
9
<PAGE>
averaging approximately 7.5% and (ii) the effect of graduation and attrition of
students in the degree granting colleges that had fixed tuition contracts
significantly below the prevailing rate being charged new students. Under prior
ownership, students in these colleges were guaranteed a fixed tuition price for
the duration of their programs. Thus, any subsequent tuition price increases
applied only to new students. Subsequent to the Company's acquisition of these
colleges, the pricing mechanism has been changed so that tuition increases now
affect both new students and continuing students. However, the Company honored
the fixed price commitment to those students already in school when the Company
acquired the colleges. The result is a greater increase in the average tuition
rate per student than the actual period to period tuition price increase because
of the period to period mix impact of new to "grandfathered" students. The
Company expects that the majority of the remaining "grandfathered" students will
graduate or discontinue over the next 9 to 15 months. After that time, the
Company expects period to period increases in the average tuition rate per
student to more closely track the actual tuition price increases implemented
period to period. Additionally, the approximately 7.5% tuition price increase
implemented in the period is higher than the expected future annual average
increase due to some increases in certain markets and for certain programs where
the Company was underpriced relative to its competition. Accordingly, the
average tuition rate increases discussed herein are not necessarily indicative
of future increases.
Seasonality and Other Factors Affecting Quarterly Results
The Company's revenues normally fluctuate as a result of seasonal
variations in its business, principally in its total student population.
Student population varies as a result of new student enrollments and student
attrition. Historically, the Company's colleges have had lower student
populations in the first fiscal quarter than in the remainder of the year. The
Company's expenses, however, do not vary as significantly as student population
and revenue. The Company expects quarterly fluctuations in operating results to
continue as a result of seasonal enrollment patterns. Such patterns may change,
however, as a result of acquisitions, new school openings, new program
introductions and increased high school enrollments. The operating results for
any quarter are not necessarily indicative of the results that could be expected
for the full fiscal year or for any future period.
Liquidity and Capital Resources
Cash provided by operating activities totaled $0.8 million in the first
nine months of fiscal 1999 compared to $4.0 million used in operating activities
in the same period of fiscal 1998. The Company had $17.4 million of working
capital as of March 31, 1999 compared to $0.6 million of working capital as of
June 30, 1998. The increase in working capital was due primarily to the receipt
of proceeds from the Offering and favorable operating results during the period,
partially offset by debt repayment, redemption of preferred stock, and payment
of preferred stock dividends. Included in working capital as of June 30, 1998
and March 31, 1999 is $760,000 and $10,000, respectively, of restricted cash
respectively. At June 30, 1998, $750,000 of the restricted cash secured a letter
of credit to the U.S. Department of Education. Subsequent to the Offering in
February 1999 the bank which provided the letter of credit released the
restricted funds to the Company.
Capital expenditures increased from $1.7 million in the nine months ended
March 31, 1998 to $1.9 million in the same period in 1999. The increase was due
to continued upgrading of school equipment and facilities and purchases of
additional equipment to accommodate the increasing student population. Capital
expenditures are expected to continue to increase as the student population
increases and the Company continues to upgrade and expand current facilities and
equipment and add new campuses. The Company does not have any material
commitments for capital expenditures for the remainder of fiscal 1999.
The Company believes that the cash flow from operations, supplemented from
time to time by borrowings from the revolving credit facility with Union Bank of
California, will provide adequate funds for ongoing operations, planned routine
capital expenditures, planned expansion to new locations and debt service during
the term of the revolving credit agreement.
10
<PAGE>
As a result of repayment of indebtedness subsequent to the Offering, the
Company expects interest expense to be lower and have a lesser impact on net
income in comparison to periods prior to the Offering.
The Company leases all of its facilities except five. The Company expects
that future commitments on existing leases will be paid from cash flow from
operations.
Year 2000 Compliance
A detailed discussion of the Company's compliance and remediation efforts
regarding the Year 2000 computer date issue is contained in the Company's final
Prospectus, as filed with the Securities and Exchange Commission on February 5,
1999. Set forth below are the most significant developments in the Company's
status regarding the Year 2000 compliance since the filing of the final
Prospectus.
State of Readiness. The Company has evaluated the readiness of its
internal and third party information technology and non-information technology
systems which, if not Year 2000 compliant, could have a direct material impact
on the Company. This evaluation identified several areas of concern, the
following two of which have not been previously remediated: (i) the Company's
proprietary student database system (School's Automation System or "SAS"), and
(ii) the Department of Education's (the "DOE's") systems for processing and
disbursing student financial aid.
The Company's SAS system is not compliant and the updates to this system
are not yet complete. To date, a detailed assessment of the system has been
completed wherein each date occurrence has been identified and documented, and a
detailed plan has been developed to complete the necessary remedial work. The
remediation project is approximately 90% complete and the Company expects that
all the necessary corrections to this system will be completed and tested by the
first quarter of fiscal 2000.
The Company is highly dependent on student funding provided through Title
IV programs. Processing of student applications for this funding and actual
disbursement of a significant portion of these funds are accomplished through
the DOE's computer systems. According to the DOE, their systems have now been
renovated, independently validated and verified, and implemented to be Year 2000
compliant. However, the Company is not able to independently verify the DOE's
assertions, and any problems in the DOE's systems could result in interruption
of funding for the Company's students and have a material adverse impact on the
Company, its business and results of operations.
The Company has also assessed the state of readiness of its major servers
and shared hardware devices. It has determined that its hardware systems are
either already Year 2000 compliant or can be made so through upgrades of
operating system software. Where necessary, these upgrades are expected to be
finalized during the first quarter of fiscal 2000.
Year 2000 Costs. The Company now estimates that it will expense
approximately $600,000 in fiscal 1999 to complete its remediation efforts, of
which approximately $442,000 was expensed in the first three fiscal quarters.
These efforts have been, and are expected to continue to be, funded through cash
from operations. The Year 2000 compliance project has not resulted in the
deferral of any significant information systems initiatives by the Company.
Risks from Year 2000 Issues. The Company believes the greatest Year
2000 compliance risk, in terms of magnitude of risk, is that the DOE's systems
experience a failure, despite their public pronouncement that they are now Year
2000 compliant, and Title IV funding for the Company's students could be
interrupted for a period of time. Other than public comments provided by the
DOE, the Company is unable to predict the likelihood of this risk occurring. Any
significant interruption of this funding could have a material adverse effect on
the Company's results of operations, liquidity or financial condition. As
mentioned earlier, the Company is dependent upon DOE assertions as to the
completion of their remediation efforts. As of the date of this Quarterly
Report, the latest public pronouncement by the DOE indicated its remediation
work was completed and implemented prior to the end of March 1999.
11
<PAGE>
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company does not utilize interest rate swaps, forward or option
contracts on foreign currencies or commodities, or other types of derivative
financial instruments. Subsequent to the Offering on February 10, 1999, and the
application of the proceeds therefrom (including repayment of certain debt), the
only assets or liabilities of the Company which are subject to risks from
interest rate changes are (i) the mortgage debt of the Company in the aggregate
amount of $3.6 million, (ii) notes receivable from students for the aggregate
amount of $6.3 million, and (iii) marketable investments of $4.5 million, all at
March 31, 1999. The mortgage debt of the Company, the student notes receivable,
and the marketable investments are all at fixed interest rates. The Company does
not believe it is subject to material risks from reasonably possible near-term
changes in market interest rates.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The use of proceeds from the Offering is described in Note 4 in the
Notes to Financial Statements in Part I above and is hereby
incorporated by this reference.
Item 6. Exhibits and Reports on Form 8-K.
The exhibits filed with the Company's Registration Statement on Form
S-1, as amended (File No. 333-59505), are hereby incorporated herein
by this reference and made a part hereof.
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
A report on Form 8-K dated March 4, 1999 was filed during
the three months ended March 31, 1999 related to the
Company's Initial Public Offering and subsequent exercise of
the underwriter's overallotment option, both in February
1999, and the Company's new credit facility with Union Bank
of California which became effective concurrent with the
Initial Public Offering. The Item listed was Item 5, Other
Events.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CORINTHIAN COLLEGES, INC.
(Registrant)
May 11, 1999 /s/ David G. Moore
---------------------------------------
David G. Moore
President and Chief Executive Officer
(Principle Executive Officer)
May 11, 1999 /s/ Frank J. McCord
-------------------------------------------
Frank J. McCord
Executive Vice President and
Chief Financial Officer
(Principle Accounting Officer)
13
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
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ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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