Enrollment Surges Despite Corinthian’s Legal Troubles

With a successful business as a personal chef, Elizabeth Simek was living the dream of every weekend gourmet.

Her Busy B’s Personal Chef Service was pulling in more than $50,000 a year. But Simek worried that it wouldn’t last. So the Peoria, Ariz., entrepreneur set out to earn a bachelor’s degree in business management through an online program from Florida Metropolitan University, one of dozens of trade and technical colleges run by Santa Ana-based Corinthian Colleges Inc.

Nearly two years into the process, she made a distressing discovery: None of her credits would transfer to any college in Arizona. And she wasn’t the only disgruntled student. Simek joined one of three lawsuits against FMU alleging that the school lied about its accreditation.

“All my hard work is going nowhere,” she said. “It’s very frustrating.”

A long stretch of bad employment news has helped for-profit education companies like Corinthian, with enrollments industrywide surging 30% to 60% in the last three years.

But Corinthian has gotten poor grades from Wall Street because of lawsuits like those in Arizona, earnings disappointments and investigations by state and federal officials into the company’s business practices.

Corinthian stock has fallen more than 50% from its peak of $36.19 reached in April.

David G. Moore, Corinthian’s chairman and chief executive, acknowledged the difficulties but said the company had just completed a fiscal year of “unparalleled growth.”

“It’s a rite of passage,” Moore said. “We’re large enough that we’re attracting attention.”

As for the student lawsuits, Moore said FMU was working to improve the transferability of credits to other educational institutions. In any event, he said, students are warned when they enroll that FMU has no control over whether another school will accept its credits.

In California, the attorney general’s office is investigating Corinthian as part of a broad examination of the industry. “Complaints from consumers and information from other sources indicated there may be a problem we want to look at,” said Tom Dresslar, spokesman for Atty. Gen. Bill Lockyer.

At the federal level, the Department of Education found violations of student loan application rules at a Bryman College campus in San Jose owned by Corinthian, the company said in June.

The department placed the campus “on reimbursement.” That means the Bryman campus has to cover students’ tuition for up to 45 days while the government reviews financial aid applications, instead of advancing the money.

The probe sparked several lawsuits accusing the company of misleading investors. Corinthian has said the suits are without merit.

Corinthian is a big beneficiary of federal funds for students. According to the most recent statistics available, 83% of Corinthian’s revenue in the fiscal year ended June 30, 2003, came from federal loans obtained by students to pay their tuition.

“It’s far and away the largest percentage of all the publicly held for-profit companies,” said Jeff Silber, an analyst with Harris Nesbitt.

During that same fiscal year, public nonprofit schools like UCLA received less than 53% of their revenue from federal student loans.

Corinthian maintains that the Bryman scandal was isolated.

“Frankly, we are embarrassed that the company’s policies and procedures were violated at that campus,” Moore, the CEO, said in a conference call last week with investors.

Corinthian isn’t the only education company with problems. ITT Educational Services Inc. of Carmel, Ind., said in a Securities and Exchange Commission filing this year that there was an investigation into its business practices. It didn’t describe details of the probe. Career Education Corp. of Hoffman Estates, Ill., is facing investigations by the Justice Department and the SEC into allegations that employees faked student records and enrollment data.

Despite Corinthian’s recent troubles, analysts say the company remains promising.

When it reported only modest 6% earnings growth for the fiscal fourth quarter Wednesday, investors pushed the share price up 23% to $14.01 largely because there were no new unpleasant revelations, analysts said. The stock closed Friday at $14.90 a share on Nasdaq.

Business Week magazine in June ranked Corinthian No. 7 on its 2004 Hot Growth list of America’s fastest-growing small companies. The rankings were based on the companies’ three-year results in sales, earnings growth and return on capital, according to the magazine.

“These are still headline risks,” Silber said. “You’re not done here, although with each new headline, there’s less of an impact.”

That may be in part because it remains unclear when the economy is going to improve.

Since 2001, more than 1.1 million jobs have been sent overseas or erased, and the uncertain climate has driven workers to trade schools, hoping they can make themselves more bankable.

For-profit schools have filled a niche in the market, attracting students who want to obtain certifications in their field of choice rather than commit to a series of more broad-based classes required for a traditional college or graduate-school diploma.

At some workplaces, such certificates are a requirement for employment. The University of Texas M.D. Anderson Cancer Center in Houston, for example, won’t hire a prospective medical assistant who doesn’t have certification from an accredited school like Corinthian.

“Going back to school is not always an option,” said Michael Brennan, an analyst with IDC, a market research firm. “The for-profit schools have done a good job of online delivery and on-site delivery in attracting those workers for degrees or certification.”

Corinthian’s online enrollment hit 2,035 this summer, a 266% increase over the same time last year. Enrollment of students who attend classes at Corinthian’s 130 campuses in the United States and Canada was 64,810 on June 30, up 50% compared with the year before.

Despite the growth, enrollment was lower than expected as a result of bad publicity from the lawsuits and investigations, Moore conceded during the investor conference call.

The company more than doubled capital spending in the last year, to $64.7 million, opening 10 campuses and expanding or remodeling 35 others. For the fiscal year ended June 30, Corinthian’s earnings increased 24% to $81.6 million and revenue jumped 56% to $804.3 million.

At one of the Houston campuses of Corinthian’s National Institute of Technology, where classes are held on the second floor of an upscale office building behind a Bombay Palace Indian restaurant, none of the students interviewed had heard of the investigations into Corinthian’s business practices. Rather, they said, they were focused on improving their credentials.

Greg Cisneros, a former U.S. Marine, is nearing the end of an NIT course to become a certified medical assistant.

“I was trying to be an RN, but then I thought I should start small -- an eight-month program -- and see if I like it,” Cisneros said. “So far, it’s easier than I thought, less bookwork, but the credits transfer to a nursing program, if that’s what I want to end up doing.”