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Marketing and Recruitment

        We employ a variety of methods to attract applicants who will benefit from our programs and achieve success in their chosen careers. The methods include a variety of direct response marketing techniques to generate leads of potential applicants for our schools. Our marketing department generated approximately 3.6 million leads in the United States and Canada in fiscal 2011, primarily through internet, television, direct mail, newspaper, and yellow pages. The effectiveness of these marketing campaigns is dependent upon timely and accurate lead tracking.

        Our external marketing agencies have access to our management information database and are provided with real time information on the effectiveness of individual campaigns. The agencies consult with our marketing department to adjust schedules for advertisements depending on our needs and the effectiveness of the particular advertisements. For the year ended June 30, 2011, approximately 13% of our new student enrollments were generated through television, newspaper and yellow pages marketing, 50% were generated from the Internet, 22% were generated through referrals, 3% were generated through direct mail, and 12% were generated through a variety of other methods.

National Branding

        We have consolidated multiple brand names to increase our company's overall visibility and gain the marketing efficiencies associated with national advertising. As of August 13, 2010 all of our schools operated under one of three national brands, Everest, WyoTech, or Heald. The Everest brand was recently developed by the Company, WyoTech is a well-established brand in automotive training, and Heald is a well-established brand with a long operating history in Northern California, Oregon and Hawaii, as well as a growth platform for campus-based and online regionally accredited programs. As of June 30, 2011, 104 out of 122 schools were operating under the Everest brand, 6 schools were operating under the WyoTech brand, and 12 schools were operating under the Heald brand.

Admissions

        As of June 30, 2011, we employed approximately 2,400 admissions representatives who work directly with prospective students to facilitate the admissions process. These representatives interview and advise students interested in specific careers and are a key component of our effort to generate interest in our educational services. We conduct semi-annual student satisfaction surveys at our campuses in the United States in which students have consistently given high marks to our admissions personnel for helpfulness, courtesy and accuracy of information. Because our success is highly dependent on the efficiency and effectiveness of our admissions process, we invest considerable resources to train our admissions representatives in product knowledge, regulatory compliance, and customer service. We also employ various admissions supervisory and monitoring programs, and conduct student surveys which help us ensure compliance with both government regulations and our corporate policies.

        One of our objectives in the admissions process is to identify students who have the ability to succeed in our schools. The majority of prospective students must pass a standardized admissions test. Most of our colleges in the United States have historically accepted non-high school graduates who can demonstrate an ability to benefit ("ATB students") from the program by passing certain tests which are required by ED. As of June 30, 2011, ATB students accounted for approximately 4.3% of total enrollments in our U.S. schools, down from 15.1% at June 30, 2010. However, ATB students are a higher risk population who complete their programs at a lower rate and default on their student loans at a higher rate than high school graduates. Accordingly, given the shift to a 3-year default measurement period, and the structural changes in student lending over the past two years, we had stopped enrolling new ATB students into our U.S. Everest and WyoTech institutions starting on September 1, 2010. Due to the success of our default prevention initiatives, we resumed enrolling

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ATB students on a more limited basis in June 2011. We plan to limit ATB students to a maximum of 10% of total enrollment.

Placement

        Graduate placement outcomes are critical to the success of our schools and their ability to continue to enroll new students. We maintain a career services department at each college and, as of June 30, 2011, employed approximately 850 individuals in this capacity. We require our career services personnel to work with students from the time they begin their courses of study until they are successfully placed in jobs for which they are trained. Our career services departments assist students with resumes, help them develop a professional demeanor, conduct practice interview sessions, and identify prospective employers for the graduates. Overall, we believe the efforts we devote to help our graduates find employment have achieved solid results in a difficult economic environment.

        Our colleges endeavor to obtain information regarding their students' employment following graduation. The reliability of that information depends, to a large extent, on the completeness and accuracy of the data provided to our colleges by graduates and their employers. Additionally, a dedicated team at the campus support center conducts a verification process to check the accuracy of the placement information gathered by our campuses. Based on information received from these groups of people, we believe that approximately 67.6% of our graduates in calendar year 2010 who were available for placement have been placed in a job for which they were trained by June 30, 2011, using accrediting agency standards. The various accrediting agencies evaluate placement rates by individual institution and program, and have different requirements regarding which students are considered "available for placement." In defining the graduate cohort group for the purpose of calculating placement rates, certain accrediting agencies may exclude, for example, graduates who are continuing their education, are in active military service or are deceased or disabled, and foreign students who are ineligible to work in the U.S. after graduation. Where applicable, we have also excluded those graduates in our calculation of students available for placement and the graduate placement rate.

Tuition

        Tuition rates for our diploma programs in the U.S. and Canada generally range from $5,375 to $39,000, depending upon the nature and length of the program. Tuition for degree programs is charged on a credit hour basis and varies by college, typically ranging from $256 to $492 per undergraduate credit hour, depending upon the program of study (except for some online programs which are charged on a per quarter basis). Tuition for graduate programs ranges from $371 to $548 per credit hour. In addition to tuition, students may be required to purchase textbooks and other supplies as part of their educational programs. We anticipate increasing tuition based on the market conditions prevailing at our individual colleges.

        If a student fails to complete the period of enrollment (such as a quarter, semester, academic year, or program), the institution may be required to refund tuition previously collected to the originating or disbursing agency or to the student directly, depending on the source of the funds. Refunds are calculated in accordance with the applicable federal, state, provincial or institutional refund policies.

Campus Administration

        We establish policies at our campus support center office, implement these policies, and monitor the performance of our schools through the coordination of the executive vice president of operations, the division presidents, our regional vice presidents of operations, the regional vice presidents of admissions, and their respective support staffs and through our internal audit department. The college

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presidents have the responsibility for the day-to-day operation of the schools. Each U.S. college generally employs the following management personnel which report to the college president:

•

an academic dean or education director;



•

an admissions director;



•

a career services director;



•

a finance director, and



•

a student accounts director.

        Our schools in Canada are typically smaller and thus employ a smaller management team. As each school's enrollment grows, additional management may be added.

        Campus support center personnel manage several key functions, including accounting, information technology, student financial services, financial aid, career services support, marketing, curriculum development, staff training, the call center, legal, treasury, internal audit, human resources, payroll, purchasing, real estate, and accreditation and licensing. Among the principal oversight functions performed by campus support center personnel (in cooperation with our division, region and college management) are the annual operating budget, strategic planning and forecasting processes. These processes establish goals for each college, assist in implementing strategies and establish performance expectations. Our senior management team monitors operating performance and profitability of each college and has established periodic communication with the college presidents to review key performance indicators such as student population, completion, placement, student satisfaction, compliance, lead flow, new enrollments and other operating results to determine the proper course of action.

        As required by their respective regional accrediting agencies, Everest College Phoenix and Heald College are overseen by boards of trustees that include a majority of independent members who review academic integrity and autonomy of the institutions. These governing boards have broad oversight over the schools' programs and operations, set the strategic direction for the institutions, play an active role in policy-making, and review financial resources of their schools to ensure the institution is able to provide a sound educational program. In furtherance of that mission, each board of trustees develops policies appropriate to the needs of the school and works closely with the respective schools' administrations to, among other things, establish a climate for articulating and promoting the educational vision of the schools.

Competition

        The post-secondary education market in the United States, consisting of approximately 7,000 accredited institutions, is highly fragmented and competitive, with no institution having a significant market share. Many of the programs offered by our colleges are also offered by public and private non-profit institutions, as well as by many of the approximately 3,100 private, for-profit colleges and schools. The post-secondary education market in Canada is also highly fragmented. Typically, the tuition charged by public institutions is less than tuition we charge for comparable programs because public institutions receive state subsidies, donations and government research and other grants that are not available to our colleges. However, tuition at other private non-profit institutions is often higher than the tuition charged at our colleges.

        We compete in most markets with other private, for-profit institutions offering similar programs. We believe our supportive learning environment, smaller class sizes, large national scale, our faculty, facilities, and our emphasis on student services and placement allows us to compete effectively. In addition, many of our colleges have been operating in their markets for many years, which has led to a

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substantial number of graduates who are working in the community and validate the quality of the colleges' programs.

Facilities

        Our campus support center office is located in Santa Ana, California and our 122 campuses as of June 30, 2011, are located in 26 states and in the province of Ontario, Canada. Our campuses are generally equipped with classroom space, instructional labs, libraries, Internet access and other facilities.

        We actively monitor the capacity at our facilities and the expected facilities capacity required to accommodate campus growth initiatives. We provide for expansion and growth at each campus through relocations to larger facilities and by expanding or remodeling existing facilities. From the beginning of fiscal 2007 through fiscal 2011, approximately 9% of the campuses have been relocated and an additional approximately 75% of total campuses have been either expanded or remodeled. The following table reflects the number of campuses added, closed or combined, and the number of campuses that have been relocated, enlarged or remodeled during each of the last five fiscal years ended and has been updated to reflect solely continuing operations:

        All but nine of our facilities are leased. In addition, we lease our campus support center offices. Most of our leases have primary terms between 5 and 10 years with options to extend the lease, at our election.

Management and Employees

        Our company is led by Jack D. Massimino, Chairman of the Board and Chief Executive Officer. He is assisted by the other executive officers of the Company: Kenneth S. Ord, Beth A. Wilson, William B. Buchanan, Mark L. Pelesh, Stan A. Mortensen, Robert C. Owen, Robert D. Bosic and David A. Poldoian. In addition to the executive officers, our management team includes other senior vice presidents and vice presidents who provide supervision of various functional areas and the presidents of our operating divisions.

        As of June 30, 2011, we had approximately 16,600 employees in the U.S. and Canada, of whom approximately 5,450 were part-time and approximately 975 were employed at or assigned to our campus support center.

Faculty

        The faculty members at our colleges are industry professionals and hold appropriate credentials in their respective disciplines. The recruitment of faculty occurs at the campus level. Local leadership is charged with identifying and retaining faculty who possess the requisite academic and experiential qualifications to be successful in working with our students. Faculty are required and encouraged to

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pursue professional development activities to enhance their functional and classroom skills. We believe the skill and dedication of our faculty is critical to the academic and professional success of our students. As of June 30, 2011, we employed approximately 6,475 faculty in the United States and Canada, approximately 1,950 of whom were full-time employees. Faculty represents approximately 39% of our employees.

Available Information

        Free copies of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports may be obtained through our website at www.cci.edu, or by contacting our investor relations department after such reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). Our website address is provided solely for informational purposes. We do not intend, by this reference, that our website or any of the information contained therein should be deemed to be part of, or incorporated into, this Annual Report.

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EXECUTIVE OFFICERS OF THE REGISTRANT

        Set forth below are the name, ages, titles and present and past positions of the persons serving as executive officers of the Company as of August 24, 2011, as well as other "significant employees" of the Company as defined under Item 401(c) of Regulation S-K:

        Jack D. Massimino, served as Chairman of the Board from August 2008 through the present. He previously served as CEO of the company from November 2004 until July 2009, when he was named Executive Chairman of the Board. The board reappointed him CEO in November 2010. He has served on the board since 1999 and during his tenure, he has been the Chair of the Audit Committee and a member of the Compensation Committee. Prior to joining our company as Chief Executive Officer in 2004, Mr. Massimino was retired and managed his personal investment portfolio. Previously, he was President and Chief Executive Officer of Talbert Medical Management Corporation, a publicly traded physician practice management company from 1995 through late 1997. Prior to his association with Talbert, Mr. Massimino was Executive Vice President and Chief Operations Officer of FHP International Corporation, a multi-state, publicly-traded HMO, with revenues of approximately $4 billion at the time of his service. He also served in other executive positions after joining FHP in 1988, including Senior Vice President and Vice President, Corporate Development. Prior to such time, Mr. Massimino held other executive positions in the healthcare field starting in the mid-1970's. He received a Bachelor of Arts in Psychology from California Western University and earned a Master's Degree in Management from the American Graduate School for International Management.

        Robert D. Bosic, became Corinthian's Executive Vice President of Operations in January of 2011. Since June of 2009, Mr. Bosic served as Group and Division President for the West Division. He has been with Corinthian for five years and held the position of Regional Vice President of Operations for the Southwest Region of CSI before being promoted to General Manager in 2008, when the Everest West Division was created. In addition, Mr. Bosic has served as Campus President at Everest Houston Greenspoint. Prior to joining Corinthian, Mr. Bosic spent 10 years in proprietary education. He has held campus-level and regional management positions at both publicly traded and non-profit companies focused on at-risk adolescents. Mr. Bosic has a Bachelors of Science degree in Business from British American University, and Juris Doctorate from British American University.

        Kenneth S. Ord became our Executive Vice President and Chief Financial Officer in February 2005. He was named Chief Administrative Officer in December 2010. Mr. Ord brings more than 30 years of financial experience to his position from publicly traded companies in the healthcare, staffing services and automotive industries. Mr. Ord was the Chief Financial Officer at Alliance Imaging, Inc. from 1998 to 2004. Previously he was the Chief Financial Officer of Talbert Medical Management Corporation during 1997 and he was the Chief Financial Officer of FHP International Corporation from 1994 to 1997. Prior to his experience at FHP, Mr. Ord held several successively responsible positions at Kelly Services Inc, including Treasurer, Controller and Vice President Finance. He began his career at Ford

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Motor Company, working in various financial roles, ranging from financial controls to profit analysis. Mr. Ord holds a Master's in Business Administration from Brigham Young University.

        Beth A. Wilson has been employed by us since our inception in July 1995. She was promoted to Executive Vice President in July 2001 and oversees all operational support for accreditation and licensure, academic affairs and quality control, employer development and student outcomes, real estate, facilities and compliance. Previously, Ms. Wilson was Vice President of Operations from June 1998 to June 2001. Ms. Wilson was Regional Operations Director for Rhodes Colleges, Inc. from May 1997 to June 1998. From July 1995 to May 1997 she was Operations Director and Regional Operations Director for Corinthian Schools, Inc. Ms. Wilson was employed by National Education Centers, Inc. from 1991 to 1995, initially as Executive Director of its Capital Hill campus, then as Area Operations Manager. From 1990 to 1991, she was Vice President, Branch Operations for National College. She was employed by United Education and Software from 1984 to 1990, initially as Executive Director of a business school, then as Group Manager for four to fifteen locations and finally as Vice President, Administration. She was Scholarship Administrator for National University from 1982 to 1984 and Assistant Director of American Business College from 1976 to 1981. Additionally, between 1999 and 2003, and again starting in July 2008 to the present, Ms. Wilson has served as a Commissioner for ACCSC. Ms. Wilson earned a Master's of Business Administration from National University and a Bachelor of Arts degree from California State College, Sonoma.

        William B. Buchanan became our Executive Vice President of Marketing in July 2004. From 2003 to 2004, Mr. Buchanan was employed by Greenpoint Mortgage, where he directed all retail marketing, with responsibility for direct marketing, internet marketing, advertising and branch marketing. From 1995 to 2002, Mr. Buchanan was employed by Providian Financial Corporation where he progressed through several senior marketing roles, including Vice President of Platinum Marketing, Senior Vice President of New Account Business, and Executive Vice President of New Channel and Product Development. Mr. Buchanan received a Bachelor of Arts in Political Science from the University of California, Berkeley.

        Mark L. Pelesh became our Executive Vice President for Legislative and Regulatory Affairs in September 2003. Prior to joining our company, he was a partner in the firm of Drinker Biddle & Reath LLP in Washington, DC, where he was the head of the Education Law Group. His practice focused on federal and state laws and regulations and private accreditation requirements affecting postsecondary educational institutions. Prior to joining Drinker Biddle & Reath, Mr. Pelesh was a partner and associate in the firm of Cohn and Marks and an associate in the firm of Arnold & Porter, both of which are in Washington, DC. Mr. Pelesh received a Juris Doctorate degree from the Yale Law School in 1978 and a Bachelor of Arts degree with distinction and honors in History from Stanford University in 1975.

        Stan A. Mortensen has served as our Executive Vice President, General Counsel and Corporate Secretary since May 2009. Prior to his appointment as Executive Vice President, Mr. Mortensen served as our Senior Vice President, General Counsel and Corporate Secretary from August 2002, and as Vice President, General Counsel and Corporate Secretary starting in January 2000. Prior to that time, Mr. Mortensen was an attorney at the law firm of O'Melveny & Myers LLP from 1997 through 1999, where his practice focused on securities law, corporate finance, mergers and acquisitions, and general corporate matters. From 1994 through 1996, Mr. Mortensen was an attorney at the law firm of Robins, Kaplan, Miller & Ciresi, where his practice focused on commercial litigation. Mr. Mortensen received a Juris Doctorate and a Bachelor of Arts in Political Science from Brigham Young University.

        Robert C. Owen has served as our Executive Vice President and Chief Accounting Officer since July 2011. Prior to his appointment to Executive Vice President, Mr. Owen served as our Senior Vice President and Chief Accounting Officer since February 2005. He joined Corinthian in 2004 as Vice President and Controller, and has more than 20 years experience in industry and public accounting.

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Previously, he served as Vice President, Controller for Princess Cruise Lines and as Assistant Controller for Royal Caribbean Cruises Ltd. Mr. Owen began his career at Deloitte & Touche, where he spent 11 years in successively responsible positions, both in the U.S. and Canada. Mr. Owen earned a B.B.A. degree in accounting from Florida Atlantic University. He obtained his license as a Certified Public Accountant in Florida in 1985 and as a Chartered Accountant in Ontario, Canada in 1994.

        David A. Poldoian joined the Company in November 2004 as President and Chief Operating Officer of the Online Learning division. In February 2008, he became Corinthian's Executive Vice President and Chief Business Development Officer, before being named the company's Executive Vice President and Chief Compliance Officer in November 2010. In June 2011, Mr. Poldoian was named Executive Vice President, New Ventures. Prior to joining Corinthian, Mr. Poldoian spent nine years with the Anheuser-Busch Companies beginning in 1995, initially serving as the President of its Eagle Snacks, Inc. division and later reporting directly to Anheuser's Chairman and CEO. Mr. Poldoian was Vice President and Partner with Bain & Company, a strategy consulting firm, from 1986 to 1995. Mr. Poldoian completed a Bachelor of Arts degree at Tufts University, and earned a Master in Business Administration from Harvard Business School.

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GOVERNMENTAL REGULATIONS AND FINANCIAL AID

U.S. Regulations

        Students attending our schools in the U.S. finance their education through a combination of family contributions, individual resources (including earnings from full or part-time employment), federal financial aid programs, and loans from the Company or third parties.

        In connection with the receipt of federal financial aid by our students, we are subject to extensive regulation by governmental agencies and licensing and accrediting agencies. In particular, the Higher Education Act of 1965, as amended (the "HEA"), and the regulations issued thereunder by the Department of Education ("ED"), subject us to significant regulatory scrutiny in the form of numerous standards that schools must satisfy in order to participate in the various federal financial aid programs under Title IV of the HEA ("Title IV"). Under the HEA, regulatory authority is divided among each of the following components, which are referred to collectively as the "Triad": (i) the federal government, which acts through the ED; (ii) the accrediting agencies recognized by the ED; and (iii) state higher education regulatory bodies. Among other things, the HEA and ED regulations require each of our U.S. institutions to:

•

maintain a rate of default by its students on federally guaranteed loans that are below a specified rate;



•

limit the proportion of its revenue (on a cash basis) derived from the Title IV programs;



•

comply with certain financial responsibility and administrative capability standards;



•

prohibit the payment of certain incentives to personnel engaged in student recruiting, admissions activities or the award of financial aid; and



•

achieve prescribed completion and placement outcomes for short-term programs.

The regulations, standards and policies of the regulatory agencies frequently change, and changes in, or new interpretations of, applicable laws, regulations or standards could have material consequences for our accreditation, authorization to operate in various states, permissible activities, receipt of funds under Title IV programs and costs of doing business.

        The HEA is required to be reauthorized on a periodic basis, which most recently occurred in August 2008. The 2008 reauthorization of the HEA, called the Higher Education Opportunity Act ("HEOA"), made significant changes to the requirements governing the Title IV Programs, including changes that, among other things:

•

revised the calculation of "cohort default rates" regarding federally guaranteed student loans and the threshold rate at which sanctions will be imposed against an institution;



•

adjusted the types of revenue that an institution is deemed to have derived from Title IV Programs for purposes of complying with the "90/10 Rule," and modified the sanctions imposed on an institution that derives too much revenue from Title IV Programs;



•

Increased the annual maximum amount and availability of Pell grants;



•

regulated the relationship between institutions and lenders that make education loans;



•

increased the type and amount of information that an institution must disclose to current and prospective students and the public; and



•

increased the types of policies and practices that an institution must adopt and follow.

        In addition, the U.S. Congress can change the laws affecting Title IV Programs in the annual federal appropriations bills and other laws it enacts between the HEA reauthorizations. In May 2008,

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the U.S. Congress enacted the Ensuring Continued Access to Student Loans Act of 2008 ("Continued Access Act") which, among other things:

•

increased the annual and total amount of certain Title IV Program loans that students can receive;



•

expanded student eligibility for, and potentially increased the amount of funds available to fund grants under, certain Title IV Programs; and



•

expanded parent eligibility and created payment deferment options for parent loans under the Title IV Programs.

        In February 2009, the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009 ("American Recovery Act") which, among other things, further increased the annual amount of funds available to fund grants under the Pell program.

        If any of our institutions were to lose its eligibility to participate in federal student financial aid programs, the students at that institution would lose access to funds derived from those programs and would have to seek alternative sources of funds to pay their tuition and fees. Students in the U.S. obtain access to federal student financial aid through an ED-prescribed application and eligibility certification process. Student financial aid funds are generally made available to students at prescribed intervals throughout their predetermined expected length of study. Students typically use the funds received from the federal financial aid programs to pay their tuition and fees. The transfer of funds from the financial aid programs is to the students, who then apply those funds to the cost of their education. The receipt of funds from federal financial aid programs reduces the students' amount due to the institution, but does not affect the Company's revenue recognition.

        The ED regulations define an institution as a main campus and its additional locations, if any. As defined by the ED, our main campuses that have additional locations in the U.S. are as follows:

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Increased Scrutiny of the Private, Post-Secondary Education Sector

        Over the past two years, ED, Congress and accrediting agencies have increased their scrutiny and rulemaking focus on the private, post-secondary educational sector.

        On June 24, 2010, the Health, Education, Labor and Pensions Committee of the U.S. Senate (the "HELP Committee") held the first in a series of hearings to examine the proprietary education sector and released a report, "Emerging Risk : An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education." On August 4, 2010, the HELP Committee held the second hearing in its series, focusing on student recruitment at for-profit schools. Earlier, on June 21, 2010, the Chairmen of each of these education committees, together with other members of Congress, requested the Government Accountability Office ("GAO") to conduct a review and prepare a report with recommendations regarding various aspects of the proprietary sector, including recruitment practices, educational quality, student outcomes, the sufficiency of integrity safeguards

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against waste, fraud and abuse in federal student aid programs and the degree to which proprietary institutions' revenue is composed of Title IV and other federal funding sources. On September 30, 2010, the HELP Committee held another hearing entitled "The Federal Investment in For-Profit Education: Are Students Succeeding?" On March 10, 2011, the HELP Committee held another hearing entitled, "Bridgepoint Education, Inc.: A Case study in For-Profit Education and Oversight." On July, 21, 2011, Senator Harkin, Chairman of the Senate HELP Committee, convened a roundtable discussion entitled "Improving For-Profit Higher Education: A Roundtable Discussion of Policy Solutions" in which various private sector education companies and critics of the sector participated.

        Prior to the HELP Committee's hearing on August 4, 2010, the GAO conducted a series of undercover investigations into the enrollment and recruiting practices at fifteen for-profit institutions of higher education in which GAO investigators with hidden cameras posed as potential new student enrollees. We believe that two of our campuses, one of which was Everest College Phoenix ("ECP"), were among those visited by the GAO. At the HELP Committee hearing on August 4, 2010, the GAO provided testimony that characterized the interactions between our campus personnel and the GAO investigators as "deceptive or otherwise questionable." On November 30, 2010, the GAO reissued its testimony by making numerous edits and corrections to its previous report. On December 1, 2010, the day after the GAO reissued its report, the HELP Committee provided the Company with copies of redacted audio recordings of the undercover investigations at the Company's two campuses. After reviewing the audiotapes, the Company disagrees with the GAO's characterization of its interactions with the Company's personnel at the two campuses the GAO visited.

        On August 5, 2010, we received a request for information from the HELP Committee relating to the ongoing series of hearings. We believe this request was extended to approximately thirty proprietary educational companies, including all such publicly traded companies. The request sought information regarding how we recruit and enroll students, set program price or tuition, determine financial aid including private or institutional loans, track attendance, handle withdrawal of students and return of Title IV dollars and manage compliance with the 90/10 rule. The request also sought information regarding the number of students who complete or graduate from our programs, how many of those students find work in their educational area, the debt levels of students enrolling and completing programs and information regarding the number of students who risk default within the cohort default rate window. The HELP Committee also requested that we provide a broad spectrum of information about our business, including detailed information relating to financial results, management, operations, personnel, recruiting, enrollment, graduation, student withdrawals, receipt of Title IV Program funds, institutional accreditation, regulatory compliance and other matters. We have made numerous submissions in response to the HELP Committee's requests.

        Additionally, on August 12, 2010, the President of ECP received a letter from its accrediting agency, The Higher Learning Commission—A Commission of the North Central Association of Colleges and Schools ("HLC"), requesting a response to the allegations contained in the GAO report. In addition to seeking a response to the specific circumstances identified in the GAO report, HLC requested that ECP demonstrate that it has reasonable, sufficient, and effective systems in place to assure appropriate control of employees engaged in the recruiting, marketing or admissions process. ECP has responded to HLC's request. ECP has also received similar requests from several state education licensing agencies regarding the allegations in the GAO report and has cooperated with those requests.

        On February 28, 2011, ECP received another letter from HLC indicating that a committee of peer reviewers and HLC staff had reviewed the materials submitted and had concluded that ECP's response raised a number of questions about its oversight of recruiting, admissions and financial aid practices and the ability of those practices to serve students effectively while providing them with clear and

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accurate information. Accordingly, HLC provided a list of specific questions developed by the committee to be addressed by ECP. These questions relate to:

•

The nature of information provided to prospective students about enrollment agreements, financial aid, academic programs and employment outcomes;



•

the hiring and evaluation of admissions officers, and the implications of recruiting and admissions processes to the mission and strategic direction of the institution;



•

the hiring and evaluation of financial aid officers;



•

admission standards and processes;



•

retention and success of students;



•

the program review of ECP by the ED; and



•

general institutional data and information.

        ECP has submitted its response to HLC. HLC has indicated that the committee intends to meet with representatives of ECP to ask questions directly about these practices, and to issue a final report regarding its findings. The committee has indicated to ECP that there may be recommendations for corrective action to be monitored through HLC's monitoring processes.

        Since October 2010, the Company has been contacted by Attorneys General offices in the states of Florida, California, Massachusetts, New York and Oregon. Each of those states' attorneys general office has requested from the Company, either through subpoenas, civil investigative demands, or informal requests, an extensive range of documents regarding its business. In every state but California, we understand the attorneys general are conducting broad inquiries into private sector education companies in their respective states, and not solely into the Company. In California, the California Attorney General's Office has requested information ostensibly pursuant to the Stipulated Judgment agreed to by the Company in July 2007 to determine compliance by the Company with the judgment and certain other matters. The Company is cooperating with these requests.

        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 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 Company is cooperating with the OIG's request.

        We cannot predict the extent to which, or whether, these hearings, investigations and reviews will result in further adverse actions affecting our participation in Title IV Programs, our accreditation, or other aspects of our business. If any laws or regulations are adopted that limit our participation in Title IV Programs or the amount of student financial aid for which our students are eligible, or if adverse action is taken against us by any state or accrediting agency, our business could be adversely and materially impacted.

Federal Support for Post-Secondary Education in the U.S.

        The federal government provides substantial support for post-secondary education through grants and loans to students who can apply the funds received to pay for their educational costs at any institution certified by ED as eligible to participate in the federally funded student financial aid programs. Since 1972, Congress has expanded the scope of the HEA by, among other things,

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(i) providing that students attending proprietary institutions, such as our institutions, are eligible for assistance under the Title IV Programs, (ii) establishing a program for loans to parents of eligible students, (iii) opening the Title IV Programs to part-time students, and (iv) increasing maximum loan limits and in some cases eliminating the requirement that students demonstrate financial need to obtain federally guaranteed loans. The Federal Direct Loan Program ("FDL") was also enacted, enabling students to obtain loans directly from the federal government rather than from commercial lenders.

        Students at our U.S. institutions receive grants, loans and work opportunities to fund their education under several of the Title IV Programs, of which, prior to June 30, 2010, the two largest were the Federal Family Education Loan ("FFEL") program and the Federal Pell Grant ("Pell") program. Our institutions also participate in the Federal Supplemental Educational Opportunity Grant ("FSEOG") program, and some of them participate in the Federal Perkins loan program and the Federal Work-Study ("FWS") program.

        Most aid under the Title IV Programs is awarded on the basis of financial need, generally defined under the HEA as the difference between the cost of attending an educational institution and the amount a student can reasonably contribute to that cost. All recipients of Title IV Program funds must maintain both a satisfactory grade point average and progress in a timely manner toward completion of their program of study.

        FFEL AND FDL.    Prior to June 30, 2010, the FFEL program consisted of Stafford Loans, which are subsidized (the government pays the interest while the student is in school and during a six-month grace period) and unsubsidized, and PLUS loans, which are made available to parents of students classified as dependents. Under the William D. Ford Federal Direct Loan ("FDL") program, students may obtain loans directly from the ED rather than commercial lenders. The conditions on FDL loans are generally the same as on loans that were made under the FFEL program. Under the Stafford Loan program, during fiscal years 2010 and 2011, students may borrow up to $9,500 for the first academic year, $10,500 for the second academic year and, in some educational programs, $12,500 for each of the third and fourth academic years in subsidized loans. PLUS loans may be obtained by the parents of a dependent student in an amount not to exceed the difference between the total cost of that student's education (including allowable expenses) and other aid to which that student is entitled. Students who are classified as independent, and dependent students whose parents are unable to obtain PLUS loans, can increase their borrowing limits and receive additional unsubsidized Stafford loans. During fiscal years 2008 and 2009, students could obtain an additional $4,000 in unsubsidized loans for each of the first and second academic years and, depending upon the educational program, an additional $5,000 for each of the third and fourth academic years. Effective July 1, 2009, such students may obtain an additional $6,000 in unsubsidized loans for each of the first and second academic years, and an additional $7,000 for subsequent academic years. The obligation to begin repaying Stafford loans does not commence until six months after a student ceases enrollment as at least a half-time student. Amounts received by students in our institutions under the Stafford program in the 2010-2011 award year equaled approximately 55.1% of our U.S. net revenue (on a modified cash basis). Amounts received by students in our institutions under the PLUS program in the 2010-2011 award year equaled approximately 3.8% of our U.S. net revenue (on a modified cash basis).

        In March 2010, Congress passed, and the President signed, the Health Care and Education Reconciliation Act of 2010 (the "HCERA"). The HCERA eliminated the FFEL program in favor of the FDL program effective as of July 1, 2010. While our institutions and students have been eligible to participate in the FDL program, we have significantly more experience in participation in the FFEL program and the continuing transition to the FDL program for the majority of our students involves risks and uncertainty. Additionally, because HCERA eliminates the FFEL program, most private lenders have exited the student loan market and most private lenders remaining have been unwilling to make private loans to our students.

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        These changes may result in higher administrative costs for schools, including us, related to student loan administration. If the costs of Title IV loans increase and if availability of alternate student financial aid decreases, students may decide not to enroll in a postsecondary institution, which could have a material adverse effect on our enrollments, revenues, and results of operation. Any further actions by the Congress, ED or other regulatory bodies that significantly reduces funding for Title IV Programs or the ability of our students to participate in those program, reduces alternate sources of student financial aid, or establishes different or more stringent requirements for participation in Title IV Programs could have a material adverse effect on our student population, course offerings, financial condition, results of operations and cash flows.

        Pell.    Pell grants are the primary component of the Title IV Programs under which the ED makes grants to students who demonstrate financial need. Every eligible student is entitled to receive a Pell grant; there is no institutional allocation or limit. For the 2010-2011 award year, the maximum Pell grant increased to $5,550. Amounts received by students enrolled in our institutions in the 2010-2011 award year under the Pell program equaled approximately 28.9% of our U.S. net revenue (on a modified cash basis).

        FSEOG.    FSEOG awards are designed to supplement Pell grants for the neediest students. FSEOG grants generally range in amount from $100 to $4,000 per year; however, the availability of FSEOG awards is limited by the amount of those funds allocated to an institution under a formula that takes into account the size of the institution, its costs and the income levels of its students. We are required to make a 25% contribution to students for all FSEOG awards disbursed. Resources for this institutional contribution may include institutional grants, scholarships and other eligible funds (i.e., funds from foundations and other charitable organizations) and, in certain states, portions of state scholarships and grants. During the 2010-2011 award year, our contribution was met by approximately $2.0 million in funds from our institutions, funds from state scholarships and grants, and funds from foundations and other charitable organizations. Amounts received by students in our institutions under the federal share (including the FSEOG match) of the FSEOG programs in the 2010-2011 award year equaled approximately 0.6% of our U.S. net revenue (on a modified cash basis).

        Perkins.    Eligible undergraduate students may borrow up to $5,500 under the Perkins program during each award year, with repayment delayed until nine months after the borrower ceases to be enrolled on at least a half-time basis. Perkins loans are made available to those students who demonstrate a financial need. Perkins loans are made from a revolving account, 75% of which was initially capitalized by the ED. Subsequent federal capital contributions, with an institutional contribution of one-third of the federal contribution, may be received if an institution meets certain requirements. Each institution collects payments on Perkins loans from its former students and loans those funds to currently enrolled students. Collection and disbursement of Perkins loans is the responsibility of each participating institution. During the 2010-2011 award year, the amount of Perkins loan repaid by former students totaled approximately $2.8 million.

        In the 2010-2011 award year, we had no required matching contribution. The Perkins loans disbursed to students in our institutions in the 2010-2011 award year equaled approximately 0.1% of Our U.S. net revenue (on a modified cash basis). Congress proposes to make major changes to the Perkins program. We cannot predict whether these proposals will be enacted and if they will be beneficial to our students.

        FWS.    Under the FWS program, federal funds are made available to pay up to 75% of the cost of compensation for part-time employment of eligible students, based on their financial need, to perform work for the institution or for off-campus public or non-profit organizations. At least 7% of an institution's FWS allocation must be used to fund student employment in community service positions. FWS earnings are given directly to the student for their own discretionary use.

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Regulatory Oversight

        The HEA provides for a three-part regulatory framework, generally referred to as the Triad, to provide regulatory oversight of post-secondary education institutions. The first part of the Triad involves the standards to be applied by the ED in evaluating the financial responsibility and administrative capability of institutions participating in the Title IV Programs. In addition, the Triad mandates that the ED periodically review the eligibility and certification to participate in the Title IV Programs of every such eligible institution. By law, all institutions are required to undergo a recertification review at least every six years, although the ED may recertify an institution for a shorter time period. Under these standards, each of our U.S. institutions is evaluated by the ED on a routine basis. A denial of recertification would preclude an institution from continuing to participate in the Title IV Programs.

        The second part of the Triad consists of accrediting agencies which review and accredit our campuses. Their examinations pertain to such areas as student achievement, curriculum, faculty, facilities, equipment, admissions, financial responsibility and timeliness of student refunds. The Triad provisions also require each accrediting agency recognized by the ED to undergo comprehensive periodic reviews by the ED to ascertain whether such accrediting agency is adhering to required standards.

        The third part of the Triad involves approvals by state education agencies with jurisdiction over educational institutions. State requirements are important to an institution's eligibility to participate in the Title IV Programs since an institution must be licensed or otherwise authorized to operate in the state in which it offers education in order to be certified as eligible. The level of regulatory oversight varies substantially from state to state. State laws establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility and other operational matters. State laws and regulations may limit our ability to obtain authorization to operate in certain states, to award degrees or diplomas, or offer new degree programs. Certain states prescribe standards of financial responsibility that are different from those prescribed by the ED.

Recent ED Rulemaking

        In the fall of 2009, ED initiated the process of negotiated rulemaking to make changes to certain provisions of the ED regulations governing Title IV Programs. The negotiated rulemaking focused on 14 program integrity issues. On June 18 and July 26, 2010, the ED issued Notices of Proposed Rulemaking ("NPRMs") which addressed all 14 program integrity issues. On October 29, 2010, the ED issued final rules related to the June 18, 2010 NPRM and to the portion of the July 26, 2010 NPRM that established a notification and approval process for additional programs of study. Those final rules became effective, with minor exceptions, on July 1, 2011. The ED issued final rules on June 13, 2011 with respect to the remaining proposed rules in the July 26, 2010 NPRM, which become effective on July 1, 2012.

        The 14 "program integrity" issues are as follows:

•

Definition of High School Diploma for the Purpose of Establishing Institutional Eligibility to Participate in the Title IV Programs, and Student Eligibility to Receive Title IV Aid;



•

Ability to Benefit;



•

Misrepresentation of Information to Students and Prospective Students;



•

Incentive Compensation;



•

State Authorization as a Component of Institutional Eligibility;



•

Gainful Employment in a Recognized Occupation;



•

Definition of a Credit Hour;

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•

Agreements Between Institutions of Higher Education;



•

Verification of Information Included on Student Aid Applications;



•

Satisfactory Academic Progress;



•

Retaking Coursework;



•

Return of Title IV Funds: Term-based Programs with Modules or Compressed Courses;



•

Return of Title IV Funds: Taking Attendance; and



•

Disbursements of Title IV Funds.

Among the most significant of the final rules are:

•

the quantitative requirements that each of our programs of study must satisfy in order for ED to determine that the program of study provides training that leads to "gainful employment in a recognized occupation" (the "Gainful Employment Requirements");



•

the elimination of 12 safe harbors that set forth certain types of activities and payment arrangements (the "Safe Harbors") that an institution may carry out without violating the rules that prohibit payment of any commission, bonus or other incentive payment based directly or indirectly, in any part, 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 "Incentive Compensation Prohibition");



•

notifying the ED of, and possibly obtaining the ED's approval to offer, additional programs of study that lead to gainful employment;



•

determining when a program of study is required to measure student progress in clock hours;



•

the specifications of what constitutes acceptable authorization by a state for institutions to offer postsecondary programs of study in that state; and



•

significantly broadening institutional liability to the ED for "substantial misrepresentation" that would, among other things, subject institutions to sanctions for statements containing inadvertent errors made to non-students, including any member of the public, impose vicarious liability on institutions for the conduct of others, and expose institutions to liability when no actual harm occurs.

Gainful Employment Requirements

        On June 13, 2011, ED issued final regulations which become effective on July 1, 2012, that set out certain quantitative requirements for a program offered by a private sector educational institution to comply with the Gainful Employment Requirements. If any of our programs of study fails to satisfy the Gainful Employment Requirements for three out of four federal fiscal years ("FFYs"), that program would be deemed ineligible under the Title IV Programs. Students would be unable to obtain financial aid under the Title IV Programs to help pay their education costs associated with attending ineligible programs of study. A program of study will only satisfy the Gainful Employment Requirements, if:

•

the program's annual loan repayment rate, as defined and calculated by the ED, is at least 35%; or



•

the program's graduates' median annual loan payment, as calculated by the ED, is less than or equal to:



–

30% of discretionary income; or



–

12% of annual earnings.

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        With regard to the "repayment" criteria of the Gainful Employment Requirements, ED will generally measure borrowers in their third and fourth years of repayment. If there are 30 or fewer borrowers in this two-year measurement period, the period would be expanded to include borrowers in the third, fourth, fifth, and sixth years. If there are still 30 or fewer borrowers in this four-year period, the program is considered to pass the measure. Under the repayment criteria, a loan is considered a successful "payments-made loan" if:

•

its balance is reduced by at least $1.00 over the course of the year or paid off;



•

it has been paid off;



•

it is on track to being forgiven due to public service employment;



•

the borrower is making payments under an interest-only or income-based repayment plan, subject to "anti-abuse" limits; or



•

for graduate programs the loan is a consolidation loan and all interest accrued over the course of the year has been paid.

        With regard to the "debt to income" criteria of the Gainful Employment Requirements, the measurement will also generally be calculated during the third and fourth years of borrowers' repayment. Debt burden is calculated based upon the program's median graduate's debt, including private student loans. Annual payments are calculated based upon a 10-year amortization schedule for certificates and associate's degree programs, a 15-year amortization schedule for bachelor's and master's degree programs, and a 20-year amortization schedule for other graduate and professional programs. Debt incurred by students for living expenses during their enrollment is not counted. The Social Security Administration (the "SSA") will provide the median and mean earnings of program graduates, and institutions can verify the lists of individuals submitted to the SSA. However, the earnings data will be subject to SSA's protections on individual privacy, so institutions will be unable to verify whether any of the earnings data submitted by the SSA to ED is correct. There may be other limitations on SSA's ability to provide meaningful and accurate data to the ED.

        If a program's median graduate's annual loan payment as calculated by the ED using earnings data obtained from the SSA is greater than 30% of discretionary income and 12% of annual earnings, however, an institution may demonstrate that the program satisfies the annual loan payment requirements by recalculating the discretionary income and annual earnings percentages using alternative earnings from:

•

the Bureau of Labor Statistics ("BLS"), but for only FFYs 2012, 2013 and 2014;



•

an institutional survey conducted in accordance with standards of the National Center for Education Statistics; or



•

a state-sponsored data system.

        An institution may use BLS earnings data to recalculate the discretionary income and annual earnings percentages with respect to a program of study, only if the institution:

•

identifies and provides documentation to the ED of the occupation by Standard Occupational Classification ("SOC") code(s) issued by the BLS in which more than 50% of the students who completed the program during the applicable earlier FFYs were employed, and that number of students is more than 30;



•

uses the most current BLS earnings data at the 25th percentile for the identified SOC code (or the weighted average of that data for each SOC code, if more than one SOC code was identified); and

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•

submits to the ED, upon its request, all of the employment and other records that support the SOC code(s) identified with the occupations in which those students were employed.

        Depending on how the ED interprets and applies the Gainful Employment Requirements, if any of our programs fail the annual loan payment requirement using the Applicable Earnings from the SSA, we believe that the alternative BLS earnings may provide us with an opportunity to demonstrate that the program satisfies the annual loan payment requirement for FFYs 2012, 2013 and 2014. However, there can be no assurance that ED would interpret and apply its Gainful Employment Requirements in a manner that would make such alternative feasible, or that our programs would meet such standards.

        If a program of study fails to satisfy the Gainful Employment Requirements for:

•

one FFY, the institution must provide a warning to current and prospective students that explains the Gainful Employment Requirements, identifies the amount by which the program did not satisfy the Gainful Employment Requirements and describes the actions that the institution plans to take to improve the program's performance under the Gainful Employment Requirements (the "Debt Warning") and may not enroll a prospective student until three days after the Debt Warning is given to the prospective student;



•

two of the three most recently completed FFYs, the institution must:



–

provide the Debt Warning to current and prospective students;



–

prominently display the Debt Warning on its Website;



–

include the Debt Warning in all of its promotional materials; and



–

enhance the Debt Warning with additional information, including, without limitation:



•

the risks associated with enrolling or continuing in the program;



•

a timeline and options available to the students, if the institution plans to discontinue the program;



•

a statement that a student who enrolls or continues in the program should expect to have difficulty repaying his or her student loans; and



•

resources that are available to students to research other educational options and compare program costs; and



•

three out of four FFYs, the program of study becomes ineligible under the Title IV Programs.

        An institution may not seek to reestablish the eligibility of a program of study that becomes ineligible for failure to satisfy the Gainful Employment Requirements, or establish the eligibility of a substantially similar program of study, until the end of the third FFY following the FFY that the program of study became ineligible. A program of study would be considered to be substantially similar if it has the same credential level and first four digits of the Classification of Instructional Programs code, or CIP code, as that of the ineligible program. If an institution voluntarily discontinues a program of study that fails to satisfy the Gainful Employment Requirements for one or two consecutive FFYs, the institution may not seek to reestablish the eligibility of that program of study until the end of the second or third FFY following the FFY in which the institution notifies the ED that the institution is relinquishing Title IV Program eligibility for that program of study, depending on when the institution provides such notice to ED.

        There are many open questions and interpretive issues related to the Gainful Employment Requirements, including questions as to the ability of institutions to obtain and verify the information needed to calculate the applicable metrics, and legal challenges to ED's authority to promulgate the regulations. Due to the unavailability of data, we cannot predict with any certainty which or how many

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of our programs will fail to satisfy the Gainful Employment Requirements. In addition, the continuing eligibility of our programs of study under Title IV Programs are at risk under the Gainful Employment Requirements due to factors beyond our control, such as:

•

macroeconomic conditions affecting the employment of our graduates;



•

the financial condition of our students and their need for student loans to complete their programs;



•

the usage by our students of deferments and forbearances to comply with their loan obligations;



•

personal employment decisions made by our students;



•

changes in interest rates; and



•

ED's interpretations of the Gainful Employment Requirements.

        In addition, providing Debt Warnings to current and prospective students could have an adverse impact on their level of interest and enrollment in those programs of study.

        We cannot predict with certainty the impact that the Gainful Employment Requirements will have on our operations. The Gainful Employment Requirements have resulted in, and will likely continue to result in, significant changes to the programs of study that we offer, in order to comply with the requirements or to avoid the uncertainty associated with such compliance, such as offering programs at lower costs or in fields with higher earnings potential. The Gainful Employment Requirements will also put downward pressure on tuition prices, so that students do not incur debt that exceeds the levels required for a program to remain eligible under Title IV Programs. This could, in turn, increase the percentage of our revenue that is derived from Title IV Programs and, therefore, adversely impact our compliance with the 90/10 Rule. We may also have to limit enrollment in certain programs of study and/or substantially increase our efforts to promote student loan repayment. Any or all of these factors could reduce our enrollment and/or increase our cost of doing business, perhaps materially, which could have a material adverse effect on our business, prospects, financial condition, results of operations, cash flows and stock price.

Incentive Compensation Prohibition

        In the 1992 reauthorization of the HEA, Congress prohibited any institution that participates in Title IV programs from paying 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 "Incentive Compensation Prohibition"). In 2002, the ED promulgated twelve clarifying regulations—the "Safe Harbors"—that defined the scope of the Incentive Compensation Prohibition.

        On October 29, 2010, ED issued final regulations eliminating its previous "Safe Harbors," and adopted new regulations that take the position that any adjustment to compensation based directly or indirectly, in any part, on securing enrollments or awarding financial aid is inconsistent with the Incentive Compensation Prohibition in the HEA. As a result of the final regulations, which took effect July 1, 2011, we changed many of our evaluation and compensation practices for admissions representatives, financial aid representatives and certain other personnel who are engaged in admissions or financial aid activities. Notwithstanding our diligent efforts to comply with the Incentive Compensation Prohibition, there are many open questions and interpretive issues with respect to the final rules. We believe that the changes related to the Incentive Compensation Prohibition, including the elimination of the Safe Harbors, increased the uncertainty about what types of compensation are prohibited and which employees are covered by the prohibition, and may subject us to qui tam lawsuits for alleged violations of the False Claims Act. These changes could adversely affect our ability to

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compensate our employees in a manner that appropriately reflects their job performance, which, in turn, could reduce their effectiveness and make it more difficult to attract and retain qualified and competent personnel. The changes could also impair our ability to sustain and grow our business, which could have a material adverse effect on our results of operations and future growth.

ED Approvals for New Programs

        On October 29, 2010, ED issued final regulations requiring the Company to notify it, and possibly obtain ED's approval to offer, additional programs of study. These rules require a proprietary institution to notify ED at least 90 days in advance of starting classes in any new program of study. The notice must include, among other things, information with regard to:

•

how the institution determined that a need for the program existed;



•

how the program was designed to meet local market needs for programs delivered in residence, or regional or national market needs for programs delivered by distance education;



•

any wage analysis that the institution performed;



•

how the program was reviewed or approved by, or developed in conjunction with, business advisory committees, program integrity boards, public or private oversight or regulatory agencies and businesses that would likely employ graduates;



•

the inclusion of the program in the institution's accreditation;



•

the date that the institution plans to start classes in the program; and



•

how the program would be offered in connection with, or in response to, any applicable initiative by a governmental entity.

        The ED will review the notice submitted by the institution and advise it whether the new program of study must be approved by the ED. We do not know how the ED or if additional information is required for the ED to determine whether the program will be approved will apply its rules with respect to additional programs. If we are required to obtain approval from the ED for any new programs of study and are unable to obtain the ED's approval in a timely manner, our ability to offer the new program of study would be impaired, which could have a material adverse effect on our expansion plans, financial condition, results of operations and cash flows.

Clock Hours

        The final rules require that a program of study be considered a clock hour program for the purposes of Title IV Program funding when measuring student progress in clock hours is a requirement of receiving Federal or State approval to offer the program (except where such requirement applies only to a practicum, internship, or clinical experience component of the program), or completing clock hours is a requirement for graduates to apply for licensure or the authorization to practice the occupation that the student is intending to pursue. The scope of these final rules, particularly as applied to the manner by which programs of study are approved by various States, is unclear. Students attending credit hour programs of study that are required to be measured in clock hours will likely receive less funds from Title IV Programs to pay their cost of education with respect to those programs of study. Students interested in those programs of study may have to use more expensive private financing to pay their cost of education or may be unable to enroll in those programs of study. Students may determine that they do not qualify for private financing or that the private financing costs make borrowing too expensive, which may cause students to abandon or delay their education. Any or all of these factors could reduce our enrollment, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and stock price.

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State Authorization

        Also on October 29, 2010, the ED issued final regulations establishing new federal requirements with respect to whether or not a state's authorization of an educational institution is sufficient for that institution to participate in Title IV programs. These final regulations also require an institution offering distance education to students in states where it is not physically located to meet any state requirements for it to be legally offering postsecondary distance or correspondence education in that state, and to be able to document the state's approval of the institution to ED. As a result of these new regulations, certain of our campuses and distance education programs may be required to obtain additional or revised state authorizations to remain certified as eligible to participate in Title IV Programs. If we are unable to obtain additional or revised state authorizations, students at certain of our campuses, or certain of our students enrolled in distance education programs, may be unable to access Title IV Program funds, which could have a material adverse effect on our business, financial condition and results of operations.

        We cannot predict the extent to which the ED will determine that the institutional authorization or complaint review process of any state satisfies the ED's regulations. If any of our campuses were to lose its eligibility to participate in Title IV Programs because a state's institutional authorization and complaint process does not satisfy the ED's regulations, and we could not arrange for alternative financing sources for the students attending that campus, we might have to close that campus. Closing campuses could have a material adverse effect on our financial condition, results of operations and cash flows.

Other Regulations

        In addition to the program integrity issues specifically addressed above, the final regulations issued by ED on October 29, 2010 include provisions regarding the types of statements by an institution or parties related to an institution that constitute prohibited misrepresentation; written agreements between institutions, particularly institutions under common ownership or control; the administration of ability-to-benefit examinations; requirements regarding an institution's return of Title IV program funds; and certain other issues pertaining to a student's eligibility to receive Title IV program funds. We have modified many of our practices as a result of the final regulations issued on October 29, 2010. We cannot predict how all of the recently released regulations will be interpreted, and therefore whether we will be deemed to be in compliance with these requirements by regulators. Uncertainty surrounding the application of the final rules, interpretive regulations, and guidance from ED may continue for some period of time and could reduce our enrollment, increase our cost of doing business, and have a material adverse effect on our business, financial condition, results of operations and cash flows. We cannot predict with certainty the impact that the ED's new regulations will have on our operations. Compliance with these regulations could reduce our enrollment, increase our cost of doing business and have a material adverse effect on our business, financial condition, results of operations and cash flows.

Department of Education Oversight of the Title IV Programs in the United States

        The substantial amount of federal funds disbursed through the Title IV Programs, coupled with the large numbers of students and institutions participating in those programs, have led the U.S. Congress to require the ED to engage in a substantial level of regulatory oversight of institutions to ensure that public funds are properly used. Each institution which participates in the Title IV Programs must annually submit to the ED both an audit by an independent accounting firm of that institution's compliance with the Title IV Program requirements, and audited financial statements. The ED also conducts compliance reviews, which include on-site evaluations, and directs student loan guaranty agencies to conduct additional reviews relating to the FFEL programs. In addition, the Office of the Inspector General of the ED conducts audits and investigations of institutions in certain circumstances.

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Under the HEA, accrediting agencies and state licensing agencies also have responsibilities for overseeing institutions' compliance with Title IV Program requirements. As a result, each participating institution, including each of our U.S. institutions, is subject to frequent and detailed oversight and must comply with a complex framework of laws and regulations or risk being required to repay funds or becoming ineligible to participate in the Title IV Programs. In addition, the ED periodically revises its regulations and changes its interpretation of existing laws and regulations.

Cohort Default Rates

        A significant requirement imposed by Congress is a limitation on participation in the Title IV Programs by institutions whose former students defaulted on the repayment of federally guaranteed or funded student loans at an "excessive" rate ("Cohort Default Rates"). Many institutions, including all of our institutions within the U.S., have responded by implementing aggressive student loan default management programs aimed at reducing the likelihood of students failing to repay their federally guaranteed loans in a timely manner. Currently, an institution's Cohort Default Rates under the FFEL and FDL programs are calculated on an annual basis as the rate at which student borrowers scheduled to begin repayment on their loans in one federal fiscal year default on those loans by the end of the next federal fiscal year.

        Under the HEOA a separate calculation will be performed that will add an additional federal fiscal year of borrowers' repayment performance. An institution that participates in both the FFEL and FDL programs receives a single "weighted average" Cohort Default Rate in place of an FFEL or FDL Cohort Default Rate. Any institution whose Cohort Default Rate equals or exceeds 25% for any one of the three most recent federal fiscal years under the current method of calculation may be found by the ED to lack administrative capability, and on that basis, placed on provisional certification status for up to three years. Additionally, any such institution may be required by its accrediting agency to provide additional information or supplemental reports. Provisional certification status does not limit an institution's access to Title IV Program funds but does subject that institution to closer review by the ED and possible summary adverse action if that institution commits violations of the Title IV Program requirements. Provisional certification may also impede an institution's ability to grow by limiting its ability to add new programs and locations. Any institution whose Cohort Default Rates equal or exceed 25% for three consecutive years under the current calculation may lose eligibility to participate in the FDL and the Pell grant programs for the remainder of the federal fiscal year in which the ED determines that such institution has lost its eligibility and for the two subsequent federal fiscal years.

        Pursuant to the HEOA, this percentage will increase to 30% after three years of Cohort Default Rates calculated with the additional federal fiscal year are available, and then become applicable to the imposition of sanctions. In addition, an institution whose Cohort Default Rate for any federal fiscal year exceeds 40% may have its eligibility to participate in the FDL program limited, suspended or terminated. Since the calculation of Cohort Default Rates involves the collection of data from many non-governmental agencies (i.e., lenders, private guarantors or servicers), as well as the ED, the HEA provides a formal process for the review and appeal of the accuracy of Cohort Default Rates before the ED takes any action against an institution based on such rates.

        In order to improve our overall default rates, we have implemented a multi-faceted cohort default prevention program. This program includes the following: a contact management system to assist in reaching students who are no longer in school; an internal department focused primarily on early stage delinquencies; an expanded program of entrance and exit counseling and financial literacy training for current students; and the use of outside firms and internal resources to reach borrowers and assist them in contacting their lenders and getting help with alternatives to default, including income-based repayment, deferral and forbearance.

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        On an on-going basis, we monitor cohort repayment data, and we are currently monitoring the repayment and default status of the 2009, 2010, and 2011 Cohorts. The most recent data we have received regarding defaults from the 2010 Cohort is encouraging, but we do not expect to receive draft data for the 2010 Cohort until February 2012. Given the trend data now available, we believe that none of our institutions will exceed the 25% threshold under ED's two-year measurement methodology for three years in a row. For the 2010 Cohort, we do not expect any of our institutions to exceed the required 25% threshold. We believe that these positive trends are the result of three main factors: 1) our substantial investment in cohort default prevention over the past 18 months; 2) stabilization in the student lending environment; and 3) the increased participation of loan servicers in default management.

        The following table sets forth the final Cohort Default Rates for our institutions included within total operations of the Company as of June 30, 2011 in the U.S. for federal fiscal years 2006, 2007 and 2008, and the draft rates for 2009: