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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2013

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
(State or other jurisdiction of
Incorporation or organization)

  33-0717312
(I.R.S. Employer
Identification No.)

6 Hutton Centre Drive, Suite 400, Santa Ana, California
www.cci.edu
(Address of principal executive offices)

92707
(Zip Code)

(714) 427-3000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered

Common Stock, $0.0001 par value per share

  Nasdaq National Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

  Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

         If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         As of December 31, 2012, the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant was approximately $208.0 million, based upon the closing sales price of the Common Stock as reported on Nasdaq National Stock Market on such date. For this computation, the Company has excluded the market value of all common stock beneficially owned by all executive officers and directors of the Company and their associates as a group. This determination of affiliate status for purposes of this computation is not necessarily a conclusive determination for other purposes. As of August 22, 2013, the number of outstanding shares of voting and non-voting common equity of the registrant was approximately 86,421,952.

   


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CORINTHIAN COLLEGES, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 2013

 
   
  Page No.  

 

INTRODUCTION AND NOTE ON FORWARD-LOOKING STATEMENTS

    1  

 

EXPLANATORY NOTE

    1  

 

DOCUMENTS INCORPORATED BY REFERENCE

    2  

PART I

 

ITEM 1.

 

BUSINESS

    2  

ITEM 1A.

 

RISK FACTORS

    40  

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

    59  

ITEM 2.

 

PROPERTIES

    59  

ITEM 3.

 

LEGAL PROCEEDINGS

    60  

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    60  

PART II

 

ITEM 5.

 

MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

    60  

ITEM 6.

 

SELECTED FINANCIAL DATA

    64  

ITEM 7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    65  

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    82  

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    83  

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    138  

ITEM 9A.

 

CONTROLS AND PROCEDURES

    138  

ITEM 9B.

 

OTHER INFORMATION

    140  

PART III

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

    140  

ITEM 11.

 

EXECUTIVE COMPENSATION

    140  

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

    140  

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

    140  

ITEM 14.

 

PRINCIPAL ACCOUNTING FEES AND SERVICES

    140  

PART IV

 

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    140  

 

SIGNATURES

    146  

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INTRODUCTION AND NOTE ON FORWARD LOOKING STATEMENTS

        Corinthian Colleges, Inc. (hereinafter the "Company" or "Corinthian") is a Delaware corporation; its principal executive offices are located at 6 Hutton Centre Drive, Suite 400, Santa Ana, California 92707.

        You should keep in mind the following points as you read this Report on Form 10-K:

        This Annual Report on Form 10-K contains statements which, to the extent they do not recite historical fact, constitute "forward looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are used under the captions "Business," "Governmental Regulations and Financial Aid," "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Annual Report on Form 10-K. You can identify these statements by the use of words like "may," "will," "could," "should," "project," "believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential," "intend," "continue," and variations of these words or comparable words. Forward looking statements do not guarantee future performance and involve risks and uncertainties. Actual results may differ substantially from the results that the forward-looking statements suggest for various reasons, including those discussed under the caption "Risk Factors." These forward-looking statements are made only as of the date of this Annual Report on Form 10-K. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.


EXPLANATORY NOTE

        During fiscal year 2013, the Company completed the teach-out of its Arlington, VA; Decatur, GA; Milwaukee, WI; Hialeah, FL; London, Ontario (Canada) and Thunder Bay, Ontario (Canada) campuses.

        Additionally, in fiscal year 2013, the Company completed the sale of the four Everest schools located in San Francisco, CA; San Jose, CA; Hayward, CA; and Los Angeles, CA (the "CA Sale Schools") (See Note 6—Business Acquisitions and Dispositions for further details). The CA Sale Schools were put into discontinued operations in fiscal year 2012.

        During fiscal year 2012, the Company announced that the two WyoTech schools located in Sacramento, CA and Daytona Beach, FL were available for sale. As of June 30, 2013, the campuses were not sold. As a result of the lack of acceptable offers, the Company decided to continue operations in Daytona Beach, FL, and the Company taught-out the Sacramento, CA campus.

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        The Company had no significant continuing involvement with these locations after the respective sale or teach-outs were completed. The results of operations for the sale or teach-out schools are reflected within discontinued operations in the Company's Consolidated Statements of Operations for all periods presented, unless otherwise stated. Daytona Beach, FL results are reflected within continuing operations in the Company's Consolidated Statements of Operations for all periods presented, unless otherwise stated.

        During fiscal year 2012, the Company completed the teach-out of the Ft. Lauderdale, FL and Chicago, IL campuses. Accordingly, the results of operations of these campuses are reflected within discontinued operations in the Company's Consolidated Statements of Operations for all periods presented, unless otherwise stated.

        During fiscal year 2011, the Company completed the teach-out of its Fife, WA and Toronto (Central), Ontario campuses. Accordingly, the results of operations of these campuses are reflected as discontinued operations in our Consolidated Statements of Operations for all periods presented, unless otherwise stated.

        The information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.


DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Company's definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after June 30, 2013, are incorporated by reference into Part III of this report.


PART I

ITEM 1.    BUSINESS

        Our Company is one of the largest for-profit post-secondary education companies in the United States and Canada, serving the large segment of the population seeking to acquire career-oriented education. As of June 30, 2013, we had a student enrollment of 81,284 and operated 97 schools in 25 states, and 14 schools in the province of Ontario, Canada. We offer a variety of diploma programs and associate, bachelor's and master's degrees through a single operating segment (refer to Note 1 of the accompanying consolidated financial statements for more information). Our training program areas include healthcare, criminal justice, business, mechanical, trades, and information technology.

        On January 4, 2010 the Company completed its acquisition of Heald Capital, LLC, a Delaware limited liability company ("Heald") for consideration of $395 million. Heald, through its subsidiaries, operates Heald College, a regionally accredited institution that prepares students for careers in healthcare, business, legal, information technology and other growing fields, primarily through associate degree programs. Heald College operates 12 campuses and its results are included in the Consolidated Financial Statements from the date of acquisition.

        Historically, we have grown our business through acquisitions as well as through organic growth. Organic growth consists of opening new branch campuses, remodeling, expanding or relocating existing campuses and expanding the number of programs at existing campuses. Since the Company's formation in 1995, we have acquired 76 colleges including the Heald acquisition and we have opened 35 branch campuses (net of closures, discontinued operations, and consolidations).

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        Key elements of our operating strategy include the following:

        Emphasize Student Outcomes.    We believe that helping our students achieve positive outcomes is best for the student, and critical to our long-term success. Accordingly, we devote substantial resources to maintaining and improving student completion and placement rates. We have implemented a variety of student service programs, including orientation and tutoring, academic advising, ride-sharing and referral programs, all of which are designed to help students complete their programs, graduate and achieve their career goals. We use a curriculum development team comprised of campus representatives, corporate program directors, instructional design professionals, and textbook publishers. For each program area, each campus also uses advisory boards comprised of local business professionals to help ensure that its curricula meet employer requirements. We also maintain full-time career services personnel at our schools who are responsible for helping our students and graduates obtain employment. The career services department identifies prospective employers, helps students prepare resumes, conducts practice interviews, establishes externship programs and tracks graduate placement success. We have also implemented a student preparedness program that is designed to teach students the soft skills they will need to portray themselves as professional and responsible in job interview and workplace settings.

        Create an Effective Learning Environment.    We seek to provide a supportive learning environment where student satisfaction and success can be achieved. We offer a flexible schedule of classes, providing students with the opportunity to attend classes throughout the day, as well as nights and weekends. Schools operate year-round, permitting students to complete their courses of study quickly. We maintain reasonable class sizes and offer support programs such as on-campus advising and tutoring. We also maintain a toll-free student hotline to address and help resolve student concerns.

        Focus on Attractive Markets.    Our schools offer educational programs in industries which are growing and offer promising career opportunities, including healthcare, criminal justice, business, mechanical, trades, and information technology (IT). Our geographic strategy is to build a strong competitive position in attractive and growing markets where we can operate efficiently and benefit from favorable demographic and labor market trends.

        Manage School and Program Performance.    We routinely review our schools in terms of student outcomes and financial and operational performance. When a school falls below standard and is not expected to achieve satisfactory performance within a reasonable period of time, we either teach-out (close) the school or put the school up for sale. In fiscal 2013, we identified four under-performing campuses that have been taught out. In addition, we regularly review programs offered at our campuses and online to ensure that our student completion and graduate placement standards are being met. Programs are taught out which do not meet outcomes standards and do not have a reasonable expectation of improvement.

        Standardize Key Business Processes.    To help ensure operational efficiency and a consistent student experience across our system of campuses, we are currently standardizing key business processes. Thus far, we have implemented a common student information system (CampusVue), a standard admissions and student finance process and we have brought in-house certain financial aid processing and cohort default prevention functions that have historically been performed by external vendors.

        Centralize Key Functions.    In order to capitalize on the experience of our senior management team and to encourage best practices, we have established a divisional management organization consisting of local school administrators, regional vice presidents of operations and admissions, and division presidents. Local and divisional operations are supported by centralized functions supervised by senior management at our campus support center.

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        Local school administrators retain control of the day-to-day operations of their individual schools. Local school administrators are assisted by and receive oversight from regional vice presidents and division presidents and their respective support teams. The campus support center management team controls key operational functions such as curriculum development, accreditation and licensing, accounting, information technology, student financial services management, marketing, staff training, call centers, legal, treasury, internal audit, human resources, payroll, purchasing, public relations, government affairs and real estate. We believe the allocation of responsibilities between the field operations and the campus support center allows us to achieve significant operating efficiencies.

        Our growth strategy consists of the following elements:

        Integrated and Centralized Marketing Program.    We employ an integrated marketing program that includes direct response advertising delivered through the Internet, television, newspaper, and direct mail. A professional staff at our campus support center manages the overall marketing program. The effectiveness of our marketing campaigns depends on timely and accurate tracking analysis and processing of inquiries from potential students.

        Launching New Programs.    During fiscal 2012 we developed several new diploma-level programs in the disciplines of healthcare, criminal justice, business and IT. We based our selection of new programs on several factors, including the student value proposition, current and projected labor market demand, facility capacity and operational capabilities. In fiscal 2013 we implemented 68 programs at 31 schools. We expect to continue the implementation of these programs in fiscal 2014 and beyond.

        Maximizing Core Programs.    We maximize the adoption of core curricula across our network of schools in such disciplines as healthcare, trades, criminal justice, and business. We have developed detailed, campus-based plans that take into account each school's program mix, facility capacity and current and projected employer needs. In fiscal 2013, we implemented 20 core programs at 14 schools.

        Facilities Enhancement and Expansion.    We believe that modern and attractive facilities enhance the overall student learning experience. We remodel, expand and relocate our existing schools to ensure we have sufficient capacity to meet our expected enrollment demand, as well as to improve the location and appearance of our facilities. We expect to continue to systematically remodel and relocate selected schools within their respective markets. During fiscal 2013 we remodeled, relocated, or expanded 51 schools. As of June 30, 2013, the total square footage of all of our properties was approximately 5.3 million square feet.

        Since our initial public offering in February 1999, we have opened 43 branch campuses, of which 35 remain a part of our operations. Opening new branch campuses allows us to enter new geographic markets, create additional capacity in existing markets and effectively leverage our infrastructure and our investment in curricula. In addition, students attending new campuses which are branched from existing campuses have immediate access to federal student financial aid programs. During fiscal 2013, we opened no branch campuses. We expect to open additional branch campuses over time, as warranted by market and other conditions.

        Online education, or education delivered via the Internet, has become an increasingly important component of higher education. We offer online learning to two categories of students: those attending

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online classes exclusively, and those attending a blend of traditional classroom and online courses. The majority of our students participating in online learning are now registered in exclusively online programs.

        We enroll exclusively online students through our Florida-based Everest University and our regionally-accredited Everest College Phoenix in Arizona. Online degree programs are offered in business, criminal justice, criminal investigations, accounting, computer information science, and paralegal. In total, 19 accredited degrees are available exclusively online at the associate, bachelor's, and master's levels.

        Our online learning participation increased by approximately 11.6% to 477,700 course registrations in fiscal 2013. As of June 30, 2013, we offered 333 online courses. We served approximately 27,740 exclusively online students as of June 30, 2013.

        Since our founding in 1995, acquisitions have been part of our growth strategy. Of the 111 campuses operated as of June 30, 2013, 76 colleges have been acquired (net of closures, consolidations, or locations sold). To evaluate acquisition opportunities, we have established several criteria, such as scale, geography, program offerings, accreditation and selected financial measurements.

        In August 2012, Corinthian, through a wholly-owned subsidiary, purchased substantially all of the capital stock of QuickStart Intelligence Corporation ("QuickStart") pursuant to a Stock Purchase Agreement with all but one of QuickStart's stockholders for $13.3 million in cash, plus $1.6 million for QuickStart's positive working capital at closing. The Company completed the acquisition of QuickStart's remaining capital stock through a statutory merger with one of Corinthian's wholly-owned subsidiaries during the quarter ended September 30, 2012. Corinthian paid the purchase price with existing cash and borrowings under its credit facility.

        QuickStart is a corporate training company that provides short-term instruction to IT professionals in Microsoft, Cisco and other software. We adopted QuickStart's courses into certain of our existing colleges to provide additional sources of non-Title IV revenue to assist in compliance with ED's 90/10 rule.

        We expect to continue pursuing strategic acquisitions as part of our growth strategy. In addition to acquisition-related activity, we have developed an in-house capability to pursue other business development opportunities. In particular, we are focused on developing other federal sources of revenue outside of Title IV. Such sources include programs sponsored by the Department of Defense and the Department of Labor.

        Our diploma programs are intended to provide students with the requisite knowledge and job skills for entry-level positions in their chosen career. Our degree programs are primarily designed to assist career-oriented adults in enhancing their functional and professional skills. Our curriculum development team is responsible for maintaining high quality, market driven curricula. Our colleges also use employer advisory boards to help evaluate and improve the curriculum for each program offered. These advisory boards are required to meet at least twice a year and are comprised of local industry and business professionals. Advisory board members provide valuable insight regarding changes in programs and suggest new technologies and other factors that may enhance curriculum.

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        Our diploma curricula includes the following core programs: medical assisting, medical insurance billing and coding, massage therapy, dental assisting, pharmacy technician, medical administrative assisting, surgical technology, automotive and diesel technology, HVAC, plumbing, electrical, and licensed practical nursing. Our core degree curriculum includes business administration, accounting, paralegal, criminal justice, medical assisting, and registered nursing. At our Everest locations in Florida, Phoenix, AZ, Mesa, AZ, Springfield, MO and Ontario Metro, CA, some of our associate degree programs also articulate into a bachelor's degree in the same course of study. Master's degrees are also offered at Everest Florida in business administration and criminal justice.

        Diploma programs are generally designed to have a duration of approximately 8-12 months, depending on the course of study. Associate degree programs are generally designed to have a duration of approximately 24-28 months, bachelor's degree programs are generally designed to have a duration of approximately 48 months and master's degree programs are generally designed to have a duration of approximately 21 months. As of June 30, 2013, approximately 39% of our students were enrolled in diploma programs, approximately 55% of students were enrolled in associate programs, approximately 5% of students were in bachelor's programs and approximately 1% of students were in master's programs.

        Additionally, we expect our acquisition of QuickStart to help our colleges adopt short-term courses (generally one week or less) targeted to IT professionals to prepare them to receive industry-recognized credentials and certifications.

        The following table reflects our schools, locations, date acquired or opened, principal curricula, institutional accrediting agency, and square footage as of June 30, 2013. In the table below, programs offered are designated as follows: healthcare (HC), business (B), information technology and electronics (IT), criminal justice (CJ), trades and transportation (T), and other miscellaneous programs (OTH)(1).

U.S. Schools and Colleges
  Date
Acquired/Opened
  Principal Curricula   Accrediting
Agency
  Square
Footage
 

Everest College, Alhambra, CA

    1/1/1996   B, HC   ACCSC(4)     42,200  

Everest College, Anaheim, CA

    7/1/1995   CJ, HC   ACCSC     35,300  

Everest College, Arlington (Mid Cities), TX

    6/9/2003   B, CJ, HC   ACICS(3)     51,500  

Everest College, Atlanta (Greenbriar), GA

    11/15/2010   HC, B, CJ   ACCSC     43,200  

Everest College, Aurora, CO

    10/1/1996   B, CJ, HC   ACICS     33,000  

Everest College, Bedford Park, IL

    1/26/2011   HC   ACCSC     40,800  

Everest College, Bremerton, WA

    8/4/2003   B, HC   ACICS     19,000  

Everest College, Burr Ridge, IL

    7/2/2002   HC   ACCSC     29,500  

Everest College, Chesapeake, VA

    3/1/1999   B, HC, CJ   ACICS     39,300  

Everest College, City of Industry, CA

    10/1/2000   B, CJ, HC   ACCSC     39,400  

Everest College, Colorado Springs, CO

    10/1/1996   B, CJ, HC, IT, OTH   ACICS     30,500  

Everest College, Dallas, TX

    2/3/2003   B, CJ, HC   ACICS     45,800  

Everest College, Everett, WA

    8/4/2003   HC   ACICS     30,100  

Everest College, Fort Worth, TX

    8/24/2004   B, CJ, HC   ACICS     41,900  

Everest College, Fort Worth (South), TX

    3/22/2010   HC   ACICS     40,900  

Everest College, Gardena, CA

    1/1/1996   HC   ACCSC     32,600  

Everest College, Henderson, NV

    10/1/1996   HC, B, CJ   ACICS     46,500  

Everest College, Kansas City, MO

    1/27/2012   HC   ACICS     45,400  

Everest College, Melrose Park, IL

    2/24/2011   HC   ACCSC     43,000  

Everest College, Merrillville, IN

    2/1/2001   B, HC   ACCSC     48,100  

Everest College, Merrionette Park, IL

    10/19/2005   HC   ACICS     42,000  

Everest College Phoenix, Mesa, AZ

    11/15/2005   B, CJ, HC   HLC/NCA(5)     22,000  

Everest College, Newport News, VA

    10/1/1995   B, CJ, HC   ACICS     16,200  

Everest College, North Aurora, IL

    2/1/2005   B, HC, T   ACCSC     40,400  

Everest College, Ontario Metro, CA

    1/1/2001   B, CJ, HC   ACICS     40,800  

Everest College, Ontario, CA

    10/1/2000   B, HC   ACCSC     34,000  

Everest College Phoenix, Phoenix, AZ

    6/1/2000   B, CJ, HC   HLC/NCA     40,200  

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U.S. Schools and Colleges
  Date
Acquired/Opened
  Principal Curricula   Accrediting
Agency
  Square
Footage
 

Everest College, Portland, OR

    10/1/1996   B, CJ, HC, IT, OTH   ACICS     36,600  

Everest College, Renton, WA

    7/1/1996   HC   ACCSC     34,900  

Everest College, Reseda, CA

    7/1/1995   HC   ACCSC     38,700  

Everest College, Salt Lake City, UT

    10/1/1996   HC, B, IT, CJ   ACICS     40,100  

Everest College, San Bernardino, CA

    7/1/1995   HC, B, CJ, T   ACICS     40,451  

Everest College, Santa Ana, CA

    9/20/2010   HC, B, CJ   ACICS     37,100  

Everest College, Seattle, WA

    8/4/2003   HC   ACICS     19,300  

Everest College, Skokie, IL

    5/1/2001   HC, B   ACCSC     36,100  

Everest College, Springfield, MO

    10/1/1996   HC, B, IT, CJ   ACICS     26,400  

Everest College, St. Louis, MO

    3/31/2005   HC, B   ACICS     40,000  

Everest College, Tacoma, WA

    8/4/2003   HC   ACICS     50,600  

Everest College, Thornton, CO(2)

    10/1/1996   HC, B, CJ   ACICS     25,900  

Everest College, Torrance, CA

    1/1/2000   HC   ACCSC     7,700  

Everest College, Tyson's Corner, VA

    6/2/2004   B, CJ, HC   ACICS     26,300  

Everest College, Vancouver, WA

    10/1/1996   HC, B, CJ, OTH   ACICS     32,800  

Everest College, West Los Angeles, CA

    10/1/2000   HC, CJ   ACCSC     31,300  

Everest College, Woodbridge, VA

    8/23/2012   HC   ACICS     35,400  

Everest Institute, Austin, TX

    10/2/2002   HC, T   ACCSC     51,900  

Everest Institute, Bensalem PA

    8/23/2011   HC   ACICS     42,500  

Everest Institute, Brighton, MA

    1/1/1996   HC   ACCSC     26,000  

Everest Institute, Chelsea, MA

    3/30/2004   HC   ACCSC     26,500  

Everest Institute, Columbus, OH

    9/7/2004   HC, B   ACCSC     28,300  

Everest Institute, Cross Lanes, WV

    7/1/1995   HC, IT   ACCSC     26,800  

Everest Institute, Dearborn, MI

    3/1/2001   HC   ACCSC     36,300  

Everest Institute, Detroit, MI

    12/23/2003   HC   ACCSC     24,400  

Everest Institute, Eagan, MN

    6/17/2004   HC   ACCSC     23,700  

Everest Institute, Grand Rapids, MI

    2/2/2001   HC, B   ACCSC     34,800  

Everest Institute, Houston (Bissonnet), TX

    6/30/2004   HC, IT, T   ACCSC     53,800  

Everest Institute, Houston (Greenspoint), TX

    1/1/2000   HC   ACCSC     27,600  

Everest Institute, Houston (Hobby), TX

    12/1/2001   HC   ACCSC     30,700  

Everest Institute, Jonesboro, GA

    4/1/2000   HC   ACCSC     30,100  

Everest Institute, Kalamazoo, MI

    2/1/2001   HC, B   ACCSC     28,400  

Everest Institute, Kendall, FL

    4/1/2002   HC, CJ, B   ACICS     33,000  

Everest Institute, Marietta, GA

    4/1/2000   HC   ACCSC     24,700  

Everest Institute, Miami, FL

    4/1/2002   HC, CJ, B   ACICS     47,100  

Everest Institute, Norcross, GA

    3/31/2003   HC   ACCSC     35,700  

Everest Institute, Pittsburgh, PA

    10/1/1996   HC, B, CJ, OTH   ACICS     39,100  

Everest Institute, Rochester, NY

    10/1/1996   B, IT, CJ, HC, OTH   ACICS     34,700  

Everest Institute, San Antonio, TX

    7/1/1995   HC, OTH, T   ACCSC     60,200  

Everest Institute, Silver Spring, MD

    2/8/2005   HC   ACICS     30,800  

Everest Institute, South Plainfield, NJ

    12/13/2005   HC   ACCSC     35,000  

Everest Institute, Southfield, MI

    1/1/1996   HC, IT   ACCSC     51,400  

Everest Institute, Tigard, OR

    8/4/2003   HC   ACICS     20,600  

Everest University, Brandon, FL

    10/1/1996   HC, B, IT, CJ   ACICS     49,400  

Everest University, Jacksonville, FL

    7/1/2000   HC, B, CJ   ACICS     47,600  

Everest University, Lakeland, FL

    10/1/1996   HC, B, IT, CJ   ACICS     30,400  

Everest University, Largo, FL

    10/1/1996   HC, B, IT, CJ   ACICS     41,200  

Everest University, Melbourne, FL(2)

    10/1/1996   HC, B, IT, CJ   ACICS     36,000  

Everest University, Orange Park-Jacksonville, FL

    3/3/2004   HC, B, CJ, T   ACICS     46,500  

Everest University, Orlando (North), FL

    10/1/1996   HC, B, IT, CJ, OTH   ACICS     55,300  

Everest University, Orlando (South), FL

    10/1/1996   HC, B, IT, CJ   ACICS     59,900  

Everest University, Pompano Beach, FL

    10/1/1996   HC, B, IT, CJ, OTH   ACICS     53,100  

Everest University, Tampa, FL(2)

    10/1/1996   HC, B, IT, CJ, T   ACICS     58,200  

WyoTech, Blairsville, PA(2)

    7/1/2002   T   ACCSC     261,200  

Wyotech, Daytona Beach, FL

    8/4/2004   T   ACCSC     92,400  

WyoTech, Fremont, CA

    8/7/2003   T   ACCSC     125,000  

WyoTech, Laramie, WY

    7/1/2002   T   ACCSC     397,100  

WyoTech, Long Beach, CA

    10/1/2000   T, HC   ACCSC     92,400  

Heald College, Concord, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.(6)     66,000  

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U.S. Schools and Colleges
  Date
Acquired/Opened
  Principal Curricula   Accrediting
Agency
  Square
Footage
 

Heald College, Fresno, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     59,200  

Heald College, Hayward, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     58,000  

Heald College, Modesto, CA

    10/27/2010   HC, B, IT, CJ, OTH   WASC Sr.     33,400  

Heald College, Rancho Cordova, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     52,100  

Heald College, Roseville, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     50,000  

Heald College, Salinas, CA

    1/4/2010   HC, B, CJ, OTH   WASC Sr.     37,900  

Heald College, San Francisco, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     51,800  

Heald College, Milpitas, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     55,400  

Heald College, Stockton, CA

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     47,800  

Heald College, Honolulu, HI

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     57,100  

Heald College, Portland, OR

    1/4/2010   HC, B, IT, CJ, OTH   WASC Sr.     39,600  

Campus Support Center Offices

                     

Santa Ana, CA

                  200,200  

Gulfport, MS

                  7,200  

Tampa (Online), FL

                  114,600  

Tampa (Student Finance), FL

                  14,500  

Tampa (Regional), FL

                  5,800  

Tempe (Online), AZ

                  65,600  

Washington, DC

                  3,200  

San Francisco, CA

                  17,300  

Colorado Springs (Online), CO

                  93,600  

New locations as of June 30, 2013 (unoccupied)

                     

Sacramento (Heald Online), CA

                  26,300  
                     

Total Square Footage for U.S. Properties

                  5,079,651  

 

Canadian Schools and Colleges
  Opened/
Acquired
  Principal Curricula   Accrediting
Agency
  Square
Footage
 

Everest College of Business, Technology and Health Care, Barrie, Ontario

  8/19/2003   HC, B, CJ, IT   ACICS     14,300  

Everest College of Business, Technology and Health Care, Brampton, Ontario

  8/19/2003   HC, B, CJ, IT, OTH   ACICS     16,500  

Everest College of Business, Technology and Health Care, College Park, Ontario

  8/19/2003   HC, OTH   ACICS     29,000  

Everest College of Business, Technology and Health Care, Hamilton (Mountain), Ontario

  8/19/2003   HC, CJ   ACICS     18,500  

Everest College of Business, Technology and Health Care, Hamilton (City Center), Ontario

  8/19/2003   B, HC, IT, CJ   ACICS     7,800  

Everest College of Business, Technology and Health Care, Kitchener, Ontario

  8/19/2003   B, HC, CJ, IT   ACICS     12,600  

Everest College of Business, Technology and Health Care, Mississauga, Ontario

  8/19/2003   HC, B, IT, CJ, OTH   ACICS     30,400  

Everest College of Business, Technology and Health Care, Newmarket, Ontario

  8/19/2003   HC, B, CJ, IT   ACICS     15,400  

Everest College of Business, Technology and Health Care, North York Ontario

  8/19/2003   HC, B, CJ, OTH   ACICS     18,000  

Everest College of Business, Technology and Health Care, Ottawa (West-Nepean), Ontario

  8/19/2003   HC, B, IT, CJ   ACICS     17,500  

Everest College of Business, Technology and Health Care, Ottawa (East), Ontario

  8/19/2003   HC, B, IT, CJ   ACICS     32,800  

Everest College of Business, Technology and Health Care, Scarborough, Ontario

  8/19/2003   HC, B, IT, CJ   ACICS     21,700  

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Canadian Schools and Colleges
  Opened/
Acquired
  Principal Curricula   Accrediting
Agency
  Square
Footage
 

Everest College of Business, Technology and Health Care, Sudbury, Ontario

  8/19/2003   B, HC, CJ, IT   ACICS     14,700  

Everest College of Business, Technology and Health Care, Windsor, Ontario

  8/19/2003   HC, B, CJ, IT   ACICS     12,400  

Everest College Canada Campus Support Center

  8/19/2003             5,400  
                   

Total Square Footage for Canadian Properties

                267,000  
                   

Total Square Footage for All Properties

                5,346,651  
                   

(1)
OTH means "Other" and includes programs such as travel and hospitality, video/film production, and other miscellaneous programs.

(2)
Indicates owned properties.

(3)
Accrediting Council for Independent Colleges and Schools.

(4)
Accrediting Commission of Career Schools and Colleges.

(5)
The Higher Learning Commission—A Commission of the North Central Association of Colleges and Schools.

(6)
The Senior College and University Commission of the Western Association of Schools and Colleges (WASC Sr.). On June 24th, 2013, ED approved WASC Sr. as the primary accreditor for Heald College. From July 3, 2012, when Heald College was granted initial accreditation by WASC Sr., to June 24, 2013, Heald College operated under dual accreditation along with the Accrediting Commission of Community and Junior Colleges of WASC (ACCJC).

        We employ a variety of methods to attract prospective students who will benefit from our programs and achieve success in their chosen careers. In fiscal 2013, we spent approximately $177.7 million or 11% of total revenue on advertising. The methods include a variety of direct response marketing techniques to generate inquiries from potential students. Our marketing department generated approximately 3.3 million inquiries in the United States and Canada in fiscal 2013, primarily through the Internet, television, direct mail, newspaper, and yellow pages. The effectiveness of these marketing campaigns is dependent upon timely and accurate tracking, analysis and processing of inquiries.

        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 and content for advertisements depending on our needs and the effectiveness of the particular advertisements. In fiscal 2013 approximately 58% of our new student enrollments were generated through the Internet; 19% were generated through referrals; 7% through television, newspaper and yellow pages; 1% were generated through direct mail; and 15% were generated through a variety of other methods.

        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 developed by the Company, WyoTech is a well-established brand in automotive training, and Heald is a

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well-established brand with a long operating history in Northern California, Oregon and Hawaii. As of June 30, 2013, 94 out of 111 schools were operating under the Everest brand, 5 schools were operating under the WyoTech brand, and 12 schools were operating under the Heald brand.

        As of June 30, 2013, we employed approximately 1,919 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 that help us promote compliance with both government regulations and our corporate policies.

        We view assisting our students to find employment after graduation as crucial to acheiving our mission of changing our students' lives. We maintain a career services department at each school, and, as of June 30, 2013, employed approximately 750 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 in preparing resumes, help them to develop a professional demeanor and other soft skills that are important in the workplace, conduct practice interview sessions, and identify prospective employers for 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. Our career services personnel at each campus attempt to obtain employment verification documentation from employers or graduates. Additionally, a team at the campus support center conducts a verification process to assist in confirming the accuracy of the placement information gathered by our campuses by attempting to contact employers by telephone, and, if the employers cannot be reached, by attempting to contact the graduates themselves.

        Based on information received from employers and graduates, and the verification process described above, we believe that approximately 69% of our graduates in calendar year 2012 who were available for placement have been placed in a job for which they were trained by June 30, 2013. This percentage is calculated using the standards that our various accreditors require, subject to certain interpretive judgments discussed below and the adjustments necessary to report on a calendar year basis. For our Heald College and Everest College Phoenix campuses, whose regional accreditors do not require the colleges to maintain minimum placement standards, we reference the standards of one of our national accrediting agencies to calculate their respective placement rates for purposes of our own assessments.

        In calculating our placement percentage, the determination of whether an individual graduate has been placed in a job for which he or she trained is not always clear for reasons beyond job verification alone. For instance, our various accrediting agencies use different definitions for the concept of "placement" and "available for placement" and some of those definitions are imprecise. In addition, we have excluded from the calculation of students available for placement and the graduate placement rate

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those 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 United States after graduation, where the applicable accrediting agency excludes these categories of graduates in defining the graduate cohort group.

        Tuition rates for our programs depend on the nature and length of the program. The chart below shows average tuition in fiscal 2013 for selected categories:

        Diplomas:

        In addition to tuition, students may be required to purchase textbooks and other supplies as part of their educational programs. We adjust tuition based on the market conditions at our individual schools. More detailed tuition information can be found, by program, on each school's website.

        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 and institutional refund policies.

        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 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:

        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

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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, career service success, student satisfaction, compliance, new student inquires, 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 institutions to ensure they are able to provide a sound educational program. In furtherance of that mission, each board of trustees develops policies appropriate to the needs of the institution and works closely with their respective administrations to, among other things, establish a climate for articulating and promoting the educational vision of the institutions.

        The post-secondary education market in the United States, consisting of approximately 7,200 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 3,400 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 private non-profit institutions is often equal to or higher than the tuition charged at our colleges.

        We compete in most markets with other institutions offering similar programs. We believe our supportive learning environment, smaller class sizes, national scale, 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 substantial number of graduates who are working in the community and validate the quality of the colleges' programs.

        Our campus support center office is located in Santa Ana, California and our 111 campuses, as of June 30, 2013, are located in 25 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 2009 through fiscal 2013, approximately 7% of the campuses have been relocated and substantially all campuses have been either expanded or remodeled. The following table reflects the number of campuses added and the number of campuses that have been relocated, enlarged or

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remodeled during each of the last five fiscal years ended June 30 and has been updated to reflect solely continuing operations:

 
  2013(1)   2012(1)   2011(1)   2010   2009  

Opened

                               

Acquired

                11      

Branched

    1     2     5     1      

Campuses at year end

    111     110     108     103     91  

Relocated

        1     1     1     5  

Enlarged or remodeled

    13     7     6     11     3  

(1)
In fiscal 2013, we moved 6 schools into discontinued operations by teaching them out, and completed the sale of 4 schools that we had put into discontinued operations in fiscal 2012. In fiscal 2012, we moved 6 schools into discontinued operations by making the decision to sell them and discontinued operations at two additional campuses by teaching them out. Of the 6 schools we decided to sell in 2012, we sold only 4, closed another and decided to retain the last, resulting in an aggregate of 5 schools presented into discontinued operations in fiscal 2012.

        All but 4 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.

        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, Stan A. Mortensen, Robert C. Owen and Robert D. Bosic. 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, 2013, we had approximately 15,200 employees in the U.S. and Canada, of whom approximately 5,100 were part-time and approximately 1,000 were employed at or assigned to our campus support center.

        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 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, 2013, we employed approximately 6,000 faculty in the United States and Canada, approximately 1,700 of whom were full-time employees. Faculty represents approximately 39% of our total employees.

        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

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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.


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 21, 2013, as well as other "significant employees" of the Company as defined under Item 401(c) of Regulation S-K:

Names
  Ages   Positions

Jack D. Massimino

    64   Chairman of the Board and Chief Executive Officer

Kenneth S. Ord

    67   Executive Vice President and Chief Administrative Officer

Robert D. Bosic

    48   Executive Vice President, Operations

Beth A. Wilson

    61   Executive Vice President

William B. Buchanan

    47   Executive Vice President, Marketing

Stan A. Mortensen

    46   Executive Vice President, General Counsel and Corporate Secretary

Robert C. Owen

    52   Executive Vice President and Chief Financial Officer

        Jack D. Massimino has served as Chairman of the Board from August 2008 through the present. He 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-1970s. 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.

        Kenneth S. Ord became our Chief Administrative Officer in December 2010. Mr. Ord served as Executive Vice President and Chief Financial Officer from February 2005 until September 2011. 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 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.

        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 eight years and held the position of Regional Vice President of Operations for the Southwest Region 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

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held campus-level and regional management positions at both publicly traded and non-profit companies focused on at-risk adolescents. Mr. Bosic has a Bachelor's of Science degree in Business from British American University, and Juris Doctorate from British American 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 Capitol 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 from July 2008 to June 2012, Ms. Wilson 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.

        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 Financial Officer since September 2011. Prior to his appointment to Chief Financial Officer, Mr. Owen 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 25 years' experience in industry and public accounting. 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.

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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 payment plans with the Company and/or loans from 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 ED; (ii) the accrediting agencies recognized by ED; and (iii) state higher education regulatory bodies. Among other things, the HEA and ED regulations require each of our U.S. institutions to:

        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:

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

        In February 2009, the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009 ("American Recovery Act") that, among other things, further increased the annual amount of funds available to fund grants under the Pell program. In December 2011, the Consolidated Appropriations Act, 2012, was enacted, which eliminated the eligibility of students who lack a high school diploma or its equivalent to receive Title IV Program funds, and also changed the manner in which Pell Grants are calculated.

        If any of our institutions were to lose eligibility to participate in federal student financial aid programs, the students at that institution would lose access to funds 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.

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

Main Campus(1)
  Additional Locations
Everest College, Seattle, WA   Everest College, Woodbridge, VA
    Everest College, Tigard, OR
    Everest College, Bensalem, PA
Everest College, Alhambra, CA   Everest College, Bedford Park, IL
    Everest Institute, Chelsea, MA
Everest College, Bremerton, WA   Everest College, Everett, WA
    Everest College, Tacoma, WA
    Everest College, St. Louis, MO
Everest College, Colorado Springs, CO   Everest College, McLean, VA
    Everest College, Fort Worth (South), TX
    Everest College, Santa Ana, CA
Everest College, Gardena, CA   Everest Institute, Norcross, GA
Everest College, Ontario, CA   Everest Institute, Columbus, OH
    Everest Institute, Jonesboro, GA
Everest College Phoenix, Phoenix, AZ   Everest College Phoenix, Mesa, AZ
Everest College, Portland, OR   Everest College, Vancouver, WA
    Everest College, Dallas, TX

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Main Campus(1)
  Additional Locations
    Everest Institute, Silver Springs, MD
Everest College, Renton, WA   Everest Institute, Houston (Bissonnet), TX
Everest College, Reseda, CA   Everest Institute, Atlanta (Greenbriar), GA
    Everest Institute, Marietta, GA
Everest College, Salt Lake City, UT   Everest College, Fort Worth, TX
Everest College, Skokie, IL   Everest College, Burr Ridge, IL
    Everest College, Melrose Park, IL
Everest College, Springfield, MO   Everest College, Ontario Metro, CA
Everest College, Thornton, CO   Everest College, Aurora, CO
Everest Institute, Brighton, MA   Everest College, North Aurora, IL
Everest Institute, Cross Lanes, WV   Everest Institute, Eagan, MN
Everest Institute, Grand Rapids, MI   Everest Institute, Kalamazoo, MI
    Everest College, Merrillville, IN
Everest Institute, Newport News, VA   Everest Institute, Chesapeake, VA
Everest Institute, Rochester, NY   Everest College, Arlington (Mid-Cities), TX
Everest Institute, San Antonio, TX   Everest Institute, Houston (Greenspoint), TX
    Everest Institute, Houston (Hobby), TX
Everest Institute, Southfield, MI   Everest Institute, South Plainfield, NJ
    Everest Institute, Dearborn, MI
    Everest Institute, Detroit, MI
    Everest Institute, Austin, TX
Everest University, Largo, FL   Everest University, Lakeland, FL
    Everest University, Jacksonville, FL
Everest University, Orlando (North), FL   Everest University, Melbourne, FL
    Everest University, Orlando (South), FL
Everest University, Pompano Beach, FL   Everest College, Merrionette Park, IL
    Everest College, Kansas City, MO
Everest University, Tampa, FL   Everest University, Brandon, FL
    Everest University, Orange Park, FL
Heald College, San Francisco, CA   Heald College, Concord, CA
    Heald College, Fresno, CA
    Heald College, Hayward, CA
    Heald College, Modesto, CA
    Heald College, Rancho Cordova, CA
    Heald College, Roseville, CA
    Heald College, Salinas, CA
    Heald College, Milpitas, CA
    Heald College, Stockton, CA
    Heald College, Honolulu, HI
    Heald College, Portland, OR
WyoTech, Laramie, WY   WyoTech, Blairsville, PA
WyoTech, Long Beach, CA   Everest College, City of Industry, CA
    Everest College, West Los Angeles, CA

(1)
The above list includes only those main campuses which have one or more branch locations.

        In June 2013, ED approved the merger of Heald's nine OPEIDs into a single OPEID, with Heald, San Francisco as the main and each of the other campuses as an additional location. Additionally, since January 2012 we have been working with ED, ACICS and numerous state regulators on a project to consolidate 6 additional OPEIDs into another OPEID. We received approval or acknowledgment for

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the consolidation from the requisite state regulators and ACICS in 2012, and submitted the application for consolidation to ED in May 2012. That application is still pending. If approved, this consolidation would simplify and centralize some of our reporting and compliance efforts, including a more unified accreditation schedule, fewer Title IV compliance audits, and simplified reporting obligations for these campuses. In addition, one of our objectives has been to blend institutions that have a higher percentage of funds derived from Title IV programs with other institutions that have a lower percentage of funds derived from Title IV programs. We believe this would help all of the combined institutions continue to comply with the 90/10 Rule and continue providing educational opportunities to all of their students. The planned consolidation, however, also entails certain risks, and would require us to place an even greater emphasis on our Title IV compliance, since a larger number of our campuses would be evaluated as a single institution and the continued Title IV eligibility of those campuses would depend on their compliance as a single institution.

        Although we would like to complete this consolidation as soon as possible, there is a risk that the consolidation will not be approved by ED. If ED approves the consolidation, and a material compliance issue is subsequently identified, there could be an adverse impact on the consolidated institution.

Increased Scrutiny of the Private, Post-Secondary Education Sector

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

        On July 30, 2012, Chairman Tom Harkin and the Majority Staff of the Senate Health, Education, Labor, and Pensions Committee (the "HELP Committee") released a report, "For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success." While stating that for-profit colleges and universities have an important role to play in higher education and should be well-equipped to meet the needs of non-traditional students who now constitute the majority of the postsecondary educational population, the report was highly critical of these institutions. The report contended that these institutions have a high cost of attendance, engage in aggressive and deceptive recruiting, have high drop-out rates, provide insufficient student support services, and are responsible for high levels of student debt and loan defaults, among other things. The report called for increased disclosure of information about student outcomes at for-profit colleges and universities, prohibiting institutions from using federal financial aid funding to market, advertise and recruit, amending the 90/10 Rule to prohibit these institutions from receiving more than 85 percent of their revenues from federal funds, to prohibit the use of mandatory binding arbitration clauses in enrollment agreements, and other measures ostensibly to protect students and taxpayers. The report was a culmination of a series of hearings held by Chairman Harkin before the HELP Committee since June 24, 2010.

        Additionally, since October 2010 the Company has been contacted by attorneys general offices in the states of Florida, California, Massachusetts, New York, Illinois, Wisconsin and Minnesota. Each of those states' attorneys general office has requested from the Company, either through subpoenas, civil investigative demands, or informal requests, extensive documents regarding our business. In most of these states, we understand the attorneys general have been conducting broad inquiries into private sector education companies in their respective states, and not solely into the Company. We and other companies in the private education sector have also received civil investigative demands and subpoenas from the Consumer Financial Protection Bureau (the "CFPB") and the SEC regarding certain aspects of our business.

        We cannot predict the extent to which the Harkin report and these investigations will result in further investigations, legislation, rulemaking or other adverse actions affecting our participation in Title IV Programs 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

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are eligible or which otherwise materially change the way in which we do business, or if any material sanctions are proposed as a result of any of the investigations and reviews being conducted, 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, (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 the two largest are the Federal Direct Lending ("FDL") 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.

        Federal Student and Parent Loans.    ED's most significant forms of aid include loans to students and their parents through the FDL Program. FDL loans are made directly by the U.S. Government to students or their parents. The FDL program offers Federal Stafford, Federal Parent PLUS, Federal Grad PLUS and Federal Consolidation Loans. Prior to July 1, 2010, students attending Title IV eligible institutions could generally utilize loans made under the Federal Family Education Loan ("FFEL") Program in addition to FDL. The FFEL Program was eliminated in March 2010, and, after June 30, 2010 Stafford and PLUS Loans may only be made through the FDL program.

        Federal Stafford Loans ("Stafford Loans"), which may either be subsidized or unsubsidized, are loans made to our students directly from the federal government through the FDL program. Students who have demonstrated financial need may be eligible to receive a subsidized Stafford Loan, with ED paying the interest on this loan while the student is enrolled at least half-time in school and during the first six months after leaving school. Students who do not demonstrate financial need may be eligible to receive an unsubsidized Stafford Loan. The student is responsible for the interest on an unsubsidized Stafford Loan while in school and after leaving school. Students who are eligible for a subsidized Stafford Loan may also be eligible to receive an unsubsidized Stafford Loan. 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 loans. The obligation to begin repaying federal 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 Loan programs in the 2012-2013 award year equaled approximately

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52.3% of our U.S. net revenue (on a cash basis). Amounts received by students in our institutions under the PLUS program in 2012-2013 award year equaled approximately 2.2% of our U.S. net revenue (on a cash basis).

        Pell.    Pell grants are the primary component of the Title IV Programs under which 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. Amounts received by students enrolled in our institutions in the 2012-2013 award year under the Pell program equaled approximately 28.0% of our U.S. net revenue (on a cash basis).

        On December 23, 2011, President Obama signed into law the Consolidated Appropriations Act, 2012 (Public Law 112-74) (the "Appropriations Act"). The Appropriations Act amended the HEA to reduce the income threshold for an automatic zero "expected family contribution" to $23,000 for the 2012-2013 award year for both dependent and independent students. The threshold for 2012-2013 was scheduled to be $32,000, but now is $23,000. For students whose families make between $23,000 and $32,000 per year, this has decreased the amount of Pell grants such students receive.

        The Appropriations Act also amended the HEA to reduce the duration of a student's eligibility to receive a federal Pell Grant from 18 semesters (or its equivalent) to 12 semesters (or its equivalent). This provision applies to all federal Pell Grant eligible students effective with the 2012-13 award year. This may eliminate the ability of some of our students to continue to receive Pell Grants, depending on their prior receipt of Pell Grants from our institutions and from other institutions prior to enrolling in our schools.

        FSEOG.    FSEOG awards are designed to supplement Pell grants for the neediest students. 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 2012-2013 award year, our contribution was met by approximately $2.8 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 2012-2013 award year equaled approximately 0.7% of our U.S. net revenue (on a cash basis).

        Perkins.    Perkins loans are made available to those students who demonstrate a financial need from a revolving account, 75% of which was initially capitalized by 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 2012-2013 award year, the amount of Perkins loan repaid by former students totaled approximately $2.3 million.

        In the 2012-2013 award year we had no required matching contribution. The Perkins loans disbursed to students in our institutions in the 2012-2013 award year equaled approximately 0.1% of our U.S. net revenue (on a 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

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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.

Regulatory Oversight

        A three-part regulatory framework, generally referred to as the Triad, provides regulatory oversight of post-secondary education institutions. The first part of the Triad involves the standards applied by ED in evaluating the financial responsibility and administrative capability of institutions participating in the Title IV Programs. In addition, ED periodically reviews 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 ED may recertify an institution for a shorter time period. Under these standards, each of our U.S. institutions is evaluated by 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 institutions. Their examinations pertain to such areas as student achievement, curriculum, faculty, facilities, equipment, admissions, financial responsibility and timeliness of student refunds. ED also requires each accrediting agency recognized by ED to undergo comprehensive periodic reviews by 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 ED.

ED Rulemaking

        The agencies that regulate our U.S. schools, including ED, periodically revise their requirements and modify their interpretations of existing requirements. From 2009-11, the U.S. Department of Education ("ED") proposed and adopted changes to its regulations on the following subjects relating to Title IV Program Integrity: (i) 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; (ii) Ability to Benefit; (iii) Misrepresentation of Information to Students and Prospective Students; (iv) Incentive Compensation; (v) State Authorization as a Component of Institutional Eligibility; (vi) Gainful Employment in a Recognized Occupation; (vii) Definition of a Credit Hour; (viii) Agreements Between Institutions of Higher Education; (ix) Verification of Information Included on Student Aid Applications; (x) Satisfactory Academic Progress; (xi) Retaking Coursework; (xii) Return of Title IV Funds: Term-based Programs with Modules or Compressed Courses; (xiii) Return of Title IV Funds: Taking Attendance; and (xiv) Disbursements of Title IV Funds. On October 29, 2010, ED published final rules on all 14 Title IV Program Integrity issues, with the exception of the final regulation establishing specific metrics to define "gainful employment." ED published final rules on the "gainful employment metrics" on June 13, 2011. We refer to the rules adopted by ED in 2010 and 2011 as the Program Integrity Regulations.

        Although the gainful employment requirements were scheduled to go into effect July 1, 2012, the U.S. District Court for the District of Columbia issued a decision on June 30, 2012 in a case captioned Association of Private Sector Colleges and Universities v. Duncan (the "APSCU case") that vacated most

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of the gainful employment requirements and remanded those regulations to ED for further action. On July 6, 2012, ED issued an electronic announcement acknowledging that the Court had vacated the quantitative gainful employment requirements (the repayment rate and debt to income measures) that would have gone into effect on July 1, 2012. ED also noted that institutions are not required to comply with related regulations relating to gainful employment reporting requirements and adding new educational programs, but are required to comply with requirements to disclose certain information about educational programs.

        After the Court vacated the gainful employment requirements (except for the disclosure requirements), the final Program Integrity Regulations that could have the most significant potential impact on our business are the following:

        Under the HEOA, proprietary schools are eligible to participate in Title IV programs in respect of educational programs that lead to "gainful employment in a recognized occupation." On June 13, 2011, ED issued final Program Integrity Regulations which were to have 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. As noted above, most of those regulations were vacated in the APSCU case.

        The Court in the APSCU case did, however, leave the gainful employment disclosure requirements in place. These rules require proprietary postsecondary institutions to provide prospective students with each eligible program's recognized occupations, cost, completion rate, job placement rate and median loan debt of program completers beginning July 1, 2011. These disclosures have increased our administrative burdens and costs and could impact student enrollment. They could also result in increased litigation or arbitration claims and expenses if current or former students or regulatory authorities claim the disclosures are not accurate.

        In April 2013, ED announced a new negotiated rulemaking, scheduled for September and October 2013, which includes gainful employment as a topic for possible new regulations. ED held four public hearings in 2013 to solicit input from the public and has selected negotiators for the rulemaking session. If new regulations go into effect which are substantially similar to the rules vacated by the District Court in the APSCU litigation, certain of our programs may be unable to maintain eligibility to enroll students receiving Title IV funds or have restrictions placed upon program offerings as a result of not meeting prescribed metrics. If we are not able to offset the loss of any of our programs, the loss of students could have a material adverse effect on our student population, business, financial condition, results of operations and cash flows.

        A school participating in Title IV programs may not pay any commission, bonus or other incentive payments to any person involved in student recruitment or admissions or awarding of Title IV program funds, if such payments are based directly or indirectly on success in enrolling students or obtaining

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student financial aid. The statutory language of this prohibition does not establish clear criteria for compliance in all circumstances, but between 2002 and June 30, 2011 there were twelve "safe harbors" that defined specific types of compensation that were deemed not to constitute impermissible incentive compensation. Until June 30, 2011, the Company relied on several of these safe harbors to ensure that our compensation and recruitment practices comply with the statutory prohibition. On October 29, 2010, ED issued final regulations that eliminated all twelve safe harbors, and in lieu of the safe harbors, took the position that any adjustment to compensation based directly or indirectly on securing enrollments or awarding financial aid—even adjustments to base salaries—is inconsistent with the incentive payment prohibition in the HEA. The final rule further expands the prohibition to individuals who have "responsibility for" recruitment or admission of students or making decisions about awarding Title IV program funds. ED states that an institution still will be able to make merit-based adjustments to employee compensation, but will not be permitted to consider or base compensation decisions directly or indirectly, in any part, on success in securing student enrollments, the award of financial aid, or institutional goals based on that success. As a result of the final regulations, which took effect July 1, 2011, we changed our evaluation and compensation practices for admissions and financial aid representatives and certain other employees. This could adversely affect our ability to compensate our admissions and financial aid representatives and other 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.

        In addition, a lack of certainty could increase the risk of future Federal False Claims Act qui tam lawsuits in which private plaintiffs assert that our compensation practices violate the incentive compensation rules and, therefore, that our receipt of Title IV funds constitutes a false claim. We have been the subject of at least three such qui tam lawsuits relating to our compensation practices, all of which that have been unsealed were initially dismissed at the district court level. The relator in one of the dismissed cases, the Lee case, appealed to the U.S. Ninth Circuit Court of Appeals, which reversed the district court's dismissal on August 8, 2011, and remanded the case to the district to permit the relators to amend their complaint. On December 15, 2011, the first amended Lee complaint was filed in U.S. District Court alleging violations of the False Claims Act, 31 U.S.C. § 3729 against the Company, Ernst & Young LLC, David Moore and Jack Massimino. The Company moved the U.S. District Court to dismiss the amended Lee complaint, and, on April 12, 2013, the District Court dismissed with prejudice the action in its entirety. The relators have appealed the dismissal to the U.S. Ninth Circuit Court of Appeal.

        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 programs of study that are now required to be measured in clock hours may receive less funds from Title IV Programs to pay their cost of education. 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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        Under the ED Program Integrity Regulations which were issued October 29, 2010 and became effective July 1, 2011, for an institution to be eligible to participate in the Title IV programs it must not only be authorized by a state, but that state's law must meet minimum requirements established by ED. These minimum requirements include a satisfactory process for resolving complaints and an adequate state approval process. These rules were set to go into effect on July 1, 2013. However, in May 2013, ED announced a further delay until July 1, 2014 of the implementation of the state authorization regulations when an institution's state authorization does not meet the requirements by the implementation date of July 1, 2013. ED provided this further extension to qualifying institutions because several states notified ED that they needed additional time to develop or complete processes in order for some institutions to be able to comply with the state authorization provisions in the Program Integrity Regulations. To receive a further extension, an institution must obtain from the state an explanation of how an additional one-year extension will permit the state to modify its procedures to comply with ED's requirements.

        If when these rules become fully effective any of our locations are unable to obtain state regulatory approval in a manner that satisfies ED's regulations, our business would be adversely impacted. The manner in which ED's regulations will apply to our institutions, and the impact of such regulation on our business, is uncertain. If we are unable to operate in any state in which we derive significant revenue in a manner that would preserve Title IV eligibility for our students, our business would be materially and adversely impacted.

        In addition, the program integrity regulations concerning state authorization formerly required, among other things, that an institution offering distance learning or online programs secure the approval of those states which require such approval and provide evidence of such approval to ED upon request. On July 12, 2011, the U.S. District Court for the District of Columbia struck down those portions of the Program Integrity Regulations requiring proof of state approval for online education programs on procedural grounds, and that ruling was later upheld on appeal. However, the courts also ruled that ED may elect to re-introduce this rule, and in April 2013, ED indicated that it will initiate a rulemaking process to do so.

        In addition to the issues specifically addressed above, the final Program Integrity 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 Program Integrity 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 an extended period of time. We cannot predict with certainty the impact that ED's new regulations will have on our operations. Uncertainty regarding, and 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.

        In April 2013 ED announced a new negotiated rulemaking which includes gainful employment as a topic for possible new regulations. ED held four public hearings in 2013 to solicit input from the public and has selected negotiators for the rulemaking session. The negotiating sessions are scheduled for September and October 2013. If new regulations go into effect which are similar to the rules vacated by

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the District Court in the APSCU litigation, certain of our programs may be unable to maintain eligibility to enroll students receiving Title IV funds or have restrictions placed upon program offerings as a result of not meeting prescribed metrics. If we are not able to offset the loss of any of our programs, the loss of students could have a material adverse effect on our student population, 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 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 ED both an audit by an independent accounting firm of that institution's compliance with the Title IV Program requirements, and audited financial statements. 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 ED conducts audits and investigations of institutions in certain circumstances. 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, ED periodically revises its regulations and changes its interpretation of existing laws and regulations.

        A significant requirement imposed by Congress is a limitation on participation in the Title IV Programs by institutions whose former students default on the repayment of federal student loans in excess of specified rates ("Cohort Default Rates"). Each "cohort" is the group of students who first enter into student loan repayment during a federal fiscal year (ending September 30). The Cohort Default Rate requirements were modified by the HEOA enacted in August 2008 to increase by one year the measuring period for each cohort. Accordingly, Cohort Default Rates now consist of those students who default on their federal student loans by the end of the second federal fiscal year following the federal fiscal year in which they enter repayment. Starting with the 2009 cohort, if an institution's three-year cohort default rate exceeds 30% for any given year, it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate, and may be also subject to provisional certification imposing various additional requirements for participation in Title IV Programs. Starting with the final three-year Cohort Default Rates for the 2011 cohort, expected to be published September 2014, the three-year rates will be applied for purposes of imposing sanctions, as follows:

        Since the calculation of Cohort Default Rates involves the collection of data from many non-governmental agencies (i.e., lenders, private guarantors and servicers), as well as ED, the HEA provides a formal process for the review and appeal of the accuracy of Cohort Default Rates before ED takes any action against an institution based on such rates.

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        In order to maintain acceptable Cohort Default Rates, we have implemented a cohort default prevention program that 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.

        Draft Cohort Default Rates are published by ED approximately six months after the end of the measuring period, and final rates are usually published approximately 12 months after the end of the measuring period. Thus, on March 25, 2013, the Company received draft three-year Cohort Default Rates from ED for students of the Company's institutions who entered repayment during the federal fiscal year ending September 30, 2010 (the "2010 Cohort"), measured over three federal fiscal years of borrower repayment. The weighted average of the Company's institutions was 19.0%, a 9.0 percentage point decrease from the 28.0% weighted average for the three-year measurement of the 2009 Cohort. For the 2010 Cohort, none of our institutions exceeded the 30% default threshold.

        The Company's institutions also continue to be measured under the prior two-year measurement period through the cohort of students who entered repayment during the federal fiscal year ending September 30, 2011 (the "2011 Cohort"). However, since none of the Company's institutions exceeded the applicable 25% default threshold for the 2010 Cohort or the 2011 Cohort (the draft results of which the Company received in March 2013), the Company will no longer report on these two-year repayment results.

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        The following table sets forth the draft Cohort Default Rates for the 3-year measurement period for our institutions included within total operations of the Company as of June 30, 2013 in the U.S. for federal fiscal years 2010 and 2009:

Institution
  2010(2)   2009  

Everest College, Seattle, WA (Fife and Vancouver, WA, and Tigard, OR)(1)

    15.5 %   21.7 %

Everest College, Alhambra, CA (Everest Institute, Chelsea, MA)(1)

    20.9 %   28.6 %

Everest College, Anaheim, CA

    24.6 %   25.5 %

Everest College, Colorado Springs, CO (McLean, VA)(1)

    18.0 %   28.0 %

Everest College, Gardena, CA (Everest Institute, Norcross, GA)(1)

    18.0 %   25.5 %

Everest College, Henderson, NV

    21.2 %   31.7 %

Everest College, Ontario, CA (Columbus, OH and Jonesboro, GA)(1)(3)

    19.3 %   31.3 %

Everest College Phoenix, Phoenix, AZ (Mesa, AZ)(1)

    19.5 %   29.6 %

Everest College, Bremerton, WA (Everett, and Tacoma, WA and St. Louis, MO)(1)

    17.1 %   25.0 %

Everest College, Portland, OR (Vancouver, WA, and Dallas, TX; Everest Institute, Silver Spring, MD)(1)(3)

    18.5 %   31.6 %

Everest College, Renton, WA (Lynnwood, WA; Everest Institute, Bissonnet, TX)(1)(3)

    20.2 %   37.0 %

Everest College, Reseda, CA (Marietta, GA)

    19.2 %   26.6 %

Everest College, Salt Lake City, UT (Fort Worth, TX)(3)

    17.1 %   30.0 %

Everest College, San Bernardino, CA(3)

    23.1 %   32.6 %

Everest College, Skokie, IL (Burr Ridge, IL)(1)

    16.4 %   24.7 %

Everest College, Springfield, MO (Ontario Metro, CA)(1)(3)

    18.3 %   31.5 %

Everest College, Thornton, CO (Aurora, CO, and Arlington, VA)(1)(3)

    18.6 %   34.9 %

Everest College, Torrance, CA

    17.8 %   20.4 %

Everest Institute, Brighton, MA (Everest College, North Aurora, IL)(1)

    19.1 %   28.1 %

Everest Institute, Cross Lanes, WV (Dekalb, GA and Eagan, MN)(1)

    19.0 %   29.5 %

Everest Institute, Grand Rapids, MI, (Kalamazoo, MI, and Everest College, Merrillville, IN)(1)

    16.5 %   26.3 %

Everest Institute, Kendall, FL (Ft. Lauderdale, FL)(1)

    20.0 %   24.3 %

Everest Institute, Miami, FL (Hialeah, FL)(1)(3)

    19.4 %   30.3 %

Everest Institute, Newport News, VA (Chesapeake, VA)(1)(3)

    16.5 %   33.1 %

Everest Institute, Pittsburgh, PA

    14.1 %   28.6 %

Everest Institute, Rochester, NY (Everest College, Arlington (Mid Cities), TX)(1)(3)

    16.9 %   32.9 %

Everest Institute, San Antonio, TX (Greenspoint, and Hobby, TX)(1)(3)

    23.6 %   36.8 %

Everest Institute, Southfield, MI (Dearborn and Detroit, MI, Austin, TX, and South Plainfield, NJ)(1)(3)

    19.7 %   30.7 %

Everest University, Largo, FL (Lakeland and Jacksonville, FL)(1)

    21.7 %   29.7 %

Everest University, Orlando (North), FL (Orlando (South), and Melbourne, FL)(1)(3)

    22.2 %   31.3 %

Everest University, Pompano Beach, FL (Everest College, Merrionette Park, IL)(1)

    19.0 %   26.8 %

Everest University, Tampa, FL (Brandon and Orange Park, FL)(1)

    23.2 %   28.1 %

Heald College, San Francisco, CA (Portland, OR and Honolulu, HI)(1)(4)

    8.8 %   12.6 %

Heald College, Rancho Cordova, CA(4)

    11.5 %   10.9 %

Heald College, Fresno, CA(4)

    9.7 %   14.2 %

Heald College, Hayward, CA(4)

    8.0 %   7.1 %

Heald College, Concord, CA(4)

    9.2 %   11.2 %

Heald College, Roseville, CA(4)

    9.0 %   12.7 %

Heald College, Milpitas, CA(4)

    8.8 %   11.8 %

Heald College, Stockton, CA(4)

    11.5 %   13.2 %

Heald College, Salinas, CA(4)

    13.7 %   15.4 %

WyoTech, Daytona Beach, FL(3)

    18.5 %   32.8 %

WyoTech, Fremont, CA (Oakland, CA)(1)(3)

    21.9 %   31.7 %

WyoTech, Laramie, WY (Sacramento, CA and Blairsville, PA)(1)

    14.2 %   19.2 %

WyoTech, Long Beach, CA (Everest College, West Los Angeles and City of Industry, CA)(1)(3)

    24.8 %   36.2 %

Consolidated Average Cohort Default Rate

    19.0 %   28.0 %

(1)
Indicates additional locations wherein the Cohort Default Rates are blended with the main campus.

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(2)
Rates are based on the draft Cohort Default Rates issued in March 2013, and are subject to change when final rates are calculated.

(3)
Indicates an institution with an open appeal pending with ED on the 2009 rates. If appeals are successful rates could improve from what is shown above.

(4)
These institutions have been merged and become branches of Heald, San Francisco effective June 21, 2013. All subsequent open cohort default period rates will be reported reflecting this revised structure. If the institutions had been merged at the time the above rates were reported the combined rate would have been 9.7% and 12.0% for 2010 and 2009, respectively.

        In addition, if an institution's Cohort Default Rate for loans under the Perkins program exceeds 15% for any one of the most recent three federal award years (i.e., July 1 through June 30), that institution may be placed on provisional certification status for up to three award years. Eleven of our institutions had Perkins program Cohort Default Rates in excess of 15% over one of the last three federal award years. For students who were scheduled to begin repayment in the 2010-11 federal award year, the most recent year for which such rates have been calculated, four of our institutions had a Perkins program Cohort Default Rates slightly in excess of 15%. Of the eleven, only two have provisional certification status which was due to a high Perkins Cohort Default Rate. During fiscal 2013, Perkins loans amounted to a very small percentage of the total cash revenues of the Company and we have therefore made the decision to liquidate ten campus portfolios. Perkins loans are still a useful funding source for the remaining institutions. Of those campuses that remain, the Perkins program Cohort Default Rates generally range in the mid-teens. Historically, provisional certification due to excessive Perkins program Cohort Default Rates has not had a material adverse effect on our business.

        If any of our institutions, depending on its size, were to lose eligibility to participate in federal student financial aid programs because of high student loan default rates, it could have a material adverse effect on our business.

        Under a provision of the HEA commonly referred to as the "90/10 Rule," a private, for-profit institution, such as each of our institutions, would cease being eligible to participate in the Title IV Programs if, on a cash accounting basis, more than 90% of its revenue was derived from the Title IV Programs. Prior to the enactment of the HEOA, any institution that violated the 90/10 Rule immediately became ineligible to participate in the Title IV Programs and was unable to apply to regain its eligibility until the following fiscal year. Under the HEOA, an institution will not become ineligible until it has exceeded the 90% maximum for two consecutive fiscal years. These changes will afford our institutions additional flexibility in meeting the 90/10 Rule. The legislation, however, also provides that institutions that exceed the 90% limit may be placed on provisional certification and be subject to additional monitoring, and those that violate the 90/10 Rule will be ineligible for two fiscal years before they regain eligibility.

        Our institutions derived between 57.1% and 93.1% of their revenues (on a modified cash basis) from Title IV programs. Two of our total 37 institutions (after giving effect to the merger of nine Heald OPEIDs into one in June 2013) exceeded the 90% threshold in fiscal 2013, Everest Institute in Crosslanes, WV at 93.1% and Everest Institute in Kendall, FL at 92.8%. Combined, these institutions had 521 students at June 30, 2013. In August 2013 we notified ED that these two institutions had 90/10 rates above 90% for the 2013 fiscal year.

        Additionally, two of our institutions exceeded the 90% threshold in fiscal 2012, Everest College Phoenix ("ECP") and Everest University in Tampa, FL, but these institutions did not exceed the 90% threshold in fiscal 2013. An OPEID must exceed the 90% threshold for two consecutive years before it loses access to Title IV funding.

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        The four institutions that exceeded the 90/10 Rule limit for fiscal years 2012 and 2013 are now considered, under ED regulations, to be certified on a provisional basis for two years and will be subject to possible additional ED sanctions. While ED has broad discretion to impose additional sanctions on these institutions, there is limited precedent to anticipate what those sanctions might be, particularly in the current regulatory environment. ED could specify a wide range of additional conditions as a part of the provisional certification and the institutions' continued participation in Title IV Programs. When an institution is subject to provisional certification at the time that its program participation agreement expires, ED also has greater discretion in considering the conditions to attach if it recertifies such institution. Any of our institutions that derives more than 90% of its revenue from Title IV Programs for two consecutive fiscal years will be ineligible to participate in Title IV Programs for at least two fiscal years. The Company as a whole derived approximately 84.8% of its net U.S. revenue (on a modified cash basis) from Title IV Programs.

        We regularly monitor compliance with this requirement in order to minimize the risk that any of our institutions would derive more than the applicable thresholds of its revenue from the Title IV Programs for any fiscal year.

        All institutions participating in the Title IV Programs must satisfy a series of specific standards of financial responsibility. Institutions are evaluated for compliance with those requirements in several circumstances, including as part of ED's recertification process and also annually as each institution submits its audited financial statements to ED. As part of the evaluation of an institution's financial responsibility, ED calculates three financial ratios for an institution: an equity ratio, a primary reserve ratio, and a net income ratio. Each ratio is scored separately and then combined to determine the institution's financial responsibility. If an institution's composite score is below the minimum requirement for unconditional approval (which is a score of 1.5) but within a designated threshold level (the "Zone," which is 1.0 to 1.4), such institution may take advantage of an alternative that allows it to continue to participate in the Title IV Programs for up to three years under additional monitoring and reporting procedures but without having to post a letter of credit in favor of ED. If an institution's composite score falls below the minimum threshold level of 1.0 or is in the Zone for more than three consecutive years, the institution may be required to post a letter of credit in favor of ED.

        On August 16, 2013, we received a letter from ED regarding its review of the Company's composite score for the fiscal years ended June 30, 2011 and June 30, 2012 (the "ED Letter"). The ED Letter stated that ED had determined the Company's composite scores for fiscal 2011 and fiscal 2012 were 0.9 and 1.5, respectively, and that the Company would not be required to post a letter of credit with respect to the composite score below 1.0 in fiscal 2011.

        In its calculations, ED treated the Company's fiscal year 2011 goodwill impairment charge of $203.6 million as an ordinary operating expense, which substantially decreased income and reduced the Company's overall composite score for the fiscal year ended June 30, 2011 by 1.1 points. The Company continues to believe this treatment of goodwill impairment is inappropriate, as ED regulations require the exclusion of goodwill as an asset in the composite score calculations. In support of its position, the Company provided substantial correspondence to ED detailing its arguments regarding the appropriate treatment of the goodwill impairment charge, including substantive letters from two highly regarded accounting experts. In the ED Letter, ED notes its receipt of this correspondence, but was not persuaded to change its position. The Company continues to disagree with this aspect of ED's determination.

        As previously reported, in a letter from ED to the Company received November 1, 2012, ED also took the position that $5 million the Company had posted as security deposits with landlords should have been characterized as intangible assets. ED has considered the Company's arguments and

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information provided and removed this adjustment from the Company's composite score analysis for fiscal 2011.

        In addition, ED excluded from long-term debt $43 million the Company borrowed under its long-term revolving credit facility at the end of fiscal 2011 in calculating the Company's composite score for the fiscal year ended June 30, 2011. ED characterized the borrowing as a questionable accounting treatment used to beneficially distort the Company's financial condition. The Company disagrees with this determination. All borrowings at June 30, 2011 were properly recorded in the Company's June 30, 2011 audited Consolidated Balance Sheet as long-term debt in accordance with generally accepted accounting principles. Therefore, the borrowing should be treated as long-term debt for purposes of its composite score calculation. Further, the Company believes the presence and use of its revolving credit facility helps demonstrate that the Company has the financial resources and liquidity to meet its operational needs.

        With respect to the Company's composite score for the fiscal year ended June 30, 2012, ED determined that the Company's composite score was 1.5. However, ED advised that it is continuing to review the portion of the Company's long-term debt balance at June 30, 2012 relating to "$16.3 million in Borrowings Under Student Notes Receivable Sale Agreement" as described in Note 6 to the Company's 2012 audited financial statements. (The Company notes that the gross amount of "Borrowings under student notes receivable sale agreement" in Note 6 of the Company's 2012 audited financial statements is actually $13.0 million, including current portion of $3.4 million. It appears from our review of the ED letter that ED may have inadvertently double-counted the current portion of that borrowing in arriving at the $16.3 million figure cited in the ED Letter.) ED indicated that its review of this transaction's effect on the Company's 2012 composite score is "expected to take some time," but noted that in the interim "no further adjustments to the CCI financial score for FY 2012 are anticipated." The Company will cooperate with ED in its review.

        The Company continues to disagree with ED's treatment of the fiscal year 2011 goodwill impairment as well as ED's exclusion of a portion of the Company's long-term debt from the calculation of the Company's fiscal year 2011 composite score. The Company's revolving credit facility requires the Company to maintain a composite score of no less than 1.5. ED's determination that our fiscal 2011 score was 0.9 could be considered an event of default under our revolving credit agreement. We have provided the ED Letter to our lenders, and they have granted a waiver for fiscal 2011.

        For fiscal 2013, the Company, on a consolidated basis, meets the requirements with a composite score of 1.5. We believe our calculations of the financial responsibility score are correct, however the calculation is subject to uncertainty as to the manner that ED will interpret the applicable regulations in its review of our calculation. If ED were to take a different interpretive position than we have with regard to this calculation, it could negatively impact the Company's composite score on a consolidated basis. The Company cannot provide any assurances that it will not have additional disagreements with ED regarding any other determinations ED may make regarding the Company's composite score for completed or future fiscal years.

        Under a separate standard of financial responsibility, if an institution has made late Title IV refunds to students in its prior two years, the institution is required to post a letter of credit in favor of ED in an amount equal to 25% of the total Title IV Program refunds paid by the institution in its prior fiscal year. As of July 1, 1997, this standard was modified to exempt an institution that has not been found to make late refunds to 5% or more of its students who were due refunds in either of the two most recent fiscal years and has not been cited for a reportable condition or material weakness in its internal controls related to late refunds in either of its two most recent fiscal years. Based on this standard, we currently have outstanding letters of credit in the aggregate amount of approximately $13.7 million because of late refunds at 3 of our institutions. There can be no assurance that, upon

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review by ED, we will not be required to post additional letters of credit in favor of ED on behalf of the affected colleges.

        An institution which undergoes a change of ownership resulting in a change in control, including all of the institutions that we have acquired or will acquire, must be reviewed and recertified for participation in the Title IV Programs under its new ownership. If an institution is recertified following a change of ownership, it will be on a provisional basis. During the time an institution is provisionally certified, it may be subject to closer review by ED and to summary adverse action for violations of Title IV Program requirements and may be impeded in expanding, but provisional certification does not otherwise limit an institution's access to Title IV Program funds. Institutions can also be placed on provisional certification primarily as a result of late refunds, financial aid audit findings and other miscellaneous matters. As of June 30, 2013, all twelve of our Heald campuses were on provisional certification due to a change of control in 2010 when we acquired them.

        The HEA generally requires that proprietary institutions be fully operational for two years before applying to participate in the Title IV Programs. However, under applicable regulations, an institution that is certified to participate in the Title IV Programs may establish an additional location and apply to participate in the Title IV Programs at that location without reference to the two-year requirement, as long as such additional location satisfies all other applicable Title IV Program participation eligibility requirements. Our expansion plans are based, in part, on our ability to acquire schools that can be recertified and to open additional locations of existing institutions.

        Generally, if an institution is eligible to participate in the Title IV Programs and adds an educational program after it has been designated as an eligible institution, the institution must apply to ED to have the additional program designated as eligible. Further, short-term educational programs, which generally consist of those programs that provide at least 300 but less than 600 clock hours of instruction, are eligible only for Title IV funding if they have been offered for a year and the institution can demonstrate, based on an attestation by its independent auditor, that at least 70% of all students who enroll in such programs complete them within a prescribed time and at least 70% of those students who graduate from such programs obtain employment in the recognized occupation for which they were trained within a prescribed time. Certain of our campuses offer such short-term programs in compliance with ED regulations. Students enrolled in such programs represent a small percentage of the total enrollment at our campuses. In the event that an institution erroneously determines that an educational program is eligible for purposes of the Title IV programs without ED's express approval, the institution would likely be required to repay the Title IV program funds provided to students in that educational program. Certain of the state authorizing agencies and accrediting agencies with jurisdiction over our campuses also have requirements that may, in certain instances, limit our ability to open a new campus, acquire an existing campus or establish an additional location of an existing institution or begin offering a new educational program.

        Most of our schools in the United States historically accepted non-high school graduates who could demonstrate an ability to benefit ("ATB students") from the program by passing certain tests which were required by ED. However, the Consolidated Appropriations Act of 2012 eliminated federal student aid eligibility for all students without a "certificate of graduation from a school providing secondary education or the recognized equivalent of such a certificate" who first enroll in a Title IV eligible program after July 1, 2012. Students who do not possess a high school diploma, or a recognized equivalent, but who have previously enrolled in a Title IV eligible program any time prior to July 1, 2012, however, may be eligible to receive Title IV student assistance after July 1, 2012. As of June 30, 2013, ATB students accounted for approximately 1.4% of total enrollments in our U.S. schools. To help

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offset the loss of ATB students associated with funding restrictions in the Appropriations Act, we offer free General Education Development ("GED") preparation services to the general public. We believe that some portion of students who prepare to take the GED exam through one of our schools could potentially enroll in one of our programs or pursue other post-secondary education.

        In 1998, amendments to the HEA changed substantially the refund requirements regarding the disposition of Title IV funds when a recipient of Title IV funds withdraws from an institution. An institution participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that were disbursed to students who withdrew from educational programs before completing the programs, and must return those funds in a timely manner. If a student withdraws prior to the completion of the academic term or program period, we are required to refund the portion of tuition and fees already paid that we are not entitled to retain, pursuant to applicable federal and state law and accrediting agency standards and our refund policy. The amount of funds to be refunded on behalf of a student is calculated based upon the period of time in which the student has attended classes and the amount of tuition and registration fees paid by the student as of the student's withdrawal date. An institution that is found to be in non-compliance with ED refund requirements for either of the last two completed fiscal years must (i) refund unearned funds, and (ii) post a letter of credit in favor of ED in an amount equal to 25% of the total Title IV Program refunds that were paid or should have been paid by the institution during its prior fiscal year if the error rate on the required return of funds exceeds 5%.

        Accreditation is a voluntary, non-governmental process by which institutions submit themselves to qualitative review by an organization of peer institutions. There are three types of accrediting agencies: (i) national accrediting agencies, which accredit institutions without regard to geographical location; (ii) regional accrediting agencies, which accredit institutions within their geographic areas; and (iii) programmatic accrediting agencies, which accredit or approve specific educational programs offered by institutions. Accrediting agencies primarily examine the academic quality of the instructional programs offered at the institution, including retention and placement rates. Accrediting agencies also review the administrative and financial operations of the institution to ensure that it has the academic and financial resources to achieve its educational mission. A grant of accreditation is generally viewed as certification that an institution and its programs meet generally accepted academic standards.

        Pursuant to the HEA, ED relies on accrediting agencies to determine whether an institution and its educational programs are of sufficient quality to permit it to participate in Title IV Programs. The HEA specifies certain standards that all recognized accrediting agencies must adopt in connection with their review of post-secondary institutions and requires accrediting agencies to submit to a periodic

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review by ED as a condition of their continued recognition. All of our colleges are accredited by an accrediting agency recognized by ED as depicted in the table below:

Accrediting Agencies:
  Number of
Campuses
Accredited
  % of
Total
Campuses
 

Accrediting Commission of Career Schools and Colleges (ACCSC)

    40     36 %

Accrediting Council for Independent Colleges and Schools (ACICS)

    57     51 %

The Higher Learning Commission—A Commission of the North Central Association of Colleges and Schools (HLC)

    2     2 %

Senior College and University Commission—Western Association of Schools and Colleges (WASC Sr.)(1)

    12     11 %
           

Total Campuses as of June 30, 2013

    111     100 %
           

(1)
The Senior College and University Commission of the Western Association of Schools and Colleges (WASC Sr.). On June 24th, 2013, ED approved WASC Sr. as the primary accreditor for Heald College. From July 3, 2012, when Heald College was granted initial accreditation by WASC Sr., to June 24, 2013, Heald College operated under dual accreditation by WASC Sr. and the Accrediting Commission of Community and Junior Colleges of WASC (ACCJC).

        The HEOA requires accrediting agencies recognized by ED to review many aspects of an institution's operations in order to ensure that the education or training offered is of sufficient quality to achieve, for the duration of the accreditation period, the stated objectives of the education or training offered. Two aspects of an institution's operations reviewed by national and programmable accrediting agencies are the completion and job placement rates of our graduates. Our national accreditors, some specialized programmatic accreditors and some state regulatory agencies require our colleges to achieve minimum retention and placement rates to remain in compliance with their standards.

        Some of these standards have been raised in recent years. ACICS (which accredits 57 of our campuses has adjusted its placement rate standards for each of the 2011, 2012 and 2013 ACICS reporting years. For the period from July 1, 2010 through June 30, 2011 (the ACICS 2011 reporting year), the benchmark placement rate standard was 65%. ACICS implemented a new standard for the 2012 ACICS reporting year that included a minimum "compliance standard" of 47% and a "benchmark rate" of 64%. If an institution's placement rate was less than the 64% benchmark, it may have become subject to heightened obligations in order to encourage the institution to reach the benchmark level. ACICS's retention rate standards also were revised from the 2011 to 2012 reporting year, increasing from a benchmark of 60% in 2011 to a benchmark of 67% in 2012 (with a new minimum compliance standard of 52%). In 2012, ACICS also began evaluating placement and retention rates at the program level and utilizing a similar minimum and benchmark standard as applied to the institution as a whole. For the 2013 reporting year, ACICS has announced an increase in the minimum acceptable placement rate compliance standard from 47% to 60%, while also increasing the benchmark placement rate threshold from 64% to 70% at both the campus and program levels.

        Under the HEOA, recognized accrediting agencies must conduct regular reviews of the institutions they accredit. In addition to periodic accreditation reviews, institutions undergoing substantive changes, including a change of ownership, may be required to be reviewed by their accrediting agency. Accrediting agencies also monitor institutions' compliance during the term of their accreditation. If an accrediting agency believes that an institution may be out of compliance with accrediting standards, including the retention and placement rates discussed above, it may place the institution on probation or a similar warning status or direct the institution to show cause why its accreditation should not be

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revoked. An accrediting agency may also require the institution to supply it with supplemental reports in order for the agency to monitor one or more specific areas of the institution's performance, typically completion or graduate placement outcomes. This is commonly referred to as being on "reporting" status. Failure to demonstrate compliance with accrediting standards in any of these instances could result in loss of accreditation. Being on probation, show cause, or reporting status may cause an accreditor to deny an institution permission, or otherwise delay approval, to open and commence instruction at new locations or to add new programs.

        In a letter dated December 21, 2011, the Company received notification that ACCSC had voted to direct the Company's Everest Institute campus in Jonesboro, GA to show cause why its accreditation should not be withdrawn for failure to demonstrate compliance with ACCSC's required student achievement outcomes. At its meeting in May 2013, ACCSC removed the Jonesboro institution from show cause.

        As of June 30, 2013, thirty four of our colleges were on reporting status to their respective accrediting agencies. The required reports relate primarily to the completion, retention, and/or placement rates of the institutions' students. In certain of these cases, the periodic supplemental reports are required only with respect to particular programs at an institution, and not to the institution's overall completion or placement rates. We are working to improve these retention and placement rates in the identified programs at these schools.

        If any of our campuses were to lose their accreditation, the Company would continue to generate revenues from continuing students, but would consider teaching out these campuses as they would be significantly competitively disadvantaged compared to other schools where students are eligible to receive federal student financial aid. During any teach-out process, the Company's revenue would decline more rapidly than operating expenses and the Company would expect to incur operating losses at those campuses. The Company could also expect to incur increased bad debt expense if students no longer have access to federal financial aid. Additionally, if the Company were to lose accreditation at one or more of its schools to which it has ascribed value for accreditation as part of purchase accounting, the Company would test the amounts it had allocated to such assets for impairment and would take an impairment charge, if necessary.

        We must be licensed or otherwise authorized to operate in each state where we offer education in order to be certified as eligible to participate in Title IV Programs. ED historically considered an institution to be licensed or otherwise authorized in order to be certified as eligible to participate in Title IV Programs if the institution were actually licensed by a state, or if the institution's state did not require the institution to obtain licensure or authorization to operate in the state. On October 29, 2010, ED adopted the final Program Integrity Regulations which consider an institution to be legally authorized by a state only if (1) the authorization is given to the institution specifically to offer programs beyond secondary education, (2) the authorization is subject to adverse action by the state and (3) the state has a process to review and appropriately act on complaints concerning an institution and enforces applicable state laws. Additionally, if an institution offers postsecondary education through distance education to students in a state in which the institution is not physically located, the institution must satisfy any requirements of that state for the institution to offer postsecondary distance education to students in that state (although the U.S. District Court for the District of Columbia declared this provision invalid in litigation by APSCU against ED). The regulations present ED's view that a state is expected to take an active role in approving an institution, and that a state should not defer its oversight responsibilities to accrediting agencies or ED. ED will determine whether a state's institutional authorization and complaint process satisfies ED's regulations, which are scheduled to go into effect on July 1, 2014. We cannot predict the extent to which ED will determine that the institutional authorization or complaint review process of any state satisfies ED's regulations. If any of

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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 ED's regulations, it could have a material adverse effect on our financial condition, results of operations and cash flows. We cannot predict with certainty the impact that 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.

Compliance with Regulatory Standards and Effect of Regulatory Violations

        Our schools are subject to audits and program compliance reviews by various external agencies, including ED, state authorizing agencies, student loan guaranty agencies and accrediting agencies. The HEA and its implementing regulations also require that an institution's administration of Title IV Program funds be audited annually by an independent accounting firm. The resulting audit report must be submitted to ED for review. If ED or another regulatory agency determined that one of our institutions improperly disbursed Title IV Program funds or violated a provision of the HEA or ED's regulations, that institution could be required to repay such funds, and could be assessed an administrative fine. ED could also subject the institution to a heightened level of monitoring, under which the institution's federal funding requests would be more carefully reviewed by ED, or ED could transfer the institution from the advance system of receiving Title IV Program funds to the reimbursement system, under which an institution must document the students' eligibility for Title IV Program funds before receiving such funds from ED. Violations of Title IV Program requirements could also subject us or our schools to other civil and criminal penalties.

        From time to time certain of our institutions have been the subject of program reviews by ED. Program reviews begin with site visits at the relevant locations. ED then prepares a program review report and the institution has the opportunity to respond. After the institution responds, ED issues a final program review determination, which may be appealed. The Company currently has open program reviews at the following stages: (i) Everest College Phoenix ("ECP") has received program review reports and provided written responses regarding the site visits ED conducted at ECP in 2008 and 2010, but has not yet received final determinations for either program review, (ii) site visits occurred at the Company's WyoTech Laramie, WY campus and its two additional locations in Blairsville, PA and Sacramento, CA in February 2012, ED issued a program review report, the Company provided a written response, and ED issued a final determination letter assessing immaterial liabilities, which the Company has paid, (iii) a site visit occurred at the Company's Everest College campus in Crosslanes, WV in April 2012, ED issued a program review report, the Company provided a written response, and ED issued a final determination letter assessing immaterial liabilities, which the Company has paid, (iv) a site visit occurred at the Company's Everest College campus in Rochester, NY, ED issued a program review report, the Company provided a written response, and ED issued a final determination letter with no liabilities assessed, and (v) ED has conducted site visits at the Company's campuses in Largo, FL in August 2012, Pompano Beach, FL in September 2012, Renton, WA in September 2012, Salinas, CA in June 2013, Southfield, MI in June 2013, Stockton, CA in July 2013, and Long Beach, CA in August 2013, but has not yet issued program review reports with respect to any of those site visits. The Company will continue to cooperate with ED in its ongoing reviews.

        As previously reported, in April 2010 we received ED's program review report related to the site visit for ECP which occurred in August 2008. The report maintains that ECP failed to make students aware of the total amounts of financial aid for which they were entitled, failed to accurately inform students of the program costs, and delayed disbursements of Title IV funds. The report also contains findings regarding inadequate documentation, verification and availability of records for ED review, and the failure to make certain disbursements. In the report, ED characterizes certain of these findings as

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misrepresentations by ECP to its students, as a breach of fiduciary duty and as evidencing an intentional evasion of the 90/10 requirements. We disagree with these characterizations and have provided written responses to the program review report in two submissions to ED. We will continue to cooperate with ED in its review.

        ED will review all responses to program review reports and ultimately issue final determination letters setting forth its final findings, as well as the actions it intends to take based on those findings. If ED were to make significant findings of non-compliance against any of the Company's institutions in any final determination letters regarding ongoing program reviews, it could result in the imposition of significant fines, penalties or other liabilities, including, without limitation, an action on the limitation, suspension or termination of the institution's participation in Title IV programs, any of which could have a material adverse effect on the Company's business, results of operations or financial condition.

        Significant violations of Title IV Program requirements by us or any of our institutions could be the basis for a proceeding by ED to limit, suspend, or terminate the participation of the affected institution in the Title IV Programs. Generally, such a termination extends for 18 months before the institution may apply for reinstatement of its participation. There is no proceeding pending to fine any of our institutions or to limit, suspend, or terminate any of our institutions' participation in the Title IV Programs, and we have no reason to believe that any such proceeding is contemplated. Any such action that substantially limited our schools' participation in the Title IV Programs could have a material adverse effect on our business, results of operations, cash flows, and financial condition.

        Under the now defunct Federal Family Education Loan ("FFEL") Program, which has since been replaced by the Federal Direct Loan ("FDL") program, nonprofit and state guaranty agencies were established to guarantee student loans made by lenders and perform certain administrative and oversight functions under the FFEL program. Under the FFEL program, ED provided reinsurance to the guaranty agencies. The Health Care and Education Reconciliation Act of 2010 ended the FFEL program effective June 30, 2010, and all federal student loans since July 1, 2010 have been made through the FDL program. Despite the end of the FFEL program, however, guaranty agencies are still involved in guaranteeing the existing FFEL loan portfolios against default and will continue in this role until all FFEL loans are paid.

        Guaranty agencies perform occasional program reviews at schools to ensure that schools are meeting all regulatory requirements and guarantor policies in the FFEL program. Eleven guaranty agency program review site visits were conducted in our institutions during fiscal year 2013, and nine program review reports have been issued. The Company is in the process of responding to these reports, including conducting file reviews with respect to findings identified in the reports. No final determinations have been made, and in several cases the Company is contesting the underlying findings. The Company will continue to cooperate with the guaranty agencies in their ongoing reviews.

        The guaranty agencies will review our responses to program review reports and ultimately issue final determination letters setting forth their final findings. If the guaranty agencies were to make significant findings of non-compliance against any of the Company's institutions in any final determination letters, it could result in the imposition of liabilities, fines or penalties, which, if large enough, could have a material adverse effect on the Company's results of operations and financial condition.

Canadian Regulations

        Students attending our schools in Canada finance their education through a combination of family contributions, individual resources (including earnings from full or part-time employment) and federal and provincial financial aid programs.

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        The schools operated by our Everest Canada division are subject to extensive regulations in the province of Ontario. These schools currently hold the necessary registrations, approvals and permits and meet the eligibility requirements to participate in governmental financial aid program. If these schools cannot continue to meet eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our Canadian business, results of operations or financial condition.

        Licensing/Registration.    Our ability to provide private-for-profit post-secondary education and grant diplomas to graduates in Canada is regulated by Ontario government. In Ontario, the Ontario Ministry of Training, Colleges and Universities is responsible for registering and regulating private-for-profit educational institutions. The Private Career Colleges Act, 2005 (the "PCCA") stipulates that an education provider, such as our Canadian schools, must register each of its diploma granting programs for approval as well as each of its campuses with the Ministry. Typical requirements for obtaining this registered status include the financial viability of the campus, the integrity and honesty of the applicant's officers and directors, and the reasonable expectation that the program of study offered by the applicant will provide the skills requisite for employment in the vocation in which it is being trained. Registration must be renewed by the applicant annually. The Province of Ontario has the statutory power to deny, refuse to renew, suspend or revoke our registration if we are in breach of a term or condition of the registration.

        Government-Sponsored Financial Aid.    Financial aid programs are offered to our Canadian students by the Canadian federal government and the government of Ontario. The Province operates the provincial financial aid program for students and administers these loans in conjunction with the administration of the Canada Student Loans granted to students studying within the province. In order for students enrolled in a program of study at a private-for-profit educational institution to be eligible for public financial aid, the private-for-profit educational institution, as well as the specific program of study, must be registered in good standing under the applicable PCCA legislation in the Province. In addition, the Province typically requires that to be financial aid eligible, the specific program must be at the post-secondary level, be taught on a full-time basis, have a duration of not less than 12 weeks and lead to a diploma or certificate conferred upon the student at the completion of the program. The Province also typically requires that the private-for-profit educational institution maintain specific admissions requirements for entrance into eligible programs and retains specific documentation on each student receiving public financial aid.

        Financial aid programs provide students with access to funds during their study period based on a needs assessment. The loans are administered through the National Student Loan Service Centre for the program. The funds are loaned interest-free to the student during the study period and interest begins to accrue once a student either completes his or her study or stops attending school. After six months, the student must begin repayment of his or her loan(s). During the student's interest-free period, interest is paid by the federal and/or provincial governments to the National Student Loan Service Centre.

        The Ontario government has an initiative to reduce the number of loan defaults in that province. In addition to several other facets of this initiative, the Ministry of Training, Colleges and Universities (the "Ministry") has adopted a policy whereby the Ministry will only guarantee defaulted student loans to a certain capped amount, beyond which the applicable private career college is responsible for guaranteeing repayment. For the 2012/13 default cohort year, we have eleven Ontario locations that were required to issue a promissory note and/or collateral due to the default sharing program. If the default rate in 2015 is below 25%, no payment will be required.

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ALTERNATIVE LOANS FOR OUR STUDENTS

        Historically, we had developed several third party loan programs with origination and servicing providers such as Sallie Mae for students with low credit scores who otherwise would not qualify for loans. These loan programs required that we pay a discount fee to the origination and servicing providers of the loans as a reserve against future defaults on these loans. We have historically referred to these types of loans as "discount loans," since we incurred a portion of the default risk related to these student loans by taking a discount on the disbursement from the third party. By accepting a reduced payment for these discounted loans from the servicing providers, we were not at risk for the amounts agreed to by our students and the service providers, but we were not entitled to any proceeds collected on the loan repayments by the service providers in excess of the reduced payment. Therefore we had recorded this discount as a reduction to revenue.

        In fiscal 2008, we were informed by Sallie Mae and two other origination and servicing providers that they would no longer make private loans available for students. In the face of this change in policy, we created a new lending program in the fourth quarter of fiscal 2008 with a different origination and servicing provider, Genesis Lending Services, Inc. ("Genesis"). Under this Genesis program we paid a discount to the origination and servicing provider for any loans purchased by Genesis and recorded the discount as a reduction to revenue. Under this program we then had both the right and an obligation to acquire the related loan, except in certain limited circumstances where Genesis did not comply with the terms of the agreement. Under the Genesis arrangement, we acquired all of the loans that had been originated. Therefore, we are exposed to any credit defaults by students but retain all amounts collected from the students under this program.

        On June 29, 2011, we entered into a loan origination agreement with ASFG, LLC (which changed its name in July 2013 to Campus Student Funding, LLC) ("ASFG"), which has subsequently been amended and expanded, for the purpose of creating a new private education discount loan program for our students. Under the loan origination agreement (including amendments), ASFG has agreed to purchase up to $775 million of new student loans through June 2015. Under this agreement, an unaffiliated bank makes private education loans to eligible students and, subsequently, sell those loans to ASFG or its designee. Total losses associated with the program recourse, inclusive of the discount paid to ASFG, are estimated to be approximately 50% of the amount funded. During the second quarter of fiscal 2012, we completed the transition from the Genesis discount loan program to the ASFG discount loan program. There have been no loans funded under the Genesis discount loan program during fiscal year 2013. We estimate that loans funded under the ASFG program, net of estimated refunds, were approximately $192.7 million for fiscal year 2013.

        The ASFG loan program has characteristics similar to the previous third party "discount loan" programs. As with the previous third party discount loan programs, under the ASFG program we pay an upfront discount to ASFG for any notes purchased by ASFG and record the upfront discount as a deferred charge and amortize the charge as a reduction to revenue ratably over the program length as the related revenue is recognized. However, unlike the previous third party discount loan programs, pursuant to a backup loan purchase agreement entered into in connection with the loan origination agreement, we have guaranteed to purchase any of the student notes from ASFG on which no payment has been made for over 90 days. We have applied historical loan performance experience to estimate and record the ultimate loan recourse obligation on a gross basis by recording both a deferred charge and liability equal to the estimated risk upon funding. The recourse obligation is in addition to the discount paid to ASFG and is based upon the ultimate anticipated loan performance under the ASFG loan program. The deferred charge is recorded within prepaid expenses and is recognized as a reduction to revenue over the period of instruction. The total deferred charge related to unrecognized discount expense is $29.6 million and $29.4 million as of June 30, 2013 and June 30, 2012, respectively. The recourse liability is established at the inception of the guarantee. Upon recourse we will repurchase any loans at the amount advanced by ASFG net of any discount paid to ASFG, less any

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principal payments collected by ASFG. The purchase will be recorded as a decrease to cash, an increase to student notes receivable, and a reduction to the recourse obligation. The net recourse obligation consists of a net short-term liability and a net long-term receivable. The receivable, pursuant to a backup loan agreement, will be paid to us as ASFG receives student payments in excess of the initial principal balance, less discount paid. The receivable and recourse obligation are reported as a net short-term and net long-term amount to reflect the legal right of offset. The net short-term recourse obligation related to the loans funded under the ASFG program at June 30, 2013 and 2012 was a net liability of $31.1 million and $29.4 million, respectively. The net short-term recourse obligation at June 30, 2013 and June 30, 2012 is recorded within accrued expenses within the Consolidated Balance Sheets. The net long-term recourse receivable related to loans funded under the ASFG program at June 30, 2013 and 2012 was a net asset of $44.7 million and $21.6 million, respectively. The net long-term recourse receivable is recorded within deposits and other assets within the Consolidated Balance Sheets. We estimate loan performance based upon actual repayment experience with similar private student loan programs. Under this backup loan purchase agreement, our maximum obligation (including the initial discount payment) could be equal to the face amount of loans originated under this loan program, although we expect the ultimate risk under this loan program to be substantially similar to the risks faced under the Genesis discount loan program.

ITEM 1A.    RISK FACTORS

Risks Related To Extensive Regulation Of Our Business

If we fail to follow extensive regulatory requirements for our business, we could suffer severe fines and penalties, including loss of access to federal student loans and grants for our students.

        We derive a majority of our revenues on a cash basis from federal student financial aid programs. 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"). As a result, our schools are subject to extensive regulations by these agencies that, among other things, require us to:

        These regulatory agencies periodically revise their requirements and modify their interpretations of existing requirements. If one or more of our schools were to violate any of these regulatory requirements, we could suffer fines, penalties or other sanctions, including the loss of our ability to participate in federal student financial aid programs at those schools, any of which could have a material adverse effect on our business. We cannot predict how all of these requirements will be applied, or whether we will be able to comply with all of the requirements.

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Congress has in the past changed, and may in the future change, eligibility standards or reduce funding for federal student financial aid programs. Other governmental or regulatory bodies may also change similar laws or regulations relating to student financial aid programs, which could adversely affect our business.

        Political and budgetary concerns can significantly affect Title IV programs and other laws and regulations governing federal and state student financial aid programs. Title IV programs are made available pursuant to the provisions of the HEA, and the HEA must be reauthorized by Congress approximately every six years. Independent of reauthorization, Congress must annually appropriate funds for Title IV programs. In mid-2008, Congress passed and the President signed the HEOA in order to reauthorize the HEA. On December 23, 2011, President Obama signed into law the Consolidated Appropriations Act, 2012 (Public Law 112-74) (the "Appropriations Act"). The new law significantly impacts the federal student aid programs authorized under Title IV of the Higher Education Act of 1965, as amended ("HEA").

        Auto-Zero EFC Income Threshold—The Appropriations Act amended the HEA to reduce the income threshold for an automatic zero "expected family contribution" to $23,000 for the 2012-2013 award year for both dependent and independent students. The threshold for 2012-2013 was scheduled to be $32,000, but now is $23,000. For students whose families make between $23,000 and $32,000 per year, this has decreased the amount of Pell grants such students receive.

        Ability-to-Benefit—The Appropriations Act also eliminated federal student aid eligibility for all students without a "certificate of graduation from a school providing secondary education or the recognized equivalent of such a certificate." The Appropriations Act makes an exception for students who have completed a secondary school education in a home school setting that is treated as a home school or private school under state law. Therefore, students who do not have a high school diploma or a recognized equivalent (e.g., a GED), or do not meet the home school requirements, and who first enroll in a program of study on or after July 1, 2012, will not be eligible to receive Title IV student aid. Students still qualify for Title IV student aid under one of the ability-to-benefit (ATB) alternatives if the student was enrolled in a Title IV eligible program prior to July 1, 2012. Those alternatives include the student passing an independently-administered, approved ATB test or successfully completing at least six credit hours or 225 clock hours of postsecondary education. A student who does not possess a high school diploma, or a recognized equivalent, but who is enrolled in a Title IV eligible program any time prior to July 1, 2012 may be eligible to receive Title IV student assistance after July 1, 2012. As of June 30, 2013 approximately 1.4% of our continuing operations student population were ATB students.

        Federal Pell Grant Duration of Eligibility—The Appropriations Act also amended the HEA to reduce the duration of a student's eligibility to receive a federal Pell Grant from 18 semesters (or its equivalent) to 12 semesters (or its equivalent). This provision applies to all federal Pell Grant eligible students effective with the 2012-13 award year. This may eliminate the ability of some of our students to continue to receive Pell Grants, depending on their prior receipt of Pell Grants from our institutions and from other institutions prior to enrolling in our schools.

        Our institutions have been unable to accept new ATB students since July 1, 2012, and the financial aid for some of our other students has been reduced or eliminated as a result of the Appropriations Act. If we are not able to effectively recruit additional new students to make up for the ATB students we have been unable to enroll, it could further negatively affect our business, results of operations and financial condition, perhaps materially.

        Future Congressional action, including in reauthorizations or appropriations acts, may result in numerous legislative changes, including those that could adversely affect our ability to participate in the Title IV programs and the availability of Title IV and non-Title IV funding sources for our students. Members of Congress frequently propose legislation to alter or amend the terms under which our institutions participate in the federal student financial aid programs. Recent proposed legislation has

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included proposals to restrict the use of funds received through federal financial aid in marketing and advertising, proposals to change the 90/10 Rule into an 85/15 Rule, proposals to count all sources of federal funds (including military tuition assistance, workforce investment and other funds outside the Title IV programs that currently count as non-Title IV funds for purposes of the 90/10 Rule) in the same way Title IV funds currently count in the 90/10 Rule. Congress also may impose certain requirements upon the state or accrediting agencies with respect to their approval of our schools. Any action by Congress or ED that significantly reduces funding for the federal student financial aid programs or the ability of our schools or students to participate in these programs would have a material adverse effect on our business. Legislative action also may increase our administrative costs and burdens and require us to modify our practices in order for our schools to comply fully with applicable requirements.

        Because a significant percentage of our revenue is derived from Title IV programs, any action by Congress that significantly reduces Title IV program funding, or the ability of our schools or students to participate in Title IV programs, could have a material adverse effect on our business, results of operations or financial condition. Legislative action also could increase our administrative costs and burdens and require us to adjust our practices in order for our schools to comply fully with Title IV program requirements.

Congress and other regulatory bodies have conducted hearings and other examinations of the for-profit education sector that could result in further legislation, rulemaking, restrictions on Title IV Program participation by private sector schools, and other adverse action that may materially and adversely affect our business.

        On July 30, 2012, Chairman Tom Harkin and the Majority Staff of the Senate Health, Education, Labor, and Pensions Committee (the "HELP Committee") released a report, "For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success." While stating that for-profit colleges and universities have an important role to play in higher education and should be well-equipped to meet the needs of non-traditional students who now constitute the majority of the postsecondary educational population, the report was highly critical of these institutions. The report contended that these institutions have a high cost of attendance, engage in aggressive and deceptive recruiting, have high drop-out rates, provide insufficient student support services, and are responsible for high levels of student debt and loan defaults, among other things. The report called for increased disclosure of information about student outcomes at for-profit colleges and universities, prohibiting institutions from using federal financial aid funding to market, advertise and recruit, amending the 90/10 Rule to prohibit these institutions from receiving more than 85 percent of their revenues from federal funds, prohibiting the use of mandatory binding arbitration clauses in enrollment agreements, and other measures ostensibly to protect students and taxpayers. The report was a culmination of a series of hearings held by Chairman Harkin before the HELP Committee since June 2010.

        We cannot predict the extent to which the Harkin report and other investigations, hearings and legislative proposals will result in further legislation, rulemaking or other adverse actions affecting our participation in Title IV Programs 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 which otherwise materially change the way in which we do business, our business could be adversely and materially impacted.

If any of our U.S. schools fails to maintain its accreditation or its state authorization, that institution may lose its ability to participate in federal student financial aid programs.

        An institution that grants degrees, diplomas or certificates must be authorized by the relevant agencies of the state in which it is located and, in some cases, other states. Requirements for

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authorization vary substantially among the states. Additionally, both an approval to operate in a state and accreditation by an accrediting agency recognized by ED are required for an institution to participate in the federal student financial aid programs. If any of our U.S. campuses were to lose its accreditation or its state authorization, it could have a material adverse effect on our business.

        Our national accreditors, some programmatic accreditors and some state regulatory agencies require our institutions, campuses and/or programs to achieve specified placement rates within limited time periods after students have graduated, and many of these standards have been raised in recent years. At the same time, job prospects for many college graduates, regardless of the institution they attend or the degree they have earned, have been diminished as new graduates are facing increased competition from workers displaced by the difficult economy with, in some cases, significant work experience. Many graduates, including those who have attended our institutions, have experienced a lengthening of the time it takes to obtain their first job after graduation. We believe our placement rates have been and will continue to be adversely impacted until there is a sustained economic recovery and a higher rate of job growth. If any of our institutions or programs, as applicable, fails to meet national or programmatic accreditor or state regulatory agency minimum placement standards, that institution or program, as applicable, may lose its accreditation or state license, and therefore its ability to participate in federal student financial aid programs.

        We have had to cap enrollment in, or teach-out entirely, certain programs due to low placement opportunities for graduates of those programs, and we expect that we will need to take these steps with respect to more programs and/or campuses if we are unable to place our graduates within the time frames required by the accreditors and states that regulate our institutions. These actions reduce our revenues and therefore could have a material adverse effect on our results of operations, cash flows and financial condition.

Rulemaking by ED could materially adversely affect our business.

        The agencies that regulate our U.S. schools, including ED, periodically revise their requirements and modify their interpretations of existing requirements. In 2009-11, ED proposed, and ultimately adopted, changes to its regulations on the following subjects relating to Title IV Program Integrity: (i) 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; (ii) Ability to Benefit; (iii) Misrepresentation of Information to Students and Prospective Students; (iv) Incentive Compensation; (v) State Authorization as a Component of Institutional Eligibility; (vi) Gainful Employment in a Recognized Occupation; (vii) Definition of a Credit Hour; (viii) Agreements Between Institutions of Higher Education; (ix) Verification of Information Included on Student Aid Applications; (x) Satisfactory Academic Progress; (xi) Retaking Coursework; (xii) Return of Title IV Funds: Term-based Programs with Modules or Compressed Courses; (xiii) Return of Title IV Funds: Taking Attendance; and (xiv) Disbursements of Title IV Funds. On October 29, 2010, ED published final rules on all 14 Title IV Program Integrity issues, with the exception of the final regulation establishing specific metrics to define "gainful employment." ED published final rules on the "gainful employment metrics" on June 13, 2011 (these new rules are collectively referred to as the "Program Integrity Regulations").

        Under the HEA, proprietary schools are eligible to participate in Title IV Programs only if their educational programs lead to "gainful employment in a recognized occupation." Historically, this concept has not been defined in detailed regulations. On October 29, 2010 and June 13, 2011, the Department published final regulations on gainful employment. These rules require proprietary postsecondary institutions to provide prospective students with each eligible program's recognized occupations, cost, completion rate, job placement rate and median loan debt of program completers beginning July 1, 2011. These disclosures have increased our administrative burdens and costs and

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could impact student enrollment. They could also result in increased litigation or arbitration claims and expenses if current or former students or regulatory authorities claim the disclosures are not accurate.

        Two additional significant sections of these regulations were vacated by the U.S. District Court for the District of Columbia on June 30, 2012. The rules purported to define—for the first time—the standards to measure "preparation for gainful employment in a recognized occupation" for purposes of determining whether a program would be Title IV eligible. The regulations established quantitative standards that purported to measure, for each program of study: (i) the percentage of federal Stafford loans made to former students that were actively paid down in the most recent year, (ii) the ratio of discretionary income to annual student loan payments for the program's completers, and (iii) ratio of actual earnings to annual student loan payments for the program's completers. In addition, the rule as initially adopted required institutions to notify ED at least 90 days before the commencement of new educational programs leading to gainful employment in recognized occupations, and in some cases, would have required that ED approve the program.

        Although the gainful employment requirements were scheduled to go into effect July 1, 2012, the U.S. District Court for the District of Columbia issued a decision on June 30, 2012 in the case captioned Association of Private Sector Colleges and Universities v. Duncan (the "APSCU" litigation) that vacated most of the gainful employment requirements and remanded those regulations to ED for further action. On July 6, 2012, ED issued an electronic announcement acknowledging that the Court had vacated the quantitative gainful employment requirements. ED also noted that institutions are not required to comply with related regulations relating to gainful employment reporting requirements and adding new educational programs, but are required to comply with requirements to disclose certain information about educational programs.

        After the gainful employment metrics and the new program approval requirements were struck down in the APSCU litigation, the Program Integrity Regulations that could have the most significant potential impact on our business are the following:

        A school participating in Title IV programs may not pay any commission, bonus or other incentive payments to any person involved in student recruitment or admissions or awarding of Title IV program funds, if such payments are based directly or indirectly on success in enrolling students or obtaining student financial aid. The statutory language of this prohibition does not establish clear criteria for compliance in all circumstances, but between 2002 and June 30, 2011 there were twelve "safe harbors" that defined specific types of compensation that were deemed not to constitute impermissible incentive compensation. Until June 30, 2011, we relied on several of these safe harbors to ensure that our compensation and recruitment practices comply with the statutory prohibition. On October 29, 2010, ED issued final regulations that eliminated all twelve safe harbors, and in lieu of the safe harbors, took the position that any adjustment to compensation based directly or indirectly on securing enrollments or awarding financial aid is inconsistent with the incentive payment prohibition in the HEA. The final rule further expands the prohibition to individuals who have "responsibility for" recruitment or admission of students or making decisions about awarding Title IV program funds. ED states that an institution still will be able to make merit-based adjustments to employee compensation, but will not be

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permitted to consider or base compensation directly or indirectly, in any part, on success in securing student enrollments, the award of financial aid or institutional goals based on that success. As a result of these rules which took effect July 1, 2011, we changed our evaluation and compensation practices for admissions and financial aid representatives and certain other employees. This could adversely affect our ability to compensate our admissions and financial aid representatives and other 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.

        In addition, a lack of certainty could increase the risk of future Federal False Claims Act qui tam lawsuits in which private plaintiffs assert that our compensation practices violate the incentive compensation rules and, therefore, that our receipt of Title IV funds constitutes a false claim. We have been the subject of at least three such qui tam lawsuits relating to our compensation practices, all of which were initially dismissed at the district court level. The relator in one of the dismissed cases, the Lee case, appealed to the U.S. Ninth Circuit Court of Appeals, which reversed the District Court's dismissal on August 8, 2011, and remanded case to permit the relator to amend its complaint. On December 15, 2011, the first amended Lee complaint was filed in District Court alleging violations of the False Claims Act, 31 U.S.C. § 3729 against the Company, Ernst & Young LLC, David Moore and Jack Massimino. The Company moved the U.S. District Court to dismiss the amended Lee complaint, and, on April 12, 2013, the District Court dismissed with prejudice the action in its entirety. The relators have appealed the dismissal to the U.S. Ninth Circuit Court of Appeal.

        The final Program Integrity 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 rules, particularly as applied to the manner by which programs of study are approved by various states, is unclear. Students attending programs of study that are now required to be measured in clock hours may receive less funds from Title IV Programs to pay their cost of education. 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.

        Under the HEA, an institution must be authorized by each State in which it is located to participate in Title IV programs. ED historically has determined that an institution is licensed or otherwise authorized in order to be certified as eligible to participate in Title IV Programs if the institution's State does not require the institution to obtain licensure or authorization to operate in the state. On October 29, 2010, ED's Program Integrity Rules established specific 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. Recognizing that the new regulations may, in effect, require many States to revise existing laws or regulations, the rule issued by ED provided that a State may seek a one-year extension until July 1, 2012 to effectuate such changes, and if necessary obtain a second extension for one additional year. In May 2013, ED announced a further delay until July 1, 2014 of the implementation of the state authorization regulations when an institution's state

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authorization does not meet the requirements by the earlier delayed implementation date of July 1, 2013. ED provided this further extension to qualifying institutions because several states notified ED that they needed additional time to develop or complete processes in order for some institutions to be able to comply with the state authorization provisions in the Program Integrity Regulations. To receive a further extension, an institution must obtain from the state an explanation of how an additional one-year extension will permit the state to modify its procedures to comply with ED's requirements.

        Under the Program Integrity Regulations, for an institution to be eligible to participate in the Title IV programs it must not only be authorized by a state, but that state's law must meet minimum requirements established by ED. These minimum requirements include a satisfactory process for resolving complaints and an adequate state approval process. Our Heald locations in California and Hawaii have historically been exempt from licensure either because no state statute required authorization, or because Heald was exempt from state licensure requirements due to its regional accreditation. In addition to our Heald locations in California and Hawaii, the sufficiency of the state approvals in other states could be determined to be non-compliant with the federal state authorization requirements if ED deems these states' oversight regimes do not meet minimum ED expectations. At this time, ED has not issued any official guidance as to whether these or other states authorization processes meet the regulatory requirements. States may have to adopt additional statutes or regulations in order to comply with the new state authorization regulations by the July 1, 2014 extended deadline and thus for our campuses to remain eligible for Title IV funds in those states. In June 2013, Hawaii passed legislation that establishes a state agency and an oversight regime intended to meet the ED state authorization requirements. Our Heald Hawaii location has not yet applied for approval from the agency, and we have no assurance that such approval will be granted. California also passed legislation in June 2013 allowing institutions that are exempt from state licensure to voluntarily submit to the jurisdiction of the state's Bureau for Private Postsecondary Education. However, in May 2013, we were notified by ED that Heald's corporate formation documents constituted sufficient state authorization to meet ED's regulatory requirements. Based on this notification, we do not believe Heald's California institutions will be required to voluntarily submit to the jurisdiction and oversight of California's Bureau for Private Postsecondary Education; however, we have no assurance that ED will not reach a different conclusion in the future regarding the sufficiency of either Heald's corporate formation documents or California's oversight regime and approval process.

        If any material number of our campuses are unable to obtain state regulatory approval that continues to satisfy ED's regulations, our business would be adversely impacted. As ED has released no official guidance, the manner in which ED's regulations will apply to our institutions in the various states, and the impact of such regulation on our business, is uncertain. If we are unable to operate in any state in which we derive significant revenue in a manner that would preserve Title IV eligibility for our students, our business would be materially and adversely impacted.

        In addition, the Program Integrity Regulations concerning state authorization formerly required, among other things, that an institution offering distance learning or online programs secure the approval of those states which require such approval and provide evidence of such approval to ED upon request. On July 12, 2011, the U.S. District Court for the District of Columbia struck down those portions of the regulations requiring proof of state approval for online education programs on procedural grounds, and that ruling was later upheld on appeal. However, the courts also ruled that ED may elect to re-introduce this rule, and on April 16, 2013, ED indicated that it will initiate a rulemaking process to do so.

        If when these rules become fully effective any of our locations are unable to obtain state regulatory approval in a manner that satisfies ED's regulations, our business would be adversely impacted. The manner in which ED's regulations will apply to our institutions, and the impact of such regulation on our business, is uncertain. If we are unable to operate in any state in which we derive

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significant revenue in a manner that would preserve Title IV eligibility for our students, our business would be materially and adversely impacted.

        In addition to the specific issues addressed above, the Program Integrity Regulations issued by ED include provisions regarding the definition of a credit hour; 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; 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 cannot predict how the Program Integrity Regulations will be interpreted, and therefore whether we will be able to comply with these requirements. Compliance with the final rules could have a material adverse effect on our business. Uncertainty surrounding application of the final rules 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.

New rulemaking by ED could result in regulatory changes that could materially adversely affect our business.

        In addition to the Program Integrity Regulations described above that were promulgated by ED from 2009 to 2011, in April 2013 ED announced its intention, over the next several years, to conduct rulemakings related to the federal student aid programs. In the near term, ED indicated its plans to address program integrity issues related to the following: cash management of funds provided under the title IV Federal Student Financial Aid programs; state authorization for programs offered through distance education or correspondence education; state authorization for foreign locations of institutions located in a State; clock-to-credit hour conversion; gainful employment; changes made by the Violence Against Women Reauthorization Act of 2013 to the campus safety and security reporting requirements in the HEA; and the definition of "adverse credit" for borrowers in the Federal Direct PLUS Loan Program. ED stated that this agenda may take several years to complete.

        In June 2013, ED announced its intent to establish a negotiated rulemaking committee to prepare proposed regulations for programs that prepare students for "gainful employment" in a recognized occupation. ED has selected negotiators for the gainful employment negotiated rulemaking committee, and the negotiating sessions are scheduled for September and October 2013. We cannot predict the form of any final rules that may be adopted through this negotiated rulemaking process. If new regulations go into effect that are similar to the rules vacated by the District Court in the APSCU litigation, certain of our programs may be unable to maintain eligibility to enroll students receiving Title IV funds or have restrictions placed upon program offerings as a result of not meeting prescribed metrics. Compliance with any burdensome new regulations adopted by ED through this rulemaking process 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.

Our U.S. schools may lose eligibility to participate in federal student financial aid programs if the percentage of their revenues derived from those programs is too high.

        Our U.S. schools may lose eligibility to participate in federal student financial aid programs if the percentage of their revenues derived from those programs is too high. Under the HEOA, an institution that derives more than 90% of its total revenue from the Title IV programs for two consecutive fiscal years would become immediately ineligible to participate in Title IV programs and would not be permitted to reapply for eligibility until the end of full two fiscal years. An institution that derives more than 90% of its revenue from Title IV programs for any single fiscal year will be automatically placed on provisional certification for two fiscal years and will be subject to possible additional sanctions determined to be appropriate under the circumstances by ED in its discretion. While ED has discretion

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to impose additional sanctions on such an institution, it is difficult to predict what those sanctions might be. ED could specify additional conditions as a part of the provisional certification and the institution's continued participation in Title IV programs. These conditions may include, among other things, restrictions on the total amount of Title IV program funds that may be distributed to students attending the institution; restrictions on programmatic and geographic expansion; requirements to obtain and post letters of credit; additional reporting requirements to include additional interim financial reporting; or any other conditions imposed by ED. If an institution is subject to a provisional certification at the time that its current program participation agreement expired, the effect on recertification of the institution or continued eligibility in Title IV programs pending recertification is uncertain.

        Our institutions derived between 57.1% and 93.1% of their revenues (on a modified cash basis) from Title IV programs in the fiscal year ended June 30, 2013. Two of our total 37 institutions (after giving effect to the merger of nine Heald OPEIDs into one in June 2013) exceeded the 90% threshold in fiscal 2013, Everest Institute in Crosslanes, WV at 93.1% and Everest Institute in Kendall, FL at 92.8%. Combined, these institutions had 521 students at June 30, 2013. In August 2013 we notified ED that these two institutions had 90/10 rates above 90% for the 2013 fiscal year.

        Additionally, two of our institutions exceeded the 90% threshold in fiscal 2012, ECP and Everest University in Tampa, FL, but these institutions did not exceed 90% threshold in fiscal 2013. An institution must exceed the 90% threshold for two consecutive years before it loses access to Title IV funding.

        The four institutions that exceeded the 90/10 Rule limit for fiscal years 2012 and 2013 are now considered, under ED regulations, to be certified on a provisional basis for two years and will be subject to possible additional ED sanctions. While ED has broad discretion to impose additional sanctions on these institutions. ED could specify a wide range of additional conditions as a part of the provisional certification and the institutions' continued participation in Title IV Programs. When an institution is subject to provisional certification at the time that its program participation agreement expires, ED also has greater discretion in considering the conditions to attach if it recertifies such institution.

        Some of our efforts to comply with the 90/10 Rule, especially for those institutions that exceed the 90% threshold for a fiscal year, may involve taking measures that reduce our revenue, increase our operating expenses, or both, perhaps significantly. If the 90/10 Rule is not changed to provide relief for private sector institutions, we may be required to make further changes to our business in order to remain in compliance, which could alter the manner in which we conduct our business and materially and adversely impact our business, financial condition, results of operations and cash flows. If any of our institutions, depending on its size, were to lose eligibility to participate in federal student financial aid programs, it could have a material adverse effect on our business.

Our U.S. schools may lose eligibility to participate in federal student financial aid programs if their current and former students' loan default rates on federally guaranteed student loans are too high.

        Under the HEA, an institution could lose its eligibility to participate in some or all of the federal student financial aid programs if the federal student loan default rate of its former students is too high. The term "institution" means a main campus and its additional locations, as defined by ED's regulations. ED generally publishes draft Cohort Default Rates in February of each year for the repayment period that ended the prior September 30.

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        Under the HEOA, any institution whose Cohort Default Rate equals or exceeds 30% for any one of the three most recent federal fiscal years, starting with the 2009 cohort, may be found by 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 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 equals or exceeds 30% for three consecutive years, starting with the 2011 cohort, expected to be published in September 2014, will lose eligibility to participate in the FDL and the Pell grant programs for the remainder of the federal fiscal year in which ED determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. In addition, an institution whose Cohort Default Rate for any federal fiscal year exceeds 40% will have its eligibility to participate in the FDL program limited, suspended or terminated.

        On an on-going basis, we monitor cohort repayment data, and we are currently monitoring the repayment and default status of the 2011, 2012 and 2013 Cohorts. If any of our institutions, depending on its size, were to lose eligibility to participate in federal student financial aid programs because of high Cohort Default Rates, it could have a material adverse effect on our business.

If we do not meet specific financial responsibility ratios and tests established by ED, our U.S. schools may lose eligibility to participate in federal student financial aid programs.

        To participate in the federal student financial aid programs, an institution must either satisfy quantitative standards of financial responsibility, or post a letter of credit in favor of ED and possibly accept other conditions on its participation in the federal student financial aid programs. Each year, based on financial information submitted by institutions that participate in federal student financial aid programs, ED calculates three financial ratios for an institution: an equity ratio, a primary reserve ratio and a net income ratio. Each of these ratios is scored separately and then combined to determine the institution's financial responsibility or "composite score." If an institution's score is above 1.5, it is deemed financially responsible without conditions or additional oversight. If an institution's composite score is below 1.5, but within a designated threshold level (the "Zone," which is 1.0 to 1.4), such institution may take advantage of an alternative that allows it to continue to participate in the Title IV Programs for up to three years under additional monitoring and reporting procedures but without having to post a letter of credit in favor of ED. If an institution's composite score falls below the minimum threshold level of 1.0 or is in the Zone for more than three consecutive years, the institution may be required to post a letter of credit in favor of ED. On a consolidated basis, we met this requirement in fiscal 2012 with a composite score of 1.5.

        On August 16, 2013, we received a letter from ED regarding its review of the Company's composite score for the fiscal years ended June 30, 2011 and June 30, 2012 (the "ED Letter"). The ED Letter stated that ED had determined the Company's composite scores for fiscal 2011 and fiscal 2012 were 0.9 and 1.5, respectively, and that the Company would not be required to post a letter of credit with respect to the composite score below 1.0 in fiscal 2011.

        In its calculations, ED treated the Company's fiscal year 2011 goodwill impairment charge of $203.6 million as an ordinary operating expense, which substantially decreased income and reduced the Company's overall composite score for the fiscal year ended June 30, 2011 by 1.1 points. The Company continues to believe this treatment of goodwill impairment is inappropriate, as ED regulations require the exclusion of goodwill as an asset in the composite score calculations. In support of its position, the Company provided substantial correspondence to ED detailing its arguments regarding the appropriate treatment of the goodwill impairment charge, including substantive letters from two highly regarded

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accounting experts. In the ED Letter, ED notes its receipt of this correspondence, but was not persuaded to change its position. The Company continues to disagree with this aspect of ED's determination.

        As previously reported, in a letter from ED to the Company received November 1, 2012, ED also took the position that $5 million the Company had posted as security deposits with landlords should have been characterized as intangible assets. ED has considered the Company's arguments and information provided and removed this adjustment from the Company's composite score analysis for fiscal 2011.

        In addition, ED excluded from long-term debt $43 million the Company borrowed under its long-term revolving credit facility at the end of fiscal 2011 in calculating the Company's composite score for the fiscal year ended June 30, 2011. ED characterized the borrowing as a questionable accounting treatment used to beneficially distort the Company's financial condition. The Company disagrees with this determination. All borrowings at June 30, 2011 were properly recorded in the Company's June 30, 2011 audited balance sheet as long-term debt in accordance with generally accepted accounting principles. Therefore, the borrowing should be treated as long-term debt for purposes of its composite score calculation. Further, the Company believes the presence and use of its revolving credit facility helps demonstrate that the Company has the financial resources and liquidity to meet its operational needs.

        With respect to the Company's composite score for the fiscal year ended June 30, 2012, ED determined that the Company's composite score was 1.5. However, ED advised that it is continuing to review the portion of the Company's long-term debt balance at June 30, 2012 relating to "$16.3 million in Borrowings Under Student Notes Receivable Sale Agreement" as described in Note 6 to the Company's 2012 audited financial statements. (The Company notes that the gross amount of "Borrowings under student notes receivable sale agreement" in Note 6 of the Company's 2012 audited financial statements is actually $13.0 million, including current portion of $3.4 million. It appears from our review of the ED letter that ED may have inadvertently double-counted the current portion of that borrowing in arriving at the $16.3 million figure cited in the ED Letter.) ED indicated that its review of this transaction's effect on the Company's 2012 composite score is "expected to take some time," but noted that in the interim "no further adjustments to the CCI financial score for FY 2012 are anticipated." The Company will cooperate with ED in its review.

        The Company continues to disagree with ED's treatment of the fiscal year 2011 goodwill impairment as well as ED's exclusion of a portion of the Company's long-term debt from the calculation of the Company's fiscal year 2011 composite score. The Company's revolving credit facility requires the Company to maintain a composite score of no less than 1.5. ED's determination that our fiscal 2011 score was 0.9 could be considered an event of default under our revolving credit agreement. We have provided the ED Letter to our lenders, and they have granted a waiver for fiscal 2011.

        For our fiscal year ended June 30, 2013, our calculations show that, on a consolidated basis, we have a passing composite score of 1.5. ED has not yet concurred with our calculations of the composite score for the fiscal year ended June 30, 2013, and we will not submit our calculations for some time. We believe our calculations for the fiscal years ended June 30, 2012 and 2013, both of which are still open, are correct. However, if ED were to conclude that we achieved a financial responsibility of less than 1.0 in any given year, or that we were in the "zone" for three years in a row, we could be required to satisfy the standards of financial responsibility on an alternative basis, including potentially by posting an irrevocable letter of credit equal to at least 10 percent of our prior year's Title IV receipts. Additionally, any definitive determination by ED that our composite score is less than 1.5 in fiscal years 2012 or 2013 could be a default under our credit agreement. We cannot provide assurance that ED will agree with our calculations, or that our institutions will continue to satisfy the financial responsibility standards in the future. If we were found by ED to have not satisfied the financial

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responsibility standards, or if we fail to satisfy such standards in the future, it could have an adverse impact on our access to Title IV funds, our financial condition, cash flows and results of operations.

One or more of our institutions may have to post a letter of credit or be subject to other sanctions if they do not correctly calculate and timely return Title IV Program funds for students who withdraw before completing their program of study.

        A school participating in Title IV Programs must correctly calculate the amount of unearned Title IV Program funds that was disbursed to students who withdrew from their educational programs before completing them, and must return those unearned funds in a timely manner, generally within 45 days of the date the school determines that the student has withdrawn. If the unearned funds are not properly calculated and timely returned, we have to post letters of credit in favor of ED or be otherwise sanctioned by ED. An institution is required to post a letter of credit with ED in an amount equal to 25% of the total dollar amount of unearned Title IV Program funds that the institution was required to return with respect to withdrawn students during its most recently completed fiscal year, if the institution was found in an audit or program review to have untimely returned unearned Title IV Program funds with respect to 5% or more of the students in the audit or program review sample of withdrawn students, in either of its two most recently completed fiscal years. We currently have outstanding letters of credit posted in favor of ED in the aggregate amount of $13.7 million. The requirement to post additional letters of credit or other sanctions by ED could increase our cost of regulatory compliance and adversely affect our results of operations.

If regulators do not approve our acquisitions, the acquired school(s) would not be permitted to participate in federal student financial aid programs.

        When we acquire an institution that participates in federal student financial aid programs, we must seek approval from ED and most applicable state agencies and accrediting agencies because an acquisition is considered a change of ownership or control of the acquired institution under applicable regulatory standards. A change of ownership or control of an institution under ED standards can result in the temporary suspension of the institution's participation in the federal student financial aid programs unless a timely and materially complete application for recertification is filed with ED and ED issues a temporary certification document. If we are unable to obtain approvals from the state agencies, accrediting agencies or ED for any institution we may acquire in the future, depending on the size of that acquisition, such a failure to obtain approval could have a material adverse effect on our business.

If regulators do not approve transactions involving a change of control or change in our corporate structure, we may lose our ability to participate in federal student financial aid programs.

        Additionally, if regulators do not approve transactions involving a change of control of the Company, all of our institutions may lose their ability to participate in federal student financial aid programs. If we experience a change of control under the standards of applicable state agencies or accrediting agencies or ED, we or the affected institutions must seek the approval of the relevant agencies. Some of these transactions or events, such as a significant acquisition or disposition of our common stock by third parties on the open market or through a tender offer, may be beyond our control. The adverse regulatory effect of a change of ownership resulting in a change of control could also discourage bids for our outstanding shares of common stock at a premium and could have an adverse effect on the market price of our common stock.

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If we fail to demonstrate "administrative capability" to ED, our business could suffer.

        ED regulations specify extensive criteria an institution must satisfy to establish that it has the requisite "administrative capability" to participate in federal student financial aid programs. These criteria require, among other things, that the institution:

        If an institution fails to satisfy any of these criteria, ED may:

        Should one or more of our institutions be limited in their access to, or lose, federal student financial aid funds due to their failure to demonstrate administrative capability, our business could be materially adversely affected.

Regulatory agencies or third parties may conduct compliance reviews, commence investigations, bring claims or institute litigation against us.

        Because we operate in a highly regulated industry, we may be subject from time to time to program reviews, audits, investigations, claims of non-compliance, or lawsuits by governmental agencies or third parties, which may allege statutory violations, regulatory infractions, or common law causes of action. In this regard, the Company currently has open program being conducted by ED at the following stages: (i) Everest College Phoenix ("ECP") has received program review reports and provided written responses regarding the site visits ED conducted at ECP in 2008 and 2010, but has not yet received final determinations for either program review, and (ii) ED has conducted site visits at the Company's campuses in Largo, FL in August 2012, Pompano Beach, FL in September 2012, Renton, WA in September 2012, Salinas, CA in June 2013, Southfield, MI in June 2013, Stockton, CA in July 2013, and Long Beach, CA in August 2013, but has not yet issued program review reports with respect to any of those site visits. Additionally, under the old Federal Family Education Loan (FFEL) Program, which has since been replaced by the FDL program, nonprofit and state guaranty agencies were established to guarantee student loans made by lenders and perform certain administrative and oversight functions under the FFEL program. Guaranty agencies perform program occasional reviews at schools to ensure that schools are meeting all regulatory requirements and guarantor policies in the FFEL program. Eleven guaranty agency program review site visits were conducted in our institutions during fiscal year 2013, and nine program review reports have been issued. The Company is in the process of responding to these reports, including conducting file reviews with respect to findings identified in the reports.

        If the results of the compliance reviews, audits or investigations are unfavorable to us or if we are unable to successfully defend against third-party lawsuits, we may be required to repay federal student

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aid, pay money damages or be subject to fines, penalties, injunctions or other censure that could have a materially adverse effect on our business. We also may be limited in our ability to open new schools or add new program offerings and may be adversely impacted by the negative publicity surrounding compliance review, investigation or lawsuit. Even if we adequately address the issues raised by an agency review or investigation or successfully defend a third-party lawsuit, we may suffer interruptions in cash flows due to, among other things, transfer from the advance funding to the "reimbursement" or "heightened cash monitoring" method of Title IV program funding, and we may have to devote significant financial and management resources to address these issues, which could harm our business. Additionally, we may experience adverse collateral consequences, including declines in the number of students enrolling at our schools and the willingness of third parties to deal with us or our schools, as a result of any negative publicity associated with such reviews, claims or litigation.

Certain regulatory authorities have initiated investigations into us and other companies in the for-profit education sector that could result in adverse actions, fines, penalties or other censure that may materially and adversely affect our business.

        Since October 2010 the Company has been contacted by attorneys general offices in the states of Florida, Massachusetts, Oregon, New York, Wisconsin, Minnesota, California, and Illinois. Each of those states' attorneys general office has requested from the Company, either through subpoenas, civil investigative demands, or informal requests, extensive document requests regarding our business. The Oregon Attorney General's office closed its investigation after nearly a year-long inquiry without taking any enforcement action. In every state but Wisconsin, we understand the attorneys general are conducting broad inquiries into private sector education companies in their respective states, and not solely into the Company.

        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.

        Additionally, the Company has also received inquiries from the Department of Justice and the Assistant U.S. Attorney involved in reviewing the previously-disclosed Lee qui tam matter regarding the Company's attendance procedures. The Company infers, but has been unable to confirm, that these inquiries may relate to one or more additional qui tams filed under seal that may be pending the government's investigation and intervention decision. Separately, on April 24, 2012, a complaint captioned United States of America ex rel. Carolina Marion v. Heald College Inc. and Corinthian Colleges Inc. was filed under seal in the U.S. District Court for the Northern District of California. Since the complaint was filed under seal, the Company has not been able to obtain a copy of the complaint but infers that this too is a qui tam action brought under the False Claims Act. The Company has also received an inquiry from the Assistant U.S. Attorney apparently involved in reviewing the Marion matter regarding attendance procedures at the Heald Salinas campus.

        On April 3, 2012, the Company was served with a Civil Investigative Demand ("CID") from the U.S. Consumer Financial Protection Bureau ("CFPB"). The CID stated that its purpose is to "determine whether for-profit postsecondary companies, student loan origination and servicing providers, or other unnamed persons, have engaged or are engaging in unlawful acts or practices relating to the advertising, marketing, or origination of private student loans." The CID contains extensive interrogatories and document production demands related to the Company's involvement with student loans and many other aspects of the Company's business. The Company has objected to the

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inquiry by filing a petition with the CFPB to set aside or modify the CID, but has voluntarily provided documents and other information to the CFPB. Recently, the CFPB indicated an intention to withdraw the existing CID and issue a new CID to the Company.

        In June 2013, the Company received correspondence and subpoenas from the Securities and Exchange Commission indicating that the SEC is conducting an investigation of the Company. The SEC has requested the production of documents and communications that, among other things, relate to student information in the areas of recruitment, attendance, completion, placement, defaults on federal loans and on alternative loans, as well as compliance with U.S. Department of Education financial requirements, standards and ratios (including the effect of certain borrowings under the Company's revolving credit facility on the Company's composite score, and 90/10 compliance), and other corporate, operational, financial and accounting matters.

        We are continuing to cooperate with these investigations, but we cannot predict their ultimate resolution. We expect to continue to incur significant legal costs and other expenses in connection with responding to them. We may be required to pay damages or settlement costs in excess of our insurance coverage, if any, related to these matters. Government investigations, including the pending investigations in which we are involved, and any related legal and administrative proceedings, may result in the institution of administrative, injunctive or other proceedings against us and/or our institutions, officers or employees, or the imposition of fines, penalties or suspensions, or other remedies and sanctions. Any such material costs and expenses or injunctive relief could have a material adverse effect on our financial condition and results of operations.

Investigations, claims and actions against other companies in our sector could adversely affect our business and stock price.

        During the past decade, we and other companies in the for-profit postsecondary education industry have been subject to intense regulatory scrutiny. In some cases, allegations of wrongdoing have resulted in reviews or investigations by the Justice Department, state attorneys general, the SEC, ED, state agencies, accrediting agencies and other entities. These allegations, reviews and investigations and the accompanying adverse publicity could have a negative impact on the for-profit postsecondary education sector in general, our business and the market price of our common stock.

Failure to comply with extensive Canadian regulations could affect the ability of our Canadian schools to participate in Canadian financial aid programs.

        Our post-secondary schools in Canada derive a significant percentage of their revenue on a cash basis from Canadian governmental financial aid programs, and our Canadian students receive loans under student financial aid programs.

        Our Canadian schools must meet eligibility standards to administer these programs and must comply with extensive statutes, rules, regulations and requirements. If our Canadian schools cannot meet these and other eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our business.

        Additionally, the Canadian and Ontario provincial governments continuously review the legislative, regulatory and other requirements relating to student financial assistance programs due to political and budgetary pressures. Although we do not currently anticipate a significant reduction in the funding for these programs, any change that significantly reduces funding or the ability of our schools to participate in these programs could have a material adverse effect on our business and results of operations.

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Operational and Economic Risks That Could Have a Material Adverse Effect on Our Business

North American macroeconomic conditions, particularly unemployment, could affect the demand for our services.

        The North American economy has been in the midst of a prolonged economic downturn in recent years. These conditions contributed to a portion of our enrollment growth from fiscal 2008 to 2011 as more potential new students were attracted to our schools to advance their education and improve their job prospects in the midst of severe unemployment in the U.S. economy. Improvements in the North American economy, including overall reductions in unemployment, have negatively affected overall demand for our educational services and contributed to declines in new student enrollment over the last two fiscal years, and could continue to do so. A more robust economic recovery in North America may further negatively impact demand for our services from potential new students, and could have a material adverse effect on our business, financial condition and results of operations.

Our discount student loan programs could have a material adverse effect on our financial condition, results of operations and cash flows.

        Our discount student loan programs have enabled students who have exhausted all available government-sponsored or other aid and are ineligible for private loans from other financial institutions to borrow a portion of their tuition and other educational expenses at our schools if they or a co-borrower meet certain criteria. Historically, we had developed several loan programs with origination and servicing providers such as Sallie Mae for students with low credit scores who otherwise would not qualify for loans. These loan programs required that we pay a discount fee to the origination and servicing providers of the loans as a reserve against future defaults on these loans. We have historically referred to these types of loans as "discount loans," since we incurred a portion of the default risk related to these students' loans by taking a discount on the disbursement from the third party.

        In early 2008 we were informed by Sallie Mae and two other origination and servicing providers that they would no longer make private loans available for students. In the face of this change in policy, we created a new student lending program with a different origination and servicing provider, Genesis. This Genesis loan program has characteristics similar to our previous "discount loan" programs. Under the Genesis loan program, we paid a discount to the origination and servicing provider. As with our previous discount loan program, we record the discount as a reduction to revenue, as the collectability of these amounts is not reasonably assured. However, unlike our previous discount loan programs, under our Genesis discount loan program we have both the right and the obligation (subject to certain limitations in our agreement with Genesis), to acquire the related loans. Since we initiated the program in the fourth quarter of fiscal 2008, we acquired all of the loans that have been originated thereunder.

        On June 29, 2012, we amended the loan origination agreement and related documents with ASFG. The original agreement with ASFG was entered into on June 29, 2011 for the purpose of creating a new private education discount loan program for our students. Pursuant to the amended loan origination agreement, ASFG has indicated it intends to purchase approximately $775 million in new student loans through June 2015. Under this agreement, an unaffiliated bank makes private education loans to eligible students and, subsequently, sell those loans to ASFG or its designee. If ASFG is unable or unwilling to purchase such loans, our students would lose an important source of funding for their education, and we would lose an important source of cash flows. Additionally, the loss of any significant source of non-Title IV funding for our students would make it difficult for us to comply with the 90/10 Rule and failure to be able to comply with the rule would materially negatively affect our business.

        The ASFG loan program has characteristics similar to our previous "discount loan" programs. As with the previous discount third party discount loan programs, under this ASFG program we pay an

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upfront discount to ASFG for any notes purchased by ASFG and record the upfront discount as a deferred charge and amortize the charge as a reduction to revenue ratably over the program length as the related revenue is recognized. However, unlike our previous third party discount loan programs, pursuant to a backup loan purchase agreement entered into in connection with the loan origination agreement, we have guaranteed to purchase any of the student notes on which no payment has been made for over 90 days. Under this backup loan purchase agreement, our maximum obligation (including the initial discount payment) could be equal to the face amount of loans originated under this loan program, although the Company expects its ultimate risk under this loan program to be substantially similar to the risks it faces under our Genesis discount loan program.

        Federal, state and local laws and public policy relating to the protection of consumers apply to the origination, servicing and collection of the loans that we purchase under this program. Any violation of the various federal, state and local laws, including, in some instances, violations of these laws by parties not under our control, may result in losses on the loans that we purchase or may limit our ability to collect all or part of the principal or interest on the loans that we purchase. This may be the case even if we are not directly responsible for the violations by such parties. Federal or state financial regulators also might delay or suspend the new student loan program for a variety of reasons. Additionally, depending on the terms of the loans, state consumer credit regulators may assert that our activities in connection with the new student loan program require us to obtain one or more licenses, registrations or other forms of regulatory approvals, any of which may not be able to be obtained in a timely manner, if at all. The CFPB may also take the position that these loans constitute unfair, deceptive, or abusive acts and practices.

        For the Genesis and ASFG discount loans we acquire or have acquired, we bear the risks of collection. Therefore, even though we record the discount as a reduction to revenue, to the extent collections are less than the net amount of revenue recorded, we may still experience increases in our allowance for doubtful accounts and our discount expense may increase. Factors that may impact our ability to collect these loans include general economic conditions, compliance with laws applicable to the origination, servicing and collection of loans, the quality of our loan servicers' performance and the priority that borrowers, particularly students who did not complete or were dissatisfied with their programs of study, attach to repaying these loans as compared to other obligations. All of these factors could result in the Genesis and ASFG discount loan programs having a material adverse effect on our business, financial condition and results of operations.

If students fail to pay their outstanding balances, our business will be harmed.

        We offer a payment plans to help students pay that portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed. Losses related to unpaid student balances in excess of the amounts we have reserved could have a material adverse effect on our business.

Our marketing and advertising efforts may not be effective in attracting prospective students.

        In order to maintain and increase our revenues and margins, we must continue to attract new students in an effective and efficient manner. If we are unable to successfully advertise and market our schools, our ability to attract and enroll new students could be adversely impacted and, consequently, our financial performance could suffer. We use marketing tools such as the Internet, radio, television and print media advertising to promote our schools and programs. Our representatives also make presentations at high schools. If we are unable to utilize these advertising methods in a cost-effective manner or if our other costs limit the amount of funds we can contribute to advertising, our revenue and margins may suffer. Additionally, we rely on the general reputation of our schools and referrals from current students, alumni and employers as a source of new students. Among the factors that could prevent us from successfully marketing and advertising our schools and programs are the failure of our

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marketing tools and strategy to appeal to prospective students, current student and/or employer dissatisfaction with our program offerings or results, and diminished access to high school campuses.

If we cannot effectively identify, acquire and integrate additional schools, it could harm our business.

        We expect to continue to rely on acquisitions as a component of our growth strategy. We often engage in evaluations of, and discussions with, possible acquisition candidates. We cannot make assurances that we will be able to identify suitable acquisition candidates or that we will be able to acquire any of the acquisition candidates on favorable terms. Furthermore, we cannot make assurances that any acquired schools can be successfully integrated into our operations or be operated profitably. Acquisitions involve a number of risks that include:

        Continued growth through acquisitions may also subject us to unanticipated business or regulatory uncertainties or liabilities. When we acquire an existing school, we typically allocate a significant portion of the purchase price to fixed assets, curriculum, goodwill and intangibles, such as covenants not-to-compete, trade names and accreditations. The Company does not amortize goodwill, accreditation, or trade names as these assets meet the indefinite life criteria outlined in the accounting guidance. Curricula are amortized over their useful lives ranging generally from three to fifteen years and student relationships are amortized over their useful life of one year. Goodwill is tested annually or more frequently for impairment. Indefinite-lived intangible assets are tested annually or more frequently if circumstances indicate potential impairment, by comparing their fair values to their carrying amounts. Separable intangible assets that are not deemed to have indefinite lives are amortized over their useful lives. In addition, our acquisition of a school is a change of ownership of that school, which may result in the temporary suspension of that school's participation in federal student financial aid programs until it obtains ED's approval. If we fail to successfully manage our acquisitions, our business would likely suffer.

Our future financial condition and results of operations could be materially adversely affected if we are required to write down the carrying value of goodwill or other intangible assets.

        Goodwill and other intangible assets are tested annually, or more frequently if circumstances indicate potential impairment, by comparing their fair value to the carrying amount at the reporting unit level as defined by the accounting guidance. We determined the fair value of our reporting units using a combination of an income approach, based on discounted cash flow, and a market-based approach. To the extent the fair value of a reporting unit is less that the carrying amount of its assets, we record an impairment charge in the consolidated statements of operations.

        In connection with receipt of federal financial aid by the Company's students, the Company is subject to extensive regulation by governmental agencies and licensing and accrediting agencies. Compliance with the regulations promulgated by these various bodies could have a material impact on the manner in which the Company conducts its business. Should the Company need to take additional actions to comply with current and future regulations, the assumptions used to calculate the fair value of our reporting units, including estimation of future cash flows, revenue growth, and discount rates, could be negatively impacted and could result in an impairment of goodwill or other intangible assets. If our stock price remains depressed or declines further, or if for any other reason we are required to significantly write down the value of our goodwill or other intangible assets, it could have a material adverse effect on our financial condition and results of operations.

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Failure to effectively manage opening new schools and adding new services could harm our business.

        Establishing new schools requires us to make investments in management, capital expenditures, marketing expenses and other resources. To open a new school, we are also required to obtain appropriate state and accrediting agency approvals. In addition, to be eligible for federal student financial aid programs, the new school is required to be certified as eligible to receive Title IV funds by ED. We cannot assure you that we will be able to successfully open new schools in the future. Our failure to effectively manage the operations of newly established schools could have a material adverse effect on our business.

Our success depends upon our ability to recruit and retain key personnel.

        We depend on key personnel, including Jack D. Massimino, Kenneth S. Ord, Robert D. Bosic, Beth A. Wilson, William B. Buchanan, Stan A. Mortensen, and Robert C. Owen, to effectively operate our business. If any of these people left our Company and we failed to effectively manage a transition to new people, our business could suffer.

        Our success also depends, in large part, upon our ability to attract and retain highly qualified faculty, school presidents and administrators and campus support center management. We may have difficulty locating and hiring qualified personnel, and retaining such personnel once hired. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could cause our business to suffer.

Anti-takeover provisions in our charter documents and Delaware law could make an acquisition of our company difficult.

        Our certificate of incorporation, our by-laws and Delaware law contain provisions that may delay, defer or inhibit a future acquisition of our Company not approved by our board of directors. These provisions are intended to encourage any person interested in acquiring us to negotiate with and obtain the approval of our Board of Directors. Our certificate of incorporation also permits our board of directors to issue shares of preferred stock with voting, conversion and other rights as it determines, without any further vote or action by our stockholders. By using preferred stock, we could:

We face litigation that could have a material adverse effect on our business, financial condition and results of operations.

        We and our schools are subject to various lawsuits, investigations and claims, covering a wide range of matters, including, but not limited to, claims involving our current and former students, alleged violations of federal and state laws, false claims made to the federal government and employment matters. It is possible that we may be required to pay substantial damages or settlement costs in excess of our insurance coverage or current reserves, which could have a material adverse effect on our financial condition or results of operation. We could also incur substantial legal costs, and management's attention and resources could be diverted from our business.

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Failure to keep pace with changing market needs and technology could harm our business.

        Prospective employers of our graduates increasingly demand that their entry-level employees possess appropriate technological skills. Educational programs at our schools, particularly programs in information technology, must keep pace with these evolving requirements. If we cannot respond to changes in industry requirements, it could have a material adverse effect on our business.

Competitors with greater resources could harm our business.

        The post-secondary education market is highly competitive, and has become ever more so over the past several years. Our schools compete with traditional public and private two-year and four-year colleges and universities and other proprietary schools, including those that offer on-line learning programs. Some public and private colleges and universities, as well as other private career-oriented schools, may offer programs similar to those of our schools. Although tuition at many private non-profit institutions is higher than tuition at our schools, some public institutions are able to charge lower tuition than our schools, due in part to government subsidies, government and foundation grants, tax-deductible contributions and other financial sources not available to proprietary schools. Some of our competitors in both the public and private sectors have substantially greater financial and other resources than us.

Failure to obtain additional capital in the future could reduce our ability to grow.

        We may need additional debt or equity financing in order to carry out our growth strategies. The amount and timing of such additional financing will vary depending on the timing and size of acquisitions, our availability to access credit markets, the sellers' willingness to provide financing themselves and our other cash and liquidity needs. To the extent that we require additional financing in the future and are unable to obtain such additional financing, we may not be able to fully implement our growth strategy.

If natural disasters, terrorist attacks, public transit strikes or economic downturns occur in specific geographic areas where we have a high concentration of schools, our business could be harmed.

        We have large numbers of schools concentrated in certain geographic areas. For instance, we have a high concentration of schools in California, Florida, Texas, Georgia, Michigan, the Province of Ontario and other states and cities. We expect to continue to have high concentrations of schools in large metropolitan areas as we create new branch campuses and acquire new schools. These geographic concentrations may change or intensify over time. If natural disasters, terrorist attacks, public transit strikes, economic developments or other adverse events occur or are more intensively felt in some of these concentrated geographic areas, our business and results of operations could be disproportionately affected compared to the rest of the United States and Canada.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        Our campus support center office is located in Santa Ana, California and our 111 campuses as of June 30, 2013, are located in 25 states and in the province of Ontario, Canada. Each campus provides our students with lecture rooms, 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

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fiscal 2009 through fiscal 2013, approximately 7% of the campuses have been relocated and substantially all campuses have been either expanded or remodeled. The following table reflects the number of campuses added, closed, combined or sold, and the number of campuses that have been relocated, enlarged or remodeled during each of the last five fiscal years ended June 30 and has been updated to reflect solely continuing operations:

 
  2013   2012   2011   2010   2009  

Opened

                               

Acquired

                11      

Branched

    1     2     5     1      

Campuses at year end

    111     110     108     103     91  

Relocated

        1     1     1     5  

Enlarged or remodeled

    13     7     6     11     3  

(1)
In fiscal 2013, we moved 6 schools into discontinued operations by teaching them out, and completed the sale of 4 schools that we had put into discontinued operations in fiscal 2012. In fiscal 2012, we moved 6 schools into discontinued operations by making the decision to sell them and discontinued operations at two additional campuses by teaching them out. Of the 6 schools we decided to sell in 2012, we sold only 4, closed another and decided to retain the last, resulting in an aggregate of 5 schools presented into discontinued operations in fiscal 2012.

        All but 4 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.

        Square footage of our schools and colleges varies significantly based upon the type of programs offered and the market being served. Please see the section entitled "Programs of Study" in Item 1, "Business", for square footage by location.

ITEM 3.    LEGAL PROCEEDINGS

        See Litigation and Regulatory Matters in Note 13—Commitments and Contingencies to the Consolidated Financial Statements, which is incorporated by reference.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2013.


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        We have never paid cash dividends on our common stock. Payment of dividends in the future, if at all, will depend upon our earnings and financial condition and various other factors our Board of Directors may deem appropriate at the time. Our amended credit agreement limits the payment of cash dividends.

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        During July 2010, the Company's Board of Directors approved a stock repurchase program under which the Company may purchase up to $200 million of its common stock. Corinthian plans to repurchase shares on the open market or in private transactions from time to time, depending on the company's cash balances, general business and market conditions, and other factors, including alternative investment opportunities. As of June 30, 2013 the Company had repurchased 3,917,200 shares at an average price of $6.38 under this program. No shares were repurchased in fiscal years 2013 or 2012.

        From November 2006 through May 2007, the Company purchased 2,256,600 shares at a total cost of $31.4 million at an average price of $13.90 per share under a previous stock purchase agreement.

        Our common stock is listed on the Nasdaq National Market System under the symbol "COCO." The approximate number of holders of record of our common stock as of August 22, 2013 was 28. Our common stock was first listed on Nasdaq upon completion of our initial public offering in February 1999.

        On August 22, 2013 the closing price per share of common stock was $2.56 and the range of high and low closing sales prices of our common stock, as reported by the Nasdaq National Market System, for each applicable quarter in fiscal 2012 and 2013, and the first quarter to date of fiscal 2014, is as follows:

 
  Price Range of Common Stock  
 
  High   Low  

Fiscal Years Ended June 30:

             

2012:

             

First Quarter

  $ 4.69   $ 1.55  

Second Quarter

    2.74     1.36  

Third Quarter

    5.13     2.22  

Fourth Quarter

    4.22     2.39  

2013:

             

First Quarter

  $ 3.21   $ 1.83  

Second Quarter

    2.85     2.03  

Third Quarter

    2.80     2.00  

Fourth Quarter

    2.80     1.88  

2014:

             

First Quarter through August 22, 2013

  $ 2.56   $ 2.15  

        As of June 30, 2013, our equity compensation plans consisted of the 1998 Performance Award Plan (the "1998 Plan"), the 2003 Performance Award Plan as amended (the "2003 Plan"), the 2004 New Hire Plan (the "New Hire Plan") and the Employee Stock Purchase Plan (the "ESPP"). The 1998 Plan, the 2003 Plan and the ESPP have all been approved by our shareholders.

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        The New Hire Plan has not been approved by our shareholders. The Company's ability to issue new stock-based awards under the New Hire Plan was terminated as of November 17, 2005.

Plan Category
  Number of securities
to be issued upon
exercise of
outstanding
options, warrants
and rights
  Weighted-average
exercise price of
outstanding
options,
warrants, and
rights
  Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
 

Equity compensation plans approved by security holders

    14,888,887 (1) $ 8.35 (3)   7,106,473  

Equity compensation plans not approved by security holders

    99,500 (2) $ 16.18 (3)    
               

Total

    14,988,387   $ 8.40 (3)   7,106,473  
               

(1)
Includes 3,347,551 shares to be issued upon the vesting of Restricted Stock Units ("RSUs"), for which no exercise price will be paid.

(2)
Includes 10,000 shares to be issued upon the vesting of RSUs, for which no exercise price will be paid.

(3)
For purposes of calculating weighted average exercise price, RSUs are assumed to have an exercise price of $0.

        The following graph shows a comparison of cumulative total returns for Corinthian, the Russell 2000 Index and an index of peer companies selected by Corinthian during the period commencing on June 30, 2008 and ending on June 30, 2013. The comparison assumes $100 was invested on June 30, 2008 in the Common Stock, the Russell 2000 Index and the peer companies selected by Corinthian and assumes the reinvestment of all dividends, if any. The companies in the peer group, all of which are education companies, are weighted according to their market capitalization. Included in the peer group are: Apollo Group Inc., Career Education Corporation, DeVry, Inc., ITT Educational Services, Inc., Lincoln Educational Services Corporation, Universal Technical Institute, Inc. and Strayer Education, Inc.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Corinthian Colleges, Inc., the Russell 2000 Index and a Peer Group

GRAPHIC


*
$100 invested on 6/30/2008 in stock or index, including reinvestment of dividends. Fiscal year ending June 30.

Date   Corinthian
Colleges, Inc.
  Russell
2000
  Peer
Group
  Date   Corinthian
Colleges, Inc.
  Russell
2000
  Peer
Group
  Date   Corinthian
Colleges, Inc.
  Russell
2000
  Peer
Group
 
  6/08     100.00     100.00     100.00     2/10     139.71     93.52     133.69     10/11     16.45     112.61     84.82  
  7/08     135.66     103.70     121.26     3/10     151.51     101.13     139.53     11/11     22.65     112.20     79.21  
  8/08     114.30     107.45     120.27     4/10     134.54     106.86     131.93     12/11     18.69     112.94     86.39  
  9/08     129.20     98.89     112.06     5/10     115.33     98.75     125.51     1/12     26.10     120.92     88.66  
  10/08     123.00     78.32     126.51     6/10     84.84     91.10     105.70     2/12     38.67     123.81     78.76  
  11/08     138.50     69.05     136.04     7/10     78.38     97.36     111.79     3/12     35.66     126.99     73.29  
  12/08     141.00     73.06     134.37     8/10     42.03     90.15     84.38     4/12     33.07     125.03     69.31  
  1/09     160.90     64.93     144.85     9/10     60.47     101.38     104.78     5/12     23.60     116.75     61.67  
  2/09     169.68     57.04     131.83     10/10     45.05     105.53     86.65     6/12     24.89     122.58     69.67  
  3/09     167.53     62.13     138.02     11/10     35.66     109.19     81.01     7/12     17.40     120.88     48.71  
  4/09     132.64     71.74     118.57     12/10     44.88     117.86     91.73     8/12     17.40     124.91     45.89  
  5/09     132.47     73.90     112.80     1/11     45.48     117.56     93.02     9/12     20.59     129.01     49.87  
  6/09     145.82     74.99     132.56     2/11     45.13     124.01     101.36     10/12     23.47     126.22     41.40  
  7/09     132.99     82.21     128.68     3/11     38.07     127.22     97.12     11/12     19.12     126.89     39.00  
  8/09     165.12     84.57     128.42     4/11     38.33     130.58     93.67     12/12     21.10     131.41     40.20  
  9/09     159.86     89.45     139.39     5/11     33.25     128.13     93.87     1/13     21.19     139.63     40.47  
  10/09     136.61     83.37     118.00     6/11     36.69     125.18     100.91     2/13     18.35     141.17     38.84  
  11/09     127.65     85.99     120.23     7/11     35.83     120.65     109.75     3/13     18.13     147.69     39.73  
  12/09     118.60     92.91     125.12     8/11     18.95     110.16     90.09     4/13     17.23     147.15     39.23  
  1/10     120.59     89.49     125.51     9/11     13.35     97.81     74.74     5/13     22.31     153.03     44.12  
                                                  6/13     19.29     152.25     41.38  

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ITEM 6.    SELECTED FINANCIAL DATA

        The following selected financial data are qualified by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere in this Report on Form 10-K and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected statement of operations data and the balance sheet data set forth below as of and for each of the 5 years ended June 30, 2013, 2012, 2011, 2010 and 2009 are derived from our audited consolidated financial statements. These historical results are not necessarily indicative of the results that may be expected in the future. The information contained throughout this document is presented on a continuing operations basis, unless otherwise stated.

 
  Years Ended June 30,  
 
  2013   2012   2011   2010(3)   2009  
 
  (In thousands, except per share data)
 

Statement of Operations Data:

                               

Net revenues(1)

  $ 1,600,205   $ 1,581,933   $ 1,750,734   $ 1,617,106   $ 1,185,257  
                       

Operating expenses:

                               

Educational services

    983,516     955,660     1,022,985     879,186     672,663  

General and administrative

    165,544     175,572     205,123     192,554     135,747  

Marketing and admissions

    396,039     391,007     382,903     327,944     267,029  

Impairment, facility closing, and severance charges

    3,565     15,644     220,058         4,324  
                       

Total operating expenses

    1,548,664     1,537,883     1,831,069     1,399,684     1,079,763  
                       

Income (loss) from operations

    51,541     44,050     (80,335 )   217,422     105,494  

Interest income

    654     1,772     878     1,069     1,610  

Interest expense, net

    (5,184 )   (9,128 )   (8,530 )   (5,010 )   (2,715 )

Other income (expense), net

    (23,803 )   (11,631 )   3,426     4,240     (1,154 )
                       

Income (loss) before provision for income taxes

    23,208     25,063     (84,561 )   217,721     103,235  

Provision for income taxes

    4,596     7,610     23,492     86,163     40,515  
                       

Income (loss) from continuing operations

    18,612     17,453     (108,053 )   131,558     62,720  

Income (loss) from discontinued operations, net of tax

    (20,272 )   (27,698 )   (3,112 )   14,413     6,040  
                       

Net (loss) income

  $ (1,660 ) $ (10,245 ) $ (111,165 ) $ 145,971   $ 68,760  
                       

Income (loss) per common share—basic:

                               

Income (loss) from continuing operations

  $ 0.22   $ 0.21   $ (1.27 ) $ 1.50   $ 0.73  
                       

(Loss) income from discontinued operations

  $ (0.24 ) $ (0.33 ) $ (0.03 ) $ 0.16   $ 0.07  
                       

Income (loss) per common share—diluted:

                               

Income (loss) from continuing operations

  $ 0.21   $ 0.20   $ (1.27 ) $ 1.48   $ 0.72  
                       

(Loss) income from discontinued operations

  $ (0.23 ) $ (0.32 ) $ (0.03 ) $ 0.17   $ 0.07  
                       

Weighted average number of common shares outstanding:

                               

Basic

    85,881     84,982     85,388     87,696     86,121  
                       

Diluted

    86,868     85,581     85,388     88,707     87,517  

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  Years Ended June 30,  
 
  2013   2012   2011   2010   2009  
 
  (Dollars in thousands)
 

Other Data:

                               

Cash flow provided by (used in):

                               

Operating activities

  $ 41,546   $ 152,766   $ 15,022   $ 204,290   $ 198,677  

Investing activities

    (55,206 )   (2,899 )   (110,660 )   (430,787 )   (48,794 )

Financing activities

    (12,138 )   (184,429 )   (7,074 )   275,244     (21,420 )

Capital expenditures

    (44,061 )   (42,196 )   (110,660 )   (83,488 )   (49,525 )

Number of colleges/training centers at end of period

    111     110     108     102     90  

Student population at end of period

    81,284     90,794     88,997     103,010     78,581  

Starts during the period(2)

    106,200     108,841     113,955     125,663     105,672  

Balance Sheet Data:

                               

Cash and cash equivalents

  $ 46,596   $ 72,525   $ 107,430   $ 209,419   $ 160,528  

Working capital

    34,823     42,041     198,838     151,071     122,367  

Total assets

    1,028,744     1,073,021     1,204,225     1,389,420     798,871  

Long-term debt, net of current portion

    123,408     132,653     317,458     299,368     13,895  

Long-term capital lease obligations, net of current portion

    11,389     12,231     12,976     13,636     14,189  

Total stockholders' equity

  $ 570,843   $ 564,915   $ 565,067   $ 691,034   $ 517,668  

(1)
Represents student tuition and fees and bookstore sales, net of refunds.

(2)
Represents the new students starting school during the periods presented.

(3)
Included in the fiscal 2010 amounts are the Heald results for the six months ending June 30, 2010.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis should be read in conjunction with the Selected Financial Data and the Company's Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-K.

        As of June 30, 2013, we operated 111 colleges with 81,284 students in 25 states and the province of Ontario, Canada. During the fiscal year ended June 30, 2013, the Company had net revenues of $1,600.2 million. Our revenues consist principally of student tuition and fees and are presented as net revenues after adjustments for refunds related to students who do not complete their courses. We recognize revenues pro-rata (on a straight-line basis) over the relevant period attended by the student of the applicable course or program.

        Net revenues increased $18.3 million or 1.2% from $1,581.9 million in fiscal 2012 to $1,600.2 million in fiscal 2013. The increase is primarily due to a 3.7% increase in the average revenue rate per student offset partially by a 3.3% decrease in the average student population during the period. The decline in average student population was largely due to the loss of ATB students in the Everest ground schools. The student population varies depending on, among other factors, the number of (i) continuing students at the beginning of a fiscal period, (ii) new student enrollments during the fiscal period, (iii) students who have previously withdrawn but who reenter during the fiscal period, and (iv) graduations and withdrawals during the fiscal period. New student enrollments typically occur several times per month in the diploma-granting colleges. In the degree-granting colleges, the majority of new student starts occur in the first month of each calendar quarter with an additional "mini-start" in the second month of each quarter in most colleges. The tuition charges vary by college depending on the local market, the program level (diploma, associate, bachelor's or master's degree) and the specific

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curriculum. The majority of students at our colleges rely on funds received under various government-sponsored student financial aid programs to pay a substantial portion of their tuition and other education-related expenses.

        Most of our schools 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. Serving ATB students has historically been part of the Company's mission. 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, we stopped enrolling ATB students into our U.S. Everest and WyoTech institutions on September 1, 2010. Due to the success of our default prevention initiatives, we resumed enrolling ATB students on a more limited basis in June 2011. However, the Consolidated Appropriations Act of 2012 eliminated federal student aid eligibility for all students without a "certificate of graduation from a school providing secondary education or the recognized equivalent of such a certificate." A student who does not possess a high school diploma, or a recognized equivalent, but who is enrolled in a Title IV eligible program any time prior to July 1, 2012 may be eligible to receive Title IV student assistance after July 1, 2012. As of June 30, 2013, ATB students accounted for approximately 1.4% of total enrollments in our U.S. schools. To help offset the loss of ATB students associated with funding restrictions in the Appropriations Act, we are offering free General Education Development (GED) preparation services to the general public. We currently offer GED services at most of our U.S. campuses. We believe that some portion of students who obtain a GED through one of our schools could potentially enroll in one of our programs or pursue other post-secondary education.

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts on those financial statements. Note 1 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended June 30, 2013 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. On an on-going basis, we evaluate our estimates, including, but not limited to, those related to our allowance for doubtful accounts, insurance/self-insurance, goodwill and intangible assets, deferred taxes, assets and liabilities held for sale, contingencies and stock-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different conditions or if our assumptions change.

        Our critical accounting estimates are those which we believe require our most significant judgments about the effect of matters that are inherently uncertain. A discussion of our critical accounting estimates is as follows:

        Allowance for Doubtful Accounts.    We maintain an allowance for doubtful accounts for estimated losses resulting from the inability, failure or refusal of our students to make required payments. We determine the adequacy of this allowance by regularly reviewing the accounts notes receivable agings and applying various expected loss percentages to student accounts notes receivable categories based upon historical bad debt experience and consideration of the current economic environment. We generally write off accounts receivable balances deemed uncollectible as they are sent to collection agencies. We offer a variety of payment plans to help students pay that portion of their education expense not covered by financial aid programs. These balances are unsecured and not guaranteed. We

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believe our reserves are adequate; however, losses related to unpaid student balances could exceed the amounts we have reserved for bad debts. The effect of an increase in our accounts receivable allowance of 3% of our outstanding receivables from 19.9% to 22.9% or $19.1 million to $22.0 million would result in a decrease in pre-tax income from continuing operations of $2.8 million for the year ended June 30, 2013. The effect of an increase in our student notes receivable allowance of 3% of our outstanding earned notes receivable from 25.0% to 28.0% or $30.3 million to $33.9 million would result in a decrease in pre-tax income from continuing operations of $3.6 million for the year ended June 30, 2013.

        Many of our students in the U.S. participate in federally guaranteed student loan programs. The federally guaranteed student loans are authorized by the Higher Education Act ("HEA") of 1965 and are guaranteed by an agency of the federal government. The guaranteed loans are not guaranteed by us, and the guaranteed student loans cannot become an obligation of ours. Accordingly, we do not record an obligation to repay any of the guaranteed loans that are not repaid by our former students and we do not record either a contingent obligation or an allowance for future obligations as a result of student defaults of federally guaranteed student loans.

        However, if an institution's former students' default rate on guaranteed loans (the "Cohort Default Rate") equals or exceeds 30% for three consecutive years, the institution may lose participation eligibility in the guaranteed loan program and its students would be denied access to the guaranteed loan program. Our institutions' Cohort Default Rates act as a gatekeeper to their eligibility to participate in the federal student financial aid programs. We have no obligation to repay any of the federally guaranteed loans that our former students default upon, even if the Cohort Default Rates of our students exceed permitted levels. Rather, if the Cohort Default Rates at a particular institution exceed 30% for three consecutive years under current calculations, the institution's students may lose eligibility to receive federal student financial aid.

        Insurance/Self-Insurance.    We use a combination of insurance and self-insurance for a number of risks including claims related to employee health care, workers' compensation, general liability, and business interruption. Liabilities associated with these risks are estimated based on, among other things, historical claims experience, severity factors and other actuarial assumptions. The Company's loss exposure related to self-insurance is limited by stop loss coverage. Our expected loss accruals are based on estimates, and while we believe the amounts accrued are adequate, the ultimate loss may differ from the amounts provided.

        Goodwill represents the excess of the cost over the fair market value of net assets acquired, including identified intangible assets. We consider a number of factors, including valuations and appraisals from independent valuation firms, in determining the amounts that are assignable to other intangible assets, such as curriculum, accreditation, and trade names. We, however, are ultimately responsible for the valuations. The fair value of identified intangible assets is derived using accepted valuation methodologies, including cost, market, and income approaches, as appropriate, following consultations with valuation firms and the requirements set forth by the Uniform Standards of Professional Appraisal Practice.

        We do not amortize goodwill, accreditation, or trade names as these assets meet the indefinite life criteria within the accounting standards. Curricula are amortized over their useful lives ranging generally from five to fifteen years and the amortization is included in general and administrative expenses in the accompanying Consolidated Statements of Operations.

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        Goodwill is tested annually for impairment during the fourth quarter or earlier in the year upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not to be impaired. The testing of goodwill for impairment is required to be performed at the level referred to as the reporting unit. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component." We perform the goodwill impairment test one level below the operating segment level.

        At June 30, 2013, we have $205.6 million of goodwill, $197.9 million relating to the Heald reporting unit and $7.7 million relating to the 2013 QuickStart Intelligence Corporation ("QuickStart") acquisition—[See Note 7—Business Acquisitions and Dispositions]. Our fiscal year 2013 annual impairment tests did not result in an impairment charge. However, goodwill impairment assessments of the Heald goodwill related to the Heald acquisition involve significant judgments related to future revenues and earnings. For Heald, we assumed a WACC of 12.1%, revenue growth rates ranging from (3.0)% to 3.4% for fiscal 2014 to 2016 and a terminal growth rate of 4%, which resulted in fair value exceeding carrying value by approximately 12.3%. These assumptions reflect the lower risk of Heald relative to the Everest schools resulting from less exposure to ATB students and less regulatory uncertainty. Although we believe the estimates made are reasonable and supportable in connection with the impairment analysis, changes in strategy or market conditions could significantly impact these judgments and result in future impairments.

        Should our stock price remain depressed or decline further, we could incur additional goodwill impairment charges to write-down all or a portion of our goodwill. Additionally, the fair value measure of accounting for financial instruments established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Level 3 is defined as unobservable inputs in which little or no market data exists, therefore requiring and entity to develop it's own assumptions. The implied fair value of goodwill was determined using Level 3 inputs included in our discounted cash flow valuation method.

        Our fiscal year 2012 annual impairment tests did not result in an impairment charge. For Heald, we assumed a WACC of 11.7%, revenue growth rates ranging from (2.4%) to 3.4% for fiscal 2013 to 2015 and a terminal growth rate of 4%, which resulted in fair value exceeding carrying value by approximately 13.6%.

        During fiscal 2011, we recorded an impairment charge of $203.6 million due to a substantial decline in market capitalization. We believe that regulatory uncertainties, and the potential impact of new regulations, particularly regulations regarding gainful employment, had a sustained negative impact on our stock price, and, consequently, our market capitalization. During the second quarter of fiscal 2011, our market capitalization was below book value of our net assets, which we considered an indicator of impairment. Consequently, we performed an interim impairment test on goodwill and other indefinite-lived intangible assets.

        The testing of goodwill for impairment is required to be performed at the level referred to as the reporting unit. A reporting unit is either the "operating segment level" or one level below, which is referred to as a "component." We performed the goodwill impairment test one level below the operating segment level. The results of the interim impairment test indicated that the fair value of two of our reporting units with identified goodwill of $203.6 million was less than their carrying value. The goodwill of these two reporting units relates to Everest schools located in North America. Accordingly,

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we estimated the implied fair value of the goodwill of these reporting units by allocating the fair value of the reporting unit's assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value allocated to goodwill. As a result of this analysis, we determined that the current fair value of the goodwill in these reporting units was $0, and accordingly recorded an impairment charge of $203.6 million, the majority of which was nondeductible for tax purposes.

        We determined the fair value of the reporting units using an equal weighting of an income approach, based on discounted cash flow ("DCF"), and a market-based approach. The DCF incorporated our cash flow projections and a terminal value. This amount was then discounted using a weighted average cost of capital ("WACC") which considered our costs of debt and equity. We then reconciled the calculated fair value of the reporting units to our market capitalization, including a reasonable premium, as another consideration in assessing fair value.

        In establishing the WACC, consideration is given to specific regulatory risks related to each reporting unit, including the impact of our decision with respect to enrolling "ability to benefit" students. Our cash flow projections incorporate our best estimate of potential future changes related to gainful employment. However, further negative developments in the regulatory environment could impact future assessments and result in impairments of goodwill and other indefinite lived intangible assets. In addition, impairment assessments involve significant judgments related to future revenues and earnings. Although we believe we have made reasonable and supportable estimates in connection with its impairment analysis, changes in strategy or market conditions could significantly impact these judgments and result in future impairments.

        We believe the underlying reason for the $203.6 million impairment charge during fiscal 2011 resulted from continued uncertainty in the regulatory environment which resulted in an increase in business risk, particularly in the Everest schools. Accordingly we increased the WACC used in the impairment testing to reflect such risk, which reduced the present value of discounted cash flows and resulted in the impairment charge. The business risk related to the uncertainty in the regulatory environment remains an influence on our stock price. The forecasted operating results continue to reflect the impact of discontinuing the enrollment of ATB students as discussed within the "Background and Overview" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations".

        The magnitude of the impairment charge is partially driven by changes in the difference between the carrying value and the fair value of accreditation. Prior to the adoption of SFAS No. 141, "Business Combinations" in July 1, 2002 we did not allocate value to other indefinite-lived assets. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying amounts, regardless of acquisition date. Accordingly, the impairment test allocates fair market value to indefinite-lived intangible assets acquired prior to July 1, 2002 that were never assigned carrying value. This assignment of value to these indefinite-lived intangible assets for valuation purposes resulted in additional goodwill impairment as a carrying value was not allocated to these assets at the date of acquisition.

        The average WACC, terminal growth rate, and revenue growth rate used to determine the fair value of the reporting units that incurred goodwill impairment at December 31, 2010 were 21.0%, 1.8%, and 3.6%, respectively.

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        Indefinite-lived intangible assets are tested annually or more frequently if circumstances indicate potential impairment, by comparing their fair values to their carrying amounts. To the extent the fair value of an intangible asset is less than its carrying amount, an impairment charge is recorded in the Consolidated Statements of Operations. When testing for impairment, we calculate the present value of its estimates of the future cash flows expected to be received from the assets tested and compares this result to the carrying value of the assets tested. If the resulting amount was below the carrying value of the related assets, we would consider the assets to be impaired and take a charge to write down those assets to fair value.

        The determination of estimated useful lives of definite-lived intangible assets and whether or not intangible assets are impaired involves significant judgment. Although we believe the goodwill and intangible assets are fairly stated, changes in strategy or market conditions could significantly impact these judgments and require adjustments to asset balances.

        Accreditation is required for an institution to be eligible to participate in the federal student financial aid programs. The process of obtaining accreditation and access to Title IV funds is a barrier to entry for the industry. The process of applying for accreditation is a time intensive and expensive process, whereby an institution is required to operate without eligibility to Title IV funds for several years. For the 2013 fiscal year, our institutions derived the majority of their revenues from Title IV programs, and we as a whole derived approximately 84.8% of our net U.S. revenue from Title IV Programs.

        We used the With and Without Method in valuing accreditation both upon acquisition and in the performance of our impairment analysis, which estimates the fair value of an asset as the present value of differential cash flows between two scenarios. As it was applied to the fair valuation of accreditation, the "With" component reflects the present value of the "as is" cash flows, while the "Without" component of the analysis assumes the initial grant of accreditation, and the hypothetical scaling of operations to the "as is" state.

        For accreditation, the current "as is" scenario derives value from cash flows projected from fiscal 2014 to fiscal 2019, with revenue compound annual growth rates ranging from 2.4% to 6% with discount rates ranging from 14.3% to 34.3%. After the estimated future cash flows for the "as is" and Without scenarios were determined, management calculated their respective present values and then subtracted the present value of the Without scenario from the present value of the "as is" scenario to obtain the estimated fair value of accreditation. The significant assumptions for the Without scenario include revenue compound annual growth rates ranging from 55.1% to 83.6% with discount rates ranging from 14.3% to 34.3%. Using this analysis, at June 30, 2013 the fair value of accreditation exceeded book value by a range of 37.2% to 4,122%.

        We used the Relief from Royalty Method to estimate the fair value of trade names. Under the Relief from Royalty Method, estimated royalty rates were selected and applied to the revenue stream generated by trade names in order to estimate the potential value of the asset, assuming that trade names would be licensed to a third-party. For Heald, we assume a royalty rate of 3% based upon profit split analysis and comparable licensing transactions, a discount rate of 14.3%, a tax rate of 39%, and a terminal growth rate value of 4%. For WyoTech, we assume a royalty rate of 2.0% based upon profit split analysis and comparable licensing transactions, a discount rate of 21.8%, a tax rate of 39% and a terminal growth rate value of 1.5%.

        During the first quarter of fiscal 2012, we considered if any indicators of impairment existed at the balance sheet date. Consequently, we performed an interim impairment test on goodwill and other indefinite lived intangible assets. We believe that continued regulatory uncertainties, and the potential impact of new regulations have had a sustained negative impact on our stock price and current fair

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value. While the results of the interim impairment test did not indicate an impairment of goodwill, it did indicate that the fair value of certain intangible assets related to the WyoTech schools were impaired. The estimated fair values of WyoTech's trade names and accreditation fell below their carrying values of $14.0 million and $2.2 million, respectively, primarily due to the decline in market capitalization and the associated increase in the discount rate assumption compared to June 30, 2011. As a result, we recorded an impairment charge of $7.1 million, which reduced the carrying value of WyoTech's trade names to $8.6 million and accreditation to $0.5 million. The impairment charge is reflected in the "Impairment, facility closing and severance charges" caption on the related Consolidated Statements of Operations.

        Amortization expense associated with intangibles was $0.9 million, $0.8 million and $6.6 million for the years ended June 30, 2013, 2012 and 2011, respectively. Curriculum is amortized over a range of five to fifteen years. Student relationships are amortized over eight years. Non-compete agreements are amortized over the related non-compete time period. The total remaining weighted-average amortization period for intangible assets subject to amortization is approximately 6.3 years as of June 30, 2013. Additionally, included in intangible amortization, we recognized non-compete agreement expense totaling approximately $0.1 million, $0.0 million and $0.2 million for the years ended June 30, 2013, 2012 and 2011, respectively.

        Deferred Taxes.    We currently have deferred income tax assets which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that more likely than not will be realized. Realization of our deferred income tax assets is principally dependent upon achievement of projected future taxable income offset by deferred income tax liabilities. We evaluate the realizability of our deferred income tax assets annually. In addition, we review our income tax filing positions quarterly and update our tax contingency reserves as necessary. See Note 11—Income Taxes.

        Assets and liabilities held for sale.    We estimate the fair value of certain assets and liabilities associated with schools that are held for sale. The valuation of these assets and liabilities involves subjective judgment by management on the timing and amount of proceeds or payments. These estimates had an effect on the amount of impairment losses recognized during 2012. We develop these assumptions based on past experience and by evaluating the circumstances surrounding each situation and location. These estimates are subject to change and thus any variation to the estimates could influence the total loss on the sale of schools.

        Contingencies.    In the ordinary conduct of the business, we are subject to occasional lawsuits, investigations and claims, including, but not limited to, claims involving students and graduates and routine employment matters. When we are aware of a claim or potential claim, we assess the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, we record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, we disclose the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved is material. There can be no assurance that the ultimate outcome of any of the lawsuits, investigations or claims pending against us will not have a material adverse effect on our financial condition or results of operations.

        Stock-based compensation.    Stock-based compensation cost for our equity instruments exchanged for employee and director services is measured at the date of grant, based on the calculated fair value of the grant and is recognized as an expense on a straight-line basis over the period of time that the grantee must provide services to us before the stock-based compensation is fully vested. The vesting period is generally the period set forth in the agreement granting the stock-based compensation.

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        Since our inception, we have completed the following acquisitions and disposals. Each acquisition has been accounted for using the purchase method of accounting. The results of operations related to the transactions are included in our consolidated results of operations since their respective dates:

        On June 30, 1995, we acquired five colleges from National Education Corporation. As part of the same transaction, we subsequently acquired from National Education Corporation a second group of five colleges on September 30, 1995 and an additional six colleges on December 31, 1995. The adjusted purchase price for all 16 colleges was approximately $4.7 million in cash.

        From July 1, 1996 through October 17, 1996, we acquired a total of 20 colleges in 3 separate transactions for a purchase price of $24.2 million in cash.

        On January 18, 2000, we acquired substantially all of the assets of Harbor Medical College, which operated one college in Torrance, California, for approximately $300,000 in cash.

        On April 1, 2000, we acquired substantially all of the assets of the Georgia Medical Institute, which operated three colleges in the greater Atlanta, Georgia metropolitan area, for approximately $7.0 million in cash.

        On June 1, 2000, we acquired substantially all of the assets of Academy of Business College, Inc. which operated one college in Phoenix, Arizona, for approximately $1.0 million in cash.

        On October 23, 2000, we acquired substantially all of the assets of Educorp, Inc. which operated four colleges in California, for approximately $12.6 million in cash.

        On November 1, 2000, we acquired substantially all of the assets of Computer Training Academy, Inc. which operated two colleges in Northern California, for approximately $6.1 million in cash. We closed one campus in April 2002 and combined the second campus with another campus in close proximity in June 2004.

        On February 1, 2001, we acquired all of the outstanding stock of Grand Rapids Educational Center, Inc., which operated three campuses in Michigan and Illinois, for approximately $2.8 million in cash.

        On April 1, 2002, we acquired all of the outstanding stock of National School of Technology, Inc., which operated three campuses in the greater Miami, Florida area, for approximately $14.4 million in cash.

        On July 1, 2002, we acquired all of the outstanding stock of WyoTech Acquisition Corporation, which operated two colleges in Laramie, Wyoming and Blairsville, Pennsylvania. The cash purchase price was $84.4 million and was funded through cash on hand and approximately $43 million provided from our credit facility.

        On January 2, 2003, we acquired substantially all of the assets of Learning Tree University, Inc. and LTU Extension, Inc., which operated two training centers in Southern California, for approximately $3.3 million in cash, plus the possibility of an additional $2.0 million if the acquired operations achieved certain operating performance targets. We closed the two LTU training centers in May 2004.

        On August 1, 2003, we acquired all of the outstanding stock of Career Choices, Inc., which operated 10 campuses in California, Washington and Oregon, for approximately $56.3 million, financed through a combination of available cash and borrowings from our credit facility. We combined one of the campuses in Washington with other campuses in close proximity in June 2004. Additionally, in the fourth quarter of fiscal 2008 the Company completed the teach-out of its Everett, WA campus.

        On August 19, 2003, we acquired approximately 89% of the outstanding shares of common stock of CDI Education Corporation ("CDI") through a tender offer to acquire all of the outstanding shares

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of common stock. As of October 7, 2003, we had acquired all shares of CDI for approximately $42.1 million and the assumption of approximately $10 million of debt and other liabilities. We funded the acquisition with available cash and borrowings from our credit facility. CDI operated 45 post-secondary colleges and 15 corporate training centers throughout Canada. In October 2003, we completed the acquisition of CMA Careers, Inc. located in Kitchener, Ontario, Canada. The intent to acquire this campus by CDI had been agreed to prior to our acquisition of CDI. We combined one of the CDI campuses with another campus in close proximity in April 2004 and closed 11 campuses and one training center in fiscal 2005. During fiscal 2006 we completed the sale of substantially all the assets of CDI's corporate training division, CDI Education, whereby we sold the remaining training centers. The Company recognized a gain of approximately $1.4 million (pre-tax) which was included within other (income) expense on the Consolidated Statement of Operations.

        Effective February 29, 2008 we completed the sale of the 12 Canadian schools located outside the province of Ontario to a wholly-owned subsidiary of the Eminata Group, for a cash payment of CAD $3.0 million. This payment consists of the purchase price of CAD $7.4 million less preliminary negative working capital and other adjustments equal to CAD $4.4 million. This cash payment was subject to a final working capital adjustment that was finalized during the third quarter of fiscal 2009. The final working capital adjustment resulted in a payment to the buyer of $0.1 million.

        On January 4, 2010 we completed the acquisition of Heald Capital, LLC, a Delaware limited liability company ("Heald") for consideration of $395 million. This cash payment was subject to a final working capital adjustment that was finalized during fiscal year 2011. The final working capital adjustment resulted in a payment from the sellers of $1.8 million. Heald, through its subsidiaries, operates Heald College, a regionally accredited institution that prepares students for careers in healthcare, business, legal, information technology and other growing fields, primarily through associate degree programs. Heald College operates 12 campuses and its results are included in the Consolidated Financial Statements from the date of acquisition.

        On August 10, 2012, we acquired, through a wholly-owned subsidiary, purchased substantially all of the capital stock of QuickStart Intelligence Corporation ("QuickStart"), which operates eight learning centers in California, Oregon and Washington, and also offers training via online instructions, for $13.3 million in cash, plus $1.6 million for QuickStart's estimated positive working capital at closing.

        On January 9, 2013, we completed the sale of the four Everest schools located in San Francisco, CA, San Jose, CA, Hayward, CA, and Los Angeles, CA to BioHealth College, Inc. The Company paid $2.3 million which consists of negative purchase price of $1.5 million and negative working capital of $0.8 million.

        During fiscal year 2013, the Company completed the teach-out of its Arlington, VA; Decatur, GA and Milwaukee, WI, Hialeah, FL; London, Ontario (Canada) and Thunder Bay, Ontario (Canada) campuses.

        Additionally, in fiscal year 2013, the Company completed the sale of the four Everest schools located in San Francisco, CA; San Jose, CA; Hayward, CA and Los Angeles, CA (the "CA Sale Schools") (See Note 6—Business Acquisitions and Dispositions for further details). The CA Sale Schools were put into discontinued operations in fiscal year 2012.

        During fiscal year 2012, the Company announced that the two WyoTech schools located in Sacramento, CA and Daytona Beach, FL were available for sale. As of June 30, 2013, the campuses were not sold. As a result of the lack of acceptable offers, the Company decided to continue operations in Daytona Beach, FL and the Company taught-out the Sacramento, CA campus.

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        Accordingly, the Company had no significant continuing involvement with these locations after the respective sale or teach-outs were completed. The results of operations for the sale or teach-out schools are reflected within discontinued operations in the Company's Consolidated Statements of Operations for all periods presented, unless otherwise stated. Daytona Beach, FL results are reflected within continuing operations in the Company's Consolidated Statements of Operations for all periods presented, unless otherwise stated.

        During fiscal year 2012, the Company completed the teach-out of the Ft. Lauderdale, FL and Chicago, IL campuses. The Company had no significant continuing involvement with these locations after the respective sale or teach-outs were completed. The results of operations for the teach-out schools are reflected within discontinued operations in the Company's Consolidated Statements of Operations for all periods presented, unless otherwise stated.

        During fiscal year 2011, we completed the teach-out of its Fife, WA and Toronto (Central), Ontario campuses. Accordingly, the results of operations of the campuses are reflected as discontinued operations in our consolidated statements of operations for all prior periods presented.

        We categorize our expenses as educational services, general and administrative, and marketing and admissions. Educational services expenses primarily consist of those costs incurred to deliver and administer the education programs at the colleges, including faculty and college administration compensation; college facility rent and other occupancy costs; bad debt expense; education materials and supplies; bookstore and classroom expenses; depreciation and amortization of college property and equipment; default management expenses and financial aid processing costs.

        General and administrative expenses consist principally of those costs incurred at the campus support center and regional level in support of college operations, except for marketing and admissions related costs. Included in general and administrative expenses are costs relating to executive management, campus support center staff and regional operations management compensation; depreciation and amortization of corporate property and equipment and certain intangibles; rent and other occupancy costs for campus support center; and other expenses incurred at campus support center.

        Marketing and admissions expenses include compensation for college admissions staff, regional admissions personnel, compensation expenses for marketing management, and all direct marketing and production costs.

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        The following table summarizes our operating results as a percentage of net revenues for the periods indicated.

 
  Years Ended June 30,  
 
  2013   2012   2011  

Statement of Operations Data:

                   

Net revenues

    100.0 %   100.0 %   100.0 %
               

Operating expenses:

                   

Educational services

    61.5     60.4     58.4  

General and administrative

    10.3     11.1     11.7  

Marketing and admissions

    24.7     24.7     21.9  

Impairment, facility closing, and severance charges

    0.2     1.0     12.6  
               

Total operating expenses

    96.7     97.2     104.6  

Income (loss) from operations

    3.3     2.8     (4.6 )

Interest income

        0.1     0.1  

Interest expense, net

    (0.3 )   (0.6 )   (0.5 )

Other expense, net

    (1.5 )   (0.7 )   0.2  
               

Income (loss) from continuing operations before provision for income taxes          

    1.5     1.6     (4.8 )

Provision for income taxes

    0.3     0.5     1.3  
               

Income (loss) from continuing operations

    1.2     1.1     (6.1 )

Loss from discontinued operations, net of tax

    (1.3 )   (1.8 )   (0.2 )
               

Net loss

    (0.1 )%   (0.7 )%   (6.3 )%

        Net Revenues.    Net revenues increased $18.3 million or 1.2% from $1,581.9 million in fiscal 2012 to $1,600.2 million in fiscal 2013. The increase is primarily due to a 3.7% increase in the average revenue rate per student offset partially by a 3.3% decrease in the average student population during the period. The decline in average student population was largely due to the loss of ATB students in the Everest ground schools. At June 30, 2013, student population decreased 10.5% to 81,284 compared with 90,794 at June 30, 2012. Total student starts decreased 2.4% to 106,200 for the year ended June 30, 2013 when compared to the prior year.

        Educational Services.    Educational services expenses include direct operating expenses of the schools consisting primarily of payroll and payroll related expenses, rents, occupancy, supplies expenses, bad debt expense and other educational related expenses. Educational services expenses increased $27.9 million or 2.9% from $955.7 million in fiscal 2012 to $983.6 million in fiscal 2013. As a percentage of net revenues, educational services expenses increased from 60.4% of net revenues in fiscal 2012 to 61.5% of net revenues in fiscal 2013. The increase was primarily due to to increased bad debt expense. Bad debt expense amounted to $65.4 million and 4.1% of net revenues in fiscal 2013 compared to $50.7 million and 3.2% of net revenues in fiscal 2012.

        General and Administrative.    General and administrative expenses include corporate compensation expenses, headquarters office rents and occupancy expenses, professional fees and other support related expenses. General and administrative expenses decreased $10.1 million or 5.8% from $175.6 million in fiscal 2012 to $165.5 million in fiscal 2013. As a percentage of net revenues, general and administrative expenses decreased from 11.1% in fiscal 2012 to 10.3% in fiscal 2013. The decrease is primarily due to continued cost savings measures.

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        Marketing and Admissions.    Marketing and admissions expenses consist primarily of direct-response and other advertising expenses, payroll and payroll related expenses, promotional materials and other related marketing costs. Marketing and admissions expenses increased $5.0 million or 1.3% from $391.0 million in fiscal 2012 to $396.0 million in fiscal 2013. As a percentage of net revenues, marketing and admissions expenses was 24.7% in both fiscal 2012 and 2013. The increase was primarily attributable to an increase in advertising costs due to an increase in advertising spend per start offset by a decrease in compensation expense. The total cost per start increased $137 or 3.8% from $3,592 in fiscal 2012 to $3,729 in fiscal 2013.

        Impairment, Facility Closing and Severance Charges.    Impairment, Facility Closing and Severance Charges decreased from $15.6 million in fiscal 2012 to $3.6 million in fiscal 2013. In fiscal 2012 we incurred intangible asset impairment charges of $7.1 million and severance of $8.5 million. During fiscal 2013, we incurred severance charges of $3.6 million.

        Provision for Income Taxes.    We recorded a tax provision of $4.6 million on our pretax income from continuing operations of $23.2 million for an effective tax rate of 19.8% in fiscal 2013 compared to a $7.6 million tax provision on our $25.1 million pretax income from continuing operations and effective rate of 30.4% in fiscal 2012. The effective tax rate in fiscal 2013 includes $1.0 million of benefits from return to provision adjustments associated with meals and entertainment deductions, tax credits, and state loss carrybacks. In addition, the 2013 effective rate includes $1.1 million of benefits from releases of FIN48 reserves from statute expirations and an additional $0.9 million of benefits from adjustments to Canadian loss carryovers. Excluding the $3.0 million of tax benefit, the effective tax rate in fiscal 2013 was 32.7%. The effective tax rate in fiscal 2012 includes return to provision adjustments associated with prior year meals and entertainment deductions and tax credit carryovers. Excluding the $2.0 million of tax benefits from return to provision adjustments related to prior year meals and entertainment deductions and tax credit carryovers, the effective tax rate in fiscal 2012 was 38.3%.

        Net Revenues.    Net revenues decreased $168.8 million, or 9.6%, from $1,750.7 million in fiscal 2011 to $1,581.9 million in fiscal 2012. The decrease is primarily due to a 7.6% decrease in the average revenue rate per student and a 2.2% decrease in the average student population during the period. The decline in average student population was largely due to our decision to limit the enrollment of ATB students beginning in fiscal 2011. At June 30, 2012, student population was 90,794 compared with 88,997 at June 30, 2011. Total student starts decreased 4.5% to 108,841 for the year ended June 30, 2012 when compared to the prior year.

        Educational Services.    Educational services expenses include direct operating expenses of the schools consisting primarily of payroll and payroll related expenses, rents, occupancy, supplies expenses, bad debt expense and other educational related expenses. Educational services expenses decreased $67.3 million, or 6.6%, from $1,023.0 million in fiscal 2011 to $955.7 million in fiscal 2012. As a percentage of net revenues, educational services expenses increased from 58.4% of net revenues in fiscal 2011 to 60.4% of net revenues in fiscal 2012. The decrease in educational services expense was primarily due to decreases in compensation expense and bad debt expense. The increase in costs as a percentage of net revenues was a result of lower net revenues which resulted in a lower level of utilization of our staff and facilities in fiscal 2012 as compared to fiscal 2011. As the costs of operating our facilities are largely fixed in nature, this lower level of capacity utilization negatively affects educational services expenses as a percentage of net revenues. Bad debt expense amounted to $50.7 million and 3.2% of net revenues in fiscal 2012 compared to $92.4 million and 5.3% of net revenues in fiscal 2011. The improvement in bad debt was primarily the result of continued efficiencies in packaging students with financial aid as a result of bringing the processing in-house.

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        General and Administrative.    General and administrative expenses include corporate compensation expenses, headquarters office rents and occupancy expenses, professional fees and other support related expenses. General and administrative expenses decreased $29.5 million, or 14.4%, from $205.1 million in fiscal 2011 to $175.6 million in fiscal 2012. The decrease is primarily due to continued cost savings measures. As a percentage of net revenues, general and administrative expenses were 11.7% and 11.1% in fiscal 2011 and fiscal 2012, respectively.

        Marketing and Admissions.    Marketing and admissions expenses consist primarily of direct-response and other advertising expenses, payroll and payroll related expenses, promotional materials and other related marketing costs. Marketing and admissions expenses increased $8.1 million, or 2.1%, from $382.9 million in fiscal 2011 to $391.0 million in fiscal 2012. As a percentage of net revenues, marketing and admissions expenses increased from 21.9% in fiscal 2011 to 24.7% in fiscal 2012. The increase was primarily attributable to an increase in advertising spend per start offset partially by a decrease in compensation expense. The total cost per start increased $232 or 6.9% from $3,360 in fiscal 2011 to $3,592 in fiscal 2012.

        Impairment, Facility Closing and Severance Charges.    Impairment, Facility Closing and Severance Charges decreased from $220.1 million in fiscal 2011 to $15.6 million in fiscal 2012. During fiscal 2011 we incurred a goodwill impairment charge of $203.6 million, severance of $9.6 million and recorded an impairment loss of $6.9 million related to the sale of a portion of our portfolio of student loans. During fiscal 2012 we incurred intangible asset impairment charges of $7.1 million and severance of $8.5 million.

        Provision for Income Taxes.    We recorded a tax provision of $7.6 million on our $25.1 million in pretax loss from continuing operations for an effective rate of 30.4% in fiscal 2012 compared to a negative effective tax rate of 27.8% in fiscal 2011. The change in our 2011 effective tax rate was due to $146.0 million of goodwill impairment which was not deductible for tax. Excluding the impairment charge related to non-deductible goodwill, the effective tax rate for fiscal 2011 was 38.2%. The effective tax rate in fiscal 2012 includes return to provision adjustments associated with prior year meals and entertainment deductions and tax credit carryovers. Excluding the $2.0 million of tax benefits from return to provision adjustments related to prior year meals and entertainment deductions and tax credit carryovers, the effective tax rate in fiscal 2012 was 38.3%.

        Our revenues normally fluctuate as a result of seasonal variations in our business. Student population varies as a result of new student enrollments and student attrition. Historically, our colleges, schools and training centers have had lower student populations in the first fiscal quarter than in the remainder of the year. Our expenses, however, do not vary as significantly as student population and revenues. We expect 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 branch openings, new program adoptions and increased enrollments from recent high school graduates. The operating results for any quarter are not necessarily indicative of the results for any future period. See the footnote entitled "Selected Quarterly Financial Summary (Unaudited)" of the Consolidated Financial Statements included elsewhere herein.

        On May 17, 2012, we entered into a Fourth Amended and Restated Credit Agreement (the "Credit Facility") with Bank of America, N.A., which replaced the credit facility that was set to expire in October 2012. The Credit Facility, which expires July 1, 2015, provides aggregate commitments including borrowings and letters of credit of up to $145 million, of which $135 million is a domestic facility, and $10 million is a Canadian facility. The Credit Facility has been established to provide

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available funds for acquisitions, to fund general corporate purposes, and to provide for letters of credit issuances of up to $50 million for domestic letters of credit and $7.5 million for Canadian letters of credit. The Credit Facility is secured by guaranties from the Company and each of its subsidiaries, as well as a first priority lien on substantially all of the tangible and intangible assets of the Company and its subsidiaries, including real property.

        The following table summarizes the terms of the Credit Facility and its status as of June 30, 2013:

Borrowing limit

  $145 million

Interest Rate

 

At the Company's discretion, the base ("prime") rate plus 1.50% - 2.00% or a LIBOR rate plus 2.50% - 3.00%, depending upon the Company's Consolidated Leverage Ratio.

Maturity

 

July 1, 2015

Outstanding borrowings at June 30, 2013

 

$116.1 million.

Weighted Average Interest Rate at June 30, 2013

 

4.7%

Outstanding letters of credit at June 30, 2013

 

$23.9 million domestic, $4.6 million Canadian.

        The Credit Facility contains customary affirmative and negative covenants, including financial covenants requiring the maintenance of consolidated net worth, fixed charge coverage ratios, leverage ratios, and the U.S. Department of Education ("ED") financial responsibility composite score. With respect to the requirement that we maintain a composite score of no less than 1.5, ED's determination that our fiscal 2011 score was 0.9 could be considered an event of default under on the Credit Facility. We provided our lenders with the letter from ED to us dated August 16, 2013, and they have granted a waiver for fiscal 2011 (the "Waiver"). As of June 30, 2013, we were in compliance with all of the covenants (after giving effect to the Waiver).

        Long-term debt at June 30, 2011 also included a term loan credit facility (the "Mortgage Facility") dated March 24, 2009 between the Company's wholly-owned subsidiary, Heald Real Estate, LLC ("Heald Real Estate"), and Bank of America, N.A. ("B of A") that was secured by real estate of Heald Real Estate and guaranteed by Heald Capital, LLC and Heald Education, LLC (the "Heald Guarantors"). During the third quarter of fiscal 2012, the Company completed the sale-leaseback of five Heald Real Estate properties. We used a portion of the proceeds to repay all mortgages held on these properties of approximately $14.7 million.

        Working capital amounted to $34.8 million as of June 30, 2013 and $42.0 million as of June 30, 2012 and the current ratio was 1.1:1 in fiscal 2013 and 1.1:1 in fiscal 2012. Average daily borrowings outstanding amounted to approximately $35.9 million in fiscal 2013, $102.4 million in fiscal 2012 and $203.3 million in fiscal 2011. The increase in working capital compared to June 30, 2012 is primarily due to a decrease in accrued expenses, liabilities held for sale, and prepaid tuition, and an increase in prepaid expenses, partially offset by a decrease in accounts receivable and deferred income taxes.

        Cash flows provided by operating activities amounted to $41.5 million in fiscal 2013 compared to $152.8 million in fiscal 2012 and to $15.0 million in fiscal 2011. The decrease in cash provided by operating activities in fiscal 2013 compared to fiscal 2012 was primarily due to a decrease in cash provided by working capital of $138.5 million. The change in working capital was primarily due to the timing of cash receipts and payments. Included in cash flows from operating activities are $(23.5) million, $(0.9) million, and $0.2 million of net cash (used in) provided by operating activities related to discontinued operations for fiscal 2013, 2012 and 2011 respectively.

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        Cash flows used in investing activities amounted to $55.2 million in fiscal 2013, $2.9 million in fiscal 2012 and $110.7 million in fiscal 2011. The increase in cash used in investing activities during fiscal 2013 compared to fiscal 2012 is attributable to payments of $11.1 million related to the acquisition of Quickstart and $39.3 million in net cash received in 2012 related to the sale-leaseback transaction.

        Capital expenditures amounted to $44.1 million in fiscal 2013, $42.2 million in fiscal 2012 and $110.7 million in fiscal 2011. Capital expenditures were incurred to build, relocate, remodel and enlarge campuses. During fiscal 2013, we incurred capital expenditures to build one new campus and to enlarge or remodel 13 campuses. During fiscal 2012, we incurred capital expenditures to build 2 new campuses, relocate one campus and to enlarge or remodel 7 campuses. During fiscal 2011, we incurred capital expenditures to build five new campuses, relocate one campus and to enlarge or remodel 6 campuses. Capital expenditures of approximately $9.8 million, $10.4 million and $19.3 million were incurred to purchase and to develop software in fiscal 2013, fiscal 2012 and fiscal 2011, respectively. The capital expenditures related to discontinued operations for fiscal 2013, 2012 and 2011 were $0.5 million, $1.1 million, and $7.5 million, respectively.

        Cash flows used in financing activities amounted to $12.1 million in fiscal 2013, $184.4 million in fiscal 2012, and $7.1 million in fiscal 2011. During fiscal 2013, cash used in financing activities consisted of a net repayment of borrowings of $7.4 million and net proceeds from borrowing under student notes receivable sale agreement of $5.8 million, partially offset by proceeds from the exercise of stock options and the Employee Stock Purchase Plan of $1.1 million. During fiscal 2012, cash used in financing activities consisted of a net repayment of borrowings of $195.4 million and deferred fees for new line of credit of $2.7 million, partially offset by net proceeds from borrowings under student notes receivable sale agreement of $13.0 million, and proceeds from the exercise of stock options and the Employee Stock Purchase Plan of $0.7 million. During fiscal 2011, cash used in financing activities consisted of a $25.0 million treasury stock purchase, partially offset by net proceeds from borrowings of $16.5 million, and proceeds from the exercise of stock options and the Employee Stock Purchase Plan of $1.4 million.

        Historically, we had developed several third party loan programs with origination and servicing providers such as Sallie Mae for students with low credit scores who otherwise would not qualify for loans. These loan programs required that we pay a discount fee to the origination and servicing providers of the loans as a reserve against future defaults on these loans. We have historically referred to these types of loans as "discount loans," since we incurred a portion of the default risk related to these student loans by taking a discount on the disbursement from the third party. By accepting a reduced payment for these discounted loans from the servicing providers, we were not at risk for the amounts agreed to by the students and the service providers and we were not entitled to any proceeds collected by the service providers in excess of the reduced payment amount. Therefore we had recorded this discount as a reduction to revenue.

        In fiscal 2008, we were informed by Sallie Mae and two other origination and servicing providers that they would no longer make private loans available for students. In the face of this change in policy, we created a new lending program in the fourth quarter of fiscal 2008 with a different origination and servicing provider, Genesis Lending Services, Inc. ("Genesis"). Under this Genesis program we paid a discount to the origination and servicing provider for any loans purchased by Genesis and recorded the discount as a reduction to revenue. Under this program we then had both the right and an obligation to acquire the related loan, except in certain limited circumstances where Genesis did not comply with the terms of the agreement. From the initiation of the Genesis program to its cessation in fiscal 2012, we acquired all of the loans that originated. Therefore, we are exposed to any credit defaults by students but retains all amounts collected from the students under this program. We estimate loans funded under the Genesis discount loan program, net of refunds, were approximately $48.4 million for fiscal 2012. There have been no loans funded under the Genesis discount loan program during fiscal year 2013.

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        On June 29, 2011, we entered into a loan origination agreement, as amended with ASFG, LLC ("ASFG") for the purpose of creating a new private education discount loan program for students. Under the loan origination agreement, ASFG has agreed to purchase up to $775 million of new student loans through June 2015. Under this agreement, an unaffiliated bank makes private education loans to eligible students and, subsequently, sell those loans to ASFG or its designee. Total losses associated with the program recourse, inclusive of the discount paid to ASFG, are estimated to be approximately 50% of the amount funded. During the second quarter of fiscal 2012, we completed the transition from the Genesis discount loan program to the ASFG discount loan program. Loans funded under the ASFG program, net of estimated refunds, are estimated to have been approximately $192.7 million and $125.3 million for the fiscal years ending June 30, 2013 and 2012, respectively. Loans funded to date under the ASFG program, net of estimated refunds, have been approximately $318.0 million.

        The ASFG loan program has characteristics similar to the previous third party "discount loan" programs. As with the previous third party discount loan programs, under the ASFG program we pay an upfront discount to ASFG for any notes purchased by ASFG. We record the upfront discount as a deferred charge and amortize the charge as a reduction to revenue ratably over the program length as the related revenue is recognized. However, unlike the previous third party discount loan programs, pursuant to a backup loan purchase agreement entered into in connection with the loan origination agreement, we have guaranteed to purchase any of the student notes from ASFG on which no payment has been made for over 90 days. We have applied historical loan performance experience to estimate and record this loan recourse obligation on a gross basis by recording both a deferred charge and liability equal to the estimated risk upon funding. The recourse obligation is in addition to the discount paid to ASFG and is based upon the ultimate anticipated loan performance under the ASFG loan program. The deferred charge is recorded within prepaid expenses and is recognized as a reduction to revenue over the period of instruction. The total deferred charge related to unrecognized discount expense is $29.6 million and $29.4 million as of June 30, 2013 and June 30, 2012, respectively.

        The recourse liability is established at the inception of the guarantee. Upon recourse we will repurchase any loans at the amount advanced by ASFG net of any discount paid to ASFG, less any principal payments collected by ASFG. The purchase will be recorded as a decrease to cash, an increase to student notes receivable, and a reduction to the recourse obligation. The net recourse obligation consists of a net short-term liability and a net long-term receivable. The receivable, pursuant to a tuition loan program agreement, that will be paid to us as ASFG receives student payments in excess of the initial principal balance, less discount paid. The receivable and recourse obligation are reported as a net short-term and net long-term amount to reflect the legal right of offset. The net short-term recourse obligation related to the loans funded under the ASFG program at June 30, 2013 and 2012 was a net liability of $31.1 million, and $29.4 million, respectively, net of recourse paid. The net short-term recourse obligation at June 30, 2013 and June 30, 2012 is recorded within accrued expenses within the Consolidated Balance Sheets. The net long-term recourse receivable related to loans funded under the ASFG program at June 30, 2013 and 2012 was a net asset of $44.7 million and $21.6 million, respectively. The net long-term recourse receivable is recorded within deposits and other assets within the Consolidated Balance Sheets. We estimate loan performance based upon actual repayment experience with similar private student loan programs. Under this backup loan purchase agreement, our maximum obligation (including the initial discount payment) could be equal to the face amount of loans originated under this loan program, although we expect the ultimate risk under this loan program to be substantially similar to the risks faced under the Genesis discount loan program.

        Cash flows associated with loans funded under the ASFG loan program, net of refunds, are recorded as a cash inflow from prepaid tuition within cash flows from operating activities in the amount of $168.4 million, $121.7 million and $0 million for fiscal years ended June 30, 2013, 2012 and 2011, respectively.

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        Cash flows associated with the ASFG discount fee, net of refunds, are recorded as a cash outflow from prepaid expenses within cash flows from operating activities in the amount of $80.8 million, $51.2 million and $0 million for fiscal years ended June 30, 2013, 2012 and 2011, respectively.

        Recourse payments to ASFG are recorded as a cash outflow from student notes receivable within cash flows from operating activities. Recourse payments to ASFG have been $39.1 million, $4.7 million and $0 million for fiscal years ended June 30, 2013, 2012 and 2011, respectively.

        Net revenues recognized related to the ASFG program, net of discount expense, have been $102.0 million, $36.2 million and $0 million, for the fiscal years ended June 30, 2013, 2012, and 2011, respectively; cash flows have been a net inflow (outflow) of $45.2 million, $57.1 million and $(6.0) million for fiscal years ended June 30, 2013, 2012 and 2011, respectively, excludes proceeds from loan sales.

        Included within the Consolidated Statement of Operations, under the caption "Other (expense) income, net," for fiscal years ended June 30, 2013, 2012 and 2011 is net other (loss) income of $(24.8) million, $(11.7) million and $3.3 million, associated with the student notes program, respectively.

Genesis Program

        The other (expense) income, net primarily reflects the interest income, loan origination fees, and costs related to servicing loans. We defer and recognize both the loan origination income and direct loan origination costs as an adjustment to the yield over the life of the related loan. All other lending-related costs, including costs related to servicing fees are charged to expense as incurred. Net other expense includes ($(7.3) million) million, $(5.5) million and $3.3 million associated with the Genesis notes program, for fiscal years ended June 30, 2013, 2012 and 2011, respectively.

ASFG Program

        The other (expense) income, net primarily reflects the program structuring fees, management fees, and other fees charged by ASFG. We defer and recognize program structuring and management fees over the program length. All other fees are charged to expense as incurred. For fiscal years ended June 30, 2013, 2012 and 2011, respectively, there was net other expense of $17.5 million million, $6.2 million and $0 million associated with the ASFG notes program. Total program structuring and management fees paid to ASFG, over the life of the program as of June 30, 2013 have been $18.0 million, of which $9.9 million are deferred as of June 30, 2013. Program fees paid to ASFG during fiscal years ended June 30, 2013, 2012 and 2011, respectively, are $3.3 million, $8.7 million and $6.0 million. Total program fees expected to be incurred over the program length are expected to be $8 to $10 million per year in incremental cost above those historically incurred under the Genesis program.

        We believe that our working capital, cash flow from operations, access to operating leases and borrowings available from our amended credit agreement will provide us with adequate resources for our ongoing operations and planned capital expenditures through fiscal 2014.

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        As of June 30, 2013, future minimum cash payments due under contractual obligations, including our credit agreement, borrowings under student notes receivable sale agreement, and non-cancelable operating and capital lease agreements, are as follows:

 
  Payments due by period (in thousands)  
Contractual Obligations
  Total   2014   2015   2016   2017   2018   Thereafter  

Long-Term Debt(1)

  $ 116,073   $   $   $ 116,073   $   $   $  

Borrowings under student notes receivable sale agreement

    7,110     1,841     5,269                  

Other Debt

    4,085     2,260     550     945     330              

Capital Lease Obligations

    18,967     2,070     2,070     2,070     2,116     2,131     8,510  

Operating Lease Obligations

    675,965     122,172     98,821     87,902     77,437     69,160     220,473  
                               

Total

  $ 822,200   $ 128,343   $ 106,710   $ 206,990   $ 79,883   $ 71,291   $ 228,983  
                               

(1)
Long-term debt consists of a revolving credit facility. The related obligations of $116.1 million do not reflect interest amounts due under the credit facility. See Note 8 for additional information related to the Company's credit facility.

        ED requires that Title IV Program funds collected in advance of student billings be kept in a separate cash or cash equivalent account until the students are billed for the program portion related to those funds. In addition, all Title IV Program funds received by our schools through electronic funds transfer are subject to certain holding period restrictions. These funds are also deposited into a separate account until the restrictions are satisfied. As of June 30, 2013, we held nominal amounts of such funds in separate accounts. The restrictions on any cash held have not significantly affected our ability to fund daily operations.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to the impact of interest rate changes and foreign currency fluctuations. We do not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments to manage these risks.

        Interest Rate Exposure.    As of June 30, 2013, our only assets or liabilities subject to risks from interest rate changes are (i) debt under the credit facility in the aggregate amount of $116.1 million and capital lease obligations of $12.2 million, and (ii) student notes receivable, net, in the aggregate amount of $90.7 million. Our capital lease obligations and student notes receivable are all at fixed interest rates. We do not believe we are subject to material risks from reasonably possible near-term changes in market interest rates.

        Foreign Currency Exposure.    A portion of our operations consists of an investment in a foreign subsidiary whose functional currency is the Canadian dollar. Our investment in our foreign operations as of June 30, 2013 was a deficit of approximately CAD $32.0 million and we had borrowings outstanding under the credit facility of approximately CAD $5.2 million. As a result, the consolidated financial results have been and could continue to be affected by changes in foreign currency exchange rates.

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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The following financial statements of the Company and its subsidiaries are included below on pages 68 - 107 of this report:

 
  10-K
Report Page
 

Report of Independent Registered Public Accounting Firm

    84  

Consolidated Balance Sheets as of June 30, 2013 and 2012

    85  

Consolidated Statements of Operations for the years ended June 30, 2013, 2012 and 2011

    86  

Consolidated Statements of Comprehensive Loss for the years ended June 30, 2013, 2012 and 2011

    87  

Consolidated Statements of Stockholders' Equity for the years ended June 30, 2013, 2012 and 2011

    88  

Consolidated Statements of Cash Flows for the years ended June 30, 2013, 2012 and 2011

    89  

Notes to Consolidated Financial Statements

    90  

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Corinthian Colleges, Inc. and subsidiaries

        We have audited the accompanying consolidated balance sheets of Corinthian Colleges, Inc. and subsidiaries (the Company) as of June 30, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Corinthian Colleges, Inc. and subsidiaries at June 30, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2013, in conformity with U.S. generally accepted accounting principles.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Corinthian Colleges, Inc. and subsidiaries internal control over financial reporting as of June 30, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated September 3, 2013 expressed an unqualified opinion thereon.

    /s/ Ernst & Young LLP

Orange County, California

September 3, 2013

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

 
  As of June 30,  
 
  2013   2012  

ASSETS

             

CURRENT ASSETS:

             

Cash and cash equivalents

  $ 46,596   $ 72,525  

Accounts receivable, net of allowance for doubtful accounts of $19,104 and $17,879 at June 30, 2013 and June 30, 2012, respectively

    76,890     96,802  

Student notes receivable, net of allowance for doubtful accounts of $7,979 and $20,776 at June 30, 2013 and June 30, 2012, respectively

    23,971     26,779  

Deferred income taxes

    28,960     37,242  

Prepaid expenses and other current assets

    109,650     100,909  

Assets held for sale

        5,055  
           

Total current assets

    286,067     339,312  

PROPERTY AND EQUIPMENT, net

    229,531     251,821  

OTHER ASSETS:

             

Goodwill

    205,593     197,875  

Other intangibles, net

    180,800     174,098  

Student notes receivable, net of allowance for doubtful accounts of $22,282 and $59,252 at June 30, 2013 and June 30, 2012, respectively

    67,000     76,300  

Deposits and other assets

    54,732     28,997  

Deferred income taxes

    5,021     4,618  
           

TOTAL ASSETS

  $ 1,028,744   $ 1,073,021  
           

LIABILITIES AND STOCKHOLDERS' EQUITY

             

CURRENT LIABILITIES:

             

Accounts payable

  $ 25,239   $ 24,184  

Accrued expenses

    113,967     147,866  

Prepaid tuition

    107,134     109,755  

Current portion of capital lease obligations

    803     710  

Current portion of long-term debt

    4,101     3,380  

Liabilities held for sale

        11,376  
           

Total current liabilities

    251,244     297,271  

LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current portion

    11,389     12,231  

LONG-TERM DEBT, net of current portion

    122,792     132,653  

DEFERRED INCOME TAXES

    16,036     4,959  

OTHER LONG-TERM LIABILITIES

    56,440     60,992  

COMMITMENTS AND CONTINGENCIES

             

STOCKHOLDERS' EQUITY:

             

Common Stock, $0.0001 par value:

             

Common Stock, 120,000 shares authorized: 92,357 shares issued and 86,183 shares outstanding at June 30, 2013 and 91,352 shares issued and 85,178 shares outstanding at June 30, 2012

    9     9  

Additional paid-in capital

    258,831     251,425  

Treasury stock

    (56,368 )   (56,368 )

Retained earnings

    366,098     367,758  

Accumulated other comprehensive income

    2,273     2,091  
           

Total stockholders' equity

    570,843     564,915  
           

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

  $ 1,028,744   $ 1,073,021  
           

   

The accompanying notes are an integral part of these consolidated financial statements.

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 
  Years Ended June 30,  
 
  2013   2012   2011  

NET REVENUES

  $ 1,600,205   $ 1,581,933   $ 1,750,734  
               

OPERATING EXPENSES:

                   

Educational services (including bad debt expense of $65,869, $50,683 and $92,408 for the years ended June 30, 2013, 2012 and 2011, respectively)

    983,516     955,660     1,022,985  

General and administrative

    165,544     175,572     205,123  

Marketing and admissions

    396,039     391,007     382,903  

Impairment, facility closing and severance charges

    3,565     15,644     220,058  
               

Total operating expenses

    1,548,664     1,537,883     1,831,069  
               

INCOME (LOSS) FROM OPERATIONS

    51,541     44,050     (80,335 )

Interest income

    654     1,772     878  

Interest expense (net of capitalized interest of $267, $625, and $2,003 for the years ended June 30, 2013, 2012 and 2011, respectively)

    (5,184 )   (9,128 )   (8,530 )

Other (expense) income net

    (23,803 )   (11,631 )   3,426  
               

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES

    23,208     25,063     (84,561 )

Provision for income taxes

    4,596     7,610     23,492  
               

INCOME (LOSS) FROM CONTINUING OPERATIONS

    18,612     17,453     (108,053 )

LOSS FROM DISCONTINUED OPERATIONS, net of tax benefit of $12,321, $17,150 and $1,589 for the years ended June 30, 2013, 2012 and 2011, respectively

    (20,272 )   (27,698 )   (3,112 )
               

NET LOSS

  $ (1,660 ) $ (10,245 ) $ (111,165 )
               

INCOME (LOSS) PER SHARE—BASIC:

                   

Income (loss) from continuing operations

  $ 0.22   $ 0.21   $ (1.27 )

Loss from discontinued operations

    (0.24 )   (0.33 )   (0.03 )
               

Net loss

  $ (0.02 ) $ (0.12 ) $ (1.30 )
               

INCOME (LOSS) PER SHARE—DILUTED:

                   

Income (loss) from continuing operations

  $ 0.21   $ 0.20   $ (1.27 )

Loss from discontinued operations

    (0.23 )   (0.32 )   (0.03 )
               

Net loss

  $ (0.02 ) $ (0.12 ) $ (1.30 )
               

Weighted average number of common shares outstanding:

                   

Basic

    85,881     84,982     85,388  
               

Diluted

    86,868     85,581     85,388  
               

   

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

 
  Years Ended  
 
  2013   2012   2011  

Net loss

  $ (1,660 ) $ (10,245 ) $ (111,165 )

Other comprehensive income:

                   

Foreign currency translation adjustment

    63     430     819  

Post-retirement benefits, net of taxes

    119     120     120  
               

Other comprehensive income

    182     550     939  
               

Comprehensive loss

  $ (1,478 ) $ (9,695 ) $ (110,226 )
               

   

The accompanying notes are an integral part of these consolidated financial statements.

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

 
  Common Stock    
   
   
   
   
 
 
   
   
   
  Accumulated
Other
Comprehensive
Income
   
 
 
  Shares   Par
Value
  Additional
Paid-in
Capital
  Treasury
Stock
  Retained
Earnings
  Stockholders'
Equity
 

Balance at June 30, 2010

    90,386   $ 9   $ 232,623   $ (31,368 ) $ 489,168   $ 602   $ 691,034  

Net loss

                    (111,165 )       (111,165 )

Foreign currency translation

                          819     819  

Other post employment benefit adjustment

                        120     120  

Issuance of common stock from employee stock purchase plan and exercise of stock options, including tax benefit

    400         (1,020 )               (1,020 )

Treasury stock repurchase

                      (25,000 )               (25,000 )

Stock based compensation expense

            10,279                   10,279  
                               

Balance at June 30, 2011

    90,786   $ 9   $ 241,882   $ (56,368 ) $ 378,003   $ 1,541   $ 565,067  
                               

Net loss

                    (10,245 )       (10,245 )

Foreign currency translation

                          430     430  

Other post employment benefit adjustment

                        120     120  

Issuance of common stock from employee stock purchase plan and exercise of stock options, including tax benefit

    566         624                 624  

Stock based compensation expense

            8,919                 8,919  
                               

Balance at June 30, 2012

    91,352   $ 9   $ 251,425   $ (56,368 ) $ 367,758   $ 2,091   $ 564,915  
                               

Net loss

                    (1,660 )       (1,660 )

Foreign currency translation

                          63     63  

Other post employment benefit adjustment

                        119     119  

Issuance of common stock from employee stock purchase plan and exercise of stock options, including tax benefit

    1,005         (156 )               (156 )

Stock based compensation expense

            7,562                 7,562  
                               

Balance at June 30, 2013

    92,357   $ 9   $ 258,831   $ (56,368 ) $ 366,098   $ 2,273   $ 570,843  
                               

   

The accompanying notes are an integral part of these consolidated financial statements.

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CORINTHIAN COLLEGES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, for continuing and discontinued operations)

 
  Years Ended June 30,  
 
  2013   2012   2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

                   

Net loss

  $ (1,660 ) $ (10,245 ) $ (111,165 )

Adjustments to reconcile net loss to net cash provided by operating activities:

                   

Depreciation and amortization

    64,324     73,165     78,589  

Stock based compensation

    7,562     8,919     10,279  

Deferred income taxes

    15,406     (10,888 )   1,929  

Loss on disposal of assets

    1,227     1,027     1,321  

Impairment charge

    4,404     17,998     210,455  

Changes in assets and liabilities, net of effects from acquisitions:           

                   

Accounts receivable, net

    23,801     69,422     (72,556 )

Student notes receivable, net

    12,108     (25,973 )   (10,521 )

Prepaid expenses and other assets

    (34,330 )   (34,179 )   (18,328 )

Accounts payable

    650     (47,751 )   2,811  

Accrued expenses and other liabilities

    (31,926 )   37,728     (21,014 )

Income taxes payable

            (9,256 )

Prepaid tuition

    (15,556 )   86,125     (46,639 )

Other long-term liabilities

    (4,464 )   (12,582 )   (883 )
               

Net cash provided by operating activities

    41,546     152,766     15,022