CORINTHIAN COLLEGES INC

In assessing the need for a valuation allowance, both positive and negative evidence are considered related to the likelihood of realization of the deferred tax assets. Topic 740 provides that important factors in determining whether a deferred tax asset will be realized are whether there has been sufficient taxable income in recent years and whether sufficient taxable income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, the Company considered, among other things, historical levels of taxable income along with possible sources of future taxable income, which include: the expected timing of the reversals of existing temporary reporting differences, the existence of taxable income in prior carryback year(s), the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits and expected future taxable income. Changes in, among other things, income tax legislation, statutory income tax rates, or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, while placing less weight on projections for future growth as projections about the future are less objectively verifiable than past results, the Company must record a valuation allowance. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. A significant piece of objective negative evidence evaluated is the projection of a cumulative loss incurred over the three-year period ended June 30, 2014. Such objective evidence limits the ability to consider other subjective evidence such as projections for future growth as projections for future growth into the future are less objectively verifiable.

In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. Topic 740 provides that important factors in determining whether a deferred tax asset will be realized are whether there has been sufficient taxable income in recent years and whether sufficient taxable income is expected in future years in order to utilize the deferred tax asset. In evaluating the realizability of deferred income tax assets, we consider, among other things, historical levels of taxable income along with possible sources of future taxable income, which include: the expected timing of the reversals of existing temporary reporting differences, the existence of taxable income in prior carryback year(s), the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits and expected future taxable income. Changes in, among other things, income tax legislation, statutory income tax rates, or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods. If, based on the weight of available evidence, we determine it is more likely than not the deferred tax assets will not be realized within a period of time, we record a valuation allowance. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. A significant piece of objective negative evidence evaluated is the projected cumulative loss we expect to incur over the three-year period ended June 30, 2014. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

Under the First Amendment, we have agreed to, among other matters, (i) no longer request Eurodollar borrowings and amend and restate the definition of “Applicable Rate” such that the Applicable Rate for any Eurodollar Rate Committed Loan (as defined in the Credit Facility) increases to 5.00%, the Applicable Rate for any Base Rate Loan (as defined in the Credit Facility) increases to 4.00%, and the Applicable Rate for any Commitment Fee (as defined in the Credit Facility) becomes fixed at 0.40%; (ii) amend the definition of “Default Rate” to increase the additional margin on the default rate of interest from 2.0% to 6.0%; (iii) amend the definition of “Consolidated Net Worth” to provide an add back for all non-cash charges related to the deferred tax asset valuation allowances incurred during the fiscal quarter ended March 31, 2014, in an amount not to exceed $76.5 million; (iv) reduce the maximum outstanding Credit Extensions under the Credit Facility to $105 million as of July 18, 2014, then down to $93 million as of August 1, 2014 and then down to $90 million as of August 15, 2014, and the Company must repay loans or other obligations under the Credit Facility to the extent the aggregate amount of such obligations exceeds the foregoing limits as of the applicable period; (v) on or before June 27, 2014, raise cash proceeds of at least $15 million through the sale of student notes receivables; (vi) comply with additional reporting and information requirements; (vii) comply with additional cash management requirements; (viii) modify certain of the exceptions to the negative covenants in the Credit Facility, including the reduction of the aggregate dollar cap on Permitted Acquisitions (as defined in the Credit Facility) from $60 million to $15 million for acquisitions completed after the First Amendment; and (ix) reimburse the Administrative Agents for reasonable expenses incurred in monitoring our operations, including the retention of a financial advisor for the Lenders. We paid separate fees to the Lenders in connection with the Waiver and the First Amendment.

Additionally, the Company received a letter dated March 31, 2014 from the Accrediting Commission of Career Schools and Colleges (“ACCSC” or the “Commission”), the institutional accrediting agency for forty of our campuses.  In that letter, ACCSC notes media reports about the Company, our disclosures regarding the CFPB investigation, the lawsuit by the CA AG, the multi-state Attorney General Investigation led by the Iowa Attorney General’s office, the January 2013 letter from ED regarding pending applications and request for information, and various other correspondence between the Company’s schools and ACCSC.  The letter notes that, following review of those matters, the Commission had voted to (i) place the Company’s system of schools on employment verification reporting, (ii) continue review of the materials and responses submitted by the Company, and (iii) not consider any substantive changes, changes of location, or additions of programs or campuses for any Company school accredited by ACCSC until further notice.  The Commission noted that the Company had provided extensive information with regard to these matters.  Upon review of these matters, the Commission determined that a third-party review of placement results of the Company’s ACCSC-accredited schools for the 2013 reporting year was warranted to provide the Company with an opportunity to demonstrate with supporting documentation that its schools are meeting their obligations to students and accurately reporting placement of students in accordance with ACCSC standards.  Based on this requirement, the Company has retained an independent third-party auditor to attempt to secure verification from the employer or graduate for at least 25% of the graduate placement data at each ACCSC-accredited Company school submitted in each school’s 2013 ACCSC annual report.  The Company and its schools will continue to cooperate with ACCSC’s review of the Company’s schools’ compliance with accreditation standards.

The gainful employment rules also purported to define certain quantitative debt-to-income and loan repayment standards to measure “preparation for gainful employment in a recognized occupation” for purposes of determining whether a program would be Title IV eligible. These requirements were scheduled to go into effect July 1, 2012, but were struck down by the U.S. District Court for the District of Columbia in the APSCU case.  In September 2013, ED again convened a negotiated rulemaking committee to consider the topic of “gainful employment.” The committee held negotiated rulemaking sessions in September, November, and December 2013, but failed to reach consensus. In March 2014, ED issued a Notice of Proposed Rulemaking to establish measures for determining whether certain postsecondary educational programs prepare students for gainful employment in a recognized occupation, and the conditions under which these educational programs remain eligible to participate in Title IV programs.  ED is currently accepting comments from the public on that proposed rule.  If adopted, final rules would likely be effective on or after July 1, 2015.  These new quantitative requirements are even more restrictive than the rules vacated by the District Court in the APSCU case.  If they go into effect as currently proposed, many of our programs may be unable to maintain eligibility to enroll students receiving Title IV funds or have restrictions placed upon them as a result of not meeting the prescribed metrics. If our students cannot participate in Title IV programs to finance their education in some of our programs, it is likely we would have to discontinue offering those programs.  The loss of a significant number of programs would have a material adverse effect on our student population, business, financial condition, results of operations and cash flows.