UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________________________________ 

FORM 10-Q

___________________________________________ 

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

For the quarterly period ended December 31, 2013

OR

o 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: 001-34466

___________________________________________ 

EDUCATION MANAGEMENT CORPORATION

(Exact name of registrant as specified in its charter)

 ___________________________________________ 

Pennsylvania	25-1119571
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

210 Sixth Avenue, 33^rd Floor

Pittsburgh, PA, 15222

(412) 562-0900

(Address, including zip code and telephone number, of principal executive offices)

___________________________________________ 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   x     No   ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):

Yes   ¨     No x

As of February 7, 2014, there were 125,920,645 shares of the registrant’s common stock outstanding.

Table of Contents

		PAGE
PART I — FINANCIAL INFORMATION
ITEM 1	FINANCIAL STATEMENTS	3
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47
ITEM 4	CONTROLS AND PROCEDURES	47
PART II — OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	48
ITEM 1A	RISK FACTORS	48
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	51
ITEM 4	MINE SAFETY DISCLOSURES	51
ITEM 5	OTHER INFORMATION	51
ITEM 6	EXHIBITS INDEX	52
SIGNATURES		53

PART I

ITEM 1. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets	4
Consolidated Statements of Operations	5
Consolidated Statements of Comprehensive Income (Loss)	6
Consolidated Statements of Cash Flows and Supplemental Cash Flow Information	7
Consolidated Statements of Shareholders’ Equity	8
Notes to Consolidated Financial Statements	9

3

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2013			June 30, 2013			December 31, 2012
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	60,790		$	130,695		$	189,042
Restricted cash	270,272			271,340			273,425
Total cash, cash equivalents and restricted cash	331,062			402,035			462,467
Student receivables, net of allowances of $180,355, $174,760 and $175,407 (Note 6)	163,741			206,406			156,294
Notes, advances and other receivables	37,639			32,547			16,532
Deferred income taxes	76,927			76,927			102,668
Prepaid income taxes	35,379			20,854			—
Other current assets	34,709			32,850			48,107
Total current assets	679,457			771,619			786,068
Property and equipment, net (Note 4)	477,222			525,625			562,184
Goodwill (Note 5)	669,090			669,090			963,550
Intangible assets, net (Note 5)	299,979			300,435			329,361
Other long-term assets (Note 6)	54,340			48,524			52,655
Total assets	$	2,180,088		$	2,315,293		$	2,693,818
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt (Note 8)	$	11,901		$	12,076		$	12,076
Revolving credit facility (Note 8)	—			75,000			—
Accounts payable	58,413			32,559			38,161
Accrued liabilities (Note 7)	154,758			157,417			136,613
Accrued income taxes	—			—			10,525
Unearned tuition	50,956			113,371			55,038
Advance payments	83,361			95,675			116,569
Total current liabilities	359,389			486,098			368,982
Long-term debt, less current portion (Note 8)	1,272,387			1,273,164			1,447,699
Deferred rent	189,173			201,202			212,085
Deferred income taxes	72,122			70,316			99,845
Other long-term liabilities	30,772			34,414			41,599
Shareholders’ equity:
Common stock, at par	1,450			1,435			1,435
Additional paid-in capital	1,809,769			1,794,846			1,785,413
Treasury stock, at cost	(331,782		)	(328,605		)	(328,605		)
Accumulated deficit	(1,212,362		)	(1,203,936		)	(917,909		)
Accumulated other comprehensive loss	(10,830		)	(13,641		)	(16,726		)
Total shareholders’ equity	256,245			250,099			523,608
Total liabilities and shareholders’ equity	$	2,180,088		$	2,315,293		$	2,693,818

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

4

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

	For the Three Months Ended December 31,					For the Six Months Ended December 31,
	2013			2012		2013			2012
Net revenues	$	593,673		$	654,895	$	1,174,053		$	1,264,459
Costs and expenses:
Educational services	345,587			360,377		703,276			741,673
General and administrative	176,414			171,190		348,583			345,682
Depreciation and amortization	38,593			39,255		77,198			83,400
Long-lived asset impairments (Note 4)	3,847			—		3,847			—
Total costs and expenses	564,441			570,822		1,132,904			1,170,755
Income before interest and income taxes	29,232			84,073		41,149			93,704
Interest expense, net	31,615			31,009		63,481			62,461
(Loss) income before income taxes	(2,383		)	53,064		(22,332		)	31,243
Income tax (benefit) expense	(3,472		)	21,920		(13,906		)	13,192
Net income (loss)	$	1,089		$	31,144	$	(8,426	)	$	18,051
Earnings (loss) per share: (Note 2)
Basic	$	0.01		$	0.25	$	(0.07	)	$	0.14
Diluted	$	0.01		$	0.25	$	(0.07	)	$	0.14
Weighted average number of shares outstanding: (Note 2)
Basic	125,450			124,560		125,053			124,519
Diluted	131,010			124,762		125,053			124,620

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

5

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands)

	For the Three Months Ended December 31,						For the Six Months Ended December 31,
	2013			2012			2013			2012
Net income (loss)	$	1,089		$	31,144		$	(8,426	)	$	18,051
Other comprehensive income
Net change in interest rate swaps:
Periodic revaluation of interest rate swaps, net of tax benefit of $271, $147, $766 and $1,434	(459		)	(249		)	(1,300		)	(2,432		)
Reclassification adjustment for interest recognized in consolidated statement of operations, net of tax expense of $1,166, $1,130, $2,316 and $2,173	1,977			1,915			3,928			3,684
Net change in unrecognized loss on interest rate swaps, net of tax	1,518			1,666			2,628			1,252
Foreign currency translation (loss) gain	(163		)	(98		)	183			59
Other comprehensive income	1,355			1,568			2,811			1,311
Comprehensive income (loss)	$	2,444		$	32,712		$	(5,615	)	$	19,362

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

6

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

	For the Six Months Ended December 31,
	2013			2012
Cash flows from operating activities:
Net (loss) income	$	(8,426	)	$	18,051
Adjustments to reconcile net (loss) income to net cash flows from operating activities:
Depreciation and amortization of property and equipment	74,181			80,241
Amortization of intangible assets	3,017			3,159
Bad debt expense	84,683			89,768
Long-lived asset impairments	3,847			—
Amortization of debt issuance costs	7,200			2,561
Share-based compensation	9,828			7,679
Non cash adjustments related to deferred rent	(9,956		)	(7,824		)
Amortization of deferred gains on sale-leaseback transactions	(1,126		)	—
Changes in assets and liabilities:
Restricted cash	1,068			(5,545		)
Receivables	(44,338		)	(40,727		)
Reimbursements for tenant improvements	573			3,891
Inventory	(1,292		)	(583		)
Other assets	(204		)	2,939
Accounts payable	24,863			(15,853		)
Accrued liabilities, including income taxes	(29,539		)	2,343
Unearned tuition	(62,416		)	(61,239		)
Advance payments	(12,273		)	14,316
Total adjustments	48,116			75,126
Net cash flows provided by operating activities	39,690			93,177
Cash flows from investing activities:
Expenditures for long-lived assets	(31,331		)	(39,458		)
Proceeds from sale of fixed assets	—			65,065
Reimbursements for tenant improvements	(573		)	(3,891		)
Net cash flows (used in) provided by investing activities	(31,904		)	21,716
Cash flows from financing activities:
Payments under revolving credit facility	(75,000		)	(111,300		)
Issuance of common stock as a result of stock option exercises	2,722			3
Gross excess tax benefit from share-based compensation	3,391			—
Minimum tax withholding requirements upon restricted stock unit vesting	(2,724		)	—
Principal payments on long-term debt	(6,088		)	(5,769		)
Net cash flows used in financing activities	(77,699		)	(117,066		)
Effect of exchange rate changes on cash and cash equivalents	8			207
Net change in cash and cash equivalents	(69,905		)	(1,966		)
Cash and cash equivalents, beginning of period	130,695			191,008
Cash and cash equivalents, end of period	$	60,790		$	189,042
Cash paid (received) during the period for:
Interest (including swap settlement)	$	55,870		$	60,980
Income taxes, net of refunds	(2,058		)	7,860
	As of December 31,
Noncash investing activities:	2013			2012
Capital expenditures in current liabilities	$	11,826		$	13,538

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

7

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock at Par Value (b)		Additional Paid-in Capital		Treasury Stock (b)			Accumulated Deficit			Accumulated Other Comprehensive Loss				Total
	(In thousands)
Balance at June 30, 2012	$	1,434	$	1,777,732	$	(328,605	)	$	(935,960	)	$	(18,037	)		$	496,564
Exercise of stock options including tax benefit	—		3		—			—			—				3
Share-based compensation	1		17,111		—			—			—				17,112
Net loss	—		—		—			(267,976		)	—				(267,976		)
Other comprehensive income	—		—		—			—			4,396				4,396
Balance at June 30, 2013	1,435		1,794,846		(328,605		)	(1,203,936		)	(13,641		)	(a)	250,099
(Unaudited)
Exercise of stock options	15		2,707		—			—			—				2,722
Share-based compensation	—		9,828		—			—			—				9,828
Minimum tax withholding requirements for restricted stock units	—		—		(3,177		)	—			—				(3,177		)
Net excess tax benefit from share-based compensation	—		2,388		—			—			—				2,388
Net loss	—		—		—			(8,426		)	—				(8,426		)
Other comprehensive income	—		—		—			—			2,811				2,811
Balance at December 31, 2013	$	1,450	$	1,809,769	$	(331,782	)	$	(1,212,362	)	$	(10,830	)	(a)	$	256,245

(a) The balance in accumulated other comprehensive loss at December 31, 2013, June 30, 2013 and December 31, 2012 was comprised of $(10.1) million, $(12.7) million and $(16.4) million of cumulative unrealized losses on interest rate swaps, net of tax, respectively and $(0.7) million, $(0.9) million and $(0.3) million of a cumulative foreign currency translation loss, respectively.

(b) There were 600,000,000 authorized shares of par value $0.01 common stock at December 31, 2013, June 30, 2013 and December 31, 2012. There were 124,601,524 outstanding shares of common stock, net of 18,902,140 shares in treasury, at December 31, 2012. Common stock outstanding and treasury stock balances and activity were as follows for the periods indicated.

	Treasury	Net outstanding
Balance at June 30, 2012	18,902,140	124,477,807
Issued for stock-based compensation plans	—	123,717
Balance at June 30, 2013	18,902,140	124,601,524
Issued for stock-based compensation plans	—	1,526,280
Minimum tax withholding requirements upon restricted stock unit vesting	233,450	(233,450	)
Balance at December 31, 2013	19,135,590	125,894,354

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

8

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES

CONDENSED NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Basis of presentation

The accompanying unaudited consolidated financial statements of Education Management Corporation ("EDMC" and, together with its subsidiaries, the "Company") have been prepared by the Company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the accompanying interim financial statements have been reflected. The consolidated statements of operations for the three and six months ended December 31, 2013 and 2012 are not necessarily indicative of the results to be expected for future periods. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 (the “Annual Report on Form 10-K”) as filed with the Securities and Exchange Commission (“SEC”). The accompanying consolidated balance sheet at June 30, 2013 and consolidated statement of shareholders' equity for the fiscal year ended June 30, 2013 have been derived from the consolidated audited balance sheet and statement of shareholders' equity included in the 2013 Annual Report on Form 10-K.

Description of Business

The Company is among the largest providers of post-secondary education in North America, with approximately 125,560 enrolled students as of October 2013. The Company offers campus-based education through four different education systems and through online platforms at three of its four education systems, or through a combination of both. These four education systems comprise the Company's reportable segments, which are The Art Institutes, Argosy University, Brown Mackie Colleges and South University. Refer to Note 14, "Segment Reporting" for additional information.

The Company is committed to offering quality academic programs and strives to improve the learning experience for its students to help them achieve their educational goals across the spectrum of in-demand careers. The curriculum is designed with a strong emphasis on applied career-oriented content and is primarily taught by faculty members who possess practical and relevant professional experience in their respective fields.

Ownership

On June 1, 2006, EDMC was acquired by a consortium of private equity investment funds led by Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners (collectively, the “Sponsors”). The acquisition was accomplished through the merger of EM Acquisition Corporation into EDMC, with EDMC surviving the merger (the "Transaction") and was financed by equity invested by the Sponsors and other investors, cash on hand and secured and unsecured borrowings. Refer to Note 8, "Short-Term and Long-Term Debt" for more information.

9

In October 2009, EDMC completed an initial public offering of 23.0 million shares of its common stock, $0.01 par value per share ("Common Stock"), at a per share price of $18.00 (the "Initial Public Offering"). The Sponsors did not sell any of their shares in connection with the Initial Public Offering.

Reclassifications

Certain reclassifications of prior year data have been made to conform to the December 31, 2013 presentation with no effect on previously reported net income (loss) or shareholders' equity.

Recent Accounting Pronouncements

In July 2013, the FASB clarified the presentation of an unrecognized tax benefit when a net operating loss or tax credit carryforward exists.  The clarification requires that an unrecognized tax benefit be presented as a reduction of a deferred tax asset for a net operating loss or tax credit carryforward when settlement of the unrecognized tax benefit using those carryforwards is available pursuant to existing tax law.  The Company's adoption of the FASB clarification had no impact on its consolidated financial statements.

2. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed using the weighted average number of shares outstanding during a given period. The Company uses the treasury stock method to compute diluted EPS, which assumes that restricted stock units are converted into common stock and that outstanding stock options are exercised and the resulting proceeds are used to acquire shares of common stock at its average market price during the reporting period.

Basic and diluted EPS were calculated as follows (in thousands, except per share amounts):

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
	2013		2012		2013			2012
Net income (loss)	$	1,089	$	31,144	$	(8,426	)	$	18,051
Weighted average number of shares outstanding:
Basic	125,450		124,560		125,053			124,519
Effect of stock-based awards	5,560		202		—			101
Diluted	131,010		124,762		125,053			124,620
Earnings (loss) per share
Basic	$	0.01	$	0.25	$	(0.07	)	$	0.14
Diluted	$	0.01	$	0.25	$	(0.07	)	$	0.14

Because the effect of applying the treasury stock method would have been antidilutive, the Company excluded time-based options to purchase approximately 1.5 million shares of common stock and 0.6 million restricted stock units outstanding at December 31, 2013 from the computation of diluted EPS in the current quarter and approximately 9.7 million shares of common stock outstanding at December 31, 2012 from the computation of diluted EPS for the three and six months ended December 31, 2012. All outstanding stock options and restricted stock units were excluded from the computation of diluted EPS for the six months ended December 31, 2013 because the Company recorded a net loss.

3. SHARE-BASED COMPENSATION

2012 Omnibus Long-Term Incentive Plan

Effective in September 2012, the Company adopted the Education Management Corporation 2012 Omnibus Long-Term Incentive Plan (the “2012 Omnibus Plan”), which replaced the Education Management Corporation Omnibus Long-Term Incentive Plan (the "2009 Omnibus Plan") that was adopted in April 2009 and became effective upon the completion of the Initial Public Offering. The 2009 Omnibus Plan and the 2006 Stock Option Plan, which it replaced, are now frozen. The 2012 Omnibus Plan may be used to issue stock options, stock appreciation rights, restricted stock, restricted stock units and other forms of long-term incentive compensation.

The Company amended the 2012 Omnibus Plan in November 2013 to formally authorize the grant of cash and stock-based awards that generally have a performance period of one year and to increase the number of shares of Common Stock authorized for issuance by 4.0 million. As of December 31, 2013, approximately 5.6 million shares of Common Stock remain reserved for issuance under the 2012 Omnibus Plan.

10

Share-Based Compensation Activity

On November 8, 2013, the Company granted the share-based compensation awards presented in the table below. The fair value of the time-based stock options was determined using a Black-Scholes-Merton model in which the key assumptions are presented below.

	Time-Based Stock Options			Restricted Stock Units
Number granted (in millions)	1.5			0.6
Fair value per unit	$	7.66		$	12.74
Exercise price	$	12.74		N/A
Expected dividend yield	0		%	N/A
Expected volatility	64		%	N/A
Risk free interest rate	1.86		%	N/A
Expected term (yrs)	6.25 years			N/A

The above awards will vest 25 percent per year and will result in compensation expense of approximately $16.5 million over the four-year service period, net of expected forfeitures. The Company also granted 0.1 million shares of restricted stock to members of its Board of Directors on November 8, 2013, all of which will vest after one year.

The Company recognized $5.7 million and $4.1 million of share-based compensation expense during the three months ended December 31, 2013 and 2012, respectively, and $9.8 million and $7.7 million of share-based compensation expense during the six months ended December 31, 2013 and 2012, respectively. Compensation expense for the three and six months ended December 31, 2013 includes additional expense recognized upon the termination of former employees that are no longer required to provide services to obtain certain awards in accordance with the terms of their employment agreements.

The table below presents outstanding share units, unrecognized compensation expense (net of expected forfeitures) and stock options that are exercisable at December 31, 2013:

	Outstanding (in millions)	Unrecognized Compensation Expense (in millions)		Exercisable (in 000s)	Weighted Average Exercise Price / Share Price
Time-based stock options	11.3	$	27.0	3.6	$	3.58
Restricted stock units	2.5	$	12.6	N/A	$	5.90
Performance-based stock options	1.0	$	2.1	—	$	3.59
Total	14.8	$	41.7	3.6

During the six month period ended December 31, 2013, the Company issued 1.5 million shares of Common Stock and recorded a gross excess tax benefit of $3.4 million in connection with share-based compensation activity. The gross excess tax benefit is classified as a cash inflow from financing activities in the accompanying consolidated statement of cash flows.

Performance-based stock options vest upon the greater of (i) the percentage of the Company's common stock sold by certain investment funds affiliated with Providence Equity Partners and Goldman Sachs Capital Partners (together, the "Principal Stockholders") or (ii) certain return on investment hurdles achieved by the Principal Stockholders. As of December 31, 2013, the Company continues to defer recognizing expense on outstanding performance-based stock options until the relevant performance conditions become probable of being met.

4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following amounts (in thousands):

11

Asset Class	December 31, 2013			June 30, 2013			December 31, 2012
Leasehold improvements	$	574,231		570,286			$	564,578
Technology and other equipment	322,349			324,403			314,663
Furniture and equipment	164,148			163,595			161,013
Software	105,720			98,537			86,284
Library books	45,001			44,248			43,319
Buildings and improvements	25,708			25,566			25,358
Construction in progress	24,182			19,600			20,258
Land	5,496			5,496			5,496
Total	1,266,835			1,251,731			1,220,969
Less accumulated depreciation and amortization	(789,613		)	(726,106		)	(658,785		)
Property and equipment, net	$	477,222		$	525,625		$	562,184

Depreciation and amortization expense related to property and equipment was $37.1 million and $37.6 million, respectively, for the three months ended December 31, 2013 and 2012 and $74.2 million and $80.2 million, respectively, for the six months ended December 31, 2013 and 2012. Depreciation and amortization expense for the six months ended December 31, 2012 included $4.6 million in accelerated amortization resulting from the write off of a software asset that no longer had a useful life.

During the three months ended December 31, 2013, the Company recorded an impairment of long-lived assets of $3.8 million in the consolidated statement of operations as estimated future cash flows at two of the Company's Brown Mackie Colleges locations were insufficient to support the carrying values of its property and equipment. In connection with the impairment, the leasehold improvement assets at the affected locations were measured at fair value using the discounted cash flow method (income approach) on a non-recurring basis using Level Three inputs as defined in Note 10, "Fair Value of Financial Instruments."

During the three months ended December 31, 2012, the Company completed five sale-leaseback transactions with unrelated third parties for net proceeds of $65.1 million. Concurrent with these sales, the Company entered into agreements to lease the properties back from the purchasers over initial lease terms ranging from three to 15 years. The Company classified these leases as operating and considers them normal leasebacks with no other continuing involvement.

5. GOODWILL AND INTANGIBLE ASSETS

Goodwill

In connection with the Transaction on June 1, 2006, the Company recorded approximately $2.6 billion of goodwill, which was allocated to its four reporting units: The Art Institutes, Argosy University, Brown Mackie Colleges and South University. The Company formally evaluates the carrying amount of goodwill for each of its reporting units on April 1 of each fiscal year. In addition, the Company performs an evaluation on an interim basis if it determines that recent events or prevailing conditions indicate a potential impairment of goodwill. A significant amount of judgment is involved in determining whether an indicator of impairment has occurred between annual impairment tests. These indicators include, but are not limited to, overall financial performance such as adverse changes in recent forecasts of operating results, industry and market considerations, the Company's market capitalization, updated business plans and regulatory and legal developments.

As disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Use of Estimates and Critical Accounting Policies" of the Company's 2013 Annual Report on Form 10-K, the fair value of The Art Institutes reporting unit exceeded its carrying value by more than 15 percent at March 31, 2013. During the quarter ended December 31, 2013, management observed declining application trends for future academic terms, particularly at The Art Institutes reporting unit, and performed a sensitivity analysis of its fair value using the most recently completed long range forecast and available earnings multiples of the Company's peer group.

As a result of the sensitivity analysis performed in the current quarter, management continues to believe that the fair value of The Art Institutes exceeds its carrying value by more than 10 percent at December 31, 2013; accordingly, the Company does not believe that it is more-likely-than-not that the fair value of The Art Institutes has decreased below its carrying value at December 31, 2013. Management also considered the results of the most recently completed long range forecast and available earnings multiples for the potential impact on the fair values of the Argosy University and South University reporting units and, based on its analysis, management does not believe that it is more-likely-than-not that the fair values of these reporting units have decreased below their carrying values at December 31, 2013. Consequently, management concluded that none of the

12

Company's reporting units experienced any triggering event that would have required a step one interim goodwill impairment analysis at December 31, 2013.

A roll forward of the Company's consolidated goodwill balance from June 30, 2012 to June 30, 2013 is as follows (in thousands):

	June 30, 2012		Impairment			June 30, 2013
The Art Institutes	$	861,619	$	(294,460	)	$	567,159
Argosy University	63,445		—			63,445
South University	38,486		—			38,486
Total goodwill	$	963,550	$	(294,460	)	$	669,090

The entire goodwill balance attributed to the Brown Mackie Colleges reporting unit was written off in connection with impairment charges incurred in fiscal 2012; therefore, it was not considered in the sensitivity analysis described above. The Company's goodwill balance did not change between June 30, 2013 and December 31, 2013.

Intangible Assets

The Company also evaluates indefinite-lived intangible assets annually on April 1 for impairment and on an interim basis if it determines that recent events or prevailing conditions indicate these assets could be potentially impaired. The Company does not believe that it is more-likely-than-not that the fair values of its indefinite-lived intangible assets have decreased below their respective carrying values at December 31, 2013; consequently, management concluded that no triggering event occurred in the current quarter that would have required an interim evaluation of these assets. Intangible assets other than goodwill consisted of the following amounts (in thousands):

	December 31, 2013					June 30, 2013					December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
The Art Institutes trade name	$	190,000	$	—		$	190,000	$	—		$	218,000	$	—
Licensing, accreditation and Title IV program participation	95,862		—			95,862		—			95,862		—
Curriculum and programs	45,315		(33,800		)	43,575		(32,596		)	41,172		(30,392		)
Student contracts, applications and relationships	39,511		(37,937		)	39,511		(37,381		)	39,511		(36,826		)
Favorable leases and other	19,403		(18,375		)	19,424		(17,960		)	19,435		(17,401		)
Total intangible assets	$	390,091	$	(90,112	)	$	388,372	$	(87,937	)	$	413,980	$	(84,619	)

The Company considers The Art Institutes reporting unit trade name to have a useful life similar to that of the overall business and assigned it an indefinite life for accounting purposes.  State licenses and accreditations of the Company’s schools, as well as their eligibility for Title IV program participation, are periodically renewed in cycles ranging from every one to up to every ten years depending upon government and accreditation regulations. Because the Company considers these renewal processes to be a routine aspect of the overall business, these assets are originally assigned indefinite lives and annual costs to renew are expensed as incurred.

Amortization of intangible assets was approximately $1.5 million and $1.6 million for the three months ended December 31, 2013 and 2012, respectively, and $3.0 million and $3.2 million for the six months ended December 31, 2013 and 2012. Total estimated amortization of the Company’s intangible assets for each of the fiscal years ending June 30, 2014 through 2018 was as follows at December 31, 2013 (in thousands):

Fiscal years	Amortization Expense
2014 (remainder)	$	2,882
2015	5,266
2016	3,910
2017	2,008
2018	51

6. STUDENT RECEIVABLES    

13

The Company records student receivables at cost less an estimated allowance for doubtful accounts, which is determined on a monthly basis based on the likelihood of collection considering students' enrollment status and historical payment experience. For example, receivables from students who are out-of-school are reserved for at a higher rate than the receivables from students who are in-school. When certain criteria are met, which is generally when receivables age past the due date by more than four months, and internal collection measures have been taken without success, the accounts of former students are placed with a collection agency. Student accounts that have been placed with a collection agency are reserved for at a very high rate and are written off after collection attempts have been unsuccessful.

Student receivables include $27.6 million (net of $29.6 million allowance), $24.3 million (net of $27.9 million allowance), and $18.9 million (net of $24.1 million allowance) recorded in other long-term assets on the accompanying consolidated balance sheets at December 31, 2013, June 30, 2013 and December 31, 2012, respectively. These amounts relate to the extension of credit to students for amounts due beyond one year, which helps students fund the difference between total tuition and fees and the amount covered by various sources of financial aid, including amounts awarded under Title IV programs and private loans. During fiscal 2013, the Company extended the repayment period for financing made available to students from a maximum of 36 months beyond graduation to a maximum of 42 months beyond graduation. The majority of applicable accounts incur interest charges that accrue each month on unpaid balances except for those accounts that have been placed into collections. The gross short-term and long-term student receivables by student status were as follows (in thousands):

	December 31, 2013		June 30, 2013		December 31, 2012
In-school	$	191,671	$	194,062	$	188,224
Out-of-school	209,647		239,330		186,465
Gross student receivables	$	401,318	$	433,392	$	374,689

The Company commenced a new program in fiscal 2013 under which it purchases loans awarded and disbursed to its students from a private lender. The Company has awarded approximately $10 million of aid under this program as of December 31, 2013, all of which has been purchased and recorded in other long-term assets, net of an allowance.

Details surrounding the Company's total allowance for doubtful accounts, including reserves related to student and other related receivables and loan loss reserves is as follows (in thousands):

Balance June 30, 2012	$	250,282
Bad debt expense	171,850
Amounts written off	(213,884		)
Balance June 30, 2013	208,248
Bad debt expense	84,683
Amounts written off	(72,236		)
Balance December 31, 2013	$	220,695

The amounts set forth above are recorded within student receivables, net and other long-term assets on the consolidated balance sheets. Recoveries of amounts previously written off were not significant in any period presented.

7. ACCRUED LIABILITIES

Accrued liabilities consisted of the following amounts (in thousands):

	December 31, 2013		June 30, 2013		December 31, 2012
Payroll and related taxes	$	28,602	$	35,668	$	36,476
Advertising	26,176		33,010		28,027
Benefits	15,383		16,235		15,444
Interest	11,117		10,416		3,037
Capital expenditures	5,791		4,113		6,789
Other	67,689		57,975		46,840
Total accrued liabilities	$	154,758	$	157,417	$	136,613

14

Over the past several fiscal years, the Company has completed restructuring plans across the organization intended to improve operational efficiencies and align costs with student enrollment levels. During the six months ended December 31, 2013, the Company recorded restructuring expenses of $11.1 million split between educational services expense and general and administrative expense, which consisted of employee severance charges of $9.4 million and $1.7 million related to a sublease transaction the Company entered into after consolidating office space. At December 31, 2013, the remaining liability for all restructuring plans was $8.8 million, consisting primarily of employee severance amounts that will be paid through June 30, 2014 and net rent charges that will be paid through the remaining lease terms.

8. SHORT-TERM AND LONG-TERM DEBT

U.S. Department of Education Letters of Credit

The Company had outstanding letters of credit of $354.0 million at December 31, 2013, the largest of which is issued to the U.S. Department of Education, which requires the Company to maintain a letter of credit due to its failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. The amount of this letter of credit was $348.6 million at December 31, 2013, which equals 15 percent of the total Title IV aid received by students who attended the Company’s institutions during the fiscal year ended June 30, 2012.

As of December 31, 2013, in order to fund its current letter of credit obligation to the U.S. Department of Education, the Company utilized all $200.0 million of capacity under two cash secured letter of credit facilities, in connection with which the Company classifies $210.0 million as restricted cash to satisfy the 105 percent collateralization requirement, and $148.6 million of letter of credit capacity under its $328.3 million revolving credit facility, which expires on June 1, 2015. The cash secured letter of credit facilities currently mature on July 8, 2014 or earlier if the existing revolving credit facility is terminated. Any future reduction in the usage of the cash secured letter of credit facilities will reduce the amount of cash that is classified as restricted cash on the consolidated balance sheet. In January 2014, the U.S. Department of Education decreased its letter of credit requirement from $348.6 million to $302.2 million, which equals 15 percent of total Title IV aid received by students who attended the Company's institutions during the fiscal year ended June 30, 2013.

Short-Term Debt

There were $75.0 million of borrowings outstanding at June 30, 2013 under the revolving credit facility, all of which was repaid in full on July 1, 2013. No borrowings were outstanding under the revolving credit facility at December 31, 2013 and 2012. After adjusting for outstanding letters of credit, which decrease availability thereunder, the Company had $174.3 million of additional capacity under the revolving credit facility at December 31, 2013 available for borrowings or issuance of letters of credit.

The interest rate on amounts outstanding at June 30, 2013 under the revolving credit facility was 6.25 percent, which is equal to the prime rate as defined under the credit facility plus a margin of 3.00 percent. The applicable margin for borrowings under the revolving credit facility can change depending on the Company's leverage ratios and credit ratings. Education Management LLC ("EM LLC"), an indirect wholly-owned subsidiary of the Company, is obligated to pay a per annum commitment fee on undrawn amounts under the revolving credit facility, which is currently 0.375 percent and varies based on certain leverage ratios. EM LLC must also pay customary letter of credit fees for outstanding letters of credit under the revolving credit facility, which is secured by certain of the Company’s assets and is subject to the Company’s satisfaction of certain covenants and financial ratios described further below.

Long-Term Debt

The Company’s long-term debt consisted of the following amounts (in thousands):

	December 31, 2013			June 30, 2013			December 31, 2012
Senior secured term loan facility, due in June 2016 ("Tranche C-2 Loan")	$	732,412		$	736,454		$	740,497
Senior secured term loan facility, due in March 2018, net of discount of $2,593, $2,898 and $3,203 ("Tranche C-3 Loan")	340,776			342,364			343,954
Senior cash pay/PIK notes due 2018, net of discount of $25,024 and $27,712 ("PIK Notes")	211,073			206,242			—
8.75% senior notes	—			—			375,000
Other	27			180			324
Total long-term debt	1,284,288			1,285,240			1,459,775
Less current portion	(11,901		)	(12,076		)	(12,076		)
Total long-term debt, less current portion	$	1,272,387		$	1,273,164		$	1,447,699

15

Cash interest on the PIK Notes accrues at the rate of 15.0 percent per annum and is payable semi-annually on March 30 and September 30. For any interest period after March 30, 2014 up to and including July 1, 2018, interest in addition to the cash interest payable will be paid by increasing the principal amount of the outstanding PIK Notes (“PIK Interest”). Additionally, the PIK Notes are required to be paid at a premium of 13.0 percent at their contractual maturity, which is being treated as an original issuance discount for accounting purposes. Including PIK Interest and the original issuance discount, the annual effective interest rate on the PIK Notes is 19.8 percent. The Tranche C-3 Loan bears interest at a rate equal to the greater of three-month LIBOR or 1.25 percent, plus a margin of 7.0 percent, which yielded an interest rate of 8.25 percent at December 31, 2013, June 30, 2013 and December 31, 2012.  The Tranche C-2 Loan bears interest at a rate equal to three-month LIBOR plus a margin of 4.00 percent, which yielded an interest rate of 4.25 percent, 4.31 percent and 4.38 percent at December 31, 2013, June 30, 2013 and December 31, 2012, respectively. 

The indenture and credit agreement governing the senior secured credit facilities and PIK Notes, respectively, contain a number of covenants that, among other things, restrict, subject to certain exceptions, EM LLC’s ability to incur additional indebtedness, pay dividends and distributions on or repurchase capital stock, create liens on assets, repay subordinated indebtedness, make investments, loans or advances, make capital expenditures, engage in certain transactions with affiliates, amend certain material agreements, change its lines of business, sell assets and engage in mergers or consolidations. In addition, EM LLC is required to satisfy and maintain a maximum total leverage ratio and a minimum interest coverage ratio under the senior secured credit facilities on a quarterly basis. EM LLC met the requirements of these two financial covenants for the twelve month period ended December 31, 2013. While the Company has continued to satisfy applicable financial covenant compliance ratios, the margin between the actual results and the covenant requirements has decreased significantly over the past 12 months due to declining operating performance.

9. DERIVATIVE INSTRUMENTS

The Company has historically utilized interest rate swap agreements, which are contractual agreements to exchange payments based on underlying interest rates, to manage the floating rate portion of its term debt. The Company currently holds two interest rate swap agreements, one of which was entered into with an affiliate of one of the Sponsors, that are for notional amounts of $312.5 million each and effectively fix future interest payments at a rate of 6.26 percent through June 1, 2015. Because both interest rate swaps are deemed to be highly effective for accounting purposes, they qualify for cash flow hedge accounting treatment and changes in their fair values are recorded in other comprehensive income or loss. The Company uses Level Two inputs to value its interest rate swaps as defined in Note 10, "Fair Value of Financial Instruments," which includes obtaining quotes from counter-parties that are based on LIBOR forward curves and assessing non-performance risk based upon published market data.

At December 31, 2013, there was a cumulative unrealized loss of $10.1 million, net of tax, related to the Company's interest rate swaps included in accumulated other comprehensive loss on the accompanying consolidated balance sheet. This unrealized loss would be recognized in the consolidated statement of operations immediately if the forecasted cash flows being hedged did not occur.  The fair values of the interest rate swap liabilities were $16.1 million, $20.2 million and $27.3 million at December 31, 2013, June 30, 2013 and December 31, 2012, respectively, and were recorded in other long-term liabilities on the accompanying consolidated balance sheets. Over the next twelve months, the Company estimates that approximately $7.9 million, net of tax, will be reclassified from accumulated other comprehensive loss to the consolidated statement of operations based on current interest rates and underlying debt obligations at December 31, 2013.

10. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determines the fair value of assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The fair value hierarchy is based on whether the inputs to valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's own assumptions of what market participants would use. The fair value hierarchy includes three levels of inputs that may be used to measure fair value as described below.

Level One - Quoted prices for identical instruments in active markets.

Level Two - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations for which all significant inputs are observable market data.

Level Three - Unobservable inputs significant to the fair value measurement supported by little or no market activity.

In some cases, the inputs used to measure fair value may meet the definition of more than one level of fair value hierarchy. The lowest level input that is significant to the fair value measurement in its totality determines the applicable level in the fair value hierarchy.

16

The following table presents the carrying amounts and fair values of the interest rate swap liabilities, which are measured at fair value on a recurring basis based on the framework described in Note 9, "Derivative Instruments," and the fair values of the Company's debt, which is recorded at carrying value (in thousands):

	December 31, 2013						June 30, 2013					December 31, 2012
	Carrying Value		Level Two		Level Three		Carrying Value		Level Two		Level Three	Carrying Value		Level One		Level Two
Recurring:
Interest rate swap liabilities	$	16,054	$	16,054	$	—	$	20,232	$	20,232	—	$	27,252	$	—	$	27,252
Disclosure only:
Variable rate debt	1,073,188		1,043,977		—		1,078,818		962,134		—	1,084,451		—		883,833
Fixed rate debt	211,110		—		225,875		206,422		—		206,422	375,324		301,262		—

The fair value of the Company’s variable rate debt was based on each instrument’s trading value in markets that are not active. The fixed rate debt at December 31, 2012 consists of the Company's 8.75 percent senior notes that were retired in connection with a refinancing transaction described in Part II, Item 8 "Financial Statements and Supplementary Data," Note 8, "Short-Term and Long-Term Debt" of the June 30, 2013 Annual Report on Form 10-K. The fixed rate debt at December 31, 2013 and June 30, 2013 reflects the Company's PIK Notes that were issued in connection with this refinancing transaction. There is currently no observable trading for the Company's PIK Notes; therefore, the fair value of the fixed rate PIK Notes was estimated using the performance of the Company's other debt while also considering current market conditions. Student accounts receivable, notes receivable and the revolving credit facility have fair values that approximate their carrying values.

11. INCOME TAXES

The Company uses the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities result from (i) temporary differences in the recognition of income and expense for financial and federal income tax reporting requirements, and (ii) differences between the recorded value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred tax assets should be reduced by a valuation allowance if, based upon the weight of the available evidence, it is more-likely-than-not that some portion or all of a deferred tax asset will not be realized. Future realization of deferred tax assets ultimately depends upon the existence of sufficient taxable income of the appropriate character in either the carry back or carry forward period under applicable tax law.

The Company assesses the realizability of its deferred tax assets on a quarterly basis by considering the relative impact of all available evidence, both positive and negative, to determine whether, based upon the weight of that evidence if a valuation allowance is needed. This evaluation requires the use of considerable judgment and estimates that are subject to change. Excluding deferred tax liabilities related to indefinite-lived intangible assets, which are not scheduled to reverse, the Company is in a net deferred tax asset position at December 31, 2013.

The Company incurred cumulative losses before taxes in the three most recent fiscal years ended June 30, 2013 primarily due to long-lived asset impairment charges recorded in fiscal 2013 and 2012, most of which was not deductible. Absent these impairment charges, the Company would have recorded pre-tax earnings in fiscal 2013 and 2012. Management considered the cumulative loss for book purposes and concluded that it was more-likely-than-not that the Company's deferred tax assets would be realized except as disclosed in Part II, Item 8 "Financial Statements and Supplementary Data," Note 11, "Income Taxes" of the June 30, 2013 Annual Report on Form 10-K with respect to certain state deferred tax assets.

The effective tax rates differ from the combined federal and state statutory rates due to valuation allowances, expenses that are non-deductible for tax purposes, discrete items and the accounting related to uncertain tax positions. The Company's effective tax rate in the three months ended December 31, 2013 was impacted by the disproportionate impact on low earnings of discrete items as well as permanent tax differences, which have remained relatively consistent period over period. The effective tax rate for the three months ended December 31, 2012 was 41.3 percent. The Company's effective tax rate was a benefit of 62.3 percent and expense of 42.2 percent, respectively, for the six months ended December 31, 2013 and 2012. The current six-month period includes a deferred tax benefit of approximately $3.2 million that was recorded as a discrete item resulting from the July 2013 enactment of Pennsylvania House Bill No. 465, which, in addition to other amendments, changes how revenues from the sale of services are sourced for Pennsylvania income tax purposes. There have been no material adjustments to liabilities relating to uncertain tax positions since the last annual disclosure for the fiscal year ended June 30, 2013.

12. CONTINGENCIES

17

Qui Tam Matters

Washington v. Education Management Corporation. On May 3, 2011, a qui tam action captioned United States of America, and the States of California, Florida, Illinois, Indiana, Massachusetts, Minnesota, Montana, New Jersey, New Mexico, New York and Tennessee, and the District of Columbia, each ex rel. Lynntoya Washington and Michael T. Mahoney v. Education Management Corporation, et al. (“Washington”) filed under the federal False Claims Act in April 2007 was unsealed due to the U.S. Department of Justice's decision to intervene in the case. Five of the states listed on the case caption joined the case based on qui tam actions filed under their respective False Claims Acts. The Court granted the Company's motion to dismiss the District of Columbia from the case and denied the Commonwealth of Kentucky's motion to intervene in the case under its consumer protection laws.

The case, which is pending in federal district court in the Western District of Pennsylvania, relates to whether the Company's compensation plans for admission representatives violated the Higher Education Act of 1965, as amended ("HEA"), and U.S. Department of Education regulations prohibiting an institution participating in Title IV programs from providing any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments to any person or entity engaged in any student recruitment or admissions activity during the period of July 1, 2003 through June 30, 2011. The complaint was initially filed by a former admissions representative at The Art Institute of Pittsburgh Online Division and a former director of training at EDMC Online Higher Education and asserts the relators are entitled to recover treble the amount of actual damages allegedly sustained by the federal government as a result of the alleged activity, plus civil monetary penalties. The complaint does not specify the amount of damages sought but claims that the Company and/or students attending the Company's schools received over $11 billion in funds from participation in Title IV programs and state financial aid programs during the period of alleged wrongdoing.

On May 11, 2012, the Court ruled on the Company's motion to dismiss case for failure to state a claim upon which relief can be granted, dismissing the claims that the design of the Company's compensation plan for admissions representatives violated the incentive compensation rule and allowing common law claims and the allegations that the plan as implemented violated the rule to continue to discovery.  The Company believes the case to be without merit and intends to vigorously defend itself. From time to time, the Company engages in settlement discussions with respect to this case.  There can be no assurance that these conversations will lead to a settlement acceptable to all parties and approved by all parties.   There can also be no assurance that any settlement will be within amounts currently accrued or be covered by insurance or not be material to the Company. 

Sobek v. Education Management Corporation. On March 13, 2012, a qui tam action captioned United States of America, ex rel. Jason Sobek v. Education Management Corporation, et al. filed under the federal False Claims Act on January 28, 2010 was unsealed after the U.S. Department of Justice declined to intervene in the case. The case, which is pending in the federal district court in the Western District of Pennsylvania, alleges that the defendants violated the U.S. Department of Education's regulation prohibiting institutions from making substantial misrepresentations to prospective students, did not adequately track student academic progress and violated the U.S. Department of Education's prohibition on the payment of incentive compensation to admissions representatives. The complaint was filed by a former project associate director of admissions at EDMC Online Higher Education who worked for South University and asserts the relator is entitled to recover treble the amount of actual damages allegedly sustained by the federal government as a result of the alleged activity, plus civil monetary penalties. The complaint does not specify the amount of damages sought but claims that the Company's institutions were ineligible to participate in Title IV programs during the period of alleged wrongdoing.

In August 2013, the parties to the action, along with the U.S. Department of Justice, participated in a private mediation in which the relator and defendants reached an agreement in principle regarding the financial terms of a potential settlement. The agreement between the parties remains subject to approval by the U.S. Department of Justice. Significant terms remain to be negotiated, and there is no certainty that a final agreement will be reached. The settlement amount agreed to by the parties under the terms of the agreement in principle would be paid by the Company's insurer and the Company would pay an immaterial amount of attorneys' fees incurred by the relator. The ultimate dismissal of the action, should a final settlement be reached, is subject to the Court's approval.

In the course of settlement discussions regarding the Sobek matter, the U.S. Department of Justice informed the Company that it is the subject of an investigation related to a claim under the federal false claims act by the U. S. Attorney’s Office in the Middle District of Tennessee. The Company plans on cooperating with the U.S. Department of Justice with regard to this matter. However, the Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

Shareholder Derivative Lawsuits

On May 21, 2012, a shareholder derivative class action captioned Oklahoma Law Enforcement Retirement System v. Todd S. Nelson, et al. was filed against the directors of the Company in state court located in Pittsburgh, PA. The Company is named as a nominal defendant in the case. The complaint alleges that the defendants violated their fiduciary obligations to the Company's shareholders due to the Company's violation of the U.S. Department of Education's prohibition on paying incentive

18

compensation to admissions representatives, engaging in improper recruiting tactics in violation of Title IV of the HEA and accrediting agency standards, improper classification of job placement data for graduates of its schools and failure to satisfy the U.S. Department of Education's financial responsibility standards. The Company previously received two demand letters from the plaintiff which were investigated by a Special Litigation Committee of the Board of Directors and found to be without merit.

The Company and the director defendants filed a motion to dismiss the case with prejudice on August 13, 2012. In response, the plaintiffs filed an amended complaint making substantially the same allegations as the initial complaint on September 27, 2012. The Company and the director defendants filed a motion to dismiss the amended complaint on October 17, 2012. On July 16, 2013, the Court dismissed the claims that the Company engaged in improper recruiting tactics and mismanaged the Company's financial well-being with prejudice and found that the Special Litigation Committee could conduct a supplemental investigation of the plaintiff's claims related to incentive compensation paid to admissions representatives and graduate placement statistics. The Special Litigation Committee filed supplemental reports on October 15, 2013 and January 9, 2014, finding no support for the incentive compensation and graduate placement statistic claims. The Court held a hearing on the defendants' supplemental motion to dismiss the case on January 29, 2014.

On August 3, 2012, a shareholder derivative class action captioned Stephen Bushansky v. Todd S. Nelson, et al. was filed against certain of the directors of the Company in federal district court in the Western District of Pennsylvania. The Company is named as a nominal defendant in the case. The complaint alleges that the defendants violated their fiduciary obligations to the Company's shareholders due to the Company's use of improper recruiting, enrollment admission and financial aid practices and violation of the U.S. Department of Education's prohibition on the payment of incentive compensation to admissions representatives. The Company previously received a demand letter from the plaintiff which was investigated by a Special Litigation Committee of the Board of Directors and found to be without merit. The Company believes that the claims set forth in the complaint are without merit and intends to vigorously defend itself. The Company and the named director defendants filed a motion to stay the litigation pending the resolution of the Oklahoma Law Enforcement Retirement System shareholder derivative case or, alternatively, dismiss the case on October 19, 2012. On August 5, 2013, the Court granted the Company's motion to stay the case in light of the ruling on the defendants' motion to dismiss the Oklahoma Law Enforcement Retirement System case.

OIG Subpoena

On May 24, 2013, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Education requesting policies and procedures related to Argosy University's attendance, withdrawal and return to Title IV policies during the period of July 1, 2010 through December 31, 2011 and detailed information on a number of students who enrolled in Argosy University's Bachelor's of Psychology degree program. The Company plans to cooperate with the Office of Inspector General in connection with its investigation. However, the Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

State Attorney General Investigations

In January 2014, the Company received inquiries from 13 states regarding the Company’s business practices. The Attorney General of the Commonwealth of Pennsylvania informed the Company that it will serve as the point of contact for the inquiries related to the Company. The inquiries focus on the Company's practices relating to the recruitment of students, graduate placement statistics, graduate certification and licensing results, and student lending activities, among other matters. Several other companies in the proprietary education industry have disclosed that they received similar inquiries. The Company intends to cooperate with the states involved and cannot predict the eventual scope, duration or outcome of the investigation at this time.

In January 2013, The New England Institute of Art received a civil investigative demand from the Commonwealth of Massachusetts Attorney General requesting information for the period from January 1, 2010 to the present pursuant to an investigation of practices by the school in connection with marketing and advertising job placement and student outcomes, the recruitment of students and the financing of education. The Company previously responded to a similar request that The New England Institute of Art received in June 2007 and intends to cooperate with the Attorney General in connection with its investigation. However, the Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

As previously disclosed, on December 5, 2013, the Company entered into a Final Consent Judgment (the “Consent Judgment”) with the Colorado Attorney General’s Office for the purpose of resolving disputed claims, avoiding the expense of further litigation, and permitting the Company to focus on its education mission with regard to its students. Under the Consent Judgment, without admitting liability, the Company has agreed to pay the aggregate amount of approximately $3.4 million, consisting of $2.9 million to be distributed as restitution to eligible students and $0.5 million to the Colorado Department of Law to be used by the State of Colorado for consumer restitution and as reimbursement to the state for reasonable costs and attorney’s fees and for future consumer education, consumer fraud and antitrust enforcement efforts. The Company further agreed to a suspended civil penalty of $1.0 million, which becomes due and payable if the Company commits a knowing and

19

willful material violation of the Consent Judgment within three years of the date of the Consent Judgment. The Company accrued a liability for the $3.4 million settlement within general and administrative expense in the accompanying consolidated statement of operations in the three months ended December 31, 2013.

In August 2011, the Company received a subpoena from the Attorney General of the State of New York requesting documents and detailed information for the time period of January 1, 2000 through the present. The Art Institute of New York City is the Company's only school located in New York though the subpoena also addresses fully-online students who reside in the State. The subpoena is primarily related to the Company's compensation of admissions representatives and recruiting activities. The relators in the Washington qui tam case filed the complaint under the State of New York's False Claims Act though the state has not announced an intention to intervene in the matter. The Company intends to cooperate with the investigation. However, the Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

In December 2010, the Company received a subpoena from the Office of Consumer Protection of the Attorney General of the Commonwealth of Kentucky requesting documents and detailed information for the time period of January 1, 2008 through December 31, 2010. The Company has three Brown Mackie College locations in Kentucky. The Kentucky Attorney General announced an investigation of the business practices of proprietary post-secondary schools and that subpoenas were issued to six proprietary colleges that do business in Kentucky in connection with the investigation. The Company intends to continue to cooperate with the investigation. However, the Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

In October 2010, Argosy University received a subpoena from the Florida Attorney General's office seeking a wide range of documents related to the Company's institutions, including the nine institutions located in Florida, from January 2, 2006 to the present. The Florida Attorney General has announced that it is investigating potential misrepresentations in recruitment, financial aid and other areas. The Company is cooperating with the investigation, but has also filed a suit to quash or limit the subpoena and to protect information sought that constitutes proprietary or trade secret information. The Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

City of San Francisco

In December 2011, the Company received a letter from the City Attorney of the City of San Francisco, California requesting information related to student recruitment and indebtedness, including recruiting practices and job placement reporting, among other issues, by The Art Institute of San Francisco and the seven other Art Institutes located in California. The Company has engaged in settlement discussions with the City Attorney's office in order to explore a potential resolution of the investigation and recorded a liability at December 31, 2013 based on these discussions which the Company believes is immaterial to the financial statements. Settlement discussions continue with the City Attorney's office and the Company cannot predict at this time the eventual scope or timing of any settlement agreement or if such an agreement will be reached with the City Attorney or if any resolution of the matter will have a material impact on the Company’s financial statements or results of operations.

Securities and Exchange Commission Subpoenas

On March 20, 2013, the Company received a subpoena from the Division of Enforcement of the Securities and Exchange Commission requesting documents and information relating to the Company's valuation of goodwill and its bad debt allowance for student receivables. The Company received a second subpoena from the Division of Enforcement on May 13, 2013 which requests documents and information related to the letters of credit posted with the U.S. Department of Education. The Company intends to cooperate with the SEC in its investigation. The Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

Argosy University, Seattle APA Program Accreditation Lawsuits

In August 2013, a petition was filed in the Superior Court of the State of Washington (King County) in the case of Winters, et al. v. Argosy Education Group, et al. by 20 former students in the Clinical Psychology program offered by the Seattle campus of Argosy University. In December 2013, a similar petition was filed in the same court in the case of McMath, et al. v. Argosy Education Group, et al. by nine former students in the Clinical Psychology program offered by the Seattle campus of Argosy University. Both cases allege negligent misrepresentation due to the failure of the Clinical Psychology program to obtain accreditation from the American Psychology Association ("APA"), breach of contract, violation of the Washington State Consumer Protection Act, negligent infliction of emotional distress, negligence and lack of institutional control, negligent misrepresentation, breach of fiduciary duty, negligent failure to disclose and fraud.  The Seattle campus of Argosy University announced that it was teaching-out (i.e., not accepting new students into the program) the Clinical Psychology program in November 2011 due to the inability to obtain APA accreditation. The Company believes the claims in the lawsuits to be without merit and intends to vigorously defend itself.

Other Matters

20

The Company is a defendant in certain other legal proceedings arising out of the conduct of its business.  Additionally, the Company is subject to compliance reviews by various state and federal agencies which provide student financial aid programs, of which noncompliance may result in liability for educational benefits paid as well as fines and other corrective action.  The U.S. Department of Veterans Affairs is currently conducting a compliance review of one of the Company's schools and has advised the Company that it intends to conduct reviews of four additional schools during fiscal 2014. As disclosed in 2013 Annual Report on Form 10-K, with regard to the review that has begun, the U. S. Department of Veterans Affairs has not yet issued a report of its findings, but has informed the Company that it has identified instances in which the school failed to notify the U. S. Department of Veterans Affairs of circumstances where students receiving educational benefits failed to pursue a course, which the Company has been informed may in turn give rise to a refund obligation by students. The Company may be required, or may elect, to reimburse the U. S. Department of Veterans Affairs for adjustments to the amount of educational benefits paid by the U. S. Department of Veterans Affairs to the affected students. In the opinion of management, based upon an investigation of these matters and discussion with legal counsel, the ultimate outcome of such other legal proceedings and compliance reviews, individually and in the aggregate, is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity. 

13. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION

The PIK Notes described in Note 8, "Short-Term and Long-Term Debt," are fully and unconditionally guaranteed by EDMC and all of EM LLC’s existing direct and indirect domestic restricted subsidiaries, other than any subsidiary that directly owns or operates a school, or has been formed for such purposes, and subsidiaries that have no material assets (collectively, the “Guarantor Subsidiaries”). All other subsidiaries of EM LLC, either direct or indirect, (the “Non-Guarantor Subsidiaries”) do not guarantee the PIK Notes.

The following tables present the condensed consolidated financial position of EM LLC, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and EDMC as of December 31, 2013, June 30, 2013 and December 31, 2012. The results of operations and comprehensive income (loss) for the three and six months ended December 31, 2013 and 2012 and the condensed statements of cash flows for the six months ended December 31, 2013 and 2012 are presented for EM LLC, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and EDMC.

21

CONDENSED CONSOLIDATED BALANCE SHEET

December 31, 2013 (In thousands)

	EM LLC		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			EM LLC Consolidated			EDMC			Eliminations			EDMC Consolidated
Assets
Current:
Cash and cash equivalents	$	57,425	$	126		$	3,239		$	—		$	60,790		$	—		$	—		$	60,790
Restricted cash	46,176		—			224,096			—			270,272			—			—			270,272
Student and other receivables, net	9,814		(15		)	191,581			—			201,380			—			—			201,380
Other current assets	27,848		586			118,581			—			147,015			—			—			147,015
Total current assets	141,263		697			537,497			—			679,457			—			—			679,457
Property and equipment, net	61,134		5,836			410,252			—			477,222			—			—			477,222
Goodwill	7,328		—			661,762			—			669,090			—			—			669,090
Intangible assets, net	976		22			298,981			—			299,979			—			—			299,979
Other long-term assets	1,519		—			52,821			—			54,340			—			—			54,340
Inter-company balances	473,854		(30,765		)	(623,801		)	—			(180,712		)	180,712			—			—
Investment in subsidiaries	769,767		—			—			(769,767		)	—			75,917			(75,917		)	—
Total assets	$	1,455,841	$	(24,210	)	$	1,337,512		$	(769,767	)	$	1,999,376		$	256,629		$	(75,917	)	$	2,180,088
Liabilities and shareholders’ equity (deficit)
Current:
Current portion of long-term debt	$	11,875	$	—		$	26		$	—		$	11,901		$	—		$	—		$	11,901
Other current liabilities	55,898		3,096			288,491			—			347,485			3			—			347,488
Total current liabilities	67,773		3,096			288,517			—			359,386			3			—			359,389
Long-term debt, less current portion	1,272,387		—			—			—			1,272,387			—			—			1,272,387
Other long-term liabilities	37,531		184			182,232			—			219,947			(2		)	—			219,945
Deferred income taxes	2,233		399			69,107			—			71,739			383			—			72,122
Total liabilities	1,379,924		3,679			539,856			—			1,923,459			384			—			1,923,843
Total shareholders’ equity (deficit)	75,917		(27,889		)	797,656			(769,767		)	75,917			256,245			(75,917		)	256,245
Total liabilities and shareholders’ equity (deficit)	$	1,455,841	$	(24,210	)	$	1,337,512		$	(769,767	)	$	1,999,376		$	256,629		$	(75,917	)	$	2,180,088

22

CONDENSED CONSOLIDATED BALANCE SHEET

June 30, 2013 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			EM LLC Consolidated			EDMC			Eliminations			EDMC Consolidated
Assets
Current:
Cash and cash equivalents	$	(10,777	)	$	139		$	141,110		$	—		$	130,472		$	223		$	—		$	130,695
Restricted cash	46,982			—			224,358			—			271,340			—			—			271,340
Student and other receivables, net	134			253			238,565			—			238,952			1			—			238,953
Other current assets	27,488			570			102,573			—			130,631			—			—			130,631
Total current assets	63,827			962			706,606			—			771,395			224			—			771,619
Property and equipment, net	65,018			5,984			454,623			—			525,625			—			—			525,625
Goodwill	7,328			—			661,762			—			669,090			—			—			669,090
Intangible assets, net	1,101			28			299,306			—			300,435			—			—			300,435
Other long-term assets	5,059			—			43,465			—			48,524			—			—			48,524
Inter-company balances	653,504			(31,016		)	(791,213		)	—			(168,725		)	168,725			—			—
Investment in subsidiaries	741,069			—			—			(741,069		)	—			81,532			(81,532		)	—
Total assets	$	1,536,906		$	(24,042	)	$	1,374,549		$	(741,069	)	$	2,146,344		$	250,481		$	(81,532	)	$	2,315,293
Liabilities and shareholders’ equity (deficit)
Current:
Current portion of long-term debt and revolving credit facility	$	86,850		$	—		$	226		$	—		$	87,076		$	—		$	—		$	87,076
Other current liabilities	51,558			3,018			344,397			—			398,973			49			—			399,022
Total current liabilities	138,408			3,018			344,623			—			486,049			49			—			486,098
Long-term debt, less current portion	1,273,214			—			—			—			1,273,214			(50		)	—			1,273,164
Other long-term liabilities	41,519			248			193,849			—			235,616			—			—			235,616
Deferred income taxes	2,233			399			67,301			—			69,933			383			—			70,316
Total liabilities	1,455,374			3,665			605,773			—			2,064,812			382			—			2,065,194
Total shareholders’ equity (deficit)	81,532			(27,707		)	768,776			(741,069		)	81,532			250,099			(81,532		)	250,099
Total liabilities and shareholders’ equity (deficit)	$	1,536,906		$	(24,042	)	$	1,374,549		$	(741,069	)	$	2,146,344		$	250,481		$	(81,532	)	$	2,315,293

23

CONDENSED CONSOLIDATED BALANCE SHEET

December 31, 2012 (In thousands)

	EM LLC		Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			EM LLC Consolidated			EDMC			Eliminations			EDMC Consolidated
Assets
Current:
Cash and cash equivalents	$	183,968	$	180		$	3,679		$	—		$	187,827		$	1,215		$	—		$	189,042
Restricted cash	41,370		—			232,055			—			273,425			—			—			273,425
Student and other receivables, net	—		142			172,684			—			172,826			—			—			172,826
Other current assets	37,350		715			112,710			—			150,775			—			—			150,775
Total current assets	262,688		1,037			521,128			—			784,853			1,215			—			786,068
Property and equipment, net	65,231		7,454			489,499			—			562,184			—			—			562,184
Goodwill	7,328		—			956,222			—			963,550			—			—			963,550
Intangible assets, net	1,801		34			327,526			—			329,361			—			—			329,361
Other long-term assets	15,043		—			37,612			—			52,655			—			—			52,655
Inter-company balances	687,013		(29,674		)	(815,535		)	—			(158,196		)	158,196			—			—
Investment in subsidiaries	911,317		—			—			(911,317		)	—			364,090			(364,090		)	—
Total assets	$	1,950,421	$	(21,149	)	$	1,516,452		$	(911,317	)	$	2,534,407		$	523,501		$	(364,090	)	$	2,693,818
Liabilities and shareholders’ equity (deficit)
Current:
Current portion of long-term debt	$	11,850	$	—		$	226		$	—		$	12,076		$	—		$	—		$	12,076
Other current liabilities	75,752		3,580			277,577			—			356,909			(3		)	—			356,906
Total current liabilities	87,602		3,580			277,803			—			368,985			(3		)	—			368,982
Long-term debt, less current portion	1,447,601		—			98			—			1,447,699			—			—			1,447,699
Other long-term liabilities	49,598		316			203,770			—			253,684			—			—			253,684
Deferred income taxes	1,530		515			97,904			—			99,949			(104		)	—			99,845
Total liabilities	1,586,331		4,411			579,575			—			2,170,317			(107		)	—			2,170,210
Total shareholders’ equity (deficit)	364,090		(25,560		)	936,877			(911,317		)	364,090			523,608			(364,090		)	523,608
Total liabilities and shareholders’ equity (deficit)	$	1,950,421	$	(21,149	)	$	1,516,452		$	(911,317	)	$	2,534,407		$	523,501		$	(364,090	)	$	2,693,818

24

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended December 31, 2013 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			EM LLC Consolidated			EDMC			Eliminations			EDMC Consolidated
Net revenues	$	—		$	1,677		$	591,996		$	—		$	593,673		$	—		$	—		$	593,673
Costs and expenses:
Educational services	26,231			2,280			317,076			—			345,587			—			—			345,587
General and administrative	(8,636		)	(525		)	185,575			—			176,414			—			—			176,414
Depreciation and amortization	7,124			156			31,313			—			38,593			—			—			38,593
Long-lived asset impairments	—			—			3,847			—			3,847			—			—			3,847
Total costs and expenses	24,719			1,911			537,811			—			564,441			—			—			564,441
Income (loss) before interest and income taxes	(24,719		)	(234		)	54,185			—			29,232			—			—			29,232
Interest expense (income), net	31,797			—			(182		)	—			31,615			—			—			31,615
Equity in subsidiaries	18,290			—			—			(18,290		)	—			1,090			(1,090		)	—
(Loss) Income before income taxes	(38,226		)	(234		)	54,367			(18,290		)	(2,383		)	1,090			(1,090		)	(2,383		)
Income tax (benefit) expense	(39,316		)	(170		)	36,013			—			(3,473		)	1			—			(3,472		)
Net income (loss)	$	1,090		$	(64	)	$	18,354		$	(18,290	)	$	1,090		$	1,089		$	(1,090	)	$	1,089
Net change in unrecognized loss on interest rate swaps, net of tax	$	1,518		$	—		$	—		$	—		$	1,518		$	1,518		$	(1,518	)	$	1,518
Foreign currency translation loss	(163		)	—			(163		)	163			(163		)	(163		)	163			(163		)
Other comprehensive income (loss)	1,355			—			(163		)	163			1,355			1,355			(1,355		)	1,355
Comprehensive income (loss)	$	2,445		$	(64	)	$	18,191		$	(18,127	)	$	2,445		$	2,444		$	(2,445	)	$	2,444

25

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended December 31, 2012 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			EM LLC Consolidated			EDMC			Eliminations			EDMC Consolidated
Net revenues	$	—		$	1,738		$	653,157		$	—		$	654,895		$	—		$	—		$	654,895
Costs and expenses:																						—
Educational services	29,515			2,645			328,218			—			360,378			(1		)	—			360,377
General and administrative	(19,799		)	(85		)	191,074			—			171,190			—			—			171,190
Depreciation and amortization	7,281			152			31,822			—			39,255			—			—			39,255
Total costs and expenses	16,997			2,712			551,114			—			570,823			(1		)	—			570,822
Income (loss) before interest and income taxes	(16,997		)	(974		)	102,043			—			84,072			1			—			84,073
Interest expense (income), net	30,416			—			600			—			31,016			(7		)	—			31,009
Equity in subsidiaries	57,038			—			—			(57,038		)	—			31,136			(31,136		)	—
Income (loss) before income taxes	9,625			(974		)	101,443			(57,038		)	53,056			31,144			(31,136		)	53,064
Income tax expense (benefit)	(21,511		)	(344		)	43,775			—			21,920			—						21,920
Net income (loss)	$	31,136		$	(630	)	$	57,668		$	(57,038	)	$	31,136		$	31,144		$	(31,136	)	$	31,144
Net change in unrecognized loss on interest rate swaps, net of tax	$	1,666		$	—		$	—		$	—		$	1,666		$	1,666		$	(1,666	)	$	1,666
Foreign currency translation loss	(98		)	—			(98		)	98			(98		)	(98		)	98			(98		)
Other comprehensive income (loss)	1,568			—			(98		)	98			1,568			1,568			(1,568		)	1,568
Comprehensive income (loss)	$	32,704		$	(630	)	$	57,570		$	(56,940	)	$	32,704		$	32,712		$	(32,704	)	$	32,712

26

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

For the Six Months Ended December 31, 2013 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			EM LLC Consolidated			EDMC			Eliminations			EDMC Consolidated
Net revenues	$	—		$	3,894		$	1,170,159		$	—		$	1,174,053		$	—		$	—		$	1,174,053
Costs and expenses:
Educational services	47,608			5,092			650,574			—			703,274			2			—			703,276
General and administrative	(27,483		)	(1,022		)	377,088			—			348,583			—			—			348,583
Depreciation and amortization	14,063			306			62,829			—			77,198			—			—			77,198
Long-lived asset impairments	—			—			3,847						3,847									3,847
Total costs and expenses	34,188			4,376			1,094,338			—			1,132,902			2			—			1,132,904
Income (loss) before interest and income taxes	(34,188		)	(482		)	75,821			—			41,151			(2		)	—			41,149
Interest expense (income), net	63,719			—			(234		)	—			63,485			(4		)	—			63,481
Equity in subsidiaries	28,515			—			—			(28,515		)	—			(8,427		)	8,427			—
(Loss) income before income taxes	(69,392		)	(482		)	76,055			(28,515		)	(22,334		)	(8,425		)	8,427			(22,332		)
Income tax (benefit) expense	(60,965		)	(300		)	47,358			—			(13,907		)	1			—			(13,906		)
Net (loss) income	$	(8,427	)	$	(182	)	$	28,697		$	(28,515	)	$	(8,427	)	$	(8,426	)	$	8,427		$	(8,426	)
Net change in unrecognized loss on interest rate swaps, net of tax	$	2,628		$	—		$	—		$	—		$	2,628		$	2,628		$	(2,628	)	$	2,628
Foreign currency translation gain	183			—			183			(183		)	183			183			(183		)	183
Other comprehensive income	2,811			—			183			(183		)	2,811			2,811			(2,811		)	2,811
Comprehensive (loss) income	$	(5,616	)	$	(182	)	$	28,880		$	(28,698	)	$	(5,616	)	$	(5,615	)	$	5,616		$	(5,615	)

27

CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

For the Six Months Ended December 31, 2012 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			EM LLC Consolidated		EDMC			Eliminations			EDMC Consolidated
Net revenues	$	—		$	4,159		$	1,260,300	$	—		$	1,264,459	$	—		$	—		$	1,264,459
Costs and expenses:
Educational services	64,315			5,290			672,069		—			741,674		(1		)	—			741,673
General and administrative	(31,377		)	(3,424		)	380,483		—			345,682		—			—			345,682
Depreciation and amortization	18,879			303			64,218		—			83,400		—			—			83,400
Total costs and expenses	51,817			2,169			1,116,770		—			1,170,756		(1		)	—			1,170,755
Income (loss) before interest and income taxes	(51,817		)	1,990			143,530		—			93,703		1			—			93,704
Interest expense (income), net	61,275			—			1,199		—			62,474		(13		)	—			62,461
Equity in subsidiaries	83,355			—			—		(83,355		)	—		18,037			(18,037		)	—
(Loss) Income before income taxes	(29,737		)	1,990			142,331		(83,355		)	31,229		18,051			(18,037		)	31,243
Income tax expense (benefit)	(47,774		)	841			60,125		—			13,192		—						13,192
Net income	$	18,037		$	1,149		$	82,206	$	(83,355	)	$	18,037	$	18,051		$	(18,037	)	$	18,051
Net change in unrecognized loss on interest rate swaps, net of tax	$	1,252		$	—		$	—	$	—		$	1,252	$	1,252		$	(1,252	)	$	1,252
Foreign currency translation gain	59			—			59		(59		)	59		59			(59		)	59
Other comprehensive income	1,311			—			59		(59		)	1,311		1,311			(1,311		)	1,311
Comprehensive income	$	19,348		$	1,149		$	82,265	$	(83,414	)	$	19,348	$	19,362		$	(19,348	)	$	19,362

28

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Six Months Ended December 31, 2013 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			EM LLC Consolidated			EDMC			EDMC Consolidated
Net cash flows provided by (used in) operations	$	(32,233	)	$	418		$	71,503		$	39,688		$	2		$	39,690
Cash flows from investing activities:
Expenditures for long-lived assets	(4,014		)	(383		)	(26,934		)	(31,331		)	—			(31,331		)
Other investing activities	—			—			(573		)	(573		)	—			(573		)
Net cash flows used in investing activities	(4,014		)	(383		)	(27,507		)	(31,904		)	—			(31,904		)
Cash flows from financing activities:
Net repayments of debt	(80,888		)	—			(200		)	(81,088		)				(81,088		)
Share-based payment activity	—			—			—			—			3,389			3,389
Inter-company transactions	185,337			(48		)	(181,675		)	3,614			(3,614		)	—
Net cash flows provided by (used in) financing activities	104,449			(48		)	(181,875		)	(77,474		)	(225		)	(77,699		)
Effect of exchange rate changes on cash and cash equivalents	—			—			8			8			—			8
Increase (decrease) in cash and cash equivalents	68,202			(13		)	(137,871		)	(69,682		)	(223		)	(69,905		)
Beginning cash and cash equivalents	(10,777		)	139			141,110			130,472			223			130,695
Ending cash and cash equivalents	$	57,425		$	126		$	3,239		$	60,790		$	—		$	60,790

29

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

For the Six Months Ended December 31, 2012 (In thousands)

	EM LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			EM LLC Consolidated			EDMC			EDMC Consolidated
Net cash flows provided by (used in) operations	$	(46,583	)	$	(3,191	)	$	142,935		$	93,161		$	16		$	93,177
Cash flows from investing activities
Expenditures for long-lived assets	(4,578		)	(524		)	(34,356		)	(39,458		)	—			(39,458		)
Proceeds from sale of fixed assets	—			—			65,065			65,065			—			65,065
Other investing activities	(375		)	—			(3,516		)	(3,891		)	—			(3,891		)
Net cash flows provided by (used in) investing activities	(4,953		)	(524		)	27,193			21,716			—			21,716
Cash flows from financing activities
Net repayments of debt and other	(116,930		)	—			(136		)	(117,066		)	—			(117,066		)
Inter-company transactions	378,683			3,797			(380,480		)	2,000			(2,000		)	—
Net cash flows provided by (used in) financing activities	261,753			3,797			(380,616		)	(115,066		)	(2,000		)	(117,066		)
Effect of exchange rate changes on cash and cash equivalents	—			—			207			207			—			207
Increase (decrease) in cash and cash equivalents	210,217			82			(210,281		)	18			(1,984		)	(1,966		)
Beginning cash and cash equivalents	(26,249		)	98			213,960			187,809			3,199			191,008
Ending cash and cash equivalents	$	183,968		$	180		$	3,679		$	187,827		$	1,215		$	189,042

30

14. SEGMENT REPORTING

The Company's principal business is providing post-secondary education. The Company manages its operations through four operating segments, which are The Art Institutes, Argosy University, Brown Mackie Colleges and South University.

During fiscal 2013, the Company created "The Center", which provides support services to its four education systems through the centralization and automation of certain non-student facing activities, including financial aid packaging, the qualification and transfer of prospective students to school admissions teams, student billing services, certain registrar services, support call center services for students and employees, and remote student advising services. Effective July 1, 2013, The Center allocates costs to each reportable segment based primarily on the level of transaction volume. In the prior fiscal year, similar costs were allocated to each reportable segment based primarily on net revenues. To ensure comparability among periods, EBITDA excluding certain expenses for each segment has been recast to report results for the three and six months ended December 31, 2012 as if The Center existed in prior periods and allocating its costs in a manner consistent with the current methodology. The creation of The Center and changes in the allocation methodology had no impact on previously reported consolidated EBITDA excluding certain expenses.

Earnings before interest, income taxes, depreciation and amortization ("EBITDA") excluding certain expenses is the measure used by the chief operating decision maker to evaluate segment performance and allocate resources. It is defined as net income before interest, income taxes, depreciation and amortization and certain expenses presented in the table below. EBITDA excluding certain expenses is not a recognized term under generally accepted accounting principles ("GAAP") and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA excluding certain expenses is not intended to be a measure of free cash flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Management believes EBITDA excluding certain expenses is helpful in highlighting trends because EBITDA excluding certain expenses excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. Management compensates for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, this presentation of EBITDA excluding certain expenses may not be comparable to similarly titled measures of other companies. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate and other,” which primarily includes unallocated corporate activity. A reconciliation of EBITDA excluding certain expenses by reportable segment to consolidated income (loss) before income taxes along with other summary financial information by reportable segment is presented below (in thousands):

31

	For the Three Months Ended December 31,						For the Six Months Ended December 31,
	2013			2012			2013			2012
Net revenues:
The Art Institutes	$	371,474		$	411,533		$	727,989		$	791,672
Argosy University	76,640			92,312			159,788			174,232
Brown Mackie Colleges	69,463			78,274			139,649			152,246
South University	76,096			72,776			146,627			146,309
Total EDMC	$	593,673		$	654,895		$	1,174,053		$	1,264,459
EBITDA excluding certain expenses:
The Art Institutes	$	87,992		$	113,429		$	147,089		$	182,848
Argosy University	2,547			15,231			5,931			15,401
Brown Mackie Colleges	7,123			8,980			13,407			18,186
South University	12,158			9,132			17,550			16,364
Corporate and other	(22,737		)	(23,444		)	(44,727		)	(46,550		)
Total EDMC	87,083			123,328			139,250			186,249
Reconciliation to consolidated (loss) income before income taxes:
Restructuring (A)	9,452			—			11,097			9,145
Settlement-related costs	5,959			—			5,959			—
Long-lived asset impairments (B)	3,847			—			3,847			—
Depreciation and amortization	38,593			39,255			77,198			83,400
Net interest expense	31,615			31,009			63,481			62,461
(Loss) income before income taxes	$	(2,383	)	$	53,064		$	(22,332	)	$	31,243

(A) Refer to Note 7, "Accrued Liabilities," for more information on these charges.

(B) Refer to Note 4, "Property and Equipment," for more information on these charges.

Total assets of each reportable segment were as follows (in thousands):

Assets: (+)	December 31, 2013		June 30, 2013		December 31, 2012
The Art Institutes	$	1,371,173	$	1,438,028	$	1,748,715
Argosy University	204,924		257,608		242,546
Brown Mackie Colleges	190,294		231,225		190,915
South University	203,945		226,041		202,341
Corporate and other	209,752		162,391		309,301
Total EDMC	$	2,180,088	$	2,315,293	$	2,693,818

(+) Excludes inter-company activity.

32

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Key Trends, Developments and Challenges

We operate in a dynamic business environment. The following developments and trends present opportunities, challenges and risks to our business:

New regulations may have a significant impact on our business.

Our business is highly regulated and there has been an increased focus on regulations designed to address the rising costs of post-secondary education in order to make higher education more affordable. President Obama announced a plan to measure performance by post-secondary institutions through a new rating system designed to provide students and their families with information to select schools that provide the best value. The President's plan would permit Congress to tie federal student aid to performance by post-secondary institutions to allow students to maximize their federal aid at institutions that provide the best value. The U.S. Department of Education announced new proposed rulemaking topics, including a negotiated rulemaking panel to address the appropriateness of adopting standards for measuring whether programs offered by proprietary institutions such as ours lead to “gainful employment” in a recognized occupation. Under the Higher Education Act of 1965, as amended ("HEA"), with the exception of certain liberal arts degree programs, proprietary schools are eligible to participate in Title IV programs only with respect to educational programs that prepare a student for “gainful employment in a recognized occupation.” The U.S. Department of Education previously adopted regulations that were scheduled to become effective as of July 1, 2012 and that would have for the first time set forth standards for measuring whether programs lead to gainful employment in a recognized occupation. These regulations, which were vacated by a federal court decision, would have established three annual metrics related to student loan borrowing which would have imposed certain restrictions on programs up to and including the prohibition on participation in Title IV financial aid programs in the event that the metrics were not satisfied over a period of time. Draft regulatory language posted by the U. S. Department of Education on August 30, 2013 takes a similar approach to determining program eligibility as the vacated 2011 regulations except that one of the three program eligibility tests has been eliminated. The draft regulatory language includes a number of modifications to the provisions of the vacated regulation and some additional provisions, with many of these changes being more restrictive than the terms of the regulation proposed in 2011. Negotiated rulemaking sessions were held in November and December 2013, but the proposal distributed by the U. S. Department of Education for discussion at the last session did not reach consensus, and the Department is preparing to publish a notice of proposed rulemaking for public comment. If implemented as proposed as part of the negotiated rulemaking sessions, the regulatory language would have a material adverse impact on our business. On January 30, 2014, the Office of Information and Regulatory Affairs ("OIRA") at the Office of Management and Budget ("OMB") posted a notice that it had received a draft of the proposed gainful employment rule from the Department of Education. The draft regulation is reviewed by OIRA/OMB prior to a notice of proposed rulemaking being released for public comment.

In addition, the HEA is scheduled for reauthorization in 2014 and the reauthorization process may result in significant changes to the post-secondary education industry. Among other things, there have been proposals in Congress to amend the 90/10 rule in connection with the reauthorization of the HEA to prohibit proprietary institutions from receiving more than 85 percent of their revenues from federal funds, including veterans benefits and U.S. Department of Defense tuition assistance. Any revisions to the HEA, the regulations adopted by the U.S. Department of Education, or the 90/10 rule could have a material adverse impact on our business. An amendment to the U. S. Telephone Consumer Protection Act of 1991 became effective on October 16, 2013 which, among other things, requires specific prior written consent from consumers in order to place telemarketing calls to wireless phones using an automatic telephone dialing system. We use telephonic communications with prospective students and cannot estimate the impact of this new regulation, including compliance costs, on our business at this early stage of compliance.  However, we believe that it contributed to lower than anticipated application production across our organization for future academic terms due to delays in contacting prospective students.

In January 2014, the U.S. Department of Education commenced negotiated rulemaking sessions to implement changes to the Clery Act required by the Violence Against Women Act which, among other items, requires institutions to compile statistics for certain crimes reported to campus security authorities or local police agencies, and include such information in its annual security report. Finally, another series of negotiated rulemaking sessions to address program integrity and improvement issues will be held in February, March, and April 2014, and will address cash management of Title IV funds including use of debit cards and handling of Title IV credit balances; state authorization for programs offered through distance or correspondence education; state authorization for non-U.S. locations of educational institutions; clock to credit hour conversion; the definition of "adverse credit" for borrowers under the Federal Direct PLUS Loan Program; and the application of repeat coursework provisions to graduate and undergraduate programs.

33

We have increased our focus on student affordability, which can have a negative impact on our net revenues.

In the past, we and other providers of a post-secondary education were able to pass along the rising cost of providing quality education through increases in tuition charged to students. As a result, the cost of a post-secondary degree increased substantially while incomes earned by families stagnated due to a weak economy. In order to make our programs more attractive to prospective students, we have introduced a number of initiatives to limit or decrease the cost of obtaining a degree from our institutions, including freezing tuition at The Art Institutes through 2015 for students who enrolled by October 2013, decreasing the number of credit hours necessary to complete certain programs, reducing certain fees and other charges, and substantially increasing the availability of scholarships to students. We have awarded approximately $70 million of scholarships in the six months ended December 31, 2013, an increase of approximately 50 percent compared to the six months ended December 31, 2012, with the majority of scholarships awarded at The Art Institutes. We anticipate awarding approximately $140 million in scholarships in fiscal 2014, an increase of approximately 45 percent from fiscal 2013. Due to this focus on decreasing the cost of education at our schools, we estimate that the average debt incurred by students graduating from the Art Institutes has decreased by approximately 15 percent since 2010. We believe that our limited ability to increase tuition will continue for the foreseeable future.

We have adopted a number of initiatives to make our business more efficient and to respond to changing market conditions and will continue to do so in the future.

We have adopted a number of measures designed to make our business more efficient in order to decrease the cost of an education for our students and to respond to changing market conditions. Primarily through process efficiencies and productivity improvements, we are targeting cost savings of $100 million to $125 million during fiscal 2014 as compared to fiscal 2013. For example, during fiscal 2013, we created The Center, which provides support services to our four education systems through the centralization and automation of certain non-student facing activities, including financial aid packaging, the qualification and transfer of prospective students to school admissions teams, student billing services, certain registrar services, support call center services for our students and employees, and remote student advising services. Additionally, during fiscal 2014, we have taken measures to decrease our reliance on third party lead generators and we anticipate these efforts will increase in the second half of the fiscal year. Some of these projected savings will offset cost increases in other areas of our business that we have incurred and expect to incur during the remainder of fiscal 2014. We believe that these affordability efforts, some of which increase the risk associated with our future operating results, contribute significantly to our core mission of educating students.

Changes in the availability of PLUS program loans contributed to a reduction in student enrollment and net revenues at The Art Institutes during fiscal 2013 and are likely to adversely impact new students in fiscal 2014 and beyond.

Approximately 50 percent of the campus-based students attending The Art Institutes education system are considered dependents for Title IV program purposes.  These traditional-age students often receive financial support from their parents to help pay for their education.  As part of this support, parents often participate in the PLUS program, which allows parents of a dependent student to borrow an amount not to exceed the difference between the total cost of that student's education and other aid to which that student is entitled.  During fiscal 2012, the U.S. Department of Education implemented more stringent underwriting criteria for PLUS program loans, which resulted in a decrease in the percentage of our net revenues we received from PLUS loans from 12.4 percent in fiscal 2012 to 8.3 percent in fiscal 2013. Total new students at The Art Institutes decreased approximately 12.8 percent in fiscal 2013 as compared to fiscal 2012, which we believe was due in part to the decrease in PLUS loan availability. 

We have undertaken a number of actions to address this issue including, among other measures, expanding our scholarship programs at The Art Institutes and extending greater amounts of credit to those Art Institute students who are denied PLUS program loans but who still enroll in school. Additionally, we increased the maximum length of payment plans we offer students from 36 months beyond graduation to 42 months beyond graduation effective in October 2012. Further, we commenced a new program under which we purchase loans awarded and disbursed to our students from a private lender during the fourth quarter of fiscal 2013. All of these initiatives have negatively impacted our liquidity. The changes we have made with respect to extension of credit to our students have resulted in higher gross long-term student receivable and purchased loan program balances, which were $67.2 million at December 31, 2013 and $43.0 million at December 31, 2012 and higher bad debt expense as a percentage of net revenues compared to prior periods. Bad debt expense was 7.2 percent and 7.1 percent of net revenues during the six months ended December 31, 2013 and 2012, respectively, and 6.9 percent and 5.9 percent during the fiscal years ended June 30, 2013 and 2012.

Investigations of proprietary education institutions, adverse publicity, and outstanding litigation have adversely impacted our operating results and student enrollment.

Although we believe that there are a number of factors that should contribute to long-term demand for post-secondary education, recently the industry as a whole has been challenged by a number of factors, including the overall negative impact of the current political and economic climate. We and other proprietary post-secondary education providers have been subject to

34

increased regulatory scrutiny and litigation in recent years. On July 30, 2012, the majority staff of the US Senate Committee on Health, Education, Labor, & Pensions (the “HELP Committee") released a report, "For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success" which was drawn from hearings on the industry beginning in August 2010. While stating that proprietary 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 post-secondary educational population, the report was highly critical of these institutions. Additionally, a number of state Attorneys General have launched investigations into proprietary post-secondary institutions, including a number of our schools. We received subpoenas from the Attorneys General of Florida, Kentucky, New York, Colorado, and Massachusetts in October 2010, December 2010, August 2011, September 2012, and January 2013, respectively, and the San Francisco, California City Attorney in December 2011 in connection with investigations of our institutions and their business practices. As previously disclosed, on December 5, 2013, the Company entered into a Final Consent Judgment with the Colorado Attorney General’s Office, and we accrued the $3.4 million settlement within general and administrative expense in the accompanying consolidated statement of operations in the three months ended December 31, 2013. We also received inquiries from 13 states in January 2014 regarding our business practices, which will be coordinated through the Attorney General of the Commonwealth of Pennsylvania.

In addition, we received subpoenas from the Division of Enforcement of the Securities and Exchange Commission in March 2013 and May 2013 requesting documents and information relating to our valuation of goodwill in fiscal 2012, bad debt allowance for student receivables, and letters of credit we posted with the U.S. Department of Education. We also received a subpoena from the Office of Inspector General of the U.S. Department of Education in May 2013 requesting policies and procedures related to Argosy University's attendance, withdrawal, and return to Title IV policies. These investigations, together with the Washington qui tam lawsuit in which the U.S. Department of Justice and Attorneys General from five states have intervened, have led to a significant amount of negative publicity for the proprietary education industry and our schools. The Consumer Financial Protection Bureau and state attorneys general are also investigating student-lending practices at proprietary education institutions, which actions are expected to continue and could expand in 2014. On January 30, 2014, the Federal Trade Commission (the "FTC") announced a new system to handle complaints from military veterans and service members regarding higher education institutions, providing online reporting forms to file complaints directly with the U.S. Department of Veterans Affairs and the U.S. Department of Defense regarding issues such as cost of attendance, marketing, graduation rates, program quality employment prospects, and course credit. Students may also email similar complaints to the U.S. Department of Education. These complaints will be forwarded to the FTC's Consumer Sentinel Network database. These initiatives could result in additional litigation and investigations regarding proprietary education.

Student concerns regarding the assumption of additional debt in light of the current economic climate have given rise to reluctance to pursue further education.

Due to the effects of the current economic climate many prospective students are unable to make cash payments towards their education. Recently, there has been a significant amount of negative publicity surrounding the incurrence of excessive debt to pay for a post-secondary education. On July 19, 2012, the Consumer Financial Protection Bureau ("CFPB") and the U.S. Department of Education issued a report describing what they characterized as risky practices in the private student loan market over the past ten years, among other things. According to the CFPB's estimates, outstanding student loan debt in the United States exceeded $1 trillion in 2011, consisting of $864 billion of federal student debt and $150 billion of private student loan debt. A number of media outlets have published stories linking student loan indebtedness to the recent mortgage loan crisis. We believe that the negative publicity surrounding student indebtedness, together with the inability of students to pay cash for their education and the effect of a stagnant economy and challenged employment prospects, have led to a reluctance in a number of prospective students to enroll in our schools.

The education industry is rapidly evolving and highly competitive.

The U.S. higher education industry, including the proprietary sector, is experiencing unprecedented, rapidly developing changes due to technological developments, evolving needs and objectives of students and employers, economic constraints affecting educational institutions and students, price competition, increased focus on affordability, and other factors that challenge many of the core principles underlying the industry. Related to this, a substantial proportion of traditional colleges and universities and community colleges now offer some form of distance learning or online education programs, including programs geared towards the needs of working learners. As a result, we face increased competition for students, including from colleges with well-established brand names. In addition, we face competition from various emerging nontraditional, credit-bearing and noncredit-bearing education programs, offered by both proprietary and not-for-profit providers. These include massive open online courses (MOOCs) offered worldwide without charge by traditional educational institutions and other direct-to-consumer education services, which some educational institutions are now accepting for credit. Further, according to information published by the National Student Clearinghouse, enrollment in post-secondary institutions decreased by 1.5 percent from the Fall of 2012 to the Fall of 2013, and enrollment in four-year proprietary institutions decreased by 9.7 percent during the same time period. We must adapt our business to meet these rapidly evolving developments. We are wo

35

rking to accelerate the enhancement of our offerings to remain competitive and to more effectively deliver a quality student experience at an attractive price.

Our business is highly leveraged, which requires us to use cash from operations to repay indebtedness and subjects us to market conditions to refinance debt.

At December 31, 2013, we had $1.28 billion of indebtedness outstanding. The terms of our debt agreements restrict us from certain activities such as incurring additional indebtedness and require us to comply with several financial ratios, which has become more difficult to do as a result of our weaker financial results in recent periods. We refinanced and repaid $375.0 million of 8.75 percent senior notes due June 1, 2014 and issued $203.0 million of senior notes, which are due on July 1, 2018. We are also required to post a letter of credit with the U.S. Department of Education due to our failure to meet certain financial responsibility standards. As of January 2014, this letter of credit requirement is set at 15 percent of the Title IV program funds received by students at our institutions during fiscal 2013, which is $302.2 million. Our significant indebtedness requires us to use a substantial portion of cash flows from operations for the payment of principal and interest on our indebtedness, thereby reducing our ability to use our cash flows to fund our operations and invest further in our business. The factors described above, which have adversely impacted our business, have also made it more difficult to refinance our indebtedness due to investor uncertainty about our results from operations. We also are subject to market factors in connection with our efforts to refinance our indebtedness, including our revolving credit facility which expires on June 1, 2015 and a portion of our term loan which is due in 2016. We may not be able to obtain additional financing on acceptable terms, if at all, particularly because of our high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt. To the extent that we do refinance any portion of our debt, that refinanced debt is likely to be subject to higher interest rates and fees than our existing debt. In addition, under its senior secured credit facilities, our subsidiary, Education Management LLC, is required to satisfy a maximum total leverage ratio, a minimum interest coverage ratio and other financial conditions tests. While Education Management LLC has continued to satisfy applicable financial covenant compliance ratios, due to declining operating performance, the margin between our results and the covenant requirements has decreased significantly over the past 12 months.

Federal government shut down.

On October 1, 2013, the U.S. Departments of Education, Defense, and Veterans Affairs began operating on a limited basis due to the partial federal government shutdown. The contingency plans for the U.S. Department of Education provided that Pell Grant and Direct Student Loan programs under Title IV of the Higher Education Act, which are funded through mandatory and carryover appropriations, would continue to operate as normal for the foreseeable future, and that the U.S. Department of Veterans Affairs benefits would be paid until current funds were exhausted. In some cases the U.S. Department of Defense ceased to provide educational benefits to students. The government shutdown ceased on October 17, 2013 when President Obama signed legislation to fund federal government agencies until January 15, 2014, and to raise the federal debt ceiling through February 7, 2014, and the U.S. Departments of Education, Defense and Veterans Affairs resumed normal activity. However, the February 7, 2014 deadline has passed and the U.S. Department of Treasury currently estimates that it will exhaust its borrowing capacity to fund the government in late February if the debt ceiling is not raised or suspended prior to such time. We are unable to anticipate whether a subsequent shutdown will occur in the future, the nature and scope of any related contingency plan, or the likelihood of another agreement to raise the debt ceiling, the occurrence or non-occurrence of each of which could negatively impact our revenues and adversely affect our business, results of operations, financial condition, and cash flows.

36

Results of Operations

The following table sets forth for the periods indicated the percentage relationship of certain statements of operations items to net revenues.

Amounts expressed as a percentage of net revenues

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
	2013		2012		2013		2012
Net revenues	100.0	%	100.0	%	100.0	%	100.0	%
Costs and expenses:
Educational services	58.3	%	55.0	%	59.9	%	58.7	%
General and administrative	29.7	%	26.1	%	29.7	%	27.3	%
Depreciation and amortization	6.5	%	6.0	%	6.6	%	6.6	%
Long-lived asset impairments	0.6	%	—	%	0.3	%	—	%
Total costs and expenses	95.1	%	87.1	%	96.5	%	92.6	%
Income before interest and taxes	4.9	%	12.9	%	3.5	%	7.4	%
Interest expense, net	5.3	%	4.8	%	5.4	%	5.0	%
(Loss) income before income taxes	(0.4	)%	8.1	%	(1.9	)%	2.4	%
Income tax (benefit) expense	(0.6	)%	3.3	%	(1.2	)%	1.0	%
Net income (loss)	0.2	%	4.8	%	(0.7	)%	1.4	%

Three Months Ended December 31, 2013 (current quarter) compared to Three Months Ended December 31, 2012 (prior year quarter)

All basis point changes are presented as a change in the percentage of net revenues in each period of comparison.

Net revenues

The largest component of our net revenues is tuition collected from our students, which is presented in our statements of operations after deducting refunds, scholarships and other adjustments. The majority of our net revenues comes from various government-sponsored student finance programs, and the amount of tuition revenue received from students varies based on our average enrolled student body, the average tuition charge per credit hour and average credit hours taken per student. Factors affecting our average enrolled student body include new students, students who withdraw and then return to school after withdrawal, student persistence, and graduates. These factors are impacted by the number of individuals seeking post-secondary education, the attractiveness of our program offerings, the quality of the student experience, the length of the education programs and our overall educational reputation. In addition to tuition and fees, net revenues consist of sales of related study materials, student housing fees, bookstore sales, restaurant sales in connection with culinary programs and workshop fees, all of which are largely a function of average enrolled student body.

Net revenues decreased 9.3 percent to $593.7 million in the current quarter compared to $654.9 million in the prior year quarter. The decrease in net revenues was due primarily to a 6.5 percent decrease in average enrolled student body to 122,990 students compared to the prior year quarter as well as our continued efforts to improve the affordability of the education we provide by awarding more scholarships to our students compared to the prior year quarter. In addition, there were less revenue days in the current quarter compared to the prior year quarter due primarily to The Art Institutes' fall academic term beginning on September 30, 2013.

Educational services expense

Educational services expense consists primarily of costs related to the development, delivery and administration of our education programs. Major cost components are faculty compensation, salaries of administrative and student services staff, costs of educational materials, facility occupancy costs, bad debt expense and information systems costs. Educational services expense decreased by $14.8 million, or 4.1 percent, to $345.6 million in the current quarter. We recognized $3.9 million of restructuring expenses in the current quarter related to a sublease we entered into after consolidating office space and employee severances that occurred primarily at our Art Institutes segment. After adjusting for restructuring expenses, educational services expense increased by 253 basis points as a percentage of net revenues compared to the prior year quarter due primarily to decreases in average class size due to lower average enrolled student body and the resulting loss of operating leverage,

37

coupled with less revenue days recognized during the current quarter primarily as a result of the early Art Institutes' campus-based fall academic term start described below under "Analysis of Operating Results by Reportable Segment."

Costs that were most affected by the loss in operating leverage in the current quarter compared to the prior year quarter were employee-related costs, which increased by 184 basis points as a percentage of net revenues, and rent expense associated with school locations, which was relatively flat on an absolute basis, but increased 94 basis points as a percentage of net revenues. The increase in rent expense as a percentage of net revenues was also impacted by the higher number of leases as a result of the sale-leaseback transactions we entered into in the latter half of the second quarter of fiscal 2013 as well as the comparative effect of a favorable rent credit at one of our leased school locations in fiscal 2013. Bad debt expense was $39.6 million, or 6.7 percent of net revenues, in the current quarter compared to $40.8 million, or 6.2 percent of net revenues, in the prior year quarter, an increase of 44 basis points. Outside services costs also increased by 18 basis points compared to the prior year quarter.

Partially offsetting the above increases was lower cost of sales related to our bookstores, which decreased 57 basis points as a percentage of revenues compared to the prior year quarter primarily due to the impact of the aforementioned early Art Institutes' campus-based fall academic term. In addition, the comparative effect of a $3.5 million net loss recorded in the prior year quarter in connection with the aforementioned sale leaseback-transactions represented a decrease in educational services expense of 53 basis points as a percentage of revenues compared to the prior year quarter. The remaining net increase of 23 basis points resulted from changes in other costs, none of which was individually significant.

General and administrative expense

General and administrative expense consists of marketing and student admissions expenses and certain central staff departmental costs such as executive management, finance and accounting, legal and consulting services, corporate development and other departments that do not provide direct services to our students. General and administrative expense was $176.4 million in the current quarter, an increase of 3.1 percent from $171.2 million in the prior year quarter. During the three months ended December 31, 2013, we recognized $5.6 million of restructuring expenses relating to corporate-related employee severance charges and $6.0 million of settlement-related costs. After adjusting for these items, general and administrative expense increased by 164 basis points as a percentage of net revenues compared to the prior year quarter primarily due to the loss of operating leverage.

Marketing and admissions costs were 22.4 percent of net revenues in the current quarter and 21.3 percent of net revenues in the prior year quarter, representing an increase of 103 basis points; however, the overall marketing and admissions cost per new student decreased approximately 4 percent as admissions productivity more than offset higher marketing costs. Also contributing to the increase in general and administrative expense were legal and consulting services costs, which increased by 57 basis points compared to the prior year quarter, the latter of which was incurred in part to assist future process optimization and centralization efforts to support student affordability. The remaining net increase of four basis points as a percentage of net revenues in the current quarter relates to other items, none of which was individually significant.

Depreciation and amortization

Depreciation and amortization on long-lived assets was $38.6 million in the current quarter compared to $39.3 million in the prior year quarter, a decrease of 1.7 percent.

Long-lived asset impairments

During the three months ended December 31, 2013, we recorded long-lived asset impairments of $3.8 million at two of our Brown Mackie Colleges locations because anticipated future cash flows could not support the net book values of their property and equipment, which primarily consisted of leasehold improvement assets.

Interest expense, net

Net interest expense was $31.6 million in the current quarter, an increase of $0.6 million, or 2.0 percent, from the prior year quarter. The increase was primarily due to the higher rate on the PIK Notes issued in connection with a debt refinancing in March 2013 partially offset by a slightly lower rate on the Tranche C-2 term loan and lower letter of credit fees in the current quarter compared to the prior year quarter. Refer to Part II, Item 8 "Financial Statements and Supplementary Data," Note 8, "Short-Term and Long-Term Debt" of the June 30, 2013 Annual Report on Form 10-K for more information on the March 2013 debt refinancing.

Provision for income taxes

Our effective tax rate in the three months ended December 31, 2013 was impacted by the disproportionate impact on low earnings of discrete items as well as permanent tax differences, which have remained relatively consistent period over period. The effective tax rate for the three months ended December 31 2012 was 41.3 percent. The effective tax rates differ from the

38

combined federal and state statutory rates due to valuation allowances, expenses that are non-deductible for tax purposes, discrete items and the accounting related to uncertain tax positions.

As discussed in Item 1, "Financial Statements," Note 11, "Income Taxes," we have evaluated the realizability of our deferred tax assets based upon the weight of all available evidence, both positive and negative, and believe it is more-likely-than-not that we will realize the benefit of our deferred tax assets and, as such, no valuation allowance is required except as disclosed in Part II, Item 8 "Financial Statements and Supplementary Data," Note 11, "Income Taxes" of the June 30, 2013 Annual Report on Form 10-K with respect to certain state deferred tax assets.

Six Months Ended December 31, 2013 (current year period) compared to the Six Months Ended December 31, 2012 (prior year period)

All basis point changes are presented as a change in the percentage of net revenues in each period of comparison.

Net revenues

Net revenues decreased 7.1 percent to $1,174.1 million in the six months ended December 31, 2013 compared to $1,264.5 million in the six months ended December 31, 2012. The decrease in net revenues was due primarily to a 7.5 percent decrease in average enrolled student body to 120,360 students compared to the prior year period as well as our continued efforts to improve the affordability of the education we provide by awarding more scholarships to our students compared to the prior year quarter.

Educational services expense

Educational services expense decreased by $38.4 million, or 5.2 percent to $703.3 million in the current year period. We recognized $4.7 million and $8.2 million of restructuring expenses in the six months ended December 31, 2013 and 2012, respectively. After adjusting for these items, educational services expense increased by 149 basis points as a percentage of net revenues compared to the prior year period due primarily to decreases in average class size due to lower average enrolled student body compared to the prior year period and the resulting loss of operating leverage.

Costs that were most affected by the loss in operating leverage were employee-related costs, which increased by 60 basis points in the current year period compared to the prior year period, and rent expense associated with school locations, which increased 82 basis points as a percentage of net revenues compared to the prior year period. The increase in rent expense as a percentage of net revenues was due in part to more leases as a result of the sale-leaseback transactions we entered into in the latter half of the second quarter of fiscal 2013 as well as the comparative effect of a favorable rent credit at one of our leased school locations in fiscal 2013. Bad debt expense was $84.7 million, or 7.2 percent of net revenues, in the current year period compared to $89.8 million, or 7.1 percent of net revenues, in the prior year period, an increase of 11 basis points. The remaining net decrease of four basis points resulted from changes in other costs, none of which was individually significant.

General and administrative expense

General and administrative expense was $348.6 million in the current year period, an increase of 0.8 percent from $345.7 million in the prior year period. We recognized $6.4 million and $0.9 million of restructuring expenses in the six months ended December 31, 2013 and 2012, respectively. Additionally, we recognized $6.0 million of settlement-related costs in the current year period. After adjusting for these items, general and administrative expense increased by 138 basis points as a percentage of net revenues compared to the prior year period. Marketing and admissions costs were 23.3 percent of net revenues in the current year period and 22.5 percent of net revenues in the prior year period representing an increase of 82 basis points. Legal and consulting services costs increased by 61 basis points in the current year period compared to the prior year period, the latter of which was incurred in part to assist future process optimization and centralization efforts to support student affordability. The remaining net decrease of five basis points as a percentage of net revenues in the current year period relates to other items, none of which was individually significant.

Depreciation and amortization

Depreciation and amortization on long-lived assets was $77.2 million in the current year period compared to $83.4 million in the prior year period. The year over year decrease of 7.4 percent was primarily due to accelerated amortization of $4.6 million recorded in the prior year period due to a software related asset that no longer had a useful life.

Interest expense, net

Net interest expense was $63.5 million in the current year period, an increase of $1.0 million from the prior year period, or 1.6 percent. The increase was primarily due to the higher rate on the PIK Notes issued in connection with a debt refinancing in March 2013 partially offset by a slightly lower rate on the Tranche C-2 term loan and lower letter of credit fees in the current year period compared to the prior year period.

39

Provision for income taxes

Our effective tax rate was a benefit of 62.3 percent in the current year period and an expense of 42.2 percent in the prior year period. The current year period reflects a deferred tax benefit of approximately $3.2 million recorded as a discrete item resulting from the July 2013 enactment of Pennsylvania House Bill No. 465, which, in addition to other amendments, changes how revenues from the sale of services are sourced for Pennsylvania income tax purposes.

Analysis of Operating Results by Reportable Segment

Each of our 110 schools provides student-centered education. Our schools are organized and managed to capitalize on recognized brands and align them with specific targeted markets based on field of study, employment opportunity, type of degree offering and student demographics. Our operations are organized into four corresponding reportable segments, which are The Art Institutes, Argosy University, Brown Mackie Colleges and South University.

Student information by segment was as follows:

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
New student enrollment: (1)	2013	2012	% Change		2013	2012	% Change
The Art Institutes	12,430	12,240	1.6	%	28,000	29,170	(4.0	)%
Argosy University	3,260	3,370	(3.3	)%	9,010	9,260	(2.7	)%
Brown Mackie Colleges	3,450	3,840	(10.2	)%	8,250	8,880	(7.1	)%
South University	4,680	4,530	3.3	%	9,330	9,440	(1.2	)%
Total EDMC	23,820	23,980	(0.7	)%	54,590	56,750	(3.8	)%
Average enrolled student body: (1) (2)
The Art Institutes	64,560	69,400	(7.0	)%	62,890	68,130	(7.7	)%
Argosy University	23,830	25,530	(6.7	)%	23,520	25,080	(6.2	)%
Brown Mackie Colleges	16,090	17,520	(8.2	)%	16,020	17,470	(8.3	)%
South University	18,510	19,030	(2.7	)%	17,930	19,420	(7.7	)%
Total EDMC	122,990	131,480	(6.5	)%	120,360	130,100	(7.5	)%

(1) The data above includes the number of students enrolled in fully-online programs at The Art Institute of Pittsburgh, Argosy University and South University.

(2) Average enrolled student body is the monthly average of the unique students who met attendance requirements within each month of the three and six months ended December 31, 2013 and 2012.

The measure used by the chief operating decision maker to evaluate segment performance and allocate resources is EBITDA excluding certain expenses, which we define as net income before interest, income taxes, depreciation and amortization and certain other expenses related to restructuring charges, settlement-related costs and long-lived asset impairments. EBITDA excluding certain expenses is not a recognized term under accounting principles generally accepted in the United States of America ("GAAP") and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA excluding certain expenses is not intended to be a measure of free cash flow available for discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. We believe EBITDA excluding certain expenses is helpful in highlighting trends because it excludes the results of decisions that are outside the control of operating management and can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We compensate for the limitations of using non-GAAP financial measures by using them to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of EBITDA excluding certain expenses may not be comparable to similarly titled measures of other companies. Adjustments to reconcile segment results to consolidated results are included under the caption “Corporate and other,” which primarily includes unallocated corporate activity.

To ensure comparability among periods, EBITDA excluding certain expenses for each segment has been recast to report results for the three and six months ended December 31, 2012 as if The Center existed in prior periods and allocating its costs in a manner consistent with the current methodology. The creation of The Center and changes in the allocation methodology had no impact on previously reported consolidated EBITDA excluding certain expenses. See Item 1, “Financial Statements,” Note 14, “Segment Reporting” for a reconciliation of EBITDA excluding certain expenses by reportable segment to consolidated income (loss) before income taxes.

Net revenues and EBITDA excluding certain expenses by reportable segment were as follows (in thousands):

	For the Three Months Ended December 31,						For the Six Months Ended December 31,
Net revenues:	2013			2012			2013			2012
The Art Institutes	$	371,474		$	411,533		$	727,989		$	791,672
Argosy University	76,640			92,312			159,788			174,232
Brown Mackie Colleges	69,463			78,274			139,649			152,246
South University	76,096			72,776			146,627			146,309
Total EDMC	$	593,673		$	654,895		$	1,174,053		$	1,264,459
EBITDA excluding certain expenses:
The Art Institutes	$	87,992		$	113,429		$	147,089		$	182,848
Argosy University	2,547			15,231			5,931			15,401
Brown Mackie Colleges	7,123			8,980			13,407			18,186
South University	12,158			9,132			17,550			16,364
Corporate and other	(22,737		)	(23,444		)	(44,727		)	(46,550		)
Total EDMC	$	87,083		$	123,328		$	139,250		$	186,249

Depreciation and amortization expense, which is excluded from EBITDA excluding certain expenses, was as follows for each reportable segment (in thousands):

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
Depreciation and Amortization:	2013		2012		2013		2012
The Art Institutes	$	19,527	$	19,702	$	39,449	$	39,280
Argosy University	3,752		4,162		7,609		8,459
Brown Mackie Colleges	5,322		5,438		10,432		11,613
South University	3,349		3,307		6,596		6,508
Corporate and other (+)	6,643		6,646		13,112		17,540
Total EDMC	$	38,593	$	39,255	$	77,198	$	83,400

(+) Includes a $4.6 million charge in the six months ended December 31, 2012 pertaining to software related assets that no longer had a useful life.

Three Months Ended December 31, 2013 (current quarter) Compared with the Three Months Ended December 31, 2012 (prior year quarter)

The Art Institutes

Net revenues decreased by $40.1 million, or 9.7 percent, to $371.5 million in the current quarter compared to the prior year quarter due primarily to a decrease in average enrolled student body of 7.0 percent, or approximately 4,840 students. The decrease in average enrolled student body was primarily the result of the factors described above under "Key Trends, Developments and Challenges." In addition, The Art Institutes awarded a larger amount of scholarships to students in the current quarter compared to the prior year quarter, which also contributed to the year-over-year decrease in net revenues. Furthermore, the campus-based fall academic term that typically begins in October for The Art Institutes began on September 30 in the current year, which resulted in one less revenue day in the current quarter compared to the prior year quarter.

The declines in average enrolled student body and net revenues contributed to the $25.4 million decrease in EBITDA excluding certain expenses, which fell to $88.0 million in the current quarter. Primarily as a result of our efforts to keep costs aligned with current enrollment levels, operating expenses, excluding depreciation and amortization, decreased by 4.9% year-over-year.

Operating expenses increased as a percentage of net revenues in the current quarter due primarily to reduced operating leverage in employee-related expenses, rent expense and investments in marketing that we believe will help stabilize our average enrolled student body as we progress through fiscal 2014. The overall marketing and admissions cost per new student decreased as admissions productivity more than offset higher marketing costs. Bad debt expense increased in the current quarter compared to the prior year quarter primarily due to higher short-term and long-term receivable balances resulting from

40

the increased extension of credit to students. Also contributing to the increase were legal and consulting services costs, the latter of which was incurred in part to assist future process optimization and centralization efforts to support student affordability. Partially offsetting the above increases was the comparative effect of a net loss recorded in the prior year quarter in connection with the sale-leaseback transactions described above under "Results of Operations."

Argosy University

Net revenues decreased by $15.7 million, or 17.0 percent, to $76.6 million in the current quarter compared to the prior year quarter due to the decrease in average enrolled student body of 6.7 percent, or approximately 1,700 students. The decrease in net revenues is also due to a higher amount of scholarships awarded in the current quarter compared to the prior year quarter and the timing of the fall semester start year-over-year that resulted in less revenue days in the current quarter compared to the prior year quarter. The decrease in net revenues, coupled with reduced operating leverage, resulted in a $12.7 million decrease to EBITDA excluding certain expenses, which was $2.5 million in the current quarter.

Brown Mackie Colleges

Net revenues decreased $8.8 million, or 11.3 percent, to $69.5 million in the current quarter compared to the prior year quarter due primarily to a decrease in average enrolled student body of 8.2 percent, or approximately 1,430 students. The above decrease in net revenues coupled with reduced operating leverage resulted in a $1.9 million decrease in EBITDA excluding certain expenses to $7.1 million in the current quarter. In addition, the prior year quarter benefited from a favorable rent credit at one of its leased school locations that did not occur in the current quarter.

South University

Despite a decrease in average enrolled student body of 2.7 percent, or approximately 520 students, net revenues increased $3.3 million, or 4.6 percent, to $76.1 million in the current quarter compared to the prior year quarter. The decrease in average enrolled student body was more than offset by an increase in average revenue per student in the current quarter due primarily to a greater mix of campus-based students relative to fully-online students. The net revenue increase coupled with improved operating leverage resulted in a $3.0 million increase to EBITDA excluding certain expenses, which was $12.2 million in the current quarter.

Six Months Ended December 31, 2013 (current period) Compared with the Six Months Ended December 31, 2012 (prior year period)

The Art Institutes

Net revenues decreased by $63.7 million, or 8.0 percent, to $728.0 million in the current period compared to the prior year period due primarily to a decrease in average enrolled student body of 7.7 percent, or approximately 5,240 students. The Art Institutes also awarded a larger amount of scholarships to students in the current period compared to the prior year period, which also contributed to the year-over-year decrease in net revenues. The declines in average enrolled student body and net revenues contributed to the $35.8 million decrease in EBITDA excluding certain expenses, which fell to $147.1 million in the current period along with reduced operating leverage in salaries and rent expense and higher bad debt expense as well as legal and consulting services costs in the current year period, the latter of which was incurred in part to assist future process optimization and centralization efforts to support student affordability.

Argosy University

Net revenues decreased by $14.4 million, or 8.3 percent, to $159.8 million in the current period compared to the prior year period due primarily to a decrease in average enrolled student body of 6.2 percent, or approximately 1,560 students as well as the higher amount of scholarships awarded. The decrease in net revenues coupled with reduced operating leverage resulted in a $9.5 million decrease in EBITDA excluding certain expenses, which was $5.9 million in the current period.

Brown Mackie Colleges

Net revenues decreased $12.6 million, or 8.3 percent, to $139.6 million in the current period compared to the prior year period due primarily to a decrease in average enrolled student body of 8.3 percent, or approximately 1,450 students. The above decrease in net revenues coupled with reduced operating leverage resulted in a $4.8 million decrease in EBITDA excluding certain expenses to $13.4 million in the current period. In addition, the prior year period benefited from a favorable rent credit at one of its leased school locations that did not occur in the current year period.

South University

Despite a decrease in average enrolled student body of 7.7 percent, or approximately 1,490 students, net revenues increased $0.3 million, or 0.2 percent, to $146.6 million in the current period compared to the prior year period. The decrease in average enrolled student body was more than offset by an increase in average revenue per student in the current period due primarily to a greater mix of campus-based students relative to fully-online students. The net revenue increase coupled with

41

improved operating leverage resulted in a $1.2 million increase to EBITDA excluding certain expenses, which was $17.6 million in the current year period.

Liquidity and Funds of Capital Resources

We finance our operating activities primarily by cash generated from operations, and our primary source of cash is tuition collected from our students. Most of the students at our institutions based in the United States rely, at least in part, on financial assistance programs to pay for their education, the most significant of which are federal student aid programs under Title IV of the HEA. We believe that cash flow from operations, supplemented from time to time with borrowings under our revolving credit facility, will provide adequate funds for ongoing operations, planned capital expenditures and debt service during the next twelve months. However, our ability to extend the maturity of our $200.0 million cash secured letter of credit facilities, which mature in July 2014, or refinance our $328.3 million revolving credit facility that matures on June 1, 2015 on terms acceptable to us could be adversely impacted by our financial performance in fiscal 2014. If we cannot extend the maturity of or refinance these financial instruments, it could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Operating cash flows

Cash flows provided by operating activities for the six months ended December 31, 2013 were $39.7 million compared to $93.2 million for the six months ended December 31, 2012. The decrease in operating cash flow was primarily due to lower operating results.

The substantial majority of our consolidated net revenues is derived from the receipt by students of Title IV financial aid program funds during the six months ended December 31, 2013, but the extent to which we extend credit to our students has increased in recent years due to decreases in the availability of PLUS program and private loans for students. We expect this trend to continue in the future. We extend credit to students to help fund the difference between our total tuition and fees and the amount covered by other sources, including amounts awarded under Title IV programs, private loans obtained by students, and cash payments by students. The repayment period for financing made available to students is currently set at a maximum of 42 months beyond graduation, and the total amount of gross receivables that extend beyond twelve months was $67.2 million at December 31, 2013 and $43.0 million at December 31, 2012, which includes amounts awarded under a new program that commenced in the fourth quarter of fiscal 2013 under which we purchase loans awarded and disbursed to our students from a private lender. We do not expect future loan purchases to have a material impact on our cash flow from operations in fiscal 2014 because there would be greater use of our payment plans absent this program.

Bad debt expense as a percentage of net revenues was 7.2 percent during the six months ended December 31, 2013 and 7.1 percent for the six months ended December 31, 2012. If students continue to utilize the funding sources described above, our bad debt expense as a percentage of net revenues will remain high and our cash flow from operations will continue to be impacted negatively due to delayed receipts of cash from students. Because these funding sources are not federal student loans, these plans do not directly affect our published federal student loan cohort default rates. However, these funding sources may have an indirect negative impact on the federal student loan cohort default rates because our students effectively may have more total debt upon graduation.

Our student receivables balance reaches a peak immediately after the billing of tuition and fees at the beginning of each academic period. We collect the majority of these receivables at or near the start of each academic period when we receive federal financial aid proceeds and cash payments from continuing students. Because the academic terms of our programs do not all coincide with our quarterly reporting periods, we may have quarterly fluctuations in cash receipts, reported net cash flows from operations, net accounts receivable, unearned tuition and advance payment balances. The changes to start dates of academic terms did not have a significant impact to cash flow from operations for the six months ended December 31, 2013 as compared to the six months ended December 31, 2012.

The significant majority of our facilities are leased under operating lease agreements, and we anticipate that future commitments on existing leases will be satisfied from cash provided from operating activities. We also expect to extend the terms of leases that will expire in the near future or enter into similar long-term commitments for comparable space.

Direct Loan Programs and Private Student Loans

On a consolidated basis, cash received from students attending our institutions that was derived from Title IV programs represented approximately 73 percent of our total cash receipts during the fiscal year ended June 30, 2013. These receipts include $368.4 million of stipends, which are receipts by students of financing that exceed the tuition and fees paid to our institutions. Stipends are disbursed to students to use for living and other expenses incurred while attending school and are not included in our consolidated net revenues. For purposes of the 90/10 Rule, which tests receipts from Title IV programs on a cash basis and excludes certain receipts such as stipends, the percentage of revenues derived by our institutions from Title IV

42

programs during the fiscal year ended June 30, 2013 ranged from 56 percent to approximately 82 percent, with a weighted average of approximately 76 percent.

Our students' ability to obtain private loans has decreased substantially during the last three fiscal years due to adverse market conditions for consumer student loans. While we are taking steps to address the private loan needs of our students as described above, the consumer lending market could worsen. The inability of our students to finance their education could cause our student population to decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Investing cash flows

Capital expenditures were $31.3 million, or 2.7 percent of net revenues, in the six months ended December 31, 2013, compared to $39.5 million, or 3.1 percent of net revenues, in the six months ended December 31, 2012. We expect capital expenditures to approximate $80.0 million for the fiscal year ending June 30, 2014.

We completed five sale-leaseback transactions with unrelated third parties in the prior year for net proceeds of $65.1 million. Reimbursements for tenant improvements represent cash paid for capital expenditures in which the terms of the applicable lease agreements require the lessors to reimburse the Company for leasehold improvements.

Financing cash flows

As a result of the Transaction, we are highly leveraged and our debt service requirements are significant. As of December 31, 2013, we had $1.3 billion in aggregate indebtedness outstanding. The largest portion of our debt is a senior secured credit facility, which currently consists of a $1.1 billion term loan and a $328.3 million revolving credit facility, that we obtained in connection with the Transaction. We borrowed $75.0 million under the revolving credit facility at June 30, 2013 in order to satisfy year-end regulatory financial ratios, which was repaid on July 1, 2013 from cash on hand at fiscal year-end. We did not borrow against the revolving credit facility at any other point during fiscal 2013 or in the six months ended December 31, 2013.

At December 31, 2013, we had issued an aggregate of $354.0 million in letters of credit, the majority of which are issued to the U.S. Department of Education, which requires us to maintain one or more letters of credit due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. The amount of the letter of credit requirement in favor of the U.S. Department of Education was $348.6 million at December 31, 2013, which equals 15 percent of the total Title IV aid received by students attending our institutions during the fiscal year ended June 30, 2012. In January 2014, the U.S. Department of Education decreased its letter of credit requirement from $348.6 million to $302.2 million, which equals 15 percent of total Title IV aid received by students who attended our institutions during the fiscal year ended June 30, 2013.

In order to fund the letter of credit obligation to the U.S. Department of Education at December 31, 2013, we used all $200.0 million of capacity under our two cash secured letter of credit facilities and $148.6 million of letter of credit capacity under the revolving credit facility. Letters of credit outstanding under the revolving credit facility reduce the amount available for borrowing; therefore, the amount available to borrow under the revolving credit facility was $174.3 million at December 31, 2013.

In the six months ended December 31, 2013, we classified $6.1 million as a financing cash inflow related to share-based payment exercise and vesting activity and any associated excess tax benefits. In connection with the vesting of restricted stock units that occurred during the current period, we paid $2.7 million in minimum tax withholdings on behalf of our employees; in exchange, we retained shares equal to the value of the required tax withholding payments on the vesting dates.

We may from time to time use cash on hand to retire or purchase our outstanding debt through open market transactions, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Covenant Compliance

Under its senior secured credit facilities, our subsidiary, EM LLC, is required to satisfy a maximum total leverage ratio, a minimum interest coverage ratio and other financial conditions tests. As of December 31, 2013, EM LLC was in compliance with the financial and non-financial covenants. Our excess coverage on the financial covenants is typically at its lowest as of December 31 and June 30 each year as a result of cash being used in the second and fourth quarters of our fiscal year due to the timing of the starts of our academic terms. While we have continued to satisfy applicable financial covenant compliance ratios, due to declining operating performance, the margin between actual results and the covenant requirements has decreased significantly over the past 12 months. Our continued ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests in the future.

The breach of covenants in the credit agreement governing our senior secured credit facilities that are tied to ratios based on Adjusted EBITDA could result in a default under that agreement, in which case the lenders could elect to declare all

43

borrowed amounts immediately due and payable. Any such acceleration also would result in a default under our indenture governing the PIK Notes. Additionally, under the credit agreement governing our senior secured credit facilities and the indenture governing the PIK Notes, our subsidiaries’ ability to engage in activities, such as incurring additional indebtedness, making investments and paying dividends or other distributions, is also tied to ratios based on Adjusted EBITDA.

Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants contained in the indenture governing the PIK Notes and in the credit agreement governing our senior secured credit facilities. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted in calculating covenant compliance under our senior secured credit facilities and the indenture governing the PIK Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to demonstrate compliance with our financial covenants.

Adjusted EBITDA does not represent net income or cash flows from operations which are terms defined by GAAP, and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Adjusted EBITDA also does not represent EBITDA excluding certain expenses, which is the measure used by the chief operating decision maker to evaluate segment performance and allocate resources. In addition, unlike GAAP measures such as net income and earnings per share, Adjusted EBITDA does not reflect the impact of our obligations to make interest payments on our other debt service obligations, which have increased substantially as a result of the indebtedness incurred in June 2006 to finance the Transaction and related expenses. Although Adjusted EBITDA and similar measures frequently are used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in our senior credit facilities and the indenture governing the PIK Notes allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income. However, these are expenses that may recur, vary greatly and are difficult to predict. Further, our debt instruments require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be affected disproportionately by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent twelve-month period or any complete fiscal year.

The following is a reconciliation of net income, which is a GAAP measure of operating results, to Adjusted EBITDA for EM LLC as defined in its debt agreements. The terms and related calculations are defined in the senior secured credit agreement (in millions).

	For the Twelve Month Period Ended December 31, 2013
Net loss	$	(294.1	)
Interest expense, net	125.7
Income tax benefit	(15.5		)
Depreciation and amortization	158.6
EBITDA	(25.3		)
Long-lived asset impairments (1)	327.5
Non-cash compensation (2)	19.4
Severance and relocation	16.7
Settlement-related costs	6.0
Loss on debt refinancing (3)	5.2
Other	5.0
Adjusted EBITDA - Covenant Compliance	$	354.5

(1) We recorded long-lived asset impairments of $323.7 million in the quarter ended March 31, 2013 primarily consisting of a goodwill impairment at The Art Institutes. In addition, we recorded an impairment of $3.8 million at two of our locations in the quarter ended December 31, 2013 as estimated future cash flows were insufficient to support the carrying values of their property and equipment.

(2) Represents non-cash expense primarily for stock options and restricted stock units.

(3) In March 2013, we recorded a $5.2 million loss on debt refinancing in connection with the refinancing of the 8.75 percent senior notes originally due June 2014.

Our financial covenant requirements under the senior secured credit facilities and actual ratios for the twelve month period ended December 31, 2013 were as follows:

44

	Covenant Requirements	Actual Ratios
Senior secured credit facility
Adjusted EBITDA to Consolidated Interest Expense ratio	Minimum of 2.75x	3.01x
Consolidated Total Debt to Adjusted EBITDA ratio	Maximum of 3.50x	3.44x

New Negotiated Rulemaking

On April 16, 2013, the U.S. Department of Education announced its intention to establish one or more negotiated rulemaking committees to propose additional new regulations under the HEA. In January 2014, the U.S. Department of Education commenced negotiated rulemaking sessions to implement changes to the Clery Act required by the Violence Against Women Act which, among other items, requires institutions to compile statistics for certain crimes reported to campus security authorities or local police agencies, and include such information in its annual security report. Additionally, another series of negotiated rulemaking sessions to address program integrity and improvement issues will be held in February, March, and April 2014, and will address cash management of Title IV funds including use of debit cards and handling of Title IV credit balances; state authorization for programs offered through distance or correspondence education; state authorization for non-U.S. locations of educational institutions; clock to credit hour conversion; the definition of "adverse credit" for borrowers under the Federal Direct PLUS Loan Program; and the application of repeat coursework provisions to graduate and undergraduate programs. These negotiated rulemaking initiatives are expected to produce new regulations in a variety of areas. The effective date of any such regulations cannot be determined at this time, but it is likely that the rules, if adopted, would be effective on or after July 1, 2015.

The U.S. Department of Education also held negotiated rulemaking sessions to discuss a proposed "gainful employment" rule in September, November, and December 2013.  On August 30, 2013, the U.S. Department of Education issued a draft gainful employment regulation that would determine program eligibility and student notice requirements based on whether the program satisfies annual metrics related to student loan borrowing and earnings of graduates. The draft regulatory language, which was subsequently modified by the U.S. Department of Education, contains a number of modifications to the provisions of the previous regulation that was vacated by the U. S. District Court for the District of Columbia on June 30, 2012 in Association of Private Colleges and Universities v. Duncan, as well as some additional provisions, with many of these being more restrictive than the vacated regulation. If implemented as proposed, the regulatory language would have a material adverse impact on our business.

We are evaluating the potential impact of the draft regulation, which may be significantly revised in the future. The negotiated rulemaking sessions did not reach consensus, which allows the U.S. Department of Education to further modify the rule proposal in its discretion. On January 30, 2014, the OIRA at the OMB posted a notice that it had received a draft of the proposed gainful employment rule from the U.S. Department of Education. The draft regulation is reviewed by OIRA/OMB prior to a notice of proposed rulemaking being released for public comment. See Part I, Item 1 “Business — Student Financial Assistance — New Negotiated Rulemaking" of our June 30, 2013 Annual Report on Form 10-K and http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/gainfulemployment.html for more information.

The U.S. Department of Education has also conducted listening tours to solicit public feedback building on President Obama’s call for a national college rating system. The Secretary of the Department has publicly stated that draft ratings system are expected to be issued in early 2014, but a system is not expected to be effective for several years.

Use of Estimates and Critical Accounting Policies

As disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Use of Estimates and Critical Accounting Policies" of our 2013 Annual Report on Form 10-K, the fair value of The Art Institutes reporting unit exceeded its carrying value by more than 15 percent at March 31, 2013. During the quarter ended December 31, 2013, we observed declining application trends for future academic terms, particularly at The Art Institutes reporting unit, and performed a sensitivity analysis of its fair value using the most recently completed long range forecast and available earnings multiples of our peer group.

As a result of the sensitivity analysis performed in the current quarter, we continue to believe that the fair value of The Art Institutes exceeds its carrying value by more than 10 percent at December 31, 2013; accordingly, we do not believe that it is more-likely-than-not that the fair value of The Art Institutes has decreased below its carrying value at December 31, 2013. We also considered the results of the most recently completed long range forecast and available earnings multiples for the potential impact on the fair values of the Argosy University and South University reporting units and, based on our analysis, we do not believe that it is more-likely-than-not that the fair values of these reporting units have decreased below their carrying values at December 31, 2013. Consequently, we concluded that none of our reporting units experienced any triggering event that would have required a step one interim goodwill impairment analysis at December 31, 2013.

45

Contingencies

Refer to Item 1 “Financial Statements,” Note 12 “Contingencies."

Off Balance Sheet Arrangements

We lease most of our facilities under operating lease agreements and anticipate that future commitments on existing leases will be satisfied by cash provided from operating activities. We also expect to extend the terms of leases that will expire in the near future or enter into similar long-term commitments for comparable space.

At December 31, 2013, we have provided $20.1 million of surety bonds primarily to state regulatory agencies through four different surety providers. We believe that these surety bonds will expire without being funded; therefore, the commitments are not expected to affect our financial condition.

New Accounting Standards Not Yet Adopted

None.

Certain Risks and Uncertainties

Certain of the matters that we discuss in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which are based on information currently available to management, typically contain words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should,” “seeks,” “approximately, ” “plans,” “projects” or similar words and concern our strategy, plans or intentions. However, the absence of these or similar words does not mean that any particular statement is not forward-looking. All of the statements that we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward looking statements. In addition, from time to time, we make forward-looking public statements concerning our expected future operations and performance and other developments. These and any other forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to differ materially and unpredictably from any future results, performance or achievements expressed or implied by such forward-looking statements. We derive many of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions, and we caution that it is very difficult to predict the impact of known factors, and impossible to anticipate all factors, that could affect our actual results.

Some of the factors that we believe could affect our results and that could cause actual results to differ materially from our expectations include, but are not limited to: the timing and magnitude of student enrollment and changes in student mix, including the relative proportions of on-ground and online students enrolled in our programs; changes in average registered credits taken by students; student retention; our ability to maintain eligibility to participate in Title IV programs; changes in government spending; other changes in our students' ability to access federal and state financial aid, as well as private loans from third-party lenders; any difficulties we may face in opening new schools, growing our online academic programs and otherwise implementing our growth strategy; increased or unanticipated legal and regulatory costs, including settlement amounts related to litigation; the results of program reviews and audits; changes in accreditation standards; the implementation of new operating procedures for our fully-online programs; the potential impact of the gainful employment regulation expected to be issued by the U. S. Department of Education; adjustments to our programmatic offerings to comply with the 90/10 rule; modifications to our marketing programs to respond to market conditions and as part of our cost saving initiatives; our high degree of leverage and our ability to generate sufficient cash to service all of our debt obligations and other liquidity needs; our ability to refinance our existing indebtedness, including our revolving credit facility which expires on June 1, 2015; other market and credit risks associated with the post-secondary education industry, adverse media coverage of the industry and overall condition of the industry; changes in the overall U.S. or global economy; disruptions or other changes in access to the credit and equity markets in the United States and worldwide; and the effects of war, terrorism, natural disasters or other catastrophic events.

The foregoing review of factors should not be construed as exhaustive. For a more detailed discussion of certain risk factors affecting the Company's risk profile, see Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and Part I, Item 1A, “Risk Factors,” in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013. The Company expressly disclaims any current intention to update any forward-looking statements contained in this report.

46

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to our market risk since June 30, 2013. For a discussion of our exposure to market risk, refer to Part II, Item 7A "Quantitative and Qualitative Disclosures About Market Risk" of our June 30, 2013 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

The Company, under the supervision and participation of its management, which include the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of its “disclosure controls and procedures,” as defined in Rule 13a-15(e) under the Exchange Act. This evaluation was conducted as of the end of the period covered by this Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are effective. Effective controls are designed to ensure that information required to be disclosed by the Company in reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These controls and procedures are designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

47

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation and other legal disputes in the ordinary course of business. Refer to Part I, Item 1, "Financial Statements," Note 12, "Contingencies" of this Quarterly Report on Form 10-Q for information regarding certain legal proceedings, which is incorporated herein by reference.

ITEM 1A. RISK FACTORS

In addition to the other information set forth below, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2013 and in our Form 10-Q for the quarter ended September 30, 2013, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business or financial performance.

We currently are subject to lawsuits filed under the federal False Claims Act, and in the future, government and regulatory and accrediting agencies may conduct compliance reviews, bring claims or initiate other litigation against us, which may adversely impact our licensing or accreditation status, or Title IV eligibility, and thereby adversely affect our results of operations and cash flows.

From time to time, we may be subject to program reviews, audits, investigations, claims of non-compliance or lawsuits by governmental or accrediting agencies or third parties, which may allege statutory violations, regulatory infractions or common law causes of action. For example, we are the subject of two qui tam actions filed under the federal False Claims Act, as discussed above in Item 1, "Financial Statements," Note 12, "Contingencies." In the Washington case, the U.S. Department of Justice and five states have intervened under their respective False Claims Acts related to our compliance with the U.S. Department of Education's prior incentive compensation rule. The Sobek case alleges that we violated the U.S. Department of Education's substantial misrepresentation regulation and did not properly track student academic progress. In both cases, the relators seek to recover treble the amount of actual damages allegedly sustained by the federal government as a result of the alleged activity, plus civil monetary damages. Consequently, while we believe these claims are without merit and intend to vigorously defend ourselves, an outcome adverse to us could result in a substantial judgment against us that could have a materially adverse effect on our financial condition. See Item 3, “Legal Proceedings" of our Annual Report on Form 10-K for the year ended June 30, 2013 and Quarterly Reports on Form 10-Q filed thereafter.

We are also the subject of a subpoena from the Office of Inspector General of the U.S. Department of Education requesting policies and procedures related to Argosy University's attendance, withdrawal and return to Title IV policies during the period of July 1, 2010 through December 31, 2011 and detailed information on a number of students who enrolled in Argosy University's Bachelor's of Psychology degree program. We are cooperating with the Office of Inspector General in connection with its investigation. Additionally, the U.S. Department of Justice recently notified us that we are being investigated by the U.S. Attorney's Office for the Middle District of Tennessee in connection with a claim under the federal False Claims Act. Further, the U.S. Department of Education may take emergency action to suspend any of our schools' certification without advance notice if it receives reliable information that a school is violating Title IV requirements and determines that immediate action is necessary to prevent the misuse of Title IV program funds.

If the results of any such proceedings are unfavorable to us, we may lose or have limitations imposed on our accreditation, state licensing, state grant or Title IV program participation, be required to pay monetary damages or be subject to fines, penalties, injunctions or other censure that could materially and adversely affect 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 an 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 money and management resources to address these issues, which could harm our business. We cannot predict that litigation with respect to which we are in settlement discussions will be settled and, if so, in amounts expected or within estimated accruals for loss contingencies, or if such settlements will be covered by insurance. Additionally,

48

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.

Increased scrutiny of post-secondary education providers by Congress, state Attorneys General and various governmental agencies may lead to increased regulatory burdens and costs.

We and other proprietary post-secondary education providers have been subject to increased regulatory scrutiny and litigation in recent years. State Attorneys General, the U. S. Department of Education, members and committees of Congress and other parties have increasingly focused on allegations of improper recruiter compensation practices and deceptive marketing practices, among other issues. For example, on July 30, 2012, the majority staff of the HELP Committee issued a report, "For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success." While stating that proprietary 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 post-secondary educational population, the majority staff 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 proprietary 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% 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.

On January 30, 2014, the FTC announced a new system to handle complaints from military veterans and service members regarding higher education institutions, providing customized online reporting forms to file complaints directly with the U.S. Department of Veterans Affairs and the U.S. Department of Defense regarding issues such as cost of attendance, marketing, graduation rates, program quality employment prospects, and course credit. Students may also email similar complaints to the U.S. Department of Education. These complaints will be forwarded to the FTC's Consumer Sentinel Network database. In November 2013, the FTC published revised Guides for Private Vocational and Distance Education Schools expanding the scope of potential liability of proprietary schools and setting forth more stringent restrictions on advertising and recruitment practices by expanding the activities that the FTC considers "deceptive." The FTC actions are intended to comply with the Improving Transparency of Educational Opportunities for Veterans Act of 2012 which requires the FTC to partner with the U.S. Department of Veterans Affairs and other agencies to improve outreach and transparency regarding the quality of instruction, recruiting practices, and post-graduate employment by higher education institutions.

Additionally, a number of state Attorneys General have launched investigations into proprietary post-secondary education institutions, including some of our schools. We received subpoenas or requests for documents from the Attorneys General of Florida, Kentucky, New York, Colorado, and Massachusetts in October 2010, December 2010, August 2011, September 2012, and January 2013 respectively, and the San Francisco, CA City Attorney in December 2011 in connection with investigations of our institutions and their business practices. We have nine schools located in Florida, three schools located in Kentucky, one school located in New York, two schools in Colorado, and one school in Massachusetts. In July 2011, the Attorney General of Kentucky announced a national bipartisan effort including 19 states to examine potential abuses by proprietary educational institutions. While the initial goal of the joint investigation is sharing information among the Attorneys General about potential violations of consumer protection laws, the Attorney General of Kentucky indicated that the Attorneys General may ultimately attempt to compel proprietary institutions located in their respective jurisdictions to revise their recruiting practices.

In January 2014, we received inquiries from 13 states regarding our business practices. The Attorney General of the Commonwealth of Pennsylvania informed us that it will serve as the point of contact for the inquiries related to us. The inquiries focus on our practices relating to the recruitment of students, graduate placement statistics, graduate certification and licensing results, and student lending activities, among other matters. Several other companies in the proprietary education industry have disclosed that they received similar inquiries. Further, in December 2013 the office of enforcement of the Consumer Financial Protection Bureau notified two publicly traded companies in the education industry that it is considering recommending that that the Bureau take legal action against the companies.

We cannot predict the extent to which, or whether, these regulatory actions, hearings, and investigations will result in legislation, further rulemaking affecting our participation in Title IV programs, or litigation alleging statutory violations, regulatory infractions or common law causes of action. The adoption of any law or regulation that reduces funding for federal student financial aid programs or the ability of our schools or students to participate in these programs could have a material adverse effect on our student population and revenue. Legislative action also may increase our administrative costs and require us to modify our practices in order for our schools to comply with applicable requirements.Additionally, actions by state Attorneys General and other governmental agencies could damage our reputation and limit our ability to recruit and enroll

49

students, which could reduce student demand for our programs and adversely impact our revenue and cash flow from operations.

Our regulatory environment and our reputation may be negatively influenced by the actions of other post-secondary education institutions and the current media environment.

In recent years, there have been a number of regulatory investigations and civil litigation matters targeting post-secondary education institution, including the HELP Committee hearings on the proprietary education sector during 2010 and 2011 and the resulting report issued by the majority staff of the HELP Committee on July 30, 2012. In addition, a number of State Attorneys General have launched investigations into post-secondary institutions, including some of our schools. Moreover, the Consumer Financial Protection Bureau and state attorneys general are also investigating student-lending practices at proprietary institutions, which actions are expected to continue and could expand in 2014. Private parties have recently filed a number of significant lawsuits against post-secondary institutions alleging wrongdoing, including the misstatement of graduate job placement rates. The HELP Committee hearings, along with other recent investigations and lawsuits, have included allegation of, among other things, deceptive trade practices, false claims against the United States and non-compliance with state and U.S. Department of Education regulations. These allegations have attracted significant adverse media coverage. The intervention by the U.S. Department of Justice and five states in a qui tam case involving our alleged violation of the U.S. Department of Education’s prior incentive compensation rules has also drawn significant media attention. Allegations against the post-secondary education sectors may impact general public perceptions of educational institutions, including us, in a negative manner. Adverse media coverage regarding other educational institutions or regarding us directly could damage our reputation, reduce student demand for our programs, adversely impact our net revenues, cash flows and operating profit or result in increased regulatory scrutiny.

Government laws and regulations are evolving and unfavorable changes could harm our business.

We are subject to general business regulations and laws, as well as regulations and laws specifically governing the post-secondary industry. Existing and future laws, regulations, and executive orders may impede our growth. These regulations, laws, and orders may cover consumer protection, taxation, privacy, data protection, pricing, content, copyrights, distribution, mobile communications, electronic device certification, electronic waste, electronic contracts and other communications and Internet services. We are also subject to federal and state lobbying regulation as well as new federal disclosure requirements regarding the use of conflict minerals (commonly referred to as tantalum, tin, tungsten, and gold), which are mined from the Democratic Republic of the Congo and surrounding countries. Legislation, regulation, and executive orders in the United States as well as international laws and regulations could result in compliance costs which may reduce our revenue and income and/or result in reputational damage, as well as governmental action should our compliance measures not be deemed satisfactory.

Our debt agreements contain restrictions that limit our flexibility in operating our business, and our risk of failing to satisfy one or more of the financial covenants under our debt agreements is greater in light of recent changes to those covenants and our recent and projected results of operations.

Our senior secured credit facilities and the indenture governing our PIK Notes contain various covenants that limit our ability to engage in specified types of transactions. These covenants limit certain of our subsidiaries' ability to, among other things:

• incur additional indebtedness or issue certain preferred shares;

• pay dividends on, repurchase or make distributions in respect of capital stock or make other restricted payments;

• make certain investments, including capital expenditures;

• sell certain assets;

• create liens;

• consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

• enter into certain transactions with affiliates.

In addition, under its senior secured credit facilities, our subsidiary, Education Management LLC, is required to satisfy a maximum total leverage ratio, a minimum interest coverage ratio and other financial conditions tests. As of December 31, 2013, it was in compliance with the financial and non-financial covenants. However, its continued ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that it will meet those ratios and tests in the future. Furthermore, on September 30, 2012, the Consolidated Total Debt to Adjusted EBITDA ratio decreased from 4.00x to 3.50x and the minimum interest coverage ratio increased from 2.50:1 to 2.75:1, which makes it more difficult for us to comply with these covenants in the future. While we have continued to satisfy applicable financial covenant compliance

50

ratios, due to declining operating performance, the margin between our results and the covenant requirements has decreased significantly over the past 12 months.

A breach of any of these covenants could result in a default under the senior secured credit agreement. Upon the occurrence of an event of default under the senior secured credit agreement, the lenders could elect to declare all amounts outstanding under the senior secured credit agreement immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. Certain of our subsidiaries have pledged a significant portion of our assets as collateral under the senior secured credit agreement. If the lenders accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our indebtedness under our senior secured credit facilities, as well as our unsecured indebtedness. In addition, the indenture governing the PIK Notes includes a cross-default provision to debt with a principal amount of greater than $50.0 million, which would require the PIK Notes to be prepaid or redeemed in the event of a default with respect to such debt.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

51

ITEM 6. EXHIBITS INDEX

Number	Document
10.1*	Waiver and Release of Claims dated December 26, 2013 between Education Management LLC and John Kline
10.2*	Education Management Corporation Amended 2012 Long Term Incentive Plan
31.1*	Certification of Edward H. West required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Mick J. Beekhuizen required by Rule 13a-14(a) or Rule 15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Edward H. West required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of Mick J. Beekhuizen required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

_______________

*Filed herewith.

52

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

EDUCATION MANAGEMENT CORPORATION

/s/    MICK J. BEEKHUIZEN

Mick J. Beekhuizen

Executive Vice President and Chief Financial Officer

Date: February 10, 2014

53