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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-148259
 
20,000,000 Shares
 
(EDMC LOGO)
Common Stock
 
 
 
 
This is an initial public offering of shares of common stock of Education Management Corporation, which we sometimes refer to in this prospectus as “EDMC”. EDMC is offering all of the shares of common stock to be sold in the offering.
 
Prior to this offering, there has been no public market for the common stock. The initial public offering price per share is $18.00. EDMC has received approval for the quotation of the common stock on The NASDAQ Stock Market LLC under the symbol “EDMC”.
 
See “Risk Factors” on page 14 to read about factors you should consider before buying shares of the common stock.
 
 
 
 
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
 
                 
   
Per Share
   
Total
 
 
Initial public offering price
  $ 18.00     $ 360,000,000  
Underwriting discount
  $ 1.08     $ 21,600,000  
Proceeds, before expenses, to EDMC
  $ 16.92     $ 338,400,000  
 
To the extent that the underwriters sell more than 20,000,000 shares of common stock, the underwriters have the option to purchase up to an additional 3,000,000 shares from EDMC at the initial public offering price less the underwriting discount.
 
 
 
 
The underwriters expect to deliver the shares against payment in New York, New York on October 7, 2009.
 
Joint Bookrunners
 
Goldman, Sachs & Co.
 
  J.P. Morgan
 
  BofA Merrill Lynch
 
  Barclays Capital
 
  Credit Suisse
 
  Morgan Stanley
 
Co-Managers
 
Robert W. Baird & Co. William Blair & Company
 
BMO Capital Markets Piper Jaffray
 
Signal Hill Stifel Nicolaus
 
Barrington Research
 
 
 
 
Prospectus dated October 1, 2009


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(GRAPHIC)
EDMC
Education Management Corporation
Education that Builds Careers
- Design
- Media Arts The Art Institutes
ARGOSY UNIVERSITY
BROWN MACKE COLLEGE
SOUTH UNIVERSITY
· Fashion
· Culinary
· Behavioral Sciences
· Health Services
· Education
· Business
· Health Sciences
· Business
· Legal Studies
· Health Sciences
· Business
· Legal Studies
· Information Technology
Serving more than 110,000 students in on-ground, online and blended formats through 92 locations in 28 U.S. states and Canada.

 


 

 
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Through and including October 26, 2009 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
 
 
No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.
 
 
We have not authorized anyone to give you any information or to make any representations about the transactions we discuss in this prospectus other than those contained in the prospectus. If you are given any information or representation about these matters that is not discussed in this prospectus, you must not rely on that information. This prospectus is not an offer to sell anywhere or to anyone where or to whom we are not permitted to offer to sell securities under applicable law.
 
In making an investment decision, investors must rely on their own examination of the issuer and the terms of the offering, including the merits and risks involved. These securities


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have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.
 
 
We have filed with the U.S. Securities and Exchange Commission, or the “SEC”, a registration statement on Form S-1 under the Securities Act with respect to the common stock offered by this prospectus. This prospectus, filed as part of the registration statement, does not contain all the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. With respect to statements in this prospectus about the contents of any contract, agreement or other document, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, and each such statement is qualified in all respects by reference to the document to which it refers.
 
The public may read and copy any reports or other information that we and our subsidiaries file with the SEC. Such filings are available to the public over the Internet at the SEC’s website at http://www.sec.gov. The SEC’s website is included in this prospectus as an inactive textual reference only. You may also read and copy any document that we file with the SEC at its public reference room at 100 F Street, N.E., Washington D.C. 20549. You may obtain information on the operation of the public reference room by calling the SEC at 1-800-SEC-0330.
 
 
Some of the industry and market data contained in this prospectus are based on independent industry publications or other publicly available information, while other information is based on internal company sources. Although we believe that these independent sources and our internal data are reliable as of their respective dates, the information contained in them has not been independently verified, and neither the underwriters nor we can assure you as to the accuracy or completeness of this information. As a result, you should be aware that the market industry data contained in this prospectus, and beliefs and estimates based on such data, may not be reliable. We obtained information relating to the U.S. post-secondary education market from the National Center for Education Statistics, which is the primary federal entity for collecting and analyzing data related to education, the College Board, the U.S. Census Bureau, the U.S. Department of Labor — Bureau of Labor Statistics and Eduventures Inc., a leading information services company for the education market.


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PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, including the risks of investing in our common stock discussed under “Risk Factors” and the financial statements and notes included elsewhere in this prospectus.
 
On June 1, 2006, EDMC was acquired by a consortium of private investors through a merger of an acquisition company into EDMC, with EDMC surviving the merger. We sometimes refer to that transaction in this prospectus as the “Transaction”. Our principal shareholders are private equity funds affiliated with Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners, which we refer to in this prospectus collectively as the “Sponsors”. As used in this prospectus, unless otherwise stated or the context otherwise requires, references to “we”, “us”, “our”, the “Company”, “EDMC” and similar references refer collectively to Education Management Corporation and its subsidiaries. The term “Successor” refers to us following the Transaction, and the term “Predecessor” refers to us prior to the Transaction. References to our fiscal year refer to the 12-month period ended June 30 of the year referenced.
 
On September 30, 2009, our Board of Directors declared a 4.4737 for one split of our common stock, which was paid in the form of a stock dividend on September 30, 2009. Unless otherwise indicated or where the context otherwise requires, all information in this prospectus reflects this stock split. We sometimes refer to this stock split in this prospectus as the “Stock Split”. In addition, in connection with the Stock Split, we amended and restated our articles of incorporation on September 30, 2009 to, among other things, increase our number of authorized shares of common stock.
 
Our Business
 
We are among the largest providers of post-secondary education in North America, with approximately 110,800 enrolled students as of October 2008. We offer academic programs to our students through campus-based and online instruction, or through a combination of both. We are committed to offering quality academic programs and continuously strive to improve the learning experience for our students. We target a large and diverse market as our educational institutions offer students the opportunity to earn undergraduate and graduate degrees, including doctoral degrees, and certain specialized non-degree diplomas in a broad range of disciplines. These disciplines include design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Each of our schools located in the United States is licensed in the state in which it is located, accredited by a national or regional accreditation agency and certified by the U.S. Department of Education, enabling students to access federal student loans, grants and other forms of public and private financial aid. Our academic programs are designed with an emphasis on applied content and are taught primarily by faculty members who, in addition to having appropriate academic credentials, offer practical and relevant professional experience in their respective fields. Our net revenues for fiscal 2009 were $2,011.5 million.
 
Our schools comprise a national education platform that is designed to address the needs of a broad market, taking into consideration various factors that influence demand, such as programmatic and degree interest, employment opportunities, requirements for credentials in certain professions, demographics, tuition pricing points and economic conditions. We believe that our schools collectively enable us to provide access to a high quality education for potential students, at a variety of degree levels and across a wide range of disciplines.
 
During our more than 35-year operating history, we have expanded the reach of our education systems and currently operate 92 primary locations across 28 U.S. states and in Canada. In addition, we have offered online programs since 2000, enabling our students to pursue degrees fully online or through a flexible combination of both online and campus-based education. During the period from October 1998 through October 2008, we experienced a compounded annual enrollment growth rate of


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18.0%. During the same time period, the schools that we have owned or operated for one year or more experienced a compounded annual enrollment growth rate of 12.0%. We seek to maintain growth in a manner that assures adherence to our high standard of educational quality and track record of student success.
 
Since the Transaction in June 2006, we have undertaken multiple initiatives to increase our penetration of addressable markets in order to enable us to accelerate our growth and expand our market position. We have opened 20 new locations, acquired two schools, developed 36 new academic programs and introduced over 600 new or existing academic programs to locations that had not previously offered such programs. The compound annual enrollment growth rate at our schools was 19.6% between July 2006 and July 2009. During the same time period, the compound annual enrollment growth rate for schools owned or operated for one year or more was 18.2%. We have made significant capital investments in technology and human resources, particularly in marketing and admissions, designed to facilitate future enrollment growth while enhancing the effectiveness of our marketing efforts. We have also upgraded our infrastructure, student interfaces and student support systems to enhance the student experience, while providing greater operational transparency. We have made considerable investments in our online education platform, which has resulted in strong enrollment growth. The number of students enrolled in fully online academic programs has grown more than five-fold to approximately 26,200 students in July 2009, compared to approximately 4,600 students in July 2006. Finally, we have enhanced our senior management team, achieving a balance of experience from both within and outside the for-profit education industry.
 
Each of our 92 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:
 
  •     The Art Institutes.  The Art Institutes focus on applied arts in creative professions such as graphic design, interior design, web design and interactive media, digital filmmaking, media arts and animation, game art and design, fashion design and marketing and culinary arts. The Art Institutes offer Associate’s, Bachelor’s and Master’s degree programs, as well as selective non-degree diploma programs. Students pursue their degrees through local campuses, fully online programs through The Art Institute of Pittsburgh, Online Division and blended formats, which combine on campus and online education. There are 44 Art Institutes campuses in 23 U.S. states and in Canada. As of October 2008, students enrolled at The Art Institutes represented approximately 60.9% of our total enrollments.
 
  •     Argosy University.  Argosy University offers academic programs in psychology and behavioral sciences, education, business and health sciences disciplines. Argosy offers Doctoral, Master’s and undergraduate degrees. Argosy’s academic programs focus on graduate students seeking advanced credentials as a prerequisite to initial licensing, career advancement and/or structured pay increases. Students pursue their degrees through local campuses, fully online programs and blended formats. There are 19 Argosy University campuses in 13 U.S. states. As of October 2008, students enrolled at Argosy University represented approximately 16.7% of our total enrollments.
 
  •     Brown Mackie Colleges.  Brown Mackie Colleges offer flexible Associate’s and non-degree diploma programs that enable students to develop skills for entry-level positions in high demand vocational specialties and Bachelor’s degree programs that assist students to advance within the workplace. Brown Mackie Colleges offer programs in growing fields such as nursing, medical assisting, business, criminal justice, legal support and information technology. There are 22 Brown Mackie College campuses in 11 U.S. states. As of October 2008, students enrolled at Brown Mackie Colleges represented approximately 12.2% of our total enrollments.
 
  •     South University.  South University offers academic programs in health sciences and business disciplines, including business administration, health services management,


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  nursing, pharmacy, medical assisting, criminal justice and information technology. South University offers Doctoral, Master’s, Bachelor’s and Associate’s degrees through local campuses, fully online programs and blended formats. There are six South University campuses in five U.S. states. As of October 2008, students enrolled at South University represented approximately 10.2% of our total enrollments.
 
Our business model has a number of favorable financial characteristics, including consistent historical enrollment growth, high visibility into operational performance, opportunity for future profit margin expansion and strong operating cash flow generation, although the interest expense relating to the significant indebtedness that we incurred in connection with the Transaction has caused our net income to decline in recent periods as compared to periods prior to the Transaction.
 
  •     History of consistent enrollment growth.  During the period from October 1998 through October 2008, we experienced a compounded annual enrollment growth rate of 18.0%. During the same time period, the schools that we have owned or operated for one year or more experienced a compounded annual enrollment growth rate of 12.0%. We generally achieve growth through a number of independent sources, including continued investment in existing schools, the addition of schools (organically or through acquisition) and new delivery channels, such as online. The significant investments we have made since the Transaction in numerous areas of our workforce, including marketing and admissions, new campuses and online education and infrastructure, are designed to support future enrollment.
 
  •     High visibility into operational performance.  We believe that we benefit from a business model with good insight into future revenue and earnings, given the length of our academic programs. Approximately 64% of our students as of October 2008 were enrolled in Doctorate, Master’s and Bachelor’s degree programs, which are typically multi-year programs that contribute to the overall stability of our student population.
 
  •     Opportunity for future profit margin expansion.  Our business model benefits from scale and permits us to leverage fixed costs across our delivery platforms. Since the Transaction in June 2006, and notwithstanding the increase in interest expense resulting from the indebtedness that we incurred in connection with the Transaction and the resulting adverse effect on our net income, we have made significant investments in numerous areas of our workforce in order to support future enrollment growth and enhance the student experience. We expect that our business model, along with the anticipated benefits of these investments, will enable us over time to leverage our fixed costs as we add new locations and expand our existing locations. With respect to our online programs, we have built sufficient presence to enable us over time to utilize shared technology and infrastructure. We believe that our continued focus on information systems, operating processes and key performance indicators will permit us to enhance our educational quality, growth and profitability over time, although we expect that expenses incurred with respect to student financial aid initiatives will negatively impact our profitability.
 
  •     Strong operating cash flow generation.  We historically have generated strong cash flows. We benefit from investments with attractive returns on capital and favorable working capital balances due to advance payment of tuition and fees. Since the Transaction, we have made significant investments to support growth while simultaneously upgrading the infrastructure required to leverage our delivery platforms. In fiscal 2009, we generated cash flows from operations of $293.4 million.
 
All of these characteristics complement the successful outcomes that we deliver to our students, as reflected in our student persistence and graduate employment rates and in student satisfaction survey data. Approximately 87% of undergraduate students who graduated from our institutions during the calendar year ended December 31, 2008 and were available for employment obtained a position in their field of study or a related field within six months of graduation.


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Industry Overview
 
The U.S. Department of Education estimates that the U.S. public and private post-secondary education market for degree-granting institutions was a $450 billion industry in 2007, representing approximately 18.2 million students enrolled at over 4,400 institutions. According to the National Center of Education Statistics, traditional students, who typically are recent high school graduates under 25 years of age and are pursuing their first higher education degree, represent approximately 62% of the national student population. The remaining 38% of the student population is comprised of non-traditional students, who are largely working adults pursuing further education in their current field or are preparing for a new career.
 
We believe that there are a number of factors contributing to the long-term growth of the post-secondary education industry. First, the shift toward a services-based economy increases the demand for higher levels of education. According to the U.S. Department of Labor — Bureau of Labor Statistics, the projected growth rate for total job openings from 2006 to 2016 for occupations that require post-secondary education is over 15%, nearly double the growth rate for occupations that do not require post-secondary education. Second, economic incentives are favorable for post-secondary graduates. According to the U.S. Census Bureau, in 2008, the median weekly earnings for individuals aged 25 years and older with a Bachelor’s degree was approximately 66% higher than for high school graduates of the same age with no college experience, and the average unemployment rate in 2008 for persons aged 25 years and older with a Bachelor’s degree was half that of those without college experience. Third, government and private financial aid in various forms, including loan guarantees, grants and tax benefits for post-secondary students, has continued to increase. We believe that this support will continue as the U.S. government emphasizes the development of a highly skilled, educated workforce to maintain global competitiveness. Finally, the strong demand for post-secondary education has enabled educational institutions to consistently increase tuition and fees. According to the College Board, public four-year colleges and universities have increased tuition and fees by 7.4% annually on average over the last ten years.
 
We believe that for-profit providers will capture an increasing share of the growing demand for post-secondary education, which has not been fully addressed by traditional public and private universities. Non-profit public and private institutions can face limited financial capability to expand their offerings in response to the growing demand for education, due to a combination of state funding challenges, significant expenditures required for research and the professor tenure system. Certain private institutions also may control enrollments to preserve the perceived prestige and exclusivity of their degree offerings.
 
As a result, we believe that for-profit, post-secondary education providers continue to have significant opportunities for growth. According to the National Center of Education Statistics, the number of students at for-profit, degree-granting institutions grew at an average annual rate of 13.7% from 1997 to 2007, compared to 2.3% growth for all degree-granting institutions over the same period. For-profit providers have continued their strong growth, primarily due to the higher flexibility of their programmatic offerings and learning structure, their emphasis on applied content and their ability to consistently introduce new campuses and academic programs. Despite rapid growth, the share of the post-secondary education market that has been captured by for-profit providers remains relatively small. In 2007, according to the National Center for Education Statistics, for-profit institutions accounted for 6.5% of all degree-granting, post-secondary enrollments, up from 2.3% in 1997.
 
We believe that growth in online education has been supported by favorable student outcomes, the flexibility and convenience associated with the instructional format and the higher penetration of broadband Internet access. According to Eduventures Inc., a leading information services company for the education market, online education programs generated an estimated $11.7 billion of revenues in 2008. Eduventures estimates that online enrollment grew by 25.3% annually from 2003 to 2008 and projects growth of 12.5% annually from 2008 to 2013.


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The post-secondary education industry is highly fragmented, with no one provider controlling a significant share of the market. Students choose among providers based on programs and degrees offered, program flexibility and convenience, quality of instruction, graduate employment rates, reputation and recruiting effectiveness. This multi-faceted market fragmentation results in significant differentiation among various education providers, limited direct competition and minimal overlap between for-profit providers. The main competitors of for-profit, post-secondary education providers are local public and private two-year junior and community colleges, traditional public and private undergraduate and graduate colleges and, to a lesser degree, other for-profit providers.
 
Our Competitive Strengths
 
We believe that the following strengths differentiate our business:
 
  •     Commitment to offering quality academic programs and student and graduate success
 
We are committed to offering quality academic programs, and we continuously strive to improve the learning experience for our students. We are dedicated to recruiting and retaining quality faculty and instructors with relevant industry experience and appropriate academic credentials. Our advisory boards help us to reassess and update our educational offerings on a regular basis in order to ensure the relevance of our curriculum and to design new academic programs. We do this with the goal of enabling students to either enter or advance in their chosen field. Our staff of trained, dedicated career services specialists maintains strong relationships with employers in order to improve our student graduate employment rates in their chosen fields.
 
  •     Recognized brands aligned with specific fields of study and degree offerings
 
We offer academic programs primarily through four education systems. We have devoted significant resources to establishing, and continue to invest in developing, the brand identity for each education system. Through The Art Institutes, Argosy University, Brown Mackie Colleges and South University education systems, we have the ability to align our academic program offerings to address the unique needs of specific student groups. Our marketing strategy is designed to develop brand awareness among practitioners and likely prospects in particular fields of study. We believe that this comprehensive brand building approach in each specific market also enables us to gain economies of scale with respect to student acquisition and retention costs, assists in the recruitment and retention of quality faculty and staff members and accelerates our ability to expand online course offerings.
 
  •     Diverse program offerings and broad degree capabilities
 
Our breadth of programmatic and degree offerings enables us to appeal to a diverse range of potential students. We currently offer academic programs in the following areas: design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Approximately 64% of our students as of October 2008 were enrolled in Doctorate, Master’s and Bachelor’s degree programs, which are typically multi-year programs that contribute to the overall stability of our student population. We monitor and adjust our education offerings based on changes in demand for new programs, degrees, schedules and delivery methods.
 
  •     National platform of schools and integrated online learning platform
 
The combination of our national platform of schools and integrated online learning platform provides students at three of our education systems with flexible curriculum delivery options and academic programs taught on campus, online and in blended formats. This flexibility enables our academic programs to appeal to both traditional students and working adults who may seek convenience due to scheduling, geographical or other constraints.


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We have 92 primary locations across 28 U.S. states and in Canada. Our campuses are located primarily in large metropolitan areas, and we focus our marketing efforts on generating demand primarily within a 100-mile radius of the campus. Throughout our history, we have invested in our campuses in order to provide attractive and efficient learning environments. Our schools offer many amenities found in traditional colleges, including libraries, bookstores and laboratories, as well as the industry-specific equipment necessary for the various programs that we offer.
 
Our online presence offers a practical and flexible solution for our students without compromising quality. We have made a significant investment in online education by strengthening our online presence within The Art Institutes, Argosy University and South University education systems. We have introduced new online academic programs, strengthened our technology infrastructure, hired additional faculty and staff and increased our spending on marketing and admissions. We intend to continue to invest in the expansion of our online program offerings and our marketing efforts to capitalize on our well-known branded schools in order to expand our online presence. As of July 2009, approximately 26,200 students were enrolled in fully online programs.
 
  •     Strong management team with a focus on long-term performance
 
Since the Transaction, we have enhanced the depth and experience of our senior management team, recruiting a number of executives with specialized knowledge in key functional areas, such as technology, marketing and finance. The current executive team has been instrumental in directing investments to accelerate enrollment growth and build infrastructure to establish a platform for sustainable long-term growth. Furthermore, our school presidents and senior operating executives have substantial experience in the sector and have contributed to our history of success. We plan to continue to build our strong management team as we execute on our long-term growth strategy.
 
Our Growth Strategy
 
We intend to support our growth through these three channels:
 
  •     Introduce new and existing academic programs across our national platform of schools
 
We seek to identify emerging industry trends in order to understand the evolving educational needs of our students and graduates. With the assistance of over 1,500 industry experts and employers who actively participate on curriculum advisory teams, we are able to rapidly develop new academic programs that address specific market opportunities. We are also able to tailor our existing proprietary content for courses across our degree programs. New academic programs that we have introduced since the Transaction include Master’s degree programs in Interior Design, Management, Principal Preparation and Health Services Management, Bachelor’s degree programs in Entertainment Design, Hotel and Restaurant Management and Hospitality Management, and Associate’s degree programs in Accessory Design, Early Childhood Education, Restaurant and Catering Operations, Registered Nursing and Veterinary Technician.
 
In addition to developing new academic programs, we frequently introduce existing academic programs to additional locations in our national platform of schools, allowing us to drive incremental enrollment growth, utilize our existing curriculum development in multiple locations and capitalize on identified market needs.
 
  •     Increase enrollments in online distance learning and blended-format programs
 
Our investments in online education have enabled us to increase the number of students enrolled in fully online academic programs from approximately 4,600 students as of July


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2006 to approximately 26,200 students as of July 2009. We believe that the fully online programs offered by The Art Institute of Pittsburgh, Online Division, Argosy University and South University allow us to offer academic programs that meet the needs of a wide range of distance learning students. In addition, our 92 schools operate under brands that are well-known within various fields, and we believe that our online programs benefit from our strong campus presence and related marketing expenditures. Online offerings are also a cost effective means for us to utilize many of our existing education curricula and generate attractive returns on capital. We intend to continue to invest in the expansion of our online program offerings and enhance our marketing efforts to capitalize on our well-known branded schools and further expand our online presence.
 
  •     Develop new school locations in attractive markets
 
We believe that many attractive locations are available to open additional campuses across the United States. We have identified target locations in new geographic markets, as well as opportunities to open additional campuses within existing large metropolitan areas. Because of the relatively large number of potential markets available for opening new campuses, we focus our efforts on markets that we believe offer the most attractive projected growth and return on capital. We rigorously analyze employment statistics and demographic data in order to align our new schools with the specific educational needs of a targeted market. This focus enables penetration and presence for new schools. After entering a market, we drive incremental growth through the introduction of new academic programs and degrees, which enhance return on investment in new markets. We pursue additional efficiencies through our centralized and standardized infrastructure, systems and processes.
 
In addition, although we believe that our diverse platform of program and degree offerings provides significant future growth opportunities, we routinely consider acquisition opportunities to increase the breadth of our education systems or provide unique programmatic exposure within new markets.
 
Recent Developments in Student Financial Assistance
 
In the United States, the largest sources of financial assistance that enable students at our schools to pay for the cost of their education are the federal student aid programs under Title IV of the Higher Education Act of 1965, which we refer to as the HEA. Additional sources of financial assistance include other federal grant programs, state grant and loan programs, private loan programs and institutional grants and scholarships. A number of students also receive private loans to fund a portion of their tuition and fees that they are otherwise unable to pay through personal resources or government-backed loan programs. During the fiscal year ended June 30, 2009, approximately 81.5% and 13.1% of our net revenues were indirectly derived from Title IV programs and private loan programs, respectively, as compared to 70.2% and 22.3%, respectively, in the fiscal year ended June 30, 2008. We estimate that private loans will represent approximately 6% of our net revenues in fiscal 2010. There have been significant recent developments that have affected these programs.
 
The maximum amount of annual Stafford loans available to an undergraduate student increased by $2,000 effective July 1, 2008. Under a reauthorization bill which became law in August 2008, the HEA provides relief from this additional amount of federal student aid under the 90/10 Rule described elsewhere in this prospectus for those loans that are disbursed before July 1, 2011. Additionally, effective July 1, 2009, the maximum amount available for a Pell grant increased to $5,350 per year from a maximum of $4,731 per year in fiscal 2009. Due to these and other increases in the availability of federal student aid, we anticipate that we will derive a higher percentage of our net revenues from Title IV loan programs during our fiscal year ended June 30, 2010 than we have in prior years.
 
Due primarily to the current economic climate, there are fewer providers of private loans to students attending our schools and the remaining lenders have generally imposed more stringent eligibility and underwriting standards. As a result, the percentage of net revenues we indirectly derive


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from private loans to students attending our schools decreased substantially during our fiscal year ended June 30, 2009. We anticipate that this trend will continue in fiscal 2010. In response, we introduced a new student loan program with a private lender in August 2008, which we refer to as the Education Finance Loan program, which enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to finance a portion of their tuition and other educational expenses. During fiscal 2009, our disbursements under the program were approximately $19 million. We estimate that additional disbursements under this program during fiscal 2010 will be approximately $75 million.


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Risk Factors
 
We are subject to certain risks related to our industry and our business, and there are risks associated with investing in our common stock. The risks set forth under the section entitled “Risk Factors” beginning on page 14 of this prospectus reflect risks and uncertainties that could significantly and adversely affect our business, prospects, financial condition, operating results and growth strategy. In summary, significant risks related to our business include:
 
  •     our compliance with extensive laws, regulations and accrediting body standards that may restrict our operations or reduce or eliminate external financial aid funding for our students;
 
  •     our introduction of the Education Finance Loan program with a private lender that exposes us to additional collection risks, increased working capital requirements and reduced cash flows, as well as causes us to incur additional expenses;
 
  •     our ability to effectively implement our growth strategies through opening new schools, growing our online programs, improving the content of our existing academic programs and developing new academic programs on a timely basis and in a cost-effective manner; and
 
  •     consequences of our substantial leverage, including the impact our leverage could have on our ability to raise additional capital, react to changes in the economy or our industry, meet our debt obligations or engage in specified types of transactions.
 
In connection with your investment decision, you should review the section of this prospectus entitled “Risk Factors”.
 
 
Education Management Corporation is a Pennsylvania corporation founded in 1962. Our headquarters are located at 210 Sixth Avenue, 33rd Floor, Pittsburgh, Pennsylvania 15222. Our telephone number is (412) 562-0900. Our website is accessible through www.edmc.com. Information on, or accessible through, this website is not a part of, and is not incorporated into, this prospectus.
 
“Argosy University”, “Brown Mackie College” and the names of certain of our other schools included in this prospectus are our trademarks. We have omitted the “®” and “tm” trademark designations for such trademarks in this prospectus. Nevertheless, all rights to such trademarks named in this prospectus are reserved. All other brand names and tradenames appearing in this prospectus are the property of their respective holders.


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The Offering
 
Common stock offered by us 20,000,000 shares of common stock, par value $0.01 per share, of EDMC or “our common stock”.
 
Common stock to be outstanding after this offering 139,770,277 shares.
 
Use of proceeds We will receive net proceeds from this offering of approximately $338.4 million after deducting underwriting discounts and commissions. We expect to (i) contribute up to $323.9 million of the net proceeds from this offering to our subsidiary, Education Management LLC, to repay a portion of its indebtedness, (ii) pay $10.9 million of the approximately $29.5 million termination fee under the Sponsor Management Agreement and (iii) pay an estimated $3.6 million in offering expenses. See “Certain Relationships and Related Transactions — Sponsor Management Agreement”.
 
Dividends We do not expect to pay dividends on our common stock for the foreseeable future.
 
NASDAQ Stock Market LLC symbol EDMC
 
Risk factors Please read “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.
 
Conflicts of Interest Affiliates of Goldman, Sachs & Co. beneficially own more than 10% of EDMC. For more information, see “Conflicts of Interest”.
 
Unless we specifically state otherwise, the information in this prospectus:
 
  •     assumes no exercise of the underwriters’ option to purchase additional shares;
 
  •     excludes (i) 7,812,887 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2009, of which options to purchase 2,062,604 shares were exercisable as of June 30, 2009, (ii) 441,855 additional shares of our common stock authorized by the Board of Directors for future issuance under the 2006 Stock Option Plan, and (iii) any shares of our common stock which may be issued to satisfy our payment obligations under the LTIC Plan; and
 
  •     gives effect to the Stock Split.
 
If the underwriters exercise the underwriters’ option in full, 142,770,277 shares of our common stock will be outstanding after this offering.


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Summary Consolidated Financial and Other Data
 
The following table sets forth our summary consolidated financial and other data as of the dates and for the periods indicated. The summary consolidated balance sheet data as of June 30, 2008 and 2009 and the summary consolidated statement of operations data and the summary consolidated statement of cash flows data for the fiscal years ended June 30, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements and related notes appearing elsewhere in this prospectus.
 
The summary consolidated financial and other data as of any date and for any period are not necessarily indicative of the results that may be obtained as of any future date or for any future period.
 
The following tables also set forth summary unaudited consolidated as adjusted balance sheet data as of June 30, 2009, which give effect to (i) the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share and (ii) the application of the net proceeds of this offering as described under “Use of Proceeds”. The summary unaudited consolidated as adjusted balance sheet data are presented for informational purposes only and do not purport to represent what our financial position actually would have been had these transactions occurred on the dates indicated or to project our financial position as of any future date.
 
You should read the following summary financial and other data in conjunction with “Selected Consolidated Financial and Other Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.


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    Year Ended
 
    June 30,  
    2007     2008     2009  
      (dollars in millions)  
Statement of Operations Data:
                       
Net revenues
  $ 1,363.7     $ 1,684.2     $ 2,011.5  
Costs and expenses:
                       
Educational services
    729.9       901.3       1,067.7  
General and administrative
    315.3       419.1       512.7  
Depreciation and amortization
    90.6       100.3       112.3  
                         
Total costs and expenses
    1,135.8       1,420.7       1,692.7  
                         
Income before interest and income taxes
    227.9       263.5       318.8  
Interest expense, net
    168.3       156.3       153.3  
                         
Income before income taxes
    59.6       107.2       165.5  
Provision for income taxes
    27.2       41.2       61.1  
                         
Net income
  $ 32.4     $ 66.0     $ 104.4  
Statement of Cash Flows Data:
                       
                         
Net cash flows provided by (used in):
                       
Operating activities
  $ 179.9     $ 152.7     $ 293.4  
Investing activities
    (110.8 )     (157.3 )     (173.1 )
Financing activities
    (41.3 )     (8.5 )     (33.7 )
Other Data:
                       
EBITDA(1)
  $ 318.5     $ 363.8     $ 431.1  
Capital expenditures for long-lived assets
  $ 96.1     $ 150.9     $ 150.7  
Enrollment at beginning of fall quarter
    80,300       96,000       110,800  
Campus locations (at period end)(2)
    78       88       92  
 
                         
    As of June 30,
    As of June 30, 2009  
    2008     Actual    
As Adjusted(3)
 
    (in millions)  
Balance Sheet Data:
                       
Cash and cash equivalents (excludes restricted cash)
  $ 277.4     $ 363.3     $ 344.7  
Total assets
    4,095.4       4,285.2       4,262.2  
Total debt, including current portion and revolving credit facility
    2,021.4       1,988.6       1,691.4  
Total shareholders’ equity
    1,392.2       1,485.7       1,782.3  
 
 
(1) EBITDA, a measure used by management to measure operating performance, is defined as net income plus interest expense, net, provision for income taxes and depreciation and amortization, including amortization of intangible assets. EBITDA 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 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. Our obligations to make interest payments and our other debt service obligations have increased substantially as a result of the indebtedness incurred to finance the Transaction and to pay related expenses in June 2006. Management believes EBITDA is helpful in highlighting trends because EBITDA 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. Further, until fiscal 2009, we used EBITDA less capital expenditures as a financial target for purposes of determining cash bonuses granted pursuant to our Management Incentive Compensation Plan (“MICP”), as described under “Management—Compensation Discussion and Analysis—Cash Bonuses”. In addition, management believes that EBITDA provides more comparability between our historical results and results that reflect purchase accounting and the new capital structure. 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


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not all companies use identical calculations, these presentations of EBITDA may not be comparable to other similarly titled measures of other companies. EBITDA is calculated as follows:
 
                         
    Year Ended
 
    June 30,  
    2007     2008     2009  
      (In millions)  
Net income
  $ 32.4     $ 66.0     $ 104.4  
Interest expense, net
    168.3       156.3       153.3  
Provision for income taxes
    27.2       41.2       61.1  
Depreciation and amortization (a)
    90.6       100.3       112.3  
                         
EBITDA (b)
  $ 318.5     $ 363.8     $ 431.1  
                         
 
(a) Depreciation and amortization includes non-cash charges related to property, equipment and intangible asset impairments of $5.5 million in fiscal 2008.
 
(b) EBITDA, as presented above, is different from the Adjusted EBITDA calculated for the purpose of determining compliance with our senior secured credit agreement and the indentures governing our 83/4% senior notes due 2014 and our 101/4% senior subordinated notes due 2016 (collectively, the “Notes”). For an explanation of our Adjusted EBITDA, see “Management Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.
 
(2) The Art Institute of Toronto announced in June 2007 that it will no longer accept new students and that it will close after all current students complete their respective programs. Prior to announcing this closing, approximately 250 students attended The Art Institute of Toronto.
 
(3) The consolidated as adjusted balance sheet data as of June 30, 2009 give effect to:
 
the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share;
 
the application of the net proceeds of this offering as described under “Use of Proceeds” and the use of cash on hand to pay approximately $18.6 million of the approximately $29.5 million termination fee under the Sponsor Management Agreement; and
 
the acceleration of a portion of the amortization on deferred costs related to our indebtedness which will be repaid as described under “Use of Proceeds” of approximately $4.4 million.


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RISK FACTORS
 
You should carefully consider the following risks and all of the other information set forth in this prospectus before deciding to invest in shares of our common stock. The following risks comprise all the material risks of which we are aware; however, these risks and uncertainties may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business or financial performance. If any of the events or developments described below actually occurred, it could have a material adverse effect on our business, financial condition or results of operations. In that case, the trading price of our common stock would likely decline, and you could lose all or part of your investment in our common stock.
 
RISKS RELATED TO OUR HIGHLY REGULATED INDUSTRY
 
Failure of our schools to comply with extensive regulations could result in monetary liabilities or assessments, restrictions on our operations, limitations on our growth or loss of external financial aid funding for our students.
 
A majority of our net revenues are indirectly derived from federal student financial aid programs pursuant to Title IV of the Higher Education Act of 1965, as amended (“Title IV programs”). Our participation in Title IV programs is subject to certification and oversight by the U.S. Department of Education and is further conditioned upon approvals granted by other agencies. Each of our schools also must obtain and maintain approval to enroll students, offer instruction and grant credentials from the state authorizing agency in the state in which the school is located. Such approval is also a precondition to the ability of our students to participate in Title IV programs. Participation in Title IV programs also requires each school to be accredited by an accrediting agency recognized by the U.S. Department of Education as a reliable authority on institutional quality and integrity. Accreditation is, in turn, conditioned upon the maintenance of applicable state authorization. Our schools also must comply with the requirements of any loan guarantee agencies that guarantee certain federal student loans made to our schools’ students, the requirements of such state financial aid programs as may be available to our students and the requirements of specialized accrediting agencies which oversee educational quality in particular program areas. Further, the Education Finance Loan program that we introduced in August 2008 may require us to obtain licenses, registrations or other forms of regulatory approval. As a result, our schools are subject to extensive regulation and review by these agencies which cover virtually all phases of our operations. These regulations also affect our ability to acquire or open additional schools, add new educational programs, continue offering the Education Finance Loan program, substantially change existing programs or change our corporate or ownership structure. The agencies that regulate our operations periodically revise their requirements and modify their interpretations of existing requirements. See “Business — Accreditation”, “Business — Student Financial Assistance”, “Business — Federal Oversight of Title IV Programs”, “Business — State Authorization and Accreditation Agencies” and “Business — Canadian Regulation and Financial Aid”.
 
If any of our schools were to violate or fail to meet any of these legal and regulatory requirements, we could suffer monetary liabilities or assessments, limitations on our operating activities, loss of accreditation, limitations on our ability to add new schools or offer new programs, termination of or limitations on the school’s ability to grant degrees and certificates, or limitations on or suspension or termination of the school’s eligibility to participate in federal student financial aid programs. A significant portion of our students rely on federal student financial aid funds to finance their education. We cannot predict with certainty how all of these requirements will be applied or interpreted by a regulatory body or whether each of our schools will be able to comply with all of the applicable requirements in the future.


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If we fail to obtain periodic recertifications for our schools to participate in Title IV programs, or if our certifications are withdrawn by the U.S. Department of Education prior to the next scheduled recertification, students at the affected schools would no longer be able to receive Title IV program funds.
 
Our schools are required to seek recertifications from the U.S. Department of Education periodically in order to participate in Title IV programs. The current provisional certifications of 18 of our schools expire between September 30, 2009 and December 31, 2009, and our applications for recertifications are due for submission three months in advance of each expiration. The provisional certifications for our other schools expire beginning on June 30, 2011. The U.S. Department of Education will also review our schools’ continued certifications in the event that we undergo a change of ownership and control pursuant to U.S. Department of Education regulations. In addition, 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 misuse of Title IV funds. If the U.S. Department of Education were to decide not to renew or to withdraw our certification to participate in Title IV programs at any time, our students no longer would be able to receive Title IV program funds, which would have a material adverse effect on our enrollments, revenues and results of operations.
 
Congress may change eligibility standards or reduce funding for federal student financial aid programs, or other governmental or regulatory bodies may change similar laws or regulations relating to other student financial aid programs, which could reduce the growth of our student population and revenue.
 
Political and budgetary concerns can significantly affect Title IV programs and other laws and regulations governing federal and state student financial aid programs. Title IV programs are made available pursuant to the provisions of the HEA, and the HEA must be reauthorized by Congress approximately every six years. Independent of reauthorization, Congress must annually appropriate funds for Title IV programs. In August 2008, the most recent reauthorization of the HEA was enacted, continuing the Title IV HEA programs through at least September 30, 2014. Future reauthorizations or appropriations may result in numerous legislative changes, including those that could adversely affect our ability to participate in the Title IV programs and the availability of Title IV and non-Title IV funding sources for our students. Congress also may impose certain requirements upon the state or accrediting agencies with respect to their approval of our schools. Any action by Congress or the U.S. Department of Education that significantly reduces funding for the federal student financial aid programs or the ability of our schools or students to participate in these programs would have a material adverse effect on our 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 fully with applicable requirements.
 
In September 2007, President Bush signed into law legislation which, among other things, decreases private lender and guaranty agency yields for participation in the Federal Family Education Loan (“FFEL”) program, decreases student interest rates on Stafford loans and limits repayment obligations for students who receive loans pursuant to Title IV programs. Decreased yields could discourage Title IV lenders from continuing to provide private, federally guaranteed Title IV loans to our students. The new HEA reauthorization includes new notification and certification requirements for private non-Title IV program educational loans and makes them subject to the Truth in Lending Act requirements and potential liabilities, which could adversely affect private lenders’ ability to make such loans and thereby affect our students’ ability to access private student loans.
 
Because a significant percentage of our revenue is derived from Title IV and private loan programs, any action by Congress that significantly reduces Title IV program funding, the availability or attractiveness of private loans or the ability of our schools or students to participate in Title IV programs could have a material adverse effect on our business, results of operations or financial


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condition. Legislative action also could increase our administrative costs and require us to adjust our practices in order for our schools to comply fully with Title IV program requirements.
 
If we do not meet specific financial responsibility ratios and other compliance tests established by the U.S. Department of Education, our schools may lose eligibility to participate in federal student financial aid programs, which may result in a reduction in our student enrollment and an adverse effect on our results of operations.
 
To participate in federal student financial aid programs, an institution, among other things, must either satisfy certain quantitative standards of financial responsibility on an annual basis or post a letter of credit in favor of the U.S. Department of Education and possibly accept other conditions or limitations on its participation in the federal student financial aid programs. As of June 30, 2009, we did not meet the required quantitative measures of financial responsibility on a consolidated basis.
 
We are required by the U.S. Department of Education to post a letter of credit and are subject to provisional certification and additional financial and cash monitoring of our disbursements of Title IV funds due to our failure on a consolidated basis to satisfy the financial responsibility standards after the completion of the Transaction resulting from the amount of debt we incurred to complete the Transaction. The amount of this letter of credit is currently set at 10% of the Title IV program funds received by students at our schools during the prior fiscal year. As a result, we posted an $87.9 million letter of credit in October 2006. Due to increases in the aggregate amount of Title IV funds received by our students, we currently post a $120.5 million letter of credit with the U.S. Department of Education. Outstanding letters of credit reduce the availability under our revolving credit facility.
 
We expect to continue to not satisfy the U.S. Department of Education’s quantitative measure of financial responsibility for the foreseeable future. As a result, we expect each of our schools to be required to continue on provisional certification for additional three-year periods. The current provisional certifications of 18 of our schools expire between September 30, 2009 and December 31, 2009. Provisional certification for our other schools expires beginning on June 30, 2011. We expect that the U.S. Department of Education’s evaluation of our schools’ financial responsibility on the basis of our consolidated financial statements will continue through future annual reviews and may result in continuation of the requirement that we maintain a letter of credit, provisional certification and financial and cash monitoring in future years. Any conditions or limitations on our participation in the federal student financial aid programs in addition to the letter of credit, provisional certification and additional financial and cash monitoring could adversely affect our net income and student population. We expect to be required to renew the letter of credit at the 10% level for as long as our schools remain provisionally certified, although the U.S. Department of Education could increase the amount substantially. There can be no assurance that the U.S. Department of Education will not require further restrictions as a condition of the renewal of our certification. Any failure to meet specific financial responsibility ratios and other compliance tests established by the U.S. Department of Education could affect our students’ ability to access student financial assistance programs, which would adversely affect our net income and student population.
 
An institution may lose its eligibility to participate in some or all of the federal student financial aid programs if defaults by its students on their federal student loans exceed specified rates. Certain of our schools have default rates in excess of specified rates in the Federal Perkins Loan Program, which is not a material federal student aid program for us or any of our institutions. Though we believe our schools do not exceed either the specified rates for student default for our material programs or the percentage of revenue limitation test, loss of eligibility to participate in the federal student financial aid programs by one or more of our schools could have a material adverse effect on our student population and revenue.
 
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages. Providers of federally guaranteed student loans have also experienced recent increases in default rates. Any increase in interest rates could contribute to higher default rates with respect to repayment of our students’ education loans. Such higher default


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rates may adversely impact our eligibility to participate in Title IV programs, which could result in a significant reduction in our student population and our profitability.
 
In the event of a bankruptcy filing by any of our schools, the schools filing for bankruptcy would not be eligible to receive Title IV program funds, notwithstanding the automatic stay provisions of federal bankruptcy law, which would make any reorganization difficult to implement. In addition, our other schools may be held to be jointly responsible for financial aid defaults experienced at the bankrupt schools.
 
If any of our schools either fails to demonstrate “administrative capability” to the U.S. Department of Education or violates other requirements of Title IV programs, the U.S. Department of Education may impose sanctions or terminate that school’s participation in Title IV programs.
 
Regulations adopted by the U.S. Department of Education specify criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. These criteria require, among other things, that the institution:
 
  •  comply with all applicable federal student financial aid regulations;
 
  •  have capable and sufficient personnel to administer the federal student financial aid programs;
 
  •  have acceptable methods of defining and measuring the satisfactory academic progress of its students;
 
  •  provide financial aid counseling to its students; and
 
  •  submit all reports and financial statements required by the regulations.
 
If an institution fails to satisfy any of these criteria, or any other of the legal and regulatory requirements of Title IV programs, the U.S. Department of Education may:
 
  •  require the repayment of federal student financial aid funds improperly disbursed;
 
  •  transfer the institution from the “advance” system of payment of federal student financial aid funds to the “reimbursement” system of payment or “cash monitoring”;
 
  •  place the institution on provisional certification status; or
 
  •  commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
 
If one or more of our schools loses or is limited in its access to, or is required to repay, federal student financial aid funds due to a failure to demonstrate administrative capability or to comply with other requirements of Title IV programs, our business could be materially adversely affected.
 
If our institutions do not comply with the 90/10 Rule, they will lose eligibility to participate in federal student financial aid programs.
 
Regulations promulgated under the HEA require all for-profit education institutions to comply with the 90/10 Rule, which imposes sanctions on participating institutions that derive more than 90% of their total revenue on a cash accounting basis from Title IV programs. An institution that derives more than 90% of its total revenue on a cash accounting basis from the Title IV programs for each of two consecutive fiscal years loses its eligibility to participate in Title IV programs and is not permitted to reapply for eligibility until the end of the following two fiscal years. Institutions which fail to satisfy the 90/10 Rule for one fiscal year are placed on provisional certification. Compliance with the 90/10 Rule is measured at the end of each of our fiscal years. For those of our institutions that disbursed federal financial aid during fiscal 2009, the percentage of revenues derived from Title IV programs ranged from approximately 55% to 86%, with a weighted average of approximately 70% as compared to a weighted average of approximately 65% in fiscal 2008. We anticipate that our 90/10 rates will continue to increase in fiscal 2010 due to recent increases in grants from the Federal Pell Grant (“Pell”) program and other Title IV loan limits, coupled with decreases in the availability of state grants and private loans and the inability of households to pay cash due to the current economic climate. While our consolidated 90/10 rate for fiscal 2010 is projected to remain under the 90% threshold, we project


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that some of our institutions will exceed the 90% threshold if we do not continue to successfully implement certain changes to these institutions during the fiscal year which would decrease their 90/10 rate, such as increases in international and military students and certain internal restructuring designed to achieve additional operational efficiencies. In prior years, similar changes to operations resulted in lower 90/10 rates at our institutions where we implemented such changes. Additionally, the revised rules included in the new HEA reauthorization include relief through June 30, 2011 from a $2,000 increase in the annual Stafford loan availability for undergraduate students which became effective July 1, 2008. We anticipate that our 90/10 rate will increase substantially in fiscal 2012 in the event that relief from this additional $2,000 is not extended beyond June 30, 2011, which would adversely affect our ability to comply with the 90/10 Rule. Continued decreases in the availability of state grants would also adversely impact our ability to comply with the 90/10 Rule because state grants generally are considered cash payments for purposes of the 90/10 Rule. We continue to monitor the compliance with the 90/10 Rule by each of our institutions and assess the impact of increased financial aid received by our students under the current rule. If any of our institutions violates the 90/10 Rule, its ineligibility to participate in Title IV programs for at least two years would have a material adverse effect on our enrollments, revenues and results of operations.
 
Our failure to comply with various state regulations or to maintain any national, regional or programmatic accreditation could result in actions taken by those states or accrediting agencies that would have a material adverse effect on our student enrollment and results of operations.
 
Each of our U.S. campuses, including our campuses that provide online programs, is authorized to offer education programs and grant degrees or diplomas by the state in which such school is physically located. The level of regulatory oversight varies substantially from state to state. In some U.S. states, the schools are subject to licensure by the state education agency and also by a separate higher education agency. Some states have sought to assert jurisdiction over online educational institutions that offer educational services to residents in the state or that advertise or recruit in the state, notwithstanding the lack of a physical location in the state. State laws may establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility and other operational matters. State laws and regulations may limit our ability to obtain authorization to operate in certain states or to award degrees or diplomas or offer new degree programs. Certain states prescribe standards of financial responsibility that are different from those prescribed by the U.S. Department of Education. In addition, each of our U.S. schools is accredited by a national or regional accreditation agency recognized by the U.S. Department of Education, and some educational programs are also programmatically accredited. The level of regulatory oversight and standards can vary based on the agency. Certain accreditation agencies prescribe standards that are different from those prescribed by the U.S. Department of Education. If we are found not to be in compliance with an applicable state regulation and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or enroll students in that state and may have to cease providing services and advertising in that state, which could have a material adverse effect on our student enrollment and revenues.
 
If one of our schools does not meet its accreditation or applicable state requirements, its accreditation and/or state licensing could be limited, modified, suspended or terminated. Failure to maintain licensure in the state where it is physically located or institutional accreditation would make such school ineligible to participate in Title IV programs, which could have a material adverse effect on our student enrollment and revenues. Further, requirements for programs offered by our schools that are accredited by national accrediting agencies with respect to retention rates, graduation rates and employment placement rates may be more difficult to satisfy due to the current economic recession in the U.S. If programmatic accreditation is withdrawn or fails to be renewed for any of the individual programs at any of our schools, enrollment in such program could decline, which could have a material adverse impact on student enrollment and revenues at that school.


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Loss of or reductions in state financial aid programs for our students could negatively impact our revenues from students.
 
In fiscal 2009, approximately 3% of our net revenues were indirectly derived from state financial aid programs. State grant programs are generally subject to annual appropriation by the state legislature, which may lead to the state’s eliminating or significantly decreasing the amount of state aid to students at our schools. Recently several states in which we have schools have substantially decreased or eliminated the amount of grants available to students who attend for-profit post secondary institutions. The loss of access to these state grants by our students could have a material adverse effect on our business due to enrollment losses at our schools.
 
If regulators do not approve transactions involving a change of control or change in our corporate structure, we may lose our ability to participate in federal student financial aid programs, which would result in declines in our student enrollment, and thereby adversely affect our results of operations.
 
If we or one of our schools experiences a change of ownership or control under the standards of applicable state agencies, accrediting agencies or the U.S. Department of Education, we or the schools governed by such agencies must seek the approval of the relevant agencies. Transactions or events that could constitute a change of control include significant acquisitions or dispositions of shares of our stock, internal restructurings, acquisition of schools from other owners, significant changes in the composition of a school’s board of directors or certain other transactions or events, several of which are beyond our control. We have received confirmation from the U.S. Department of Education, each of the applicable institutional accrediting agencies and each of the applicable state educational agencies that authorize or license our schools that this offering will not constitute a change of control under their respective standards. The failure of any of our schools to reestablish its state authorization, accreditation or U.S. Department of Education certification following a transaction involving a change of ownership or control would result in a suspension of operating authority or suspension or loss of federal student financial aid funding, which could have a material adverse effect on our student population and revenue. Further, such a change of ownership or control could result in the imposition of growth restrictions on our schools, including limitations on our ability to open new campuses or initiate new educational programs. Restrictions on growth such as these could have a material adverse impact on our student population and revenue and future growth plans. The potential adverse effects of a change of control also could influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock, which could discourage bids for your shares of our common stock and could have an adverse effect on the market price of your shares.
 
Government and regulatory and accrediting agencies may conduct compliance reviews, bring claims or initiate litigation against us, which may adversely impact our licensing or accreditation status, and thereby adversely affect our results of operations.
 
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. 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. Additionally, we may experience adverse collateral consequences, including declines in the number of students enrolling at our schools and the


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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.
 
Our regulatory environment and our reputation may be negatively influenced by the actions of other post-secondary education institutions.
 
In recent years, there have been a number of regulatory investigations and civil litigation matters targeting post-secondary education institutions. These investigations and lawsuits have alleged, 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 adverse media coverage and have been the subject of federal and state legislative hearings. Allegations against the overall student lending and 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 revenues and operating profit or result in increased regulatory scrutiny.
 
We do not have significant experience in processing student loans through the Direct Loan program and, if we are required to process all or a substantial portion of our students’ federal loans through this program, we could experience increases to our administrative costs and delays to the receipt of federal loan proceeds.
 
Loans to students at our U.S. schools under the FFEL/Direct loan program represented approximately 69.9% of our net revenues in fiscal 2009. President Obama has introduced a budget proposal and a committee in the U.S. House of Representative has approved a bill that would require all new federal student loans after July 1, 2010 to be made through the Direct Loan program. While all of our schools are eligible to participate in the Direct Loan program, as of June 30, 2009 only Brown Mackie College — Tucson and The Art Institute of Tucson actively participated in the program. While we anticipate that each of our U.S. based schools will participate in the Direct Loan program by June 30, 2010, processing all or a significant portion of our students’ federal loans through this program will require a substantial change to our systems and operating procedures, which could cause increases to our administrative costs and delays to our receipt of federal student loan proceeds.
 
RISKS RELATED TO OUR BUSINESS
 
If our students were unable to obtain private loans from third party lenders, our business could be adversely affected given our reliance on such lenders as a source of net revenues.
 
The education finance industry has been experiencing and may continue to experience problems that have resulted in fewer overall financing options for some of our students. Factors that could impact the general availability of loans to our students include:
 
  •     changes in overall economic conditions or overall uncertainty or disruption in capital markets, in either case causing lenders to cease making student loans, limit the volume or types of loans made or impose more stringent eligibility or underwriting standards;
 
  •     the financial condition and continued financial viability of student loan providers, including Sallie Mae;
 
  •     changes in applicable laws or regulations, such as provisions of the recently-enacted HEA reauthorization that impose new disclosure and certification requirements with respect to private educational loans, that could have the effect of reducing the availability of education financing, including as a result of any lenders choosing to provide fewer loans or to stop providing loans altogether in light of increased regulation, or which could increase the costs of student loans; or


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  •     determinations by lenders to reduce the number of loans, or to cease making loans altogether, to students attending or planning to attend certain types of schools, particularly for-profit institutions.
 
During fiscal 2009, revenues derived indirectly from private loans to students at our schools, excluding loans under our Education Finance Loan program, represented approximately 13.1% of our net revenues, as compared to approximately 22.3% of our net revenues in fiscal 2008. We estimate that net revenues derived indirectly from private loans to students attending our schools will represent approximately 6% of net revenues in fiscal 2010. These loans are provided pursuant to private loan programs and are made available to eligible students at our schools to fund a portion of the students’ costs of education not covered by federal and state financial aid grants due to increases in tuition and the cost of living. Private loans are made to our students by institutions and are non-recourse to us and our schools. Approximately 79% of the private loans in fiscal 2009, or approximately $206.5 million of private loans, were offered by Sallie Mae and its affiliates and serviced by its affiliated loan servicer.
 
During fiscal 2009, adverse market conditions for consumer student loans have resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. In order to provide student loans to certain of our students who do not satisfy the new standard underwriting, we pay credit enhancement fees to certain lenders (including Sallie Mae) based on the principal balance of each loan disbursed by the lender. An agreement we entered into with Sallie Mae to provide loans to certain students who received a private loan from Sallie Mae prior to April 17, 2008 and are continuing their education but who do not satisfy Sallie Mae’s current standard underwriting criteria expires in June 2010. There can be no assurance that we will be able to extend the current agreement or enter into a new agreement on acceptable terms, if at all. If we were unable to do so, we would attempt to assist these students in their pursuit of alternate financing options, including through our Education Finance Loan program.
 
The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages, which in some cases have called into question the continued financial viability of certain student loan providers and has resulted in fewer providers of student loans. Providers of federally guaranteed student loans and alternative or private student loans have also experienced recent increases in default rates. Adverse market conditions for consumer and federally guaranteed student loans have resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Certain private lenders have also required that we pay them new or increased fees in order to provide private loans to prospective students.
 
While we are taking steps to address the private loan needs of our students, 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.
 
We recently introduced the Education Finance Loan program, which could have a material adverse effect on our financial condition, results of operations and cash flows.
 
In August 2008, we introduced the Education Finance Loan program, which enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses at our schools not covered by other financial aid sources if they or a co-borrower meet certain eligibility and underwriting criteria. During fiscal 2009, approximately 1.0% of our net revenues were derived from loans under the


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Education Finance Loan program. We estimate that additional disbursements under this program during fiscal 2010 will be approximately $75 million.
 
We will bear the risks of collection with respect to these loans from students who do not meet eligibility and underwriting standards of other commercial lenders. As a result, we expect that our allowance for doubtful accounts and bad debt expense will increase. Factors that may impact our ability to collect these loans include general economic conditions, compliance with laws applicable to the origination, servicing and collection of loans, the quality of our loan servicers’ performance and the priority that borrowers under these loans, particularly students who did not complete or were dissatisfied with their programs of study, attach to repaying these loans as compared to other obligations. We also expect our accounts receivable and days sales outstanding to increase from prior years. In addition, because of restrictions imposed under our existing debt arrangements or otherwise, this program, or any enlargement or extension of this program, could adversely affect our ability to make investments and incur indebtedness for the financing of other aspects of our business, including acquisitions.
 
Approximately 1% of our student population currently participates in the Education Finance Loan program, and a number of factors may contribute to fewer students participating in the program in the future than we currently expect. Students may believe that loans under this program are undesirable, or we may find that fewer students qualify for the program than we anticipate. If other loans are not available to finance these students’ education, they may choose not to attend our schools. In addition, because the documents governing our debt arrangements contain limitations on the amount of investments we may make under the Education Finance Loan program, student demand for loans under the program may exceed the applicable limit from time to time. Finally, if the lender participating in the program decides to discontinue its involvement, we may not be able to engage substitute lenders or initiate a direct financing or lending program in a timely manner on similar terms, if at all.
 
Federal, state and local laws and public policy and general principles of equity relating to the protection of consumers apply to the origination, servicing and collection of the loans that we purchase under this program. Any violation of the various federal, state and local laws, including, in some instances, violations of these laws by parties not under our control, may result in losses on the loans that we purchase or may limit our ability to collect all or part of the principal or interest on the loans that we purchase. This may be the case even if we are not directly responsible for the violations by such parties.
 
Federal or state financial regulators also might delay or suspend the Education Finance Loan program for a variety of reasons, including as a result of concerns that the program exposes our bank partners to unacceptable risks. Finally, depending on the terms of the loans, state consumer credit regulators may assert that our activities in connection with the Education Finance Loan program require us to obtain one or more licenses, registrations or other forms of regulatory approvals, any of which may not be able to be obtained in a timely manner, if at all.
 
Our business may be adversely affected by a general economic slowdown or recession in the U.S. or abroad.
 
The U.S. and other industrialized countries currently are experiencing reduced economic activity, increased unemployment, substantial uncertainty about their financial services markets and, in some cases, economic recession. In addition, homeowners in the United States have experienced a significant reduction in wealth due to the decline in residential real estate values across much of the country. These events may reduce the demand for our programs among students, which could materially and adversely affect our business, financial condition, results of operations and cash flows. These adverse economic developments also may result in a reduction in the number of jobs available to our graduates and lower salaries being offered in connection with available employment, which, in turn, may result in declines in our placement and persistence rates. In addition, these events could adversely affect the ability or willingness of our former students to repay student loans, which could


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increase our student loan cohort default rate and require increased time, attention and resources to manage these defaults. Further, the inability of students to pay their tuition and fees in cash has, along with other factors, resulted in a significant increase to our 90/10 rate.
 
The current unprecedented disruptions in the credit and equity markets worldwide may impede or prevent our access to the capital markets for additional funding to expand or operate our business and may affect the availability or cost of borrowing under our existing credit facilities.
 
The credit and equity markets of both mature and developing economies have experienced extraordinary volatility, asset erosion and uncertainty in the last year, leading to governmental intervention in the banking sector in the United States and abroad on an unprecedented scale. Until these market disruptions diminish, we may not be able to access the capital markets to obtain funding needed to refinance our existing indebtedness or expand our business. In addition, changes in the capital or other legal requirements applicable to commercial lenders may affect the availability or increase the cost of borrowing under our senior secured credit facilities. If we are unable to obtain needed capital on terms acceptable to us, we may have to limit our growth initiatives or take other actions that materially adversely affect our business, financial condition, results of operations and cash flows.
 
We may have difficulty opening additional new schools and growing our online academic programs, and we may be unable to achieve the anticipated return on our investment.
 
We anticipate continuing to open new schools in the future. Establishing new schools poses unique challenges and requires us to make investments in management, capital expenditures, marketing expenses and other resources. When opening a new school, we are required to obtain appropriate state or provincial and accrediting agency approvals. In addition, to be eligible for federal student financial aid programs, a school has to be certified by the U.S. Department of Education. Further, our debt agreements include limitations on the amount of capital expenditures we may make on an annual basis. Our failure to effectively manage the operations of newly established schools or service areas, or any diversion of management’s attention from our core school operating activities, could harm our business.
 
We anticipate significant future growth from online courses we offer to students. As of June 30, 2009, we offer fully online programs at The Art Institute of Pittsburgh, Online Division, Argosy University and South University. We plan to continue to introduce new online programs at these schools in the future. The success of any new online programs and classes depends in part on our ability to expand the content of our programs, develop new programs in a cost-effective manner and meet the needs of our students in a timely manner. The expansion of our existing online programs, the creation of new online classes and the development of new fully online programs may not be accepted by students or the online education market for many reasons, including as a result of the expected increased competition in the online education market or because of any problems with the performance or reliability of our online program infrastructure. In addition, a general decline in Internet use for any reason, including due to security or privacy concerns, the cost of Internet service or changes in government regulation of Internet use may result in less demand for online educational services, in which case we may not be able to grow our online programs as planned.
 
We may not be able to implement our growth strategy optimally if we are not able to improve the content of our existing academic programs or to develop new programs on a timely basis and in a cost-effective manner.
 
We continually seek to improve the content of our existing academic programs and develop new programs in order to meet changing market needs. Revisions to our existing academic programs and the development of new programs may not be accepted by existing or prospective students or employers in all instances. If we cannot respond effectively to market changes, our business may be


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adversely affected. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as students require or as quickly as our competitors are able to introduce competing programs. Our efforts to introduce a new academic program may be conditioned or delayed by requirements to obtain federal, state and accrediting agency approvals. The development of new programs and classes, both conventional and online, is subject to requirements and limitations imposed by the U.S. Department of Education, state licensing agencies and the relevant accrediting bodies. The imposition of restrictions on the initiation of new educational programs by any of our regulatory agencies may delay such expansion plans. If we do not respond adequately to changes in market requirements, our ability to attract and retain students could be impaired and our financial results could suffer.
 
Establishing new academic programs or modifying existing academic programs also may require us to make investments in specialized personnel and capital expenditures, increase marketing efforts and reallocate resources away from other uses. We may have limited experience with the subject matter of new programs and may need to modify our systems and strategy. If we are unable to increase the number of students, offer new programs in a cost-effective manner or otherwise manage effectively the operations of newly established academic programs, our results of operations and financial condition could be adversely affected.
 
Our marketing and advertising programs may not be effective in attracting prospective students, current students or potential employers of our graduates.
 
In order to maintain and increase our revenues and margins, we must continue to attract new students in a cost-effective manner. Over the last several fiscal years, we have increased the amounts spent on marketing and advertising, and we anticipate that this trend will continue. If we are unable to successfully advertise and market our schools and programs, our ability to attract and enroll new students could be adversely impacted and, consequently, our financial performance could suffer. We use marketing tools such as the Internet, radio, television and print media advertising to promote our schools and programs. Our representatives also make presentations at high schools. If we are unable to utilize these advertising methods in a cost-effective manner or if our other costs limit the amount of funds we can contribute to advertising, our profitability and revenue may suffer. Additionally, we rely on the general reputation of our schools and referrals from current students, alumni and employers as a source of new students. Among the factors that could prevent us from successfully marketing and advertising our schools and programs are the failure of our marketing tools and strategy to appeal to prospective students or current student and/or employer dissatisfaction with our program offerings or results and diminished access to high school campuses.
 
A decline in the overall growth of enrollment in post-secondary institutions could cause us to experience lower enrollment at our schools, which would negatively impact our future growth.
 
According to the U.S. Department of Education, enrollment in degree-granting, post-secondary institutions is projected to grow 11.7% over the ten-year period ending in the fall of 2017 to approximately 20.1 million students. This growth compares with a 24.0% increase reported in the prior ten-year period ended in 2007, when enrollment increased from 14.5 million students in 1997 to 18.0 million students in 2007. While enrollment growth in the ten-year period ended 2007 was accompanied by a 23.7% increase in high school graduates from 2.7 million students in 1997 to 3.3 million students in 2007, the U.S. Department of Education is not projecting any significant growth in the number of high school graduates through 2017.
 
Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and expose us to interest rate risk to the extent of our variable rate debt.
 
The following chart shows our level of consolidated indebtedness at June 30, 2009 (in millions), as adjusted to reflect the sale of 20,000,000 shares of common stock by us in this offering at the


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initial public offering price of $18.00 per share and the application of the net proceeds of this offering as described under “Use of Proceeds”.
 
         
Revolving credit facility(1)
  $ 100.0  
Senior secured term loan facility
    1,126.8  
83/4% senior notes due 2014
    223.7  
101/4% senior subordinated notes due 2016
    239.1  
Capital leases
    0.6  
Mortgage debt of consolidated entity
    1.2  
         
Total
  $ 1,691.4  
         
 
(1) Upon the closing of the Transaction, we entered into a $300.0 million revolving credit facility with a six-year maturity. The revolving credit facility was increased to $322.5 million in February 2008 and to $388.5 million in August 2009. Upon consummation of this offering, the revolving credit facility will automatically increase to $442.5 million. As of June 30, 2009, we had an aggregate of $137.8 million in outstanding letters of credit, including $121.1 million of letters of credit issued to the U.S. Department of Education due primarily to our failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. Outstanding letters of credit reduce the availability under our revolving credit facility.
 
Our high degree of leverage could have important consequences for you, including:
 
  •     making it more difficult for us to make payments on our indebtedness;
 
  •     increasing our vulnerability to general economic and industry conditions;
 
  •     requiring a substantial portion of cash flows from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flows to fund our operations, capital expenditures and future business opportunities;
 
  •     increasing the likelihood of our not satisfying, on a consolidated basis, the U.S. Department of Education’s annual responsibility requirements and subjecting us to letter of credit and provisional certification requirements for the foreseeable future;
 
  •     exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior secured credit facilities, will bear interest at variable rates;
 
  •     restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
 
  •     limiting our ability to obtain additional financing for working capital, capital expenditures, program development, debt service requirements, acquisitions and general corporate or other purposes; and
 
  •     limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.
 
In addition, we and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indentures governing our Notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.
 
We may not be able to generate sufficient cash to service all of our debt obligations and may be forced to take other actions in an effort to satisfy our obligations under such indebtedness, which may not be successful.
 
Our ability to make scheduled payments on our indebtedness, or to refinance our obligations under our debt agreements on acceptable terms, if at all, will depend on our financial and operating


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performance, which is subject to prevailing economic and competitive conditions and to the financial and business risk factors described in this prospectus, many of which are beyond our control. We cannot assure you that we will be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay the opening of new schools, acquisitions or capital expenditures, sell assets, seek to obtain additional equity capital or restructure our indebtedness. We also cannot assure you that we will be able to refinance any of our indebtedness or 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.
 
Our debt agreements contain restrictions that limit our flexibility in operating our business.
 
Our senior secured credit facilities and the indentures governing the 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 our senior secured credit agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests. Our 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. 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. See “Description of Certain Indebtedness”.
 
Failure to keep pace with changing market needs and technology could harm our ability to attract students.
 
The success of our schools depends to a large extent on the willingness of prospective employers to employ our students upon graduation. Increasingly, employers demand that their new employees possess appropriate technological skills and also appropriate “soft” skills, such as communication, critical thinking and teamwork skills. These skills can evolve rapidly in a changing economic and technological environment. Accordingly, it is important that our educational programs evolve in response to those economic and technological changes. The expansion of existing academic programs and the development of new programs may not be accepted by current or prospective students or the employers of our graduates. Even if our schools are able to develop acceptable new programs, our schools may not be able to begin offering those new programs as quickly as required


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by prospective employers or as quickly as our competitors offer similar programs. If we are unable to adequately respond to changes in market requirements due to regulatory or financial constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, the rates at which our graduates obtain jobs involving their fields of study could suffer and our results of operations and cash flows could be adversely affected.
 
Failure to obtain additional capital in the future could adversely effect our ability to grow.
 
We believe that funds from operations, cash, investments and borrowings under our revolving credit facility will be adequate to fund our current operating plans for the foreseeable future. However, we may need additional debt or equity financing in order to finance our continued growth. The amount and timing of such additional financing will vary principally depending on the timing and size of acquisitions and new school openings, the willingness of sellers to provide financing for future acquisitions and the amount of cash flows from our operations. To the extent that we require additional financing in the future and are unable to obtain such additional financing, we may not be able to fully implement our growth strategy.
 
Failure to effectively manage our growth could harm our business.
 
Our business recently has experienced rapid growth. Growth and expansion of our operations may place a significant strain on our resources and increase demands on our management information and reporting systems, financial management controls and personnel. We may not be able to maintain or accelerate our current growth rate, effectively manage our expanding operations or achieve planned growth on a timely or profitable basis. If we are unable to manage our growth effectively, we may experience operating inefficiencies and our net income may be materially adversely affected.
 
Capacity constraints or system disruptions to our online computer networks could have a material adverse effect on our ability to attract and retain students.
 
The performance and reliability of the program infrastructure of our schools’ online operations is critical to the reputation of these campuses and our ability to attract and retain students. Any computer system error or failure, or a sudden and significant increase in traffic on our computer networks that host our schools’ online operations, may result in the unavailability of our schools’ online operations’ computer networks. In addition, any significant failure of our computer networks could disrupt our on campus operations. Individual, sustained or repeated occurrences could significantly damage the reputation of our schools’ online operations and result in a loss of potential or existing students. Additionally, our schools’ online computer systems and operations are vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and network and telecommunications failures. Any interruption to our schools’ online computer systems or operations could have a material adverse effect on the ability of our schools’ online operations to attract and retain students.
 
The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations.
 
Possession and use of personal information in our operations subjects us to risks and costs that could harm our business. Our schools collect, use and retain large amounts of personal information regarding our students and their families, including social security numbers, tax return information, personal and family financial data and credit card numbers. We also collect and maintain personal information of our employees in the ordinary course of our business. Our computer networks and the networks of certain of our vendors that hold and manage confidential information on our behalf may be vulnerable to unauthorized access, computer hackers, computer viruses and other security threats. Confidential information also may become available to third parties inadvertently when we integrate or convert computer networks into our network following an acquisition of a school or in connection with upgrades from time to time.


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Due to the sensitive nature of the information contained on our networks, such as students’ grades, our networks may be targeted by hackers. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of student or employee privacy. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches. A major breach, theft or loss of personal information regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in further regulation and oversight by federal and state authorities and increased costs of compliance.
 
We may not be able to retain our key personnel or hire and retain additional personnel needed for us to sustain and grow our business as planned.
 
Our success depends, in large part, upon our ability to attract and retain highly qualified faculty, school presidents and administrators and corporate management. We may have difficulty locating and hiring qualified personnel, and retaining such personnel once hired. In addition, key personnel may leave and subsequently compete against us. The loss of the services of any of our key personnel, many of whom are not party to employment agreements with us, or our failure to attract and retain other qualified and experienced personnel on acceptable terms could impair our ability to successfully sustain and grow our business, which could have a material adverse effect on our results of operations.
 
If we are not able to integrate acquired schools, we may experience operational inefficiencies.
 
From time to time, we engage in acquisitions of schools. Integrating acquired operations into our institutions involves significant risks and uncertainties, including:
 
  •     inability to maintain uniform standards, controls, policies and procedures;
 
  •     distraction of management’s attention from normal business operations during the integration process;
 
  •     expenses associated with the integration efforts; and
 
  •     unidentified issues not discovered in our due diligence process, including legal contingencies.
 
Our inability to operate one or more of our schools or locations due to a natural disaster, terrorist act or widespread epidemic or to restore a damaged school or location to its prior operational level could materially hurt our operating results.
 
A number of our schools are located in Florida and elsewhere in the southeastern United States in areas prone to hurricane damage, which may be substantial. We also have a number of schools located in California in areas vulnerable to earthquakes. One or more of these schools may be unable to operate for an extended period of time in the event of a hurricane, earthquake or other natural disaster which does substantial damage to the area in which a school is located. In addition, we may not be in a position to devote sufficient resources to a damaged school in order for it to re-open in a timely fashion or at the same level of operation as existed prior to the damage. Further, a regional or national outbreak of influenza or other illness easily spread by human contact could cause us to close one or more of our schools for an extended period of time. The failure of one or more of our schools


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to operate for a substantial period of time could have a material adverse effect on our results of operations.
 
We have a significant concentration of admissions representatives for our fully online schools in two geographically separate locations. A natural disaster or terrorist act which affected one of these locations could result in our inability to contact prospective students for our fully online programs for an extended period of time, which would result in a significantly lower number of new students enrolling in our programs.
 
We operate in a highly competitive industry, and competitors with greater resources could harm our business.
 
The post-secondary education market is highly fragmented and competitive. Our schools compete for students with traditional public and private two-year and four-year colleges and universities and other for-profit providers, including those that offer online learning programs. Many public and private colleges and universities, as well as other for-profit providers, offer programs similar to those we offer. We expect to experience additional competition in the future as more colleges, universities and for-profit providers offer an increasing number of online programs. Public institutions receive substantial government subsidies, and public and private institutions have access to government and foundation grants, tax-deductible contributions and other financial resources generally not available to for-profit providers. Accordingly, public and private institutions may have instructional and support resources superior to those in the for-profit sector, and public institutions can offer substantially lower tuition prices. Some of our competitors in both the public and private sectors also have substantially greater financial and other resources than we do.
 
We could experience an event of default under our senior secured credit agreement if the Sponsors cease to own an aggregate of at least 35% of the voting interests of our outstanding capital stock, and such an event of default could adversely effect our liquidity and financial position.
 
Under the current terms of our senior secured credit agreement, an event of default would occur if the Sponsors cease to own, collectively, at least 35% of the voting interests of our outstanding capital stock. This event of default could be triggered during the term of the senior secured credit agreement either by future sales or transfers of our capital stock by any of the Sponsors or by additional issuances of voting capital stock by us. Upon completion of this offering, the Sponsors will own, in the aggregate, approximately 70.7% of the voting interests of our outstanding capital stock (or 69.2% assuming the exercise in full of the underwriters’ option to purchase additional shares) of the voting interests of our outstanding capital stock.
 
Because we cannot control when future transactions by any of the Sponsors will occur, we cannot assure you that one or more Sponsors will not engage in transactions that trigger an event of default under the current terms of our senior secured credit agreement, or that we will be able to amend this provision of our senior secured credit agreement prior to any such sale or transfer. If an event of default occurs as a result of a future sale or transfer by any of the Sponsors, the lenders could elect to declare all amounts outstanding under the senior secured credit agreement to be immediately due and payable and terminate all commitments to extend further credit. It is possible that we would not be in a position at that time to refinance the amounts due under the senior secured credit agreement on economical terms, or at all, or repay the amounts due to the lenders, and the lenders then could proceed against the collateral securing our indebtedness.
 
If we expand in the future into new markets outside the United States, we would be subject to risks inherent in non-domestic operations.
 
If we acquire or establish schools in new markets outside the United States, we will face risks that are inherent in non-domestic operations, including the complexity of operations across borders, currency exchange rate fluctuations, monetary policy risks, such as inflation, hyperinflation and deflation, and potential political and economic instability in the countries into which we expand.


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RISKS RELATED TO INVESTING IN OUR COMMON STOCK
 
There is no existing market for our common stock, and we do not know if one will develop to provide you with adequate liquidity.
 
Immediately prior to this offering, there has been no public market for our common stock. An active and liquid public market for our common stock may not develop or be sustained after this offering. The price of our common stock in any such market may be higher or lower than the price you pay. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters and such price may not be indicative of prices that will prevail in the open market following this offering.
 
The market price of our common stock may be volatile, which could cause the value of your investment to decline or could subject us to securities class action litigation.
 
Many factors could cause the market price of our common stock to rise and fall, including the following:
 
  •     variations in our or our competitors’ actual or anticipated operating results;
 
  •     our or our competitors’ growth rates;
 
  •     our or our competitors’ introduction of new schools, new programs, concepts, or pricing policies;
 
  •     recruitment or departure of key personnel;
 
  •     changes in the estimates of our operating performance or changes in recommendations by any securities analyst that follows our stock;
 
  •     changes in the conditions in the education industry, the financial markets or the economy as a whole;
 
  •     substantial sales of our common stock;
 
  •     failure of any of our schools to secure or maintain accreditation;
 
  •     announcements of regulatory or other investigations, adverse regulatory action by the U.S. Department of Education, state agencies or accrediting agencies, regulatory scrutiny of our operations or operations of our competitors or lawsuits filed against us or our competitors; and
 
  •     changes in accounting principles.
 
Market volatility, as well as general economic, market or potential conditions, could reduce the market price of our common stock in spite of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation often has been brought against that company. Due to the potential volatility of our stock price, we therefore may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
 
Private equity funds affiliated with the Sponsors will continue to own the majority of our voting stock immediately after this offering, which, if they acted together, would allow them to control substantially all matters requiring shareholder approval.
 
Upon the completion of this offering, private equity funds affiliated with Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners will beneficially own approximately 29.2%, 34.4% and 7.1%, respectively, of our outstanding common stock (or 28.6%, 33.7% and 7.0%, respectively, if the underwriters fully exercise their option to purchase additional shares). In


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addition, pursuant to the Shareholders Agreement that certain of our shareholders, including the Sponsors, will enter into upon completion of this offering, we expect that five of our ten directors immediately following this offering will be representatives of the private equity funds affiliated with the Sponsors. Certain private equity funds affiliated with Providence Equity Partners and certain private equity funds affiliated with Goldman Sachs Capital Partners each will have the right to appoint two directors if such Sponsor owns 10% or more of our common stock and each of the Sponsors will have the right to appoint one director if such Sponsor owns 2% or more of our common stock. See “Certain Relationships and Related Transactions — Shareholders Agreement”. As a result, these private equity funds, should they vote their respective shares in concert with each other, could have significant influence over our decision to enter into any corporate transaction and may have the ability to prevent any transaction that requires the approval of shareholders, regardless of whether or not other shareholders believe that such transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our shareholders.
 
Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. As long as private equity funds affiliated with the Sponsors collectively continue to own, directly or indirectly, a significant amount of the outstanding shares of our common stock, the Sponsors will collectively continue to be able to strongly influence or effectively control our decisions.
 
We will qualify for and avail ourself of exemptions from certain corporate governance requirements for companies whose stock is quoted on The NASDAQ Stock Market LLC (“Nasdaq”) that provide protection to shareholders of other companies.
 
After the completion of this offering, the private equity funds affiliated with the Sponsors collectively will own more than 50% of the total voting power of our common stock, and we intend to utilize certain “controlled company” exemptions under Nasdaq’s corporate governance listing standards that free us from the obligation to comply with certain Nasdaq corporate governance requirements, including the requirements:
 
  •     that a majority of our Board of Directors consists of independent directors;
 
  •     that the compensation of executive officers be determined, or recommended to our Board of Directors for determination, either by (a) a majority of the independent directors or (b) a compensation committee comprised solely of independent directors; and
 
  •     that director nominees be selected, or recommended for our Board of Directors’ selection, either by (a) a majority of the independent directors or (b) a nominations committee comprised solely of independent directors.
 
As a result of our use of these exemptions, you will not have the same protection afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements. In the event that we cease to be eligible to utilize “controlled company” exemptions under Nasdaq’s corporate governance listing standards, we will have a transitionary period during which we must achieve compliance with the requirements described above.
 
Your percentage ownership in EDMC may be diluted by future issuances of capital stock, which could reduce your influence over matters on which shareholders vote.
 
Following the completion of this offering, our Board of Directors has the authority, without action or vote of our shareholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our payment obligations under our LTIC Plan or shares of our authorized but unissued preferred stock.


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Issuances of common stock or voting preferred stock would reduce your influence over matters on which our shareholders vote, and, in the case of issuances of preferred stock, likely would result in your interest in us being subject to the prior rights of holders of that preferred stock.
 
The sale of a substantial number of shares of our common stock after this offering may cause the market price of shares of our common stock to decline.
 
Sales of our common stock by existing investors may begin shortly after the completion of this offering. Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. The shares of our common stock outstanding prior to this offering will be eligible for sale in the public market at various times in the future. We, all of our directors and executive officers, the Sponsors and other parties to our existing shareholders agreement, representing a majority of our outstanding shares of common stock immediately prior to this offering, agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus (or such longer period as described in “Shares Eligible For Future Sale — Lock-Up Agreements”), except with the prior written consent of the representatives as described in the section of this prospectus entitled “Underwriting”. Upon expiration of this lock-up period and assuming no exercise of outstanding stock options in the interim, up to approximately 26.6 million additional shares of common stock may be eligible for sale in the public market without restriction, subject to any applicable restrictions under our Shareholders Agreement, and up to approximately 100.3 million shares of common stock held by affiliates may become eligible for sale, subject to the restrictions under Rule 144 of the Securities Act of 1933. In addition, the private equity funds affiliated with Providence Equity Partners and Goldman Sachs Capital Partners, which will collectively beneficially own approximately 88.9 million shares of common stock upon completion of this offering, have the right to cause us, at our expense, to use our reasonable best efforts to register such shares held by the private equity funds for public resale, subject to certain limitations. For more information, see “Shares Eligible for Future Sale”, “Certain Relationships and Related Transactions — Shareholders Agreement” and “Certain Relationships and Related Transactions — Registration Rights Agreement”.
 
You will incur immediate and substantial dilution in the net tangible book value of your shares.
 
If you purchase shares in this offering, the value of your shares based on our actual book value immediately will be less than the price you paid. This reduction in the value of your equity is known as dilution. This dilution occurs in large part because our earlier investors paid substantially less than the initial public offering price when they purchased their shares of our common stock. Based upon the issuance and sale of 20,000,000 shares of our common stock by us in this offering at the initial public offering price of $18.00 per share, you will incur immediate dilution of $25.50 in the net tangible book value per share. Investors will incur additional dilution in the future upon the exercise of outstanding stock options. For more information, see “Dilution”.
 
We will incur increased costs as a result of being a public company, and the requirements of being a public company may divert management attention from our business and adversely affect our financial results.
 
As a public company, we will be subject to a number of additional requirements, including the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002 and the listing standards of Nasdaq. These requirements will cause us to incur increased costs and might place a strain on our systems and resources. The Securities Exchange Act of 1934 requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we


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maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight will be required. As a result, our management’s attention might be diverted from other business concerns, which could have a material adverse effect on our business, results of operations and financial condition. Furthermore, we might not be able to retain our independent directors or attract new independent directors for our committees.
 
Provisions in our charter documents and the Pennsylvania Business Corporation Law could make it more difficult for a third party to acquire us and could discourage a takeover and adversely affect existing shareholders.
 
Provisions in our charter documents could discourage potential acquisition proposals or make it more difficult for a third party to acquire control of the Company, even if doing so might be beneficial to our shareholders. Our articles of incorporation and bylaws provide for various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. For example, our articles of incorporation authorize our Board of Directors to issue up to 20.0 million shares of preferred stock and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions on those shares, without any further vote or action by our shareholders. The rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Additional provisions that could make it more difficult for shareholders to effect certain corporate actions include the following:
 
  •     our articles of incorporation prohibit cumulative voting in the election of directors;
 
  •     once the private equity funds affiliated with the Sponsors and certain of our other institutional investors collectively cease to beneficially own 50% or more of our outstanding common stock, our articles of incorporation and bylaws will not (i) permit shareholder action without a meeting by consent, except for unanimous written consent, (ii) permit shareholders to call or to require the Board of Directors to call a special meeting or (iii) permit shareholder removal of directors without assigning any cause; and
 
  •     our bylaws provide that shareholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of shareholders must comply with advance notice procedures.
 
Our shareholders may remove directors only for cause; provided, that as long as our shareholders have the right to act by partial written consent, directors may be removed from office by partial written consent without assigning any cause. These and other provisions of the Pennsylvania Business Corporation Law (the “PBCL”) and our articles of incorporation and bylaws may discourage acquisition proposals, make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect our stock price. See “Description of Capital Stock”.
 
We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
 
We do not expect to pay dividends on shares of our common stock in the foreseeable future. The terms of our senior secured credit facilities or indentures limit our ability to pay cash dividends in certain circumstances. Furthermore, if we are in default under our credit facilities or indentures, our ability to pay cash dividends will be limited in certain circumstances in the absence of a waiver of that default or an amendment to the facilities or indentures. In addition, because we are a holding company, our ability to pay cash dividends on shares of our common stock may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including the restrictions under our senior


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secured credit facilities and indentures. Subject to these restrictions, the payment of cash dividends in the future, if any, will be at the discretion of our Board of Directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our Board of Directors. Consequently, your only opportunity to achieve a return on your investment in the Company will be if the market price of our common stock appreciates.
 
We rely on dividends, distributions and other payments, advances and transfers of funds from our operating subsidiaries to meet our debt service and other obligations.
 
We conduct all of our operations through certain of our subsidiaries, and we currently have no significant assets other than cash of approximately $42.0 million and the capital stock of our respective subsidiaries. As a result, we will rely on dividends and other payments or distributions from our operating subsidiaries to meet any existing or future debt service and other obligations. The ability of our operating subsidiaries to pay dividends or to make distributions or other payments to their parent companies will depend on their respective operating results and may be restricted by, among other things, the laws of their respective jurisdictions of organization, regulatory requirements, agreements entered into by those operating subsidiaries and the covenants of any existing or future outstanding indebtedness that we or our subsidiaries may occur. For example, our senior secured credit agreement and the indentures governing the Notes contain certain restrictions on our subsidiaries’ ability to pay dividends and to make distributions.
 
We experience seasonal fluctuations in our results of operations which may result in similar fluctuations in the trading price of our common stock.
 
Historically, our quarterly revenues and income have fluctuated primarily as a result of the pattern of student enrollments at our schools. The number of students enrolled at our schools typically is greatest in the second quarter of our fiscal year, when the largest number of recent high school and college graduates typically begin post-secondary education programs. Student vacations generally cause our student enrollments to be at their lowest during our first fiscal quarter. Because a significant portion of our expenses do not vary proportionately with the fluctuations in our revenue, our results in a particular fiscal quarter may not indicate accurately the results we will achieve in a subsequent quarter or for the full fiscal year. These fluctuations in our operating results may result in corresponding volatility in the market price for our common stock.


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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
 
This prospectus contains “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. All of these forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this prospectus, including, without limitation, in conjunction with the forward-looking statements included in this prospectus. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the factors discussed in this prospectus. Some of the factors that we believe could affect our results include:
 
  •     compliance with extensive federal, state and accrediting agency regulations and requirements;
 
  •     our ability to maintain eligibility to participate in Title IV programs;
 
  •     government and regulatory changes including revised interpretations of regulatory requirements that affect the post-secondary education industry;
 
  •     regulatory and accrediting agency approval of transactions involving a change of ownership or control or a change in our corporate structure;
 
  •     damage to our reputation or our regulatory environment caused by actions of other for-profit institutions;
 
  •     availability of private loans for our students;
 
  •     our introduction of the Education Finance Loan program with a private lender;
 
  •     effects of a general economic slowdown or recession in the United States or abroad;
 
  •     disruptions in the credit and equity markets worldwide;
 
  •     difficulty in opening additional schools and expanding online academic programs;
 
  •     our ability to improve existing academic programs or to develop new programs on a timely basis and in a cost-effective manner;
 
  •     failure to effectively market and advertise to new students;
 
  •     decline in the overall growth of enrollment in post-secondary institutions;
 
  •     our ability to manage our substantial leverage;
 
  •     compliance with restrictions and other terms in our debt agreements, some of which are beyond our control;
 
  •     our ability to keep pace with changing market needs and technology;
 
  •     our ability to raise additional capital in the future in light of our substantial leverage;


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  •     our ability to effectively manage our growth;
 
  •     increases to our administrative costs and delays to the receipt of federal loan proceeds that we may experience if we are required to process all or a substantial portion of our students’ federal loans through the Direct Loan Program;
 
  •     capacity constraints or system disruptions to our online computer networks;
 
  •     the vulnerability of our online computer networks to security risks;
 
  •     failure to attract, retain and integrate qualified management personnel;
 
  •     our ability to integrate acquired schools;
 
  •     inability to operate schools due to a natural disaster;
 
  •     competitors with greater resources;
 
  •     risks inherent in non-domestic operations; and
 
  •     the other factors set forth under “Risk Factors”.
 
We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this prospectus may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.


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USE OF PROCEEDS
 
We will receive net proceeds from this offering of approximately $338.4 million after deducting estimated underwriting discounts. We expect to (i) contribute up to $323.9 million of the net proceeds from this offering to our subsidiary, Education Management LLC, to repay a portion of its indebtedness, as described below, (ii) pay $10.9 million of the approximately $29.5 million termination fee under the Sponsor Management Agreement and (iii) pay an estimated $3.6 million in offering expenses. See “Certain Relationships and Related Transactions — Sponsor Management Agreement”.
 
On September 21, 2009, Education Management LLC commenced a tender offer to purchase for cash a portion of its 83/4% senior notes due 2014, which we refer to as senior notes, and 101/4% senior subordinated notes due 2016, which we refer to as senior subordinated notes. It is offering to purchase an aggregate principal amount of these notes such that the maximum aggregate consideration for all notes purchased in the tender offer, excluding accrued and unpaid interest, will be $323.9 million. Education Management LLC intends to accept for purchase notes tendered in the tender offer based on the following priority: (1) first, the maximum aggregate principal amount of senior subordinated notes validly tendered on a pro rata basis that can be purchased, such that the maximum aggregate consideration for senior subordinated notes, excluding accrued and unpaid interest, will be $323.9 million and (2) thereafter, the maximum aggregate principal amount of senior notes validly tendered on a pro rata basis that can be purchased, if any, such that the aggregate consideration paid for all senior notes and senior subordinated notes purchased in the tender offer, excluding accrued and unpaid interest, will be $323.9 million. The tender offer is conditioned upon, among other things, the completion of this offering. If any condition of the tender offer is not satisfied, Education Management LLC is not obligated to accept for purchase, or to pay for, any notes tendered and may delay the acceptance for payment of any tendered notes, in each case subject to applicable laws.
 
Holders of senior subordinated notes and senior notes will receive $1,110 and $1,070, respectively, plus accrued and unpaid interest for each $1,000 principal amount of such notes that are validly tendered on or before 5:00 p.m., New York City time, on October 5, 2009 and accepted for purchase in the tender offer. Holders of senior subordinated notes and senior notes will receive $1,080 and $1,040, respectively, plus accrued and unpaid interest for each $1,000 principal amount of such notes that are validly tendered after 5:00 p.m., New York City time, on October 5, 2009 but on or before 5:00 p.m., New York City time, on October 19, 2009 and accepted for purchase in the tender offer.
 
We believe that affiliates of certain of the Sponsors own in the aggregate approximately $81 million in aggregate principal amount of the senior subordinated notes. To the extent that an affiliate of a Sponsor validly tenders all or any portion of its senior subordinated notes in the tender offer and such senior subordinated notes are accepted for purchase in the tender offer, such affiliate indirectly will receive a portion of the proceeds from this offering.
 
As of June 30, 2009, the outstanding aggregate principal amounts of the senior notes and senior subordinated notes were $375.0 million and $385.0 million, respectively. See “Description of Certain Indebtedness — Senior Notes and Senior Subordinated Notes”. Unless we specifically state otherwise, the information in this prospectus assumes that Education Management LLC will purchase in the tender offer $151.4 million aggregate principal amount of senior notes for $162.0 million and $145.9 million aggregate principal amount of senior subordinated notes for $161.9 million. However, Education Management LLC may not be able to consummate the tender offer on the terms described above. It may modify the terms of the tender offer, including pricing terms or the maximum consideration to be paid for notes that are validly tendered, or it may extend or terminate the tender offer, at any time prior to its consummation, which may result in it spending more or less than $323.9 million in connection with the tender offer. If Education Management LLC applies less than $323.9 million of net proceeds from this offering contributed to it to repurchase notes in the tender offer, it intends to use any remaining amounts of those net proceeds contributed to it for general corporate purposes, which may include the repayment, redemption or refinancing of its indebtedness,


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including indebtedness under its senior secured credit facilities, the material terms of which are described under “Description of Certain Indebtedness — Senior Secured Credit Facilities”.
 
This prospectus is not an offer to purchase senior notes or senior subordinated notes. Education Management LLC’s tender offer is made only by and pursuant to the terms of the Offer to Purchase and the related Letter of Transmittal, each dated as of September 21, 2009.
 
We intend to use the net proceeds from the sale of any shares of our common stock pursuant to the underwriters’ option to purchase additional shares for general corporate purposes, which may include the repayment of additional debt.
 
Other than the termination fee described above, no fees are payable to any of the Sponsors under the Sponsor Management Agreement from the proceeds of this offering. Goldman, Sachs & Co., an affiliate of one of the Sponsors, will receive customary underwriting compensation in connection with this offering, as described under “Underwriting”.


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DIVIDEND POLICY
 
We do not expect to declare dividends on shares of our common stock in the foreseeable future. We expect to retain our future earnings, if any, for use in the operation and expansion of our business. The terms of our senior secured credit facilities and indentures limit our ability to pay cash dividends in certain circumstances. Furthermore, if we are in default under these credit facilities or indentures, our ability to pay cash dividends will be limited in the absence of a waiver of that default or an amendment to those facilities or indentures. In addition, our ability to pay cash dividends on shares of our common stock may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including the restrictions under our senior secured credit facilities and indentures. For more information on our senior secured credit facilities and indentures, see “Description of Certain Indebtedness”. Subject to the foregoing, the payment of cash dividends in the future, if any, will be at the discretion of our Board of Directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our Board of Directors.


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CAPITALIZATION
 
The following table sets forth as of June 30, 2009 on a consolidated basis:
 
  •     Our actual capitalization that gives effect to (i) the Stock Split and (ii) the amendment and restatement of our articles of incorporation in connection with the Stock Split; and
 
  •     Our as adjusted capitalization that gives effect to (i) the Stock Split, (ii) the amendment and restatement of our articles of incorporation in connection with the Stock Split, (iii) the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share, (iv) the application of the net proceeds of this offering as described under “Use of Proceeds” and the use of cash on hand to pay approximately $18.6 million of the approximately $29.5 million termination fee under the Sponsor Management Agreement and (v) the acceleration of a portion of the amortization on deferred costs related to our indebtedness which will be repaid as described under “Use of Proceeds” of approximately $4.4 million.
 
You should read the following table in conjunction with the information in this prospectus under the captions “Selected Consolidated Financial and Other Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Description of Certain Indebtedness” and with the audited annual consolidated financial statements and related notes included elsewhere in this prospectus.
 
                 
    As of June 30, 2009  
    Actual     As Adjusted  
    (dollars in millions)  
Debt:
               
Short-term debt:
               
Revolving credit facility
  $ 100.0     $ 100.0  
Current portion of long-term debt(1)
    12.6       12.6  
Long-term debt:
               
Senior secured term loan facility, due 2013
    1,126.8       1,126.8  
83/4% senior notes due 2014
    375.0       223.7  
101/4% senior subordinated notes due 2016
    385.0       239.1  
Capital leases
    0.6       0.6  
Mortgage debt of consolidated entity
    1.2       1.2  
                 
Total long-term debt
    1,888.6       1,591.4  
                 
Total debt
    1,988.6       1,691.4  
Shareholders’ equity:
               
Common stock, par value $0.01 per share, 600,000,000 shares authorized, 119,770,277 shares issued and outstanding actual and 139,770,277 shares issued and outstanding as adjusted(2)
    1.2       1.4  
Additional paid-in capital
    1,338.3       1,672.9  
Retained earnings
    181.8       143.6  
Accumulated other comprehensive loss
    (35.6 )     (35.6 )
                 
Total shareholders’ equity
    1,485.7     $ 1,782.3  
                 
Total capitalization
  $ 3,474.3     $ 3,473.7  
                 
 
(1) Current portion of long-term debt consists primarily of payments due within the next 12 months on our senior secured term loan facility.
 
(2) Excludes (i) 7,812,887 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2009, of which options to purchase 2,062,604 shares were exercisable as of June 30, 2009, (ii) 441,855 additional shares of our common stock authorized by the Board of Directors for future issuance under the 2006 Stock Option Plan, and (iii) any shares of our common stock which may be issued to satisfy our payment obligations under the LTIC Plan.


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CORPORATE STRUCTURE
 
The following diagram sets forth our corporate structure. Subsidiaries of Education Management LLC own all of the operating assets of EDMC, and each subsidiary is wholly owned, directly or indirectly, by EDMC.
 
(CORPORATE STRUCTURE GRAPHIC)
 
 
(1) The obligations under our senior secured credit facilities are guaranteed by Education Management Holdings LLC and all of Education Management LLC’s existing direct and indirect domestic subsidiaries, other than any subsidiary that directly owns or operates a school or any inactive subsidiary that has less than $100,000 of assets. The Notes are fully and unconditionally guaranteed by all of our existing direct and indirect domestic restricted subsidiaries, other than any subsidiary that directly owns or operates a school or has been formed for such purpose and has no material assets.
 
(2) As of June 30, 2009, we had an aggregate of $137.8 million in outstanding letters of credit, including $121.1 million in outstanding letters of credit issued to the U.S. Department of Education due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. Outstanding letters of credit reduce the availability under our revolving credit facility. Upon consummation of this offering, the revolving credit facility will automatically increase to $442.5 million.
 
(3) As adjusted to give effect to the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share and the application of the net proceeds of this offering as described under “Use of Proceeds”.
 
(4) Education Management Finance Corp. has only nominal assets, does not currently conduct any operations and was formed solely to act as co-issuer of the Notes.


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DILUTION
 
If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the adjusted net tangible book value per share of common stock upon the consummation of this offering.
 
Our net tangible book deficit as of June 30, 2009 was approximately $1.3 billion, or approximately $11.23 per share of common stock after giving effect to the Stock Split. The number of shares outstanding excludes (i) 7,812,887 shares of our common stock issuable upon the exercise of options outstanding as of June 30, 2009, of which options to purchase 2,062,604 shares were exercisable as of June 30, 2009 (ii) 441,855 additional shares of our common stock authorized by the Board of Directors for future issuance under the 2006 Stock Option Plan and (iii) any shares of our common stock which may be issued to satisfy our payment obligations under the LTIC Plan. Net tangible book deficit per share is determined by dividing our tangible net worth, which is defined as total tangible assets less total liabilities, by the aggregate number of shares of common stock outstanding. Our net tangible book deficit at June 30, 2009 excludes the book value of our intangible assets totaling $3.1 billion and corresponding net deferred tax liabilities of $0.2 billion.
 
After giving effect to the (i) sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share, (ii) the application of the net proceeds of this offering as described under “Use of Proceeds” and the use of cash on hand to pay approximately $18.6 million of the approximately $29.5 million termination fee under the Sponsor Management Agreement and (iii) the acceleration of a portion of the amortization on deferred costs related to our indebtedness which will be repaid as described under “Use of Proceeds” of approximately $4.4 million, our adjusted net tangible book deficit as of June 30, 2009 would have been approximately $1.0 billion, or approximately $7.50 per share after giving effect to the Stock Split. This represents an immediate decrease in adjusted net tangible book deficit to existing shareholders of $3.73 per share after giving effect to the Stock Split and an immediate dilution to new investors of $25.50 per share after giving effect to the Stock Split. The following table illustrates this per share dilution:
 
         
Initial public offering price per share
  $ 18.00  
Net tangible book deficit per share as of June 30, 2009 (after giving effect to the Stock Split but excluding this offering)
    (11.23 )
Decrease in net tangible book deficit per share attributable to new investors
    3.73  
Adjusted net tangible book deficit per share after this offering
    (7.50 )
         
Dilution per share to new investors
  $ 25.50  
         
 
If the underwriters exercise their option to purchase additional shares in full, the adjusted net tangible book deficit per share after this offering would be $6.99, the decrease in adjusted net tangible book deficit per share to existing shareholders would be $4.24 per share and the dilution per share to new investors would be $24.99.


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The following table summarizes as of June 30, 2009 the number of shares of our common stock purchased from us, the total consideration paid to us, and the average price per share paid to us by our existing shareholders and to be paid by new investors purchasing shares of our common stock in this offering, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
                                         
                Total Consideration
    Average
 
    Shares Purchased     (in 000’s)     Price Per
 
   
Number
   
Percentage
   
Amount
   
Percentage
   
Share
 
 
Existing shareholders
    119,770,277       85.7 %   $ 1,339,514       78.8 %   $ 11.18  
New investors
    20,000,000       14.3 %   $ 360,000       21.2 %   $ 18.00  
                                         
Total
    139,770,277       100.0 %   $ 1,699,514       100.0 %   $ 12.16  
                                         
 
The foregoing discussion and tables assume no exercise of outstanding stock options. As of June 30, 2009, there were options outstanding to purchase a total of 7,812,887 shares of our common stock (as adjusted to give effect to the Stock Split) at a weighted average exercise price of $12.35 per share (as adjusted to give effect to the Stock Split).
 
To the extent that any of these stock options are exercised, there may be further dilution to new investors. See “Capitalization”, “Management” and Note 11 to the notes to our audited annual consolidated financial statements included elsewhere in this prospectus.
 
In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of such securities could result in further dilution to our shareholders.


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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following table sets forth our selected consolidated financial and other data as of the dates and for the periods indicated. The selected consolidated balance sheet data of Successor as of June 30, 2008 and 2009 and the selected consolidated statement of operations data and the selected consolidated statement of cash flows data for the Successor fiscal years ended June 30, 2007, 2008 and 2009 have been derived from our audited consolidated financial statements and related notes appearing elsewhere in this prospectus. The selected historical consolidated statement of operations and statement of cash flows data for the fiscal year ended June 30, 2005 and for the periods from July 1, 2005 through May 31, 2006 and June 1, 2006 through June 30, 2006 and the consolidated balance sheet data as of June 30, 2005, 2006 and 2007 presented in this table have been derived from audited consolidated financial statements not included in this prospectus.
 
The selected consolidated financial and other data as of and for any period are not necessarily indicative of the results that may be obtained for any future date or for any future period.
 
The following tables also set forth selected unaudited consolidated as adjusted balance sheet data of Successor as of June 30, 2009, which give effect to (i) the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share and (ii) the application of the net proceeds of this offering as described under “Use of Proceeds”. The selected unaudited consolidated as adjusted balance sheet data are presented for informational purposes only and do not purport to represent what our financial position actually would have been had these transactions occurred on the dates indicated or to project our financial position as of any future date.
 
You should read the following selected financial and other data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.


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    Predecessor       Successor  
          Period
      Period
                   
          from
      from
                   
          July 1,
      June 1,
                   
    Year Ended
    2005 to
      2006 to
                   
    June 30,
    May 31,
      June 30,
    Year Ended June 30,  
    2005(1)     2006       2006     2007     2008     2009  
    (dollars in millions except per share amounts)  
                                                   
Statement of Operations Data:
                                                 
Net revenues
  $ 1,019.3     $ 1,095.8       $ 74.4     $ 1,363.7     $ 1,684.2     $ 2,011.5  
Costs and expenses:
                                                 
Educational services
    564.2       590.9         59.0       729.9       901.3       1,067.7  
General and administrative
    202.4       273.3         26.0       315.3       419.1       512.7  
Depreciation and amortization
    84.1       62.9         7.4       90.6       100.3       112.3  
                                                   
Total costs and expenses
    850.7       927.1         92.4       1,135.8       1,420.7       1,692.7  
                                                   
Income (loss) before interest and income taxes
    168.6       168.7         (18.0 )     227.9       263.5       318.8  
Interest (income) expense, net
    (0.2 )     (5.3 )       14.1       168.3       156.3       153.3  
                                                   
Income (loss) before income taxes
    168.8       174.0         (32.1 )     59.6       107.2       165.5  
Provision for (benefit from) income taxes
    67.2       73.6         (12.4 )     27.2       41.2       61.1  
                                                   
Net income (loss)
  $ 101.6     $ 100.4       $ (19.7 )   $ 32.4     $ 66.0     $ 104.4  
                                                   
Basic and diluted earnings (loss) per common share(2)
    *       *       $ (0.17 )   $ 0.27     $ 0.55     $ 0.87  
Basic and diluted weighted average shares outstanding(2)
    *       *         116,316       118,292       119,769       119,770  
Statement of Cash Flows Data:
                                                 
Net cash flows provided by (used in):
                                                 
Operating activities
  $ 192.5     $ 301.7       $ (22.5 )   $ 179.9     $ 152.7     $ 293.4  
Investing activities
    (98.1 )     (56.4 )       (3,534.0 )     (110.8 )     (157.3 )     (173.1 )
Financing activities
    (39.0 )     (43.2 )       3,445.5       (41.3 )     (8.5 )     (33.7 )
Other Data:
                                                 
EBITDA(3)
  $ 252.7     $ 231.6       $ (10.6 )   $ 318.5     $ 363.8     $ 431.1  
Capital expenditures for long-lived assets
  $ 74.9     $ 57.9       $ 7.7     $ 96.1     $ 150.9     $ 150.7  
Enrollment at beginning of fall quarter
    66,200       72,500                 80,300       96,000       110,800  
Campus locations (at period end)(4)
    70       71         71       78       88       92  
                                                   
 
* Not meaningful
 
                                                   
    Predecessor       Successor  
    As of
                                 
    June 30,
      As of June 30,     As of June 30, 2009  
    2005       2006     2007     2008     Actual     As Adjusted(5)  
    (In millions)  
                                                   
Balance Sheet Data:
                                                 
Cash and cash equivalents (excludes restricted cash)
  $ 172.0       $ 263.3     $ 290.7     $ 277.4     $ 363.3     $ 344.7  
Total assets
    956.0         3,945.4       3,988.7       4,095.4       4,285.2       4,262.2  
Total debt, including current portion and revolving credit facility
    70.4         2,110.0       2,030.0       2,021.4       1,988.6       1,691.4  
Total shareholders’ equity
    666.0         1,282.7       1,350.8       1,392.2       1,485.7       1,782.3  
                                                   
 
(1) Fiscal 2005 results include a $19.5 million charge related to cumulative adjustments for changes in lease accounting recorded in depreciation and amortization expense in the statement of operations. This amount


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was substantially offset by a cumulative credit of $15.7 million related to the amortization of a deferred rent credit recorded in educational services expense in the statement of operations.
 
(2) In all periods presented, the amounts are adjusted to give effect to the 4.4737 for one stock split that occurred on September 30, 2009.
 
(3) EBITDA, a measure used by management to measure operating performance, is defined as net income (loss) plus interest (income) expense, net, provision for (benefit from) income taxes and depreciation and amortization, including amortization of intangible assets. EBITDA is not a recognized term under 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 is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Our obligations to make interest payments and our other debt service obligations have increased substantially as a result of the indebtedness incurred to finance the Transaction and to pay related expenses in June 2006. Management believes EBITDA is helpful in highlighting trends because EBITDA 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. Further, until fiscal 2009, we used EBITDA less capital expenditures as a financial target for purposes of determining cash bonuses granted pursuant to our MICP, as described under “Management — Compensation Discussion and Analysis —  Cash Bonuses”. In addition, management believes that EBITDA provides more comparability between our historical results and results that reflect purchase accounting and the new capital structure. 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, these presentations of EBITDA may not be comparable to other similarly titled measures of other companies. EBITDA is calculated as follows:
 
                                                   
    Predecessor       Successor  
          Period
      Period
                   
          from
      from
                   
          July 1,
      June 1,
                   
    Year Ended
    2005 to
      2006 to
                   
    June 30,
    May 31,
      June 30,
    Year Ended June 30,  
    2005     2006       2006     2007     2008     2009  
    (In millions)  
                                                   
Net income (loss)
  $ 101.6     $ 100.4       $ (19.7 )   $ 32.4     $ 66.0     $ 104.4  
Interest (income) expense, net
    (0.2 )     (5.3 )       14.1       168.3       156.3       153.3  
Provision for (benefit from) income taxes
    67.2       73.6         (12.4 )     27.2       41.2       61.1  
Depreciation and amortization (a)
    84.1       62.9         7.4       90.6       100.3       112.3  
                                                   
EBITDA (b)
  $ 252.7     $ 231.6       $ (10.6 )   $ 318.5     $ 363.8     $ 431.1  
                                                   
                                                   
 
(a) Depreciation and amortization includes non-cash charges related to property, equipment and intangible asset impairments of $4.2 million in fiscal 2005 and $5.5 million in fiscal 2008. Fiscal 2005 also includes a $19.5 million charge related to cumulative adjustments for changes in lease accounting.
 
(b) EBITDA, as presented above, is different from the Adjusted EBITDA calculated for the purpose of determining compliance with our senior secured credit agreement and the indentures governing our Notes. For an explanation of our Adjusted EBITDA, see “Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”.
 
(4) The Art Institute of Toronto announced in June 2007 that it will no longer accept new students and that it will close after all current students complete their respective programs. Prior to announcing this closing, approximately 250 students attended The Art Institute of Toronto.
 
(5) The consolidated as adjusted balance sheet data as of June 30, 2009 give effect to:
 
  •     the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share;
 
  •     the application of the net proceeds of this offering as described under “Use of Proceeds” and the use of cash on hand to pay approximately $18.6 million of the approximately $29.5 million termination fee under the Sponsor Management Agreement; and
 
  •     the acceleration of a portion of the amortization on deferred costs related to our indebtedness which will be repaid as described under “Use of Proceeds” of approximately $4.4 million.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We are among the largest providers of post-secondary education in North America, with approximately 110,800 active students as of October 2008. We offer academic programs to our students through campus-based and online instruction, or through a combination of both. We are committed to offering quality academic programs and continuously strive to improve the learning experience for our students. We target a large and diverse market as our educational institutions offer students the opportunity to earn undergraduate and graduate degrees, including doctoral degrees, and certain specialized non-degree diplomas in a broad range of disciplines. These disciplines include design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Each of our schools located in the United States is recognized by a national or regional accreditation agency and by the U.S. Department of Education, enabling students to access federal student loans, grants and other forms of public and private financial aid. Our academic programs are designed with an emphasis on applied content and are taught primarily by faculty members who, in addition to having appropriate academic credentials, offer practical and relevant professional experience in their respective fields. Our net revenues for fiscal 2009 were $2,011.5 million.
 
On June 1, 2006, we were acquired by a consortium of private investors led by the Sponsors. The acquisition was accomplished through the merger of an acquisition company into EDMC, with EDMC surviving the Transaction. Although we continued as the same legal entity, we contributed substantially all of our assets and liabilities to Education Management LLC, an indirect wholly-owned subsidiary, in connection with the Transaction.
 
Since the Transaction in June 2006, we have undertaken multiple initiatives to increase our penetration of addressable markets in order to enable us to accelerate our growth and expand our market position. We have opened 20 new locations, acquired two schools, developed 36 new academic programs and introduced over 600 new or existing academic programs to locations that had not previously offered such programs. The compound annual enrollment growth rate at our schools was 19.6% between July 2006 and July 2009. During the same time period, the compound annual enrollment growth rate for schools owned or operated for one year or more was 18.2%. We have made significant capital investments in technology and human resources, particularly in marketing and admissions, designed to facilitate future enrollment growth while enhancing the effectiveness of our marketing efforts. We have also upgraded our infrastructure, student interfaces and student support systems to enhance the student experience, while providing greater operational transparency. We have made considerable investments in our online education platform, which has resulted in strong enrollment growth. The number of students enrolled in fully online academic programs has grown more than five-fold since July 2006 to approximately 26,200 students in July 2009. We expect to continue to pursue a disciplined approach to opening new school locations in attractive target markets.
 
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. Net revenues consist of tuition and fees, student housing fees, bookstore sales, restaurant sales in connection with culinary programs, workshop fees, finance charges related to credit extended to students and sales of related study materials. Net revenues are reduced for student refunds and scholarships. We recognize revenue on a pro rata basis over the term of instruction or occupancy or when cash is received in the case of certain point-of-sale revenues. The amount of tuition revenue received from students varies based on the average tuition charge per credit hour, average credit hours taken per student, type of program, specific curriculum and average student population. Bookstore and housing revenues are largely a function of the average student population.


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The two main drivers of our net revenues are average student population and tuition rates. Factors affecting our average student population include the number of continuing students attending our schools at the beginning of a period and the number of new students entering our schools during such period. We believe that the size of our student population at our campuses is influenced by a number of factors. These include the number of individuals seeking post-secondary education, the attractiveness of our program offerings, the quality of the student experience, the effectiveness of our marketing efforts, the persistence of our students, the length of the education programs and our overall educational reputation. We seek to grow our average student population by offering additional programs at existing schools and by establishing new school locations, whether through new facility start-up or acquisition. Historically, we have been able to pass along the rising cost of providing quality education through increases in tuition. Average tuition rates increased by approximately 6% in fiscal 2009 and 5% in fiscal 2008.
 
We believe that several factors influence the number of individuals seeking post-secondary education programs. According to the U.S. Department of Education, enrollment in degree-granting, post-secondary institutions is projected to grow 11.7% over the ten-year period ending in the fall of 2017 to approximately 20.1 million students. This growth compares with a 24.0% increase reported in the prior ten-year period ended 2007, when enrollment increased from 14.5 million students in 1997 to 18.0 million students in 2007. Enrollment growth in the ten-year period ended 2007 was accompanied by a 23.7% increase in high school graduates from 2.7 million students in 1997 to 3.3 million students in 2007. The U.S. Department of Education, while projecting that the number of high school graduates will remain at approximately 3.3 million students per year through 2017, estimates that enrollment in degree-granting, post-secondary institutions by students 18-24 years of age will increase 8.3% from 10.8 million students in 2007 to 11.7 million students in 2017. Moreover, the U.S. Department of Education projects even faster growth rates for students 25 years of age and older, up 17.0% from 7.0 million students in 2007 to 8.2 million students in 2017.
 
In addition to the number of high school graduates available to matriculate into post-secondary education, we believe that several other factors influence demand for post-secondary education. The wage gap between college degree and non-college degree workers provides an important economic incentive to pursue post-secondary education. According to the U.S. Census Bureau, in 2008, the median weekly earnings for workers 25 years of age and older with a Bachelor’s degree was approximately 66% higher than for high school graduates of the same age with no college experience and the average unemployment rate in 2008 for persons aged 25 and older with a Bachelor’s degree was half that of those without a college degree. A greater number of jobs also require post-secondary education. The U.S. Department of Labor — Bureau of Labor Statistics projects that the growth rate for total job openings from 2006 to 2016 for occupations that require post-secondary education is over 15%, nearly double the growth rate for occupations that do not require post-secondary education.
 
A majority of our students rely on funds received under various government-sponsored student financial aid programs, especially Title IV programs, to pay a substantial portion of their tuition and other education-related expenses. Because of the dependence on government-sponsored programs, we participate in industry groups and monitor the impact of newly proposed legislation on our business. Some of our students also rely upon funds received from private lenders to pay a portion of their tuition and related expenses. Net revenues derived indirectly from private loans to students at our schools represented approximately 13.1% of our net revenues in fiscal 2009, as compared to approximately 22.3% in fiscal 2008. The number of students who obtain a private loan has decreased substantially due to increases in the availability of federal student aid and decreases in the financial options available to our students as a result of tightened credit standards and other factors. In response, we implemented the Education Finance Loan program in August 2008 to enable students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses at our schools if they or a co-borrower meet certain eligibility and underwriting criteria. During fiscal 2009, revenues derived


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indirectly from the Education Finance Loan program, represented approximately 1.0% of our net revenues.
 
Our quarterly net revenues and income fluctuate primarily as a result of the pattern of student enrollments. The seasonality of our business has decreased over the last several years due to an increased percentage of students enrolling in online programs, which generally experience less seasonal fluctuations than campus-based programs. Our first fiscal quarter is typically our lowest revenue recognition quarter due to student vacations.
 
Educational services expenses, the largest component of our operating expenses, consist 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, information systems costs, bad debt expense and private loan fees. We anticipate that these expenses as a percentage of net revenues will decrease over time due to continued leverage on our fixed cost base through the introduction of new programs at our existing schools and continued growth in the number of students taking classes online.
 
The second largest expense line item, general and administrative expenses, consists of marketing and student admissions expenses and certain central staff departmental costs such as executive management, finance and accounting, legal, corporate development and other departments that do not provide direct services to our students. We have centralized many of these services to gain consistency in management reporting, efficiency in administrative effort and cost control. With regard to the marketing component of our expenses, we have seen a change in the way we market to and attract inquiries from prospective students as the Internet has become an increasingly important way of reaching students. However, Internet inquiries, which generally cost less than leads from traditional media sources such as television and print, convert to applications at a lower rate than inquiries from traditional media sources.
 
Certain of our historic costs and expenses will change in the future as a result of the completion of this offering. Since the Transaction, we have paid the Sponsors an annual management fee of $5.0 million and reimbursed the Sponsors for out-of-pocket expenses of $0.5 million incurred by them or their affiliates in connection with travel, transportation and similar expenses related to the provision of management services. Upon completion of this offering, we will pay to the Sponsors a management termination fee of approximately $29.5 million, and our obligation to pay the annual management fee will cease.
 
We have not recognized compensation expense under SFAS No. 123R, “Share-Based Payment”, due to restrictions on the 2006 Stock Option Plan participants’ ability to receive value on their stock option grants until certain performance conditions are achieved. At June 30, 2009, we had $35.7 million in unrecognized SFAS No. 123R expenses, net of expected forfeitures, and the intrinsic value of the outstanding vested and unvested options was $13.0 million and $31.6 million, respectively, based on the initial public offering price of $18.00 per share. Upon completion of this offering, we expect to recognize $14.9 million of non-cash compensation expense related to our stock options.


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Option grants since the Transaction through August 31, 2009 were as follows:
 
                         
            Estimated
    No. of Options
      Fair Value per
Time-Vested Option Grants
  Granted (000s)(1)   Exercise Price(2)   Share at Grant Date(2)
 
August 2006
    1,071     $ 11.18     $ 11.18  
December 2006
    1,386     $ 11.18     $ 11.18  
March 2007
    1,406     $ 12.29     $ 12.29  
June 2007
    212     $ 13.41     $ 13.41  
August 2007
    43     $ 16.76     $ 16.76  
May 2008
    126     $ 21.46     $ 21.46  
July 2008
    63     $ 21.46     $ 21.46  
October 2008
    75     $ 21.46     $ 21.46  
                         
Performance-Vested Option Grants
                       
                         
August 2006
    1,071     $ 11.18     $ 11.18  
December 2006
    1,386     $ 11.18     $ 11.18  
March 2007
    1,294     $ 12.29     $ 12.29  
June 2007
    212     $ 13.41     $ 13.41  
August 2007
    43     $ 16.76     $ 16.76  
May 2008
    126     $ 21.46     $ 21.46  
July 2008
    63     $ 21.46     $ 21.46  
October 2008
    75     $ 21.46     $ 21.46  
 
 
(1)  Includes options that have been forfeited through August 31, 2009 due to the termination of the grantees’ employment. The number of options granted has been adjusted to give effect to the Stock Split.
 
(2)  The Board of Directors established the exercise price of option grants based on its determination of the fair market value of a share of common stock on the day of grant. The exercise price and estimated fair value per share at the date of grant were supported by a contemporaneous valuation or private transaction in our stock. Given the relative proximities of the March and June 2007 option grant dates to the end of their respective fiscal quarters, the fair value of common stock assumption used in determining the options’ fair values, which will be used to recognize compensation expense, was based on the fair value of the common stock at the end of the respective fiscal quarters. Exercise prices and estimated fair values per share at the dates of grant have been adjusted to give effect to the Stock Split.
 
We have also adopted the LTIC Plan pursuant to which we have granted unit awards to non-executive employees. Under the terms of the LTIC Plan, a bonus pool is created if Providence Equity Partners and Goldman Sachs Capital Partners (together, the “Principal Shareholders”) satisfy certain required returns on their initial investment in our stock when a realization event occurs, which is defined in the LTIC Plan as the time when the Principal Shareholders (i) cease to own in the aggregate at least 30% of our outstanding voting securities, and (ii) have, in the aggregate, disposed of at least 70% of their shares. The size of the bonus pool, if any, depends on the returns to the Principal Shareholders when they sell shares of our stock. We will recognize compensation expense for units issued under the LTIC Plan pursuant to SFAS No. 123R.
 
Also upon completion of this offering, we expect to use $323.9 million of the net proceeds to repay a portion of our indebtedness as described under “Use of Proceeds”. As a result, we will accelerate a portion of the amortization on the related deferred debt costs of approximately $4.4 million.


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Results of Operations
 
For the fiscal years indicated, the following table presents the percentage relationship of our statement of operations items to net revenues.
 
                                   
    Year Ended
       
    June 30,        
   
2007
     
2008
    2009        
                                   
                                   
Net revenues
    100.0 %       100.0 %     100.0 %        
Costs and expenses:
                                 
Educational services
    53.5 %       53.5 %     53.1 %        
General and administrative
    23.1 %       24.9 %     25.5 %        
Depreciation and amortization
    6.7 %       6.0 %     5.6 %        
                                   
Total costs and expenses
    83.3 %       84.4 %     84.2 %        
                                   
Income before interest and income taxes
    16.7 %       15.6 %     15.8 %        
Interest expense, net
    12.3 %       9.3 %     7.6 %        
                                   
Income before income taxes
    4.4 %       6.3 %     8.2 %        
                                   
Provision for income taxes
    2.0 %       2.4 %     3.0 %        
                                   
Net income
    2.4 %       3.9 %     5.2 %        
                                   
                                   
 
Year Ended June 30, 2009 (Fiscal 2009) Compared with the Year Ended June 30, 2008 (Fiscal 2008)
 
All basis point changes are presented as a percentage of net revenues in each year of comparison.
 
Net revenues
 
Net revenues for fiscal 2009 increased 19.4% to $2,011.5 million, compared to $1,684.2 million in fiscal 2008. Average student enrollment increased 17.4% from fiscal 2008 to fiscal 2009 due primarily to the opening of new school locations, the growth in our fully online programs and the introduction of new academic programs. In addition, tuition rates increased approximately 6% in fiscal 2009 compared to fiscal 2008. These factors were partially offset by a lower average credit load taken by students. The decrease in credit load was primarily the result of growth in the number of students enrolled in fully online programs, in which students typically take a lesser credit load. Average student enrollment for fiscal 2009 was approximately 107,700 students, an increase of 15,800 students compared to fiscal 2008. None of this growth was from the acquisitions of educational institutions. Tuition revenue generally varies based on the average tuition charge per credit hour, average credits per student and the average student population. We derived approximately 91.7% and 91.1% of our net revenues from tuition and fees paid by, or on behalf of, our students in fiscal 2009 and fiscal 2008, respectively.
 
Bookstore and housing revenue is largely a function of the average student population. Net housing revenues increased by $4.5 million, or 5.9%, to $81.2 million in fiscal 2009 compared to fiscal 2008. Revenues from bookstore sales, which include supplies and other items, grew to $68.9 million in fiscal 2009 compared to $57.2 million in fiscal 2008, an increase of 20.4%.
 
Educational services expenses
 
Educational services expenses increased by $166.4 million, or 18.5%, to $1,067.7 million in fiscal 2009 due primarily to the incremental costs incurred to support higher student enrollment. As a percentage of net revenues, educational services expenses decreased by 43 basis points. Salaries and benefits decreased by 73 basis points from the prior year primarily due to operating leverage at existing onground campuses partially offset by an increase in these costs for our fully online programs. Rent expense associated with schools was $148.3 million in fiscal 2009 and $131.3 million in the prior fiscal year, representing a decrease of 42 basis points. Additionally, costs related to insurance, employee relations and travel and training decreased 38 basis points in fiscal 2009 compared to fiscal 2008. These decreases were partially offset by an increase in bad debt expense as a percentage of


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net revenues from 2.5% in the prior fiscal year to 3.6% in the current year, or an increase of 110 basis points. The increase in bad debt expense was primarily due to larger receivable balances, higher delinquency rates and an increase in the proportion of our receivables from out-of-school students, which are reserved for at a higher rate than in-school students. In addition, allowances recorded in connection with our Education Finance Loan program and worsening economic conditions also had a negative impact on bad debt expense. We also experienced a 25 basis point increase from the prior year in fees paid to private lenders to originate loans obtained by our students. The remaining net decrease of 25 basis points in the current fiscal year was driven by other costs, none of which were individually significant.
 
General and administrative expenses
 
General and administrative expenses were $512.7 million in fiscal 2009, an increase of 22.3% from fiscal 2008. As a percentage of net revenues, general and administrative expenses increased 60 basis points compared with the prior fiscal year, primarily due to an increase in personnel costs of 119 basis points from continued investment in marketing and admissions representatives. Advertising costs also increased by 13 basis points against the prior year, due primarily to marketing of fully online programs representing a greater percentage of our total costs. Corporate costs, such as consulting, legal, and audit, along with operating leverage on other costs, resulted in a 72 basis point decrease from the prior year.
 
Depreciation and amortization expense
 
Depreciation and amortization expense on long-lived assets was $112.3 million for fiscal 2009, an increase of 12.0% from $100.3 million in fiscal 2008. As a percentage of net revenues, depreciation and amortization expense decreased by 37 basis points compared to the prior year, due primarily to a non-recurring $5.5 million impairment charge recorded at one of our schools in the prior year.
 
Interest expense, net
 
Net interest expense was $153.3 million in fiscal 2009, a decrease of $3.0 million from the prior fiscal year. The decrease in net interest expense is primarily related to a reduction in the average interest rate of the term loan during the current fiscal year, partially offset by interest incurred on $180.0 million outstanding on our revolving credit facility beginning in September 2008. We drew down on our revolving credit facility as a precautionary measure due to the state of the capital markets. We repaid $80.0 million of the amount outstanding on June 26, 2009 and the remaining $100.0 million on July 1, 2009. We typically draw against the revolving credit facility at the end of each fiscal year for regulatory purposes.
 
Provision for income taxes
 
Income tax expense for fiscal 2009 was $61.1 million as compared to $41.2 million in fiscal 2008. Our effective tax rate was 36.9% in fiscal 2009 versus 38.4% in fiscal 2008. The decrease in the effective tax rate for fiscal 2009 as compared to the prior fiscal year was primarily due to a decrease in the state tax provision as a result of restructuring plans implemented during fiscal years 2007 and 2008.


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Year Ended June 30, 2008 (Fiscal 2008) Compared with the Year Ended June 30, 2007 (Fiscal 2007)
 
All basis point changes are presented as a percentage of net revenues in each year of comparison.
 
Net revenues
 
Net revenues for fiscal 2008 increased 23.5% to $1,684.2 million, compared to $1,363.7 million in fiscal 2007, primarily resulting from a 19.1% increase in average student enrollment, and an approximate 5% increase in tuition rates. These factors are slightly offset by a lower average credit load taken by students. Average student enrollment for fiscal 2008 increased to approximately 91,900 students, less than 1.0% of which was from the acquisitions of educational institutions, compared to approximately 77,200 students in fiscal 2007. The decrease in credit load was primarily the result of growth in the number of students enrolled in fully online programs, in which students typically take a lesser credit load. Tuition revenue generally varies based on the average tuition charge per credit hour, average credits per student and the average student population. We derived approximately 91% of our net revenues from tuition and fees paid by, or on behalf of, our students in both the 2008 and 2007 periods.
 
Bookstore and housing revenue is largely a function of the average student population. Net housing revenues increased to $76.7 million in fiscal 2008 compared to $59.8 million in fiscal 2007, an increase of 28.3%. Revenues from bookstore sales, which include supplies and other items, grew to $57.2 million in fiscal 2008 compared to $47.3 million in fiscal 2007.
 
Educational services expenses
 
Educational services expenses increased by $171.4 million, or 23.5%, to $901.3 million in fiscal 2008 from $729.9 million in fiscal 2007, due primarily to the incremental costs incurred to support higher student enrollment. Educational services expenses decreased by one basis point as a percentage of net revenues. We experienced a reduction in personnel and facility expenses, excluding rent, of 64 basis points in fiscal 2008 despite continued investment in new campuses and online programs. These decreases were partially offset by an increase in bad debt expense of 46 basis points, due to an increase in the proportion of our receivables from out-of-school students, which are reserved for at a higher rate than in-school students. As a percentage of net revenues, bad debt expense represented 2.5% in fiscal 2008 as compared to 2.0% in fiscal 2007. Rent expense associated with campuses, which increased as a percentage of net revenues by nine basis points, was $131.3 million in fiscal 2008 and $105.0 million in fiscal 2007. The remaining net increase of eight basis points in fiscal 2008 was driven by other costs, none of which were individually significant.
 
General and administrative expenses
 
General and administrative expenses were $419.1 million for fiscal 2008, an increase of 32.9% from $315.3 million in fiscal 2007. As a percentage of net revenues, general and administrative expenses increased 176 basis points compared with fiscal 2007. Personnel costs increased 91 basis points in fiscal 2008 primarily as a result of continued investments in marketing and admissions. In addition, higher investment in advertising in our fully online programs and at our new campuses drove an increase of 104 basis points in fiscal 2008 compared to fiscal 2007. These increases as a percentage of net revenues were partially offset by a decrease in consulting and other professional services expenses of 18 basis points compared to the prior fiscal year. The remaining net decrease of one basis point in fiscal 2008 was driven by other costs, none of which were individually significant.
 
Depreciation and amortization expense
 
Depreciation and amortization expense on long-lived assets was $100.3 million for fiscal 2008, an increase of 10.7% from $90.6 million in fiscal 2007. Due to the fixed nature of these expenses in relation to net revenues, we experienced a reduction in depreciation and amortization expense of


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69 basis points as a percentage of net revenues, despite taking a $5.5 million impairment charge at one of our schools during fiscal 2008.
 
Interest expense, net
 
Net interest expense was $156.3 million in fiscal 2008, a decrease of $12.0 million from fiscal 2007. The decrease in net interest expense is primarily related to the decrease in the average interest rate of the term loan during fiscal 2008.
 
Provision for income taxes
 
Income tax expense for fiscal 2008 was $41.2 million as compared to $27.2 million in fiscal 2007. Our effective tax rate was 38.4% in fiscal 2008 as compared to 45.7% in fiscal 2007. The decrease in the effective tax rate for fiscal 2008 as compared to fiscal 2007 was primarily due to the impact of valuation allowances established against certain state deferred tax assets as a result of an internal restructuring in fiscal 2007, a decrease in the state provision and a decrease in state deferred taxes.
 
Liquidity and Funds of Capital Resources
 
We finance our operating activities primarily from cash generated from operations, and our primary source of cash is tuition collected from our students. We believe that cash flow from operations, supplemented from time to time with borrowings under our $388.5 million revolving credit facility, will provide adequate funds for ongoing operations, planned expansion to new locations, planned capital expenditures and debt service as well as acquisitions during the next twelve months. Upon consummation of this offering, the revolving credit facility will automatically increase to $442.5 million.
 
Net working capital is calculated as total current assets less total current liabilities. Advance payments and amounts outstanding under our revolving credit facility do not contribute to any changes in net working capital as these liabilities are directly offset in current assets. We had working capital of $73.9 million at June 30, 2009, which compares favorably to $0.1 million of net working capital at June 30, 2008. The change in working capital is primarily the result of a $38.4 million increase in net income in fiscal 2009 compared to fiscal 2008, which significantly improved our cash position at June 30, 2009 compared to June 30, 2008.
 
Operating cash flows
 
Cash provided by operating activities for the fiscal year ended June 30, 2009 was $293.4 million, an increase of $140.7 million, or 92.1%, compared to the year ended June 30, 2008. Increased operating cash flows in the current year were primarily related to increased net income, additional cash collected due to the timing of the number of academic starts during the fiscal year and lower cash interest payments.
 
Days sales outstanding (“DSO”) in receivables was 23.5 days at June 30, 2009 compared to 21.1 days at June 30, 2008. We calculate DSO by dividing net student and other receivables at period end by average daily net revenues for the most recently completed quarter. Net accounts receivable can be affected significantly by the changes in the start dates of academic terms from reporting period to reporting period. There were no significant changes to the start dates of academic terms in session as compared to the prior year. DSO increased slightly in the current year due to increased receivable balances, which were the result of deteriorating economic conditions and limitations on the availability of private loans to our students.
 
The level of accounts receivable reaches a peak immediately after the billing of tuition and fees at the beginning of each academic period. Collection of these receivables is heaviest at the start of each academic period. Additionally, federal financial aid proceeds for continuing students can be received up to ten days prior to the start of an academic quarter, which can result in fluctuations in quarterly cash receipts due to the timing of the start of academic periods.


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In an effort to provide our students with financing for the cost of tuition, we have established relationships with alternative or private loan providers. Private loans help bridge the funding gap created by tuition rates that have risen more quickly than federally-guaranteed student loans. In addition, we introduced the Education Finance Loan program in August 2008, which enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses at our schools if they or a co-borrower meet certain eligibility and underwriting criteria.
 
We have accrued a total of $22.6 million as of June 30, 2009 for uncertain tax positions under FIN 48, excluding interest and the indirect benefits associated with state income taxes. We may have future cash payments relating to the amount accrued if we are ultimately unsuccessful in defending these uncertain tax positions. However, we cannot reasonably predict at this time the future period in which these payments may occur, if at all.
 
Investing cash flows
 
Capital expenditures were $150.7 million, or 7.5% of net revenues, for the year ended June 30, 2009, compared to $150.9 million, or 9.0% of net revenues, for the same period a year ago. We expect capital expenditures in fiscal 2010 to be between 6% and 8% of net revenues. During fiscal 2009, we continued to invest both in new facilities and in the expansion of existing facilities. Reimbursements for tenant improvements represent cash received from lessors based on the terms of lease agreements to be used for leasehold improvements. We lease most of our facilities under operating lease agreements. 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.
 
Financing cash flows
 
Our $388.5 million revolving credit facility is available to draw upon in order to satisfy certain year-end regulatory financial ratios, fund working capital needs that may result from the seasonal pattern of cash receipts that occur throughout the year and finance acquisitions. In September 2008, we borrowed $180.0 million under the revolving credit facility as a precautionary measure due to the state of the capital markets, which remained outstanding until we repaid $80.0 million on June 26, 2009. On July 1, 2009, we repaid the remaining outstanding balance of $100.0 million, which existed in order to satisfy year-end regulatory financial ratios, under the revolving credit facility from cash on hand at June 30, 2009. In August 2009, we signed an agreement to increase capacity on our revolving credit facility from $322.5 million to $388.5 million and to add two letter of credit issuing banks. The addition of issuing banks increased amounts available for letters of credit from $175.0 million to $375.0 million. The agreement also outlines terms under which the revolving credit facility could be increased by up to another $54.0 million once we complete a qualifying initial public offering under the terms of the senior credit facility. Upon consummation of this offering, the revolving credit facility will automatically increase to $442.5 million.
 
At June 30, 2009, we had outstanding letters of credit issued to the U.S. Department of Education of approximately $121.1 million, including a $120.5 million letter of credit due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. Outstanding letters of credit reduce our availability to borrow funds under the revolving credit facility. Including those issued to the U.S. Department of Education, an aggregate of $137.8 million of letters of credit were outstanding at June 30, 2009.
 
As a result of the Transaction, we are highly leveraged, and our debt service requirements are significant. At June 30, 2009, we had $1,988.6 million in aggregate indebtedness outstanding, including short-term debt under the revolving credit facility. After giving effect to outstanding letters of credit and amounts drawn, we had $84.7 million of additional borrowing capacity on the revolving credit facility at June 30, 2009. We expect our cash flows from operations, combined with availability


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under our revolving credit facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending over the next twelve months.
 
Federal Family Education Loan Program and Private Student Loans
 
Approximately 81.5% and 13.1% of our net revenues were indirectly derived from Title IV programs under the Higher Education Act of 1965 and private loan programs, respectively, in fiscal 2009 compared to 70.2% and 22.3% from Title IV programs and private loan programs, respectively, in fiscal 2008. There have been significant recent developments that have impacted these programs.
 
The U.S. government has recently made additional financial aid available to students in order to meet rising post-secondary education and decreased availability of private loans. Effective July 1, 2008, the annual Stafford loans available for undergraduate students under the FFEL program increased by $2,000. Effective as of July 1, 2008, the maximum amount of availability of a Pell grant increased to $4,731 per year from a maximum of $4,310 per year in fiscal 2008. The maximum Pell grant available to eligible students further increased effective July 1, 2009 to $5,350 per award year.
 
The credit and equity markets of both mature and developing economies have experienced extraordinary volatility, asset erosion and uncertainty in the last year, leading to governmental intervention in the banking sector in the United States and abroad on an unprecedented scale. In particular, adverse market conditions for consumer student loans have resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. In order to provide student loans to certain of our students who do not satisfy the new standard underwriting, we pay credit enhancement fees to certain lenders (including Sallie Mae) based on the principal balance of each loan disbursed by the lender. An agreement we entered into with Sallie Mae to provide loans to certain students who received a private loan from Sallie Mae prior to April 17, 2008 and are continuing their education but who do not satisfy Sallie Mae’s current standard underwriting criteria expires in June 2010.
 
The reliance by students attending our schools on private loans decreased substantially during fiscal 2009 due to the increased availability of federal aid, including the $2,000 increase in Stafford loan availability for undergraduate students as of July 1, 2008, and certain operating initiatives we implemented over the past 18 months. Excluding activity under our Education Finance Loan program, approximately 14% of the students attending our schools received a private loan in fiscal 2009 as compared to approximately 24% in fiscal 2008. We anticipate that the net revenues we receive from private loans and the number of students receiving private loans will further decrease in fiscal 2010.
 
In response to the tightened credit markets facing our students, in August 2008 we introduced the Education Finance Loan program through a private lender. The program enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses at our schools if they or a co-borrower meet certain eligibility and underwriting criteria. Under the program, we purchase loans made by a private lender to students who attend our schools. During fiscal 2009, approximately 1.0% of our net revenues were from the Education Finance Loan Program. We estimate that additional disbursements under this program during fiscal 2010 will be approximately $75 million.
 
The Education Finance Loan program adversely impacts our liquidity and exposes us to new and greater credit risk because we own loans to our students. This financing provides for payments to us by our students over an extended term, which could have a material adverse effect on our cash flows from operations. In addition, we have the risk of collection with respect to these loans, which resulted in an increase in our bad debt expense as a percentage of net revenues in fiscal 2009 compared to prior fiscal years. While we are taking steps to address the private loan needs of our students, 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.


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Contractual Obligations
 
The following table describes our commitments at June 30, 2009 under various contracts and agreements (in thousands):
 
                                                         
    Total
                                     
    Amounts
    Payments Due by Fiscal Year  
   
Committed
   
2010
   
2011
   
2012
   
2013
   
2014
   
Thereafter
 
 
Revolving credit facility(1)
  $ 100,000     $ 100,000     $     $     $     $     $  
Senior secured term loan facility
    1,126,827       11,850       11,850       8,887       1,094,240              
83/4% senior notes due 2014
    375,000                               375,000        
101/4% senior subordinated notes due 2016
    385,000                                     385,000  
Mortgage debt of consolidated entity
    1,194       238       244       264       284       164        
Capital leases
    622       534       88                          
                                                         
Total short-term and long-term debt
    1,988,643       112,622       12,182       9,151       1,094,524       375,164       385,000  
Interest payments(2)
    772,101       151,979       157,303       138,375       173,240       72,279       78,925  
Operating leases, extending through 2020
    888,776       119,648       111,327       107,882       107,114       100,285       342,520  
Unconditional purchase obligations through 2014
    46,364       29,467       12,813       3,366       445       273        
                                                         
Education finance loan program(3)
    39,449       31,789       7,660                          
Total commitments
  $ 3,735,333     $ 445,505     $ 301,285     $ 258,774     $ 1,375,323     $ 548,001     $ 806,445  
                                                         
 
(1) Borrowings under our revolving credit facility, if any, mature on June 1, 2012. Since the $100.0 million of borrowings outstanding under our revolving credit facility at June 30, 2009 were repaid on July 1, 2009, we have included these borrowings in the table above as a fiscal 2010 repayment.
 
(2) Interest payments are based on either the fixed rate or the variable rate as of June 30, 2009 and assume that repayments are in accordance with the loan agreements, without giving effect to mandatory prepayments.
 
(3) We are required to purchase loans originated by a private lender on behalf of our students under the Education Finance Loan Program. There is typically a 10-month lag between the time a loan is originated by the private lender and when we purchase it.
 
As described under “Use of Proceeds”, we expect to use $323.9 million of the net proceeds from this offering to repay a portion of our indebtedness. As a result, we expect that our debt service obligations reflected in the chart above will be reduced following this repayment of indebtedness.
 
Contingencies
 
In June 2007, The New England Institute of Art (“NEIA”) received a civil investigative demand letter from the Massachusetts State Attorney General requesting information in connection with the Attorney General’s review of alleged submissions of false claims by NEIA to the Commonwealth of Massachusetts and alleged unfair and deceptive student lending and marketing practices engaged in by the school. In February 2008, the Attorney General informed NEIA that it does not plan to further pursue its investigation of the false claims and deceptive marketing practices. NEIA intends to fully cooperate with the Attorney General in connection with its investigation of NEIA’s student lending practices.


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The Art Institute of Portland and our schools located in Illinois have received requests for information from the Attorney General of their respective states addressing the relationships between the schools and providers of loans to students attending the schools. We have responded to the requests for information and have fully cooperated with the Attorneys General in their investigations, and we will continue to do so should the investigations continue.
 
In August 2009, a complaint was filed in the District Court for Dallas County, Texas against, among others, Argosy University. The plaintiffs in the litigation are 15 former students who were enrolled in the Clinical Psychology doctoral program at the Dallas campus of Argosy University. The complaint alleges that, prior to the plaintiffs’ enrollment and/or while the plaintiffs were enrolled in the program, the defendants violated the Texas Deceptive Trade Practices and Consumer Protection Act and made material misrepresentations regarding the importance of accreditation of the program by the Commission on Accreditation, American Psychological Association, the status of the application of the Dallas campus of Argosy University for such accreditation, the availability of loan repayment options for the plaintiffs, and the quantity and quality of the plaintiffs’ career options. Plaintiffs seek unspecified monetary damages. The Company is currently evaluating the recently filed complaint and has not yet filed a response.
 
In addition to the matters described above, we are a defendant in certain legal proceedings arising out of the conduct of our business. In the opinion of management, based upon an investigation of these claims and discussion with legal counsel, the ultimate outcome of such legal proceedings, individually and in the aggregate, is not anticipated to have a material adverse effect on our consolidated financial position, results of operations or liquidity.
 
In August 2008, we introduced the Education Finance Loan program with a private lender, which enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow funds to finance a portion of their tuition and other educational expenses. Under the Education Finance Loan program, we purchase loans that are originated by a private lender. As of June 30, 2009, we were committed to purchase $39.4 million of loans over the next two fiscal years.
 
Off Balance Sheet Arrangements
 
At June 30, 2009, we had provided $9.1 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.
 
Indebtedness
 
  Overview
 
As of June 30, 2009, we had $1,988.6 million in aggregate indebtedness outstanding, with $112.6 million included in current liabilities. This indebtedness was incurred primarily to finance the Transaction and related expenses. After giving effect to outstanding letters of credit and amounts drawn, we also had an additional $84.7 million of borrowing capacity available under our revolving credit facility.
 
Our liquidity requirements are significant and include debt service and capital expenditures, as further described below. We benefit from investments with attractive returns on capital and favorable working capital balances due to the advanced payment of tuition and fees. We generated cash flows from operations of $293.4 million and $152.7 million in fiscal 2009 and fiscal 2008, respectively. Our obligations to make principal and interest payments on indebtedness we incurred in June 2006 in connection with the Transaction have not negatively impacted our ability to make investments in numerous areas of our business. We have invested in marketing and admissions, new and expanded campuses, online education and infrastructure necessary to support future enrollment growth and enhance the student experience. However, our term loan facility matures on June 1, 2013, our 83/4% senior notes mature on June 1, 2014, and our 101/4% senior subordinated notes mature on


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June 1, 2016. Our ability to make scheduled payments on our indebtedness, or to refinance our obligations under our debt agreements on acceptable terms, if at all, will depend on our financial and operating performance. Our operating performance is subject to prevailing economic and competitive conditions and to the financial and business risk factors described in this prospectus, many of which are beyond our control. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay the opening of new schools, acquisitions or capital expenditures, sell assets, seek to obtain additional equity capital or restructure our indebtedness.
 
  Senior Secured Credit Facilities
 
Overview.  In connection with the Transaction, our subsidiary, Education Management LLC, entered into senior secured credit facilities consisting of a $1,185.0 million term loan facility and a $300.0 million revolving credit facility. In February 2008, we increased our revolving credit facility to $322.5 million through increased bank participation. In August 2009, we signed an agreement to increase capacity on our revolving credit facility from $322.5 million to $388.5 million and to add two letter of credit issuing banks. The addition of issuing banks increased amounts available for letters of credit from $175.0 million to $375.0 million. The agreement also outlines terms under which the revolving credit facility could be increased by up to another $54.0 million once we complete a qualifying initial public offering under the terms of the senior credit facility. Upon consummation of this offering, the revolving credit facility will automatically increase to $442.5 million. The revolving credit facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as swing line loans.
 
As of June 30, 2009, we had aggregate outstanding borrowings of $1,226.8 million under our senior secured credit facilities.
 
Interest Rate and Fees.  Borrowings under the senior secured credit facilities bear interest at a rate equal to LIBOR plus an applicable margin or, at our option, an applicable margin plus an alternative base rate determined by reference to the higher of (x) the prime rate as published in The Wall Street Journal or (y) the federal funds rate plus 1/2 of 1.0%. The applicable margin for borrowings under the revolving credit facility is 0.5% with respect to base rate borrowings and 1.5% with respect to LIBOR borrowings. Under the term loan facility, the margin is 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings, at June 30, 2009. The applicable margin for borrowings under the senior secured credit facilities has been reduced subject to our attainment of certain leverage ratios, as discussed below.
 
We utilize interest rate swap agreements, which are contractual agreements to exchange payments based on underlying interest rates, to manage the variable rate portion of our term debt. On June 6, 2006, we entered into two five-year interest rate swap agreements for a total notional amount of $750.0 million in order to hedge a portion of our exposure to variable interest payments associated with the senior secured credit facilities. Under the terms of the interest rate swaps, we receive payments based on variable interest rates based on the three month LIBOR and make payments based on a fixed rate of 5.397%.
 
In addition to paying interest on outstanding principal under the senior secured credit facilities, we are required to pay a commitment fee to the lenders under the revolving credit facility in respect of the unutilized commitments thereunder. At June 30, 2009, the commitment fee rate was 0.375% per annum. We must also pay customary letter of credit fees.
 
Payments.  We are required to pay installments on the loans under the term loan facility in quarterly principal amounts of $3.0 million, which is equal to 0.25% of their initial total funded principal amount calculated as of the closing date, through April 1, 2013. The remaining amount is payable on June 3, 2013, which we estimate will be $1,082.4 million, assuming that we do not make any prepayments before then. Principal amounts outstanding under the revolving credit facility are due and payable in full on June 1, 2012.


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We may be required to make additional principal payments based on excess cash flow generated for the preceding fiscal year and our debt covenant ratios, as defined in the senior secured term loan agreement. We have not been required to make such a prepayment since the second quarter of fiscal 2008. We are not required to make an additional payment relating to the fiscal year ended June 30, 2009 due to Education Management LLC’s Consolidated Total Debt to Adjusted EBITDA ratio, described below, being below 5.00 to 1.00.
 
Certain Covenants and Events of Default.  The credit agreement governing our senior secured credit facilities contains covenants that, among other things, restrict, subject to certain exceptions, our subsidiaries’ ability to:
 
  •     incur additional indebtedness;
 
  •     make capital expenditures;
 
  •     create liens on assets;
 
  •     engage in mergers or consolidations;
 
  •     sell assets;
 
  •     pay dividends and distributions or repurchase the capital stock of Education Management LLC;
 
  •     make investments, loans or advances;
 
  •     prepay subordinated indebtedness (including our senior subordinated notes);
 
  •     make certain acquisitions;
 
  •     engage in certain transactions with affiliates;
 
  •     enter into certain restrictive agreements;
 
  •     amend agreements governing our subordinated indebtedness (including our senior subordinated notes) or certain of our organizational documents;
 
  •     change the nature of our business; and
 
  •     change the status of Education Management Holdings LLC as a passive holding company.
 
In addition, the credit agreement governing Education Management LLC’s senior secured credit facilities requires Education Management LLC to maintain a maximum total leverage ratio and a minimum interest coverage ratio within specified ranges, as discussed further under “Covenant Compliance” below.
 
The credit agreement governing Education Management LLC’s senior secured credit facilities also contains certain customary affirmative covenants and events of default and has a cross-default provision to debt with a principal amount of greater than $50 million, which would cause the term loan to be prepaid or redeemed in the event of a default with respect to such debt.
 
  Senior Notes and Senior Subordinated Notes
 
In connection with the Transaction, our subsidiaries, Education Management LLC and Education Management Finance Corp., co-issued $375.0 million aggregate principal amount of 83/4% senior notes due 2014 and $385.0 million aggregate principal amount of 101/4% senior subordinated notes due 2016. The indentures governing the Notes limit our subsidiaries’ ability to:
 
  •     incur additional indebtedness;
 
  •     pay dividends on or make other distributions or repurchase the capital stock of Education Management LLC or any of its parent companies;


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  •     make certain investments, including capital expenditures;
 
  •     enter into certain types of transactions with affiliates;
 
  •     use assets as security in other transactions; and
 
  •     sell certain assets or merge with or into other companies.
 
Subject to meeting certain qualifications, the indentures governing the Notes permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness. The indentures governing the Notes include cross-default provisions to debt with a principal amount of greater than $50.0 million, which would require the applicable Notes to be prepaid or redeemed in the event of a default with respect to such debt.
 
  Covenant Compliance
 
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 June 30, 2009, it was in compliance with the financial and non-financial covenants. 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.
 
Adjusted EBITDA is a non-GAAP measure used to determine our compliance with certain covenants contained in the indentures governing the 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 indentures governing the Notes. We believe that the inclusion of supplementary adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.
 
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 borrowed amounts immediately due and payable. Any such acceleration also would result in a default under our indentures governing the Notes. Additionally, under the credit agreement governing our senior secured credit facilities and the indentures governing the 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 does not represent net income or cash flows from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. 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. While 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 indentures governing the 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 12-month period or any complete fiscal year.


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The following is a reconciliation of net income, which is a GAAP measure of operating results, to Adjusted EBITDA for Education Management LLC as defined in its debt agreements. The terms and related calculations are defined in the senior secured credit agreement (in millions).
 
                         
    Year Ended
    For the Year Ended
 
    June 30,     June 30, 2009,
 
    2008     2009     as adjusted(1)  
 
Net income
  $ 64.7     $ 104.2     $ 122.5  
Interest expense, net
    157.7       153.6       124.6  
Provision for income taxes
    41.1       61.2       71.9  
Depreciation and amortization(2)
    100.3       112.3       112.3  
                         
EBITDA
    363.8       431.3       431.3  
                         
Reversal of impact of unfavorable leases(3)
    (1.5 )     (1.4 )     (1.4 )
Advisory and transaction costs(4)
    5.0       5.0       5.0  
Severance and relocation
    3.7       4.9       4.9  
Capital taxes
    1.2       1.2       1.2  
Other
    1.7       1.5       1.5  
                         
Adjusted EBITDA — Covenant Compliance
  $ 373.9     $ 442.5     $ 442.5  
                         
 
 
(1) As adjusted to give effect to (i) the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share at July 1, 2008 and (ii) the application of the net proceeds of this offering as described under “Use of Proceeds”.
 
(2) Depreciation and amortization includes non-cash charges related to fixed asset impairments of $5.5 million in the year ended June 30, 2008.
 
(3) Represents non-cash reductions to rent expense due to the amortization on $7.3 million of unfavorable lease liabilities resulting from fair value adjustments required under SFAS No. 141 as part of the Transaction.
 
(4) Represents $5.0 million of advisory fees per annum beginning June 1, 2006 under the Sponsor Management Agreement.
 
Education Management LLC’s covenant requirements and actual and as adjusted ratios for fiscal 2009 are as follows:
 
                         
    Covenant
    Actual
    As Adjusted
 
    Requirements     Ratios     Ratios(1)  
 
Senior Secured Credit Facilities
                       
Adjusted EBITDA to Consolidated Interest Expense ratio
    Minimum of 1.70 x     2.88 x     3.55 x
Consolidated Total Debt to Adjusted EBITDA ratio
    Maximum of 6.75 x     3.77 x     3.10 x
 
 
(1) As adjusted to give effect to (i) the sale of 20,000,000 shares of common stock by us in this offering at the initial public offering price of $18.00 per share at July 1, 2008 and (ii) the application of the net proceeds of this offering as described under “Use of Proceeds”.
 
Quantitative and Qualitative Disclosures About Market Risk
 
We are exposed to market risks in the ordinary course of business that include foreign currency exchange rates. We typically do not utilize forward or option contracts on foreign currencies or commodities. We are subject to fluctuations in the value of the Canadian dollar relative to the


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U.S. dollar. We do not believe we are subject to material risks from reasonably possible near-term changes in exchange rates due to the size of our Canadian operations relative to our total business.
 
The fair values of cash and cash equivalents, accounts receivable, borrowings under our revolving credit facility, accounts payable and accrued expenses approximate carrying values because of the short-term nature of these instruments. The derivative financial instruments are carried at fair value, which is based on the SFAS No. 157 framework discussed in Note 8 to the accompanying audited consolidated financial statements. We do not use derivative instruments for trading or speculative purposes.
 
At June 30, 2009, we had total debt obligations of $1,988.6 million, including $1,226.8 million in variable rate debt under the senior secured credit facility at a weighted average interest rate of 6.98%. A hypothetical change of 1.25% in interest rates from June 30, 2009 levels would have increased or decreased interest expense by approximately $6.0 million for the variable-rate debt in fiscal 2009.
 
Two five-year interest rate swap agreements fix the interest rate on $750.0 million of our variable rate debt through July 1, 2011. At June 30, 2009, we had variable rate debt of $476.8 million that was subject to market rate risk, as our interest payments fluctuated as a result of market changes. Under the terms of the interest rate swaps, we receive variable payments based on the three month LIBOR and make payments based on a fixed rate of 5.397%. The net receipt or payment from the interest rate swap agreements is recorded in interest expense. The interest rate swaps are designated and qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. As such, the swaps are accounted for as an asset or liability in the consolidated balance sheet at fair value. We used level two inputs when applying SFAS No. 157, “Fair Value Measurements”, to our interest rate swap agreements, including obtaining quotes from counterparties to the transactions and assessing nonperformance risk based upon published market data. For fiscal 2009, we recorded an unrealized after-tax loss of $9.8 million in other comprehensive loss related to the change in market value on the swap agreements. The cumulative unrealized net loss of $34.2 million, net of tax, at June 30, 2009 related to the swaps may be recognized in the consolidated statement of operations if certain terms of the senior secured credit facilities change, if the senior secured credit facilities are extinguished or if the swap agreements are terminated prior to maturity.
 
Regulations
 
U.S. Department of Education regulations require Title IV program funds received by our schools in excess of the tuition and fees owed by the relevant students at that time to be, with these students’ permission, maintained and classified as restricted funds until they are billed for the portion of their education program related to those funds. Funds transferred through electronic funds transfer programs are held in a separate cash account and released when certain conditions are satisfied. These restrictions have not significantly affected our ability to fund daily operations.
 
Education institutions participating in Title IV programs must satisfy a series of specific standards of financial responsibility. The U.S. Department of Education has adopted standards to determine an institution’s financial responsibility to participate in Title IV programs. The regulations establish three ratios: (i) the equity ratio, intended to measure an institution’s capital resources, ability to borrow and financial viability; (ii) the primary reserve ratio, intended to measure an institution’s ability to support current operations from expendable resources; and (iii) the net income ratio, intended to measure an institution’s profitability. Each ratio is calculated separately, based on the figures in the institution’s most recent annual audited financial statements, and then weighted and combined to arrive at a single composite score. The composite score must be at least 1.5 for the institution to be deemed financially responsible without conditions or additional oversight. If an institution fails to meet any of these requirements, the U.S. Department of Education may set restrictions on our eligibility to participate in Title IV programs. We are required by the U.S. Department of Education to post a letter of credit and are subject to provisional certification and additional financial and cash monitoring of our disbursements of Title IV funds due to our failure on a consolidated basis to satisfy the financial responsibility


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standards after the completion of the Transaction. This is a result of the goodwill we recorded in connection with the Transaction. The amount of this letter of credit is currently set at 10% of the Title IV program funds received by students at our schools during the prior fiscal year. As a result, we posted an $87.9 million letter of credit in October 2006. Due to increases in the aggregate amount of Title IV funds received by our students, we currently post a $120.5 million letter of credit to the U.S. Department of Education.
 
Regulations promulgated under the HEA require all for-profit education institutions to comply with the 90/10 Rule, which imposes sanctions on participating institutions that derive more than 90% of their total revenue from Title IV programs. Under the current regulations, compliance with the 90/10 Rule is measured at the end of each of our fiscal years. An institution will cease to be eligible to participate in Title IV programs if, on a cash accounting basis, more than 90% of its revenues for each of two consecutive fiscal years were derived from Title IV programs. If an institution loses its Title IV eligibility under the 90/10 Rule, it may not reapply for eligibility until the end of two fiscal years. Institutions which fail to satisfy the 90/10 Rule for one fiscal year are placed on provisional certification. For our schools that disbursed federal financial aid during fiscal 2009, the percentage of revenues derived from Title IV programs on a cash accounting basis ranged from approximately 55% to 86%, with a weighted average of approximately 70% as compared to a weighted average of approximately 65% in fiscal 2008. We anticipate that our 90/10 rates will continue to increase in fiscal 2010 due to recent increases in grants from the Pell program and other Title IV loan limits, coupled with decreases in the availability of state grants and private loans and the inability of households to pay cash due to the current economic climate. While our consolidated 90/10 rate for fiscal 2010 is projected to remain under the 90% threshold, we project that some of our institutions will exceed the 90% threshold if we do not continue to successfully implement certain changes to these institutions during the fiscal year which would decrease their 90/10 rate, such as increases in international and military students and certain internal restructuring designed to achieve additional operating efficiencies. In prior years, we have successfully addressed 90/10 rate issues when they have arisen through similar changes to operations. Additionally, the revised rules included in the new HEA reauthorization include relief through June 30, 2011 from a $2,000 increase in the annual Stafford loan availability for undergraduate students which became effective July 1, 2008. We anticipate that our 90/10 rate will increase substantially in fiscal 2012 in the event that relief from this additional $2,000 is not extended beyond June 30, 2011, which would adversely affect our ability to comply with the 90/10 Rule.
 
Use of Estimates and Critical Accounting Policies
 
General
 
In preparing our financial statements in conformity with accounting principles generally accepted in the United States, judgments and estimates are made about the amounts reflected in the consolidated financial statements that affect the reported amounts of assets, liabilities, net revenues and expenses during the reporting period. As part of the financial reporting process, our management collaborates to determine the necessary information on which to base judgments and develop estimates used to prepare the consolidated financial statements. Historical experience and available information are used to make these judgments and estimates. However, different amounts could be reported using different assumptions and in light of changes in facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the audited consolidated financial statements appearing elsewhere in this prospectus.
 
We believe that the following critical accounting policies comprise the more significant judgments and estimates used in the preparation of the consolidated financial statements.
 
Revenue Recognition and Receivables
 
We bill tuition and housing revenues at the beginning of an academic term and recognize the revenue on a pro rata basis over the term of instruction or occupancy. Some of our academic terms


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have starting and ending dates that differ from our fiscal quarters. Therefore, at the end of each fiscal quarter, we may have tuition from these academic terms on which the associated revenue has not yet been earned. Accordingly, this unearned revenue has been recorded as unearned tuition in the accompanying consolidated balance sheets. Advance payments represent that portion of payments received but not earned and are also recorded as a current liability in the accompanying consolidated balance sheets. These payments are typically related to future academic periods and generally are refundable.
 
If a student withdraws from one of our schools, a student’s obligation for tuition and fees is limited depending on when a student withdraws during an academic term. Student refunds are regulated by the standards of the U.S. Department of Education, most state education authorities that regulate our schools, the accrediting commissions that accredit our schools and our own internal policies (collectively, “Refund Policies”). Refund Policies vary by state, and the limitations imposed by the Refund Policies are generally based on the portion of the academic term that has elapsed at the time the student withdraws. The greater the portion of the academic term that has elapsed at the time the student withdraws, the greater the student’s obligation is to the school for the tuition and fees related to that academic term. We record revenue net of any refunds that result from any applicable Refund Policy; therefore, we do not recognize gross revenue on amounts that will ultimately be refunded in future periods.
 
Trade receivable balances consist of amounts related to net revenues from current or former students for academic terms that have been completed or are currently in session, prior periods of occupancy in our housing facilities for which payment has not been received or obligations of current students for tuition, housing or other items related to academic terms in progress for which payment has not been received. The balances are comprised of individually insignificant amounts due from students primarily from the United States and Canada.
 
We determine our allowance for doubtful accounts for most locations primarily by categorizing gross receivables based upon the enrollment status (in-school vs. out-of-school) of the student and establishing a reserve based on the likelihood of collection in consideration of our historical experience and current economic conditions. Student accounts are monitored through an aging process whereby past due accounts are pursued. When certain criteria are met (primarily aging with no payments and account balances 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 an outside collection agency. Student accounts in collection are reserved at a high rate and are evaluated on a case-by-case basis before being written off. If current collection trends differ significantly from historical collections, an adjustment to our allowance would be required. Historically, however, accounts we have ultimately written off have approximated our uncollectable accounts estimates. A one percentage point change in our allowance for doubtful accounts as a percentage of gross receivables at June 30, 2009 and 2008 would have resulted in a change in net income of $1.3 million and $0.8 million, respectively, for the years ended June 30, 2009 and 2008.
 
Impairment of Property, Equipment and Finite-Lived Intangible Assets
 
We record impairment losses on property, equipment and finite-lived intangible assets when events and circumstances indicate the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, as described in SFAS No. 144, “Accounting or Disposal of Long-Lived Assets”. Events and circumstances that trigger an impairment review include deteriorating economic conditions or poor operating performance at individual locations or groups of locations. The impairment loss is measured by comparing the fair value of the assets to their carrying amounts using a traditional discounted cash flow model, and it is recorded as an operating expense in the consolidated statement of operations in the period in which carrying value exceeds fair value. As described in Notes 4 and 5 to the audited June 30, 2009 consolidated financial statements, we recorded an impairment charge of $4.5 million related to property and equipment and $1.0 million related to finite-lived intangible assets during fiscal 2008. For other property, equipment


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and finite-lived intangible assets that were tested for impairment, the sum of the future undiscounted cash flows was sufficiently in excess of the carrying amounts such that reducing the cash flows by 10% would not have resulted in impairment. We did not record any impairment charges during the year ended June 30, 2009.
 
Impairment of Goodwill and Indefinite-Lived Intangible Assets
 
We evaluate our goodwill and indefinite-lived intangible assets for impairment at least annually, using April 1 as our measurement date. SFAS No. 142, “Goodwill and Other Intangible Assets”, prescribes a two-step method for determining goodwill impairment. In the first step, we determine the fair value of each reporting unit and compare that fair value to each unit’s carrying value. We estimate the fair value of our reporting units using a traditional discounted cash flow approach coupled with the guideline public company method that takes into account the relative price and associated earnings multiples of publicly-traded peer companies. If the results of this first step indicate the carrying amount of a reporting unit is higher than its fair value, the second step under SFAS No. 142 must be performed, which requires that we determine the implied fair value of goodwill in the same manner as if we had acquired those reporting units as of the testing date. Under the second step, an impairment is recognized if the carrying amount of a reporting unit’s goodwill is greater than its implied fair value. If an impairment charge was required to be recorded, it would be presented as an operating expense in the period in which the goodwill’s carrying value exceeds its new implied fair value.
 
Our last annual test, which was performed as of April 1, 2009, resulted in an increase in each reporting unit’s calculated equity value as compared to the date of the Transaction. As a result, each reporting unit’s fair value exceeded its carrying value as measured under the first step of the SFAS No. 142 analysis. In addition, although we perform our full impairment test under SFAS No. 142 only once annually, throughout the fiscal year we evaluate forecasts, business plans, regulatory and legal matters and other activities necessary to identify triggering events under SFAS No. 142. There were no triggering events in the interim period between our 2008 and 2009 impairment tests at any of our reporting units. Further, we did not record any goodwill impairments from the date of the Transaction through April 1, 2009.
 
The following table illustrates the amount of goodwill allocated to each reporting unit as well as the deficit, if any, created between the fair value and the carrying value that would occur given hypothetical reductions in their respective fair values at April 1, 2009:
 
                                         
                Step One Analysis:        
          Deficit Caused By Hypothetical Reductions to Fair Value  
          (in millions)  
    Goodwill     5%     15%     25%     35%  
 
The Art Institutes
  $ 1,982     $   —     $   —     $   —     $  
Argosy University
    219                   (14 )     (54 )
Brown Mackie Colleges
    255                   (2 )     (59 )
South University
    123                         (27 )
                                         
    $ 2,579     $     $     $ (16 )   $ (140 )
                                         
 
The valuations of our reporting units require use of internal business plans that are based on judgments and estimates regarding future economic conditions, demand and pricing for our educational services, costs, inflation rates and discount rates, among other factors. These judgments and estimates involve inherent uncertainties. The measurement of the fair values of the reporting units are dependent on the accuracy of the assumptions used and how these estimates compare to our future operating performance. Details of the key assumptions used in our impairment evaluation include, but are not limited to, the following:
 
  •  Discount rate — The discount rate is based on each reporting unit’s estimated weighted average cost of capital (WACC). The cost of equity, cost of debt and capital structure are the


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  three components of the WACC, each of which requires judgment by management to estimate. The cost of equity was developed using the Capital Asset Pricing Model (CAPM) which is comprised of a risk free rate, beta derived from comparable company betas, and an equity risk premium combined with other company-specific adjustments based on perceived risks and predictability of future cash flows. The equity risk premium, which utilizes the Morningstar 2008 Ibbotson® and SBBI 2008 Valuation Workbook, is calculated by taking large company stock total returns minus long-term government bond income returns. The cost of debt component represents a market participant’s estimated cost of borrowing, which we estimated using an average of corporate bond yields as of the valuation date. The capital structure component is estimated based on the target capital structure ratios of our industry peer group as of the testing date.
 
The global recession that occurred during fiscal 2009 adversely affected our WACC, which has increased from a blended rate of 12.0% at April 1, 2008 to 12.7% at April 1, 2009. Any difference in WACC used between reporting units was primarily due to the impact of the relative maturity of each unit on the predictability of its future cash flows. Sensitivity analyses performed in connection with our annual 2009 impairment test indicated that an increase in the discount rate of 1.0% at each of our reporting units would not have resulted in the carrying values of the reporting unit exceeding its respective estimated fair value.
 
  •  Future cash flow assumptions — Our projections are based on organic growth and are derived from historical experience and assumptions on how growth and profitability will trend into the future. These projections also take into account the continuing growing demand for post-secondary education and the growth opportunities that exist in our markets. Our assumed period of cash flows was ten years with a terminal value determined using the Gordon Growth Model. For our 2009 annual impairment test, a decrease in the projected cash flows of 10% would not have resulted in the carrying value of any of our reporting units exceeding its fair value.
 
The impairment test for indefinite-lived intangible assets requires an annual determination of fair value using the same approach used for the valuation as of the acquisition date. If the fair value falls below its carrying value, an impairment would be recorded in the period in which the carrying value exceeds the fair value.
 
Our indefinite-lived intangible assets consist of the trade names associated with The Art Institute schools, and licensing, accreditation and Title IV program participation assets for all of our education systems. The total carrying value of these assets at April 1, 2009 was as follows:
 
  •  $330.0 million related to The Art Institutes tradename; and
 
  •  $112.2 million related to our licensing, accreditation and Title IV program participation assets.
 
As of the date of our annual impairment test, we revalued The Art Institutes tradename using the Relief from Royalty method, the same approach used to value this asset as of the date of the Transaction. The Relief from Royalty method focuses on the level of royalty payments that the user of an intangible asset would have to pay a third party for the use of the asset if it were not owned by the user. The resulting analysis demonstrated that the tradename had a higher fair value than carrying value by approximately 10%, using a standard royalty rate of 2.0% and discount rate of 11.8% As a result, we did not record an impairment related to this asset during the year ended June 30, 2009.
 
We also revalued the licensing, accreditation and Title IV program participation assets at the impairment testing date using the same approaches used to value these assets as of the date of the Transaction. These assets were valued by a combination of the cost and income approaches. Costs to replace licenses and accreditations have not changed significantly since the date of the Transaction or since the impairment testing date. Numerous factors are considered in order to estimate the Title IV portion of the asset, including the estimated amount of time it would take for an institution to qualify for Title IV funds as a new operation, the number of students currently receiving federal financial aid,


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the amount schools would have to lend students during the estimated time it would take to qualify for Title IV funds and the present value of projected cash flows. The current fair values of the licensing, accreditation and Title IV program participation asset at each reporting unit exceeded its carrying value by at least 10%, with the consolidated fair values of these assets exceeding the consolidated carrying value by more than 20%.
 
Income Taxes
 
We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes”, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities result from (i) temporary differences in the recognition of income and expense for financial and 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. SFAS No. 109 also requires that deferred income tax assets be reduced by a valuation allowance if it is more-likely-than-not that some portion of the deferred income tax asset will not be realized. We evaluate all available evidence, both positive and negative, on a quarterly basis to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit from an existing deferred tax asset ultimately depends upon the existence of sufficient taxable income within the carryback or carryforward period available under the tax law of the applicable jurisdiction. At June 30, 2009 and 2008, we had gross deferred tax assets of $112.5 million and $76.1 million, respectively, and valuation allowances against those gross deferred tax assets of $18.8 million and $22.5 million, respectively. We re-evaluate the realizability of these deferred tax assets quarterly and will adjust the valuation allowances based upon available evidence. Any future change in our assessment of the realizability of these deferred tax assets could affect our effective income tax rate, net income, and net deferred tax assets in the period in which our assessment changes.
 
We adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109,” on July 1, 2007. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is at least more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The amount of the tax benefit so recognized is measured as the largest amount of benefit that is more-likely-than-not to be realized upon effective settlement. We classify interest and penalties accrued in connection with unrecognized tax benefits as income tax expense in our consolidated statement of operations. This classification is consistent with our past accounting policy for interest and penalties related to tax liabilities.
 
Share-Based Payment
 
In August 2006, our Board of Directors approved the 2006 Stock Option Plan for executive management and key personnel. As of June 30, 2009, approximately 7.8 million options were outstanding under this plan. Under SFAS No. 123R, “Share Based Payment”, compensation expense related to our grants is not recognized until one of the conditions entitling participants to fair value for their shares becomes probable. We have not recognized any compensation expense under SFAS No. 123R since the Transaction even though certain of our time-based stock options vested during these fiscal years because (i) shares of our common stock that are received upon an option holder’s exercise are subject to a call right held by us, which allows us to repurchase such common stock at a value equal to the lesser of an option exercise price or current fair value if an employee voluntarily terminates his or her employment or is terminated for cause, and (ii) in the event that we do not exercise this repurchase right, the holder is prohibited from selling the shares of common stock received upon exercise of a stock option without our prior consent. A 10% increase in the fair values of our time-based and performance-based options would have increased our unrecognized compensation cost by $3.6 million at June 30, 2009.


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We use the Black-Scholes option pricing model to determine the fair value of time-based stock options at the grant date. In order to value performance-based options, we use a Monte Carlo simulation model. Both models require management to make certain assumptions to determine compensation expense. Such assumptions can significantly impact the fair values of stock options and associated compensation expense recognized over the requisite service periods. See Note 11 to the accompanying audited consolidated financial statements for a further discussion on share-based compensation.
 
Our Board of Directors establishes the exercise price for each option grant based on the estimated fair value at the date of grant. Given that we were not publicly traded during the period covered by the 2006 Stock Option Plan, we used assumptions and valuation methodologies to estimate the fair value of our common stock during the period. In order to value our SFAS No. 123R compensation expense, options granted in August and December 2006 were based on contemporaneous private transactions involving our common stock. Beginning in January 2007, option grants were valued based on a valuation as of the beginning or ending of the fiscal quarter in which the options were granted, depending on the proximity of the grant date to the beginning or ending of the quarter. We did not separately estimate the values of common stock during periods between our quarter-end dates because we believe a quarterly fair value calculation for our common stock is a reasonable method of estimating its fair value at any point during the quarter. Variations of both the market and income approaches were used in the analyses for all quarterly valuations. The valuations used the following methodologies described in the American Institute of Certified Public Accountants’ practice aid entitled Valuation of Privately-Held-Company Equity Securities Issued as Compensation:
 
(i) a discounted cash flow analysis (“Income Method” or “DCF”);
 
(ii) the Guideline Public Company method; and
 
(iii) the Guideline Transactions method.
 
The valuations derived under each approach were then weighted to derive an overall company value, which was used to value our common stock after adjusting for outstanding indebtedness. Factors contributing to the results of the three methods used, and the relative weights of each methodology, were as follows:
 
(i)   Income method (DCF)
 
The income method considers our consistent revenue and EBITDA growth since the Transaction along with our significant leverage, the regulatory nature of our business and our ability to attract and retain key personnel. A weight of 50% was given to this method in determining the fair value of our common stock for all valuations.
 
(ii)   Guideline Public Company method
 
The Guideline Public Company method uses the relative price and associated earnings multiples of publicly traded peer companies. The same peer group was used for each valuation. Under this methodology, we compared our financial results to those of our competitors for each of the following quantitative measures: profit margins from the last twelve months; size as it relates to the cost of capital; historical revenue growth; historical EBITDA growth; and asset returns and leverage. Qualitative factors were also considered. A weight of 25% or 50% was given to this method in determining the fair value of our common stock, depending on relevant factors at the date of our valuation.
 
(iii)   Guideline Transactions method
 
The Guideline Transactions method is based on actual market transactions of companies within our peer group including us. A weight of 0% or 25% was given to this method in determining the fair value of our common stock, depending on relevant factors at the date of our valuation.


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We also considered the following additional factors which generally affect the fair market value of our common stock for option grants after December 31, 2006:
 
  •  the nature, history and growth opportunities of our business;
 
  •  the outlook for the general economy and for our industry;
 
  •  the book value of the securities and our financial condition;
 
  •  the historical trend of earnings and the future earnings and dividend-paying potential;
 
  •  market valuations of our publicly traded competitors, with particular attention given to the ratio of price to sales, equity and earnings; and
 
  •  the risk involved in the investment, as related to earnings stability, capital structure, competition and market potential.
 
Long-Term Incentive Compensation Plan
 
Our Board of Directors adopted the LTIC Plan during fiscal 2007. Pursuant to the terms of the plan, a bonus pool will be created based on specified returns on capital invested in EDMC by the Principal Shareholders after the occurrence of a realization event, as defined in the plan. Out of a total of 1,000,000 units authorized, approximately 835,000 units were outstanding at June 30, 2009. Each unit represents the right to receive a payment based on the value of the bonus pool. Since the contingent future events that would result in value to the unit-holders are not probable to occur at June 30, 2009, we have not recognized any compensation expense related to these units. The plan is currently being accounted for as a liability-based plan as the units must be settled in cash if a realization event were to occur prior to an initial public offering of our common stock. If we were to complete an initial public offering, the units may be settled in shares of common stock or cash at the discretion of our Board of Directors.
 
New Accounting Standards
 
In February 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No. 157”, which delayed the effective date for applying SFAS No. 157 to nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. Nonfinancial assets and nonfinancial liabilities for which we have not applied the provisions of SFAS No. 157 include those measured at fair value as a result of goodwill and long-lived asset impairment testing. We do not expect the adoption of FSP No. 157-2, which is effective for us on July 1, 2009, to have a material impact on our consolidated financial statements.
 
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”, which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in a company it acquires, including the recognition and measurement of goodwill resulting from a business combination. The requirements of SFAS No. 141R are effective for us beginning July 1, 2009. We will apply the provisions of this standard for any business combination that transpires subsequent to the effective date of the standard.
 
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement 133”, which enhances required disclosures regarding how an entity uses and accounts for derivative instruments. We adopted SFAS No. 161 on January 1, 2009, and its adoption did not impact our consolidated financial statements but did result in expanded disclosures contained in Note 8 of our audited consolidated financial statements.
 
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which formalizes the period after the balance sheet date that management is required to evaluate subsequent events, the


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circumstances under which an entity is required to record events or transactions occurring after the balance sheet date in that period’s financial statements and the required disclosures that an entity shall make in its financial statements. SFAS No. 165 is effective for us beginning in the fourth fiscal quarter of 2009. We performed an evaluation of subsequent events through August 28, 2009, the date the financial statements were issued.
 
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codificationtm and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162”. All existing accounting standard documents are superseded by the Codification. All current references to GAAP will no longer be used in our consolidated financial statements upon adoption in the first fiscal quarter of 2010. The Codification does not change or alter existing GAAP; therefore, it will have no impact on our consolidated financial statements.


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BUSINESS
 
Business Overview
 
We are among the largest providers of post-secondary education in North America, with approximately 110,800 enrolled students as of October 2008. We offer academic programs to our students through campus-based and online instruction, or through a combination of both. We are committed to offering quality academic programs and continuously strive to improve the learning experience for our students. We target a large and diverse market as our educational institutions offer students the opportunity to earn undergraduate and graduate degrees, including doctoral degrees, and certain specialized non-degree diplomas in a broad range of disciplines. These disciplines include design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Each of our schools located in the United States is licensed in the state in which it is located, accredited by a national or regional accreditation agency and certified by the U.S. Department of Education, enabling students to access federal student loans, grants and other forms of public and private financial aid. Our academic programs are designed with an emphasis on applied content and are taught primarily by faculty members who, in addition to having appropriate academic credentials, offer practical and relevant professional experience in their respective fields. Our net revenues for fiscal 2009 were $2,011.5 million.
 
Our schools comprise a national education platform that is designed to address the needs of a broad market, taking into consideration various factors that influence demand, such as programmatic and degree interest, employment opportunities, requirements for credentials in certain professions, demographics, tuition pricing points and economic conditions. We believe that our schools collectively enable us to provide access to a high quality education for potential students, at a variety of degree levels and across a wide range of disciplines.
 
During our more than 35-year operating history, we have expanded the reach of our education systems and currently operate 92 primary locations across 28 U.S. states and in Canada. In addition, we have offered online programs since 2000, enabling our students to pursue degrees fully online or through a flexible combination of both online and campus-based education. During the period from October 1998 through October 2008, we experienced a compounded annual enrollment growth rate of 18.0%. During the same time period, the schools that we have owned or operated for one year or more experienced a compounded annual enrollment growth rate of 12.0%. We seek to maintain growth in a manner that assures adherence to our high standard of educational quality and track record of student success.
 
Since the Transaction in June 2006, we have undertaken multiple initiatives to increase our penetration of addressable markets in order to enable us to accelerate our growth and expand our market position. We have opened 20 new locations, acquired two schools, developed 36 new academic programs and introduced over 600 new or existing academic programs to locations that had not previously offered such programs. The compound annual enrollment growth rate at our schools was 19.6% between July 2006 and July 2009. During the same time period, the compound annual enrollment growth rate for schools owned or operated for one year or more was 18.2%. We have made significant capital investments in technology and human resources, particularly in marketing and admissions, designed to facilitate future enrollment growth while enhancing the effectiveness of our marketing efforts. We have also upgraded our infrastructure, student interfaces and student support systems to enhance the student experience, while providing greater operational transparency. We have made considerable investments in our online education platform, which has resulted in strong enrollment growth. The number of students enrolled in fully online academic programs has grown more than five-fold to approximately 26,200 students in July 2009, compared to approximately 4,600 students in July 2006. Finally, we have enhanced our senior management team, achieving a balance of experience from both within and outside the for-profit education industry.


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Each of our 92 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:
 
  •     The Art Institutes.  The Art Institutes focus on applied arts in creative professions such as graphic design, interior design, web design and interactive media, digital filmmaking, media arts and animation, game art and design, fashion design and marketing and culinary arts. The Art Institutes offer Associate’s, Bachelor’s and Master’s degree programs, as well as selective non-degree diploma programs. Students pursue their degrees through local campuses, fully online programs through The Art Institute of Pittsburgh, Online Division and blended formats, which combine on campus and online education. There are 44 Art Institutes campuses in 23 U.S. states and in Canada. As of October 2008, students enrolled at The Art Institutes represented approximately 60.9% of our total enrollments.
 
  •     Argosy University.  Argosy University offers academic programs in psychology and behavioral sciences, education, business and health sciences disciplines. Argosy offers Doctoral, Master’s and undergraduate degrees. Argosy’s academic programs focus on graduate students seeking advanced credentials as a prerequisite to initial licensing, career advancement and/or structured pay increases. Students pursue their degrees through local campuses, fully online programs and blended formats. There are 19 Argosy University campuses in 13 U.S. states. As of October 2008, students enrolled at Argosy University represented approximately 16.7% of our total enrollments.
 
  •     Brown Mackie Colleges.  Brown Mackie Colleges offer flexible Associate’s and non-degree diploma programs that enable students to develop skills for entry-level positions in high demand vocational specialties and Bachelor’s degree programs that assist students to advance within the workplace. Brown Mackie Colleges offer programs in growing fields such as nursing, medical assisting, business, criminal justice, legal support and information technology. There are 22 Brown Mackie College campuses in 11 U.S. states. As of October 2008, students enrolled at Brown Mackie Colleges represented approximately 12.2% of our total enrollments.
 
  •     South University.  South University offers academic programs in health sciences and business disciplines, including business administration, health services management, nursing, pharmacy, medical assisting, criminal justice and information technology. South University offers Doctoral, Master’s, Bachelor’s and Associate’s degrees through local campuses, fully online programs and blended formats. There are six South University campuses in five U.S. states. As of October 2008, students enrolled at South University represented approximately 10.2% of our total enrollments.
 
Our business model has a number of favorable financial characteristics, including consistent historical enrollment growth, high visibility into operational performance, opportunity for future profit margin expansion and strong operating cash flow generation, although the interest expense relating to the significant indebtedness that we incurred in connection with the Transaction has caused our net income to decline in recent periods as compared to periods prior to the Transaction.
 
  •     History of consistent enrollment growth.  During the period from October 1998 through October 2008, we experienced a compounded annual enrollment growth rate of 18.0%. During the same time period, the schools that we have owned or operated for one year or more experienced a compounded annual enrollment growth rate of 12.0%. We generally achieve growth through a number of independent sources, including continued investment in existing schools, the addition of schools (organically or through acquisition) and new delivery channels, such as online. The significant investments we have made since the Transaction in numerous areas of our workforce, including marketing and admissions, new campuses and online education and infrastructure, are designed to support future enrollment.


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  •     High visibility into operational performance.  We believe that we benefit from a business model with good insight into future revenue and earnings, given the length of our academic programs. Approximately 64% of our students as of October 2008 were enrolled in Doctorate, Master’s and Bachelor’s degree programs, which are typically multi-year programs that contribute to the overall stability of our student population.
 
  •     Opportunity for future profit margin expansion.  Our business model benefits from scale and permits us to leverage fixed costs across our delivery platforms. Since the Transaction in June 2006, and notwithstanding the increase in interest expense resulting from the indebtedness that we incurred in connection with the Transaction and the resulting adverse effect on our net income, we have made significant investments in numerous areas of our workforce in order to support future enrollment growth and enhance the student experience. We expect that our business model, along with the anticipated benefits of these investments, will enable us over time to leverage our fixed costs as we add new locations and expand our existing locations. With respect to our online programs, we have built sufficient presence to enable us over time to utilize shared technology and infrastructure. We believe that our continued focus on information systems, operating processes and key performance indicators will permit us to enhance our educational quality, growth and profitability over time, although we expect that expenses incurred with respect to student financial aid initiatives will negatively impact our profitability.
 
  •     Strong operating cash flow generation.  We historically have generated strong cash flows. We benefit from investments with attractive returns on capital and favorable working capital balances due to advance payment of tuition and fees. Since the Transaction, we have made significant investments to support growth while simultaneously upgrading the infrastructure required to leverage our delivery platforms. In fiscal 2009, we generated cash flows from operations of $293.4 million.
 
All of these characteristics complement the successful outcomes that we deliver to our students, as reflected in our student persistence and graduate employment rates and in student satisfaction survey data. Approximately 87% of undergraduate students who graduated from our institutions during the calendar year ended December 31, 2008 and were available for employment obtained a position in their field of study or a related field within six months of graduation.
 
Industry Overview
 
The U.S. Department of Education estimates that the U.S. public and private post-secondary education market for degree-granting institutions was a $450 billion industry in 2007, representing approximately 18.2 million students enrolled at over 4,400 institutions. According to the National Center of Education Statistics, traditional students, who typically are recent high school graduates under 25 years of age and are pursuing their first higher education degree, represent approximately 62% of the national student population. The remaining 38% of the student population is comprised of non-traditional students, who are largely working adults pursuing further education in their current field or are preparing for a new career.
 
We believe that there are a number of factors contributing to the long-term growth of the post-secondary education industry. First, the shift toward a services-based economy increases the demand for higher levels of education. According to the U.S. Department of Labor — Bureau of Labor Statistics, the projected growth rate for total job openings from 2006 to 2016 for occupations that require post-secondary education is over 15%, nearly double the growth rate for occupations that do not require post-secondary education. Second, economic incentives are favorable for post-secondary graduates. According to the U.S. Census Bureau, in 2008, the median weekly earnings for individuals aged 25 years and older with a Bachelor’s degree was approximately 66% higher than for high school graduates of the same age with no college experience, and the average unemployment rate in 2008 for persons aged 25 years and older with a Bachelor’s degree was half that of those without college experience. Third, government and private financial aid in various forms, including loan guarantees,


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grants and tax benefits for post-secondary students, has continued to increase. We believe that this support will continue as the U.S. government emphasizes the development of a highly skilled, educated workforce to maintain global competitiveness. Finally, the strong demand for post-secondary education has enabled educational institutions to consistently increase tuition and fees. According to the College Board, public four-year colleges and universities have increased tuition and fees by 7.4% annually on average over the last ten years.
 
We believe that for-profit providers will capture an increasing share of the growing demand for post-secondary education, which has not been fully addressed by traditional public and private universities. Non-profit public and private institutions can face limited financial capability to expand their offerings in response to the growing demand for education, due to a combination of state funding challenges, significant expenditures required for research and the professor tenure system. Certain private institutions also may control enrollments to preserve the perceived prestige and exclusivity of their degree offerings.
 
As a result, we believe that for-profit, post-secondary education providers continue to have significant opportunities for growth. According to the National Center of Education Statistics, the number of students at for-profit, degree-granting institutions grew at an average annual rate of 13.7% from 1997 to 2007, compared to 2.3% growth for all degree-granting institutions over the same period. For-profit providers have continued their strong growth, primarily due to the higher flexibility of their programmatic offerings and learning structure, their emphasis on applied content and their ability to consistently introduce new campuses and academic programs. Despite rapid growth, the share of the post-secondary education market that has been captured by for-profit providers remains relatively small. In 2007, according to the National Center for Education Statistics, for-profit institutions accounted for 6.5% of all degree-granting, post-secondary enrollments, up from 2.3% in 1997.
 
We believe that growth in online education has been supported by favorable student outcomes, the flexibility and convenience associated with the instructional format and the higher penetration of broadband Internet access. According to Eduventures Inc., a leading information services company for the education market, online education programs generated an estimated $11.7 billion of revenues in 2008. Eduventures estimates that online enrollment grew by 25.3% annually from 2003 to 2008 and projects growth of 12.5% annually from 2008 to 2013.
 
The post-secondary education industry is highly fragmented, with no one provider controlling a significant share of the market. Students choose among providers based on programs and degrees offered, program flexibility and convenience, quality of instruction, graduate employment rates, reputation and recruiting effectiveness. This multi-faceted market fragmentation results in significant differentiation among various education providers, limited direct competition and minimal overlap between for-profit providers. The main competitors of for-profit, post-secondary education providers are local public and private two-year junior and community colleges, traditional public and private undergraduate and graduate colleges and, to a lesser degree, other for-profit providers.
 
Our Competitive Strengths
 
We believe that the following strengths differentiate our business:
 
  •     Commitment to offering quality academic programs and student and graduate success
 
We are committed to offering quality academic programs, and we continuously strive to improve the learning experience for our students. We are dedicated to recruiting and retaining quality faculty and instructors with relevant industry experience and appropriate academic credentials. Our advisory boards help us to reassess and update our educational offerings on a regular basis in order to ensure the relevance of our curriculum and to design new academic programs. We do this with the goal of enabling students to either enter or advance in their chosen field. Our staff of trained, dedicated career services specialists


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maintains strong relationships with employers in order to improve our student graduate employment rates in their chosen fields.
 
  •     Recognized brands aligned with specific fields of study and degree offerings
 
We offer academic programs primarily through four education systems. We have devoted significant resources to establishing, and continue to invest in developing, the brand identity for each education system. Through The Art Institutes, Argosy University, Brown Mackie Colleges and South University education systems, we have the ability to align our academic program offerings to address the unique needs of specific student groups. Our marketing strategy is designed to develop brand awareness among practitioners and likely prospects in particular fields of study. We believe that this comprehensive brand building approach in each specific market also enables us to gain economies of scale with respect to student acquisition and retention costs, assists in the recruitment and retention of quality faculty and staff members and accelerates our ability to expand online course offerings.
 
  •     Diverse program offerings and broad degree capabilities
 
Our breadth of programmatic and degree offerings enables us to appeal to a diverse range of potential students. We currently offer academic programs in the following areas: design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Approximately 64% of our students as of October 2008 were enrolled in Doctorate, Master’s and Bachelor’s degree programs, which are typically multi-year programs that contribute to the overall stability of our student population. We monitor and adjust our education offerings based on changes in demand for new programs, degrees, schedules and delivery methods.
 
  •     National platform of schools and integrated online learning platform
 
The combination of our national platform of schools and integrated online learning platform provides students at three of our education systems with flexible curriculum delivery options and academic programs taught on campus, online and in blended formats. This flexibility enables our academic programs to appeal to both traditional students and working adults who may seek convenience due to scheduling, geographical or other constraints.
 
We have 92 primary locations across 28 U.S. states and in Canada. Our campuses are located primarily in large metropolitan areas, and we focus our marketing efforts on generating demand primarily within a 100-mile radius of the campus. Throughout our history, we have invested in our campuses in order to provide attractive and efficient learning environments. Our schools offer many amenities found in traditional colleges, including libraries, bookstores and laboratories, as well as the industry-specific equipment necessary for the various programs that we offer.
 
Our online presence offers a practical and flexible solution for our students without compromising quality. We have made a significant investment in online education by strengthening our online presence within The Art Institutes, Argosy University and South University education systems. We have introduced new online academic programs, strengthened our technology infrastructure, hired additional faculty and staff and increased our spending on marketing and admissions. We intend to continue to invest in the expansion of our online program offerings and our marketing efforts to capitalize on our well-known branded schools in order to expand our online presence. As of July 2009, approximately 26,200 students were enrolled in fully online programs.
 
  •     Strong management team with a focus on long-term performance
 
Since the Transaction, we have enhanced the depth and experience of our senior management team, recruiting a number of executives with specialized knowledge in key functional areas, such as technology, marketing and finance. The current executive team has been


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instrumental in directing investments to accelerate enrollment growth and build infrastructure to establish a platform for sustainable long-term growth. Furthermore, our school presidents and senior operating executives have substantial experience in the sector and have contributed to our history of success. We plan to continue to build our strong management team as we execute on our long-term growth strategy.
 
Our Growth Strategy
 
We intend to support our growth through these three channels:
 
  •     Introduce new and existing academic programs across our national platform of schools
 
We seek to identify emerging industry trends in order to understand the evolving educational needs of our students and graduates. With the assistance of over 1,500 industry experts and employers who actively participate on curriculum advisory teams, we are able to rapidly develop new academic programs that address specific market opportunities. We are also able to tailor our existing proprietary content for courses across our degree programs. New academic programs that we have introduced since the Transaction include Master’s degree programs in Interior Design, Management, Principal Preparation and Health Services Management, Bachelor’s degree programs in Entertainment Design, Hotel and Restaurant Management and Hospitality Management, and Associate’s degree programs in Accessory Design, Early Childhood Education, Restaurant and Catering Operations, Registered Nursing and Veterinary Technician.
 
In addition to developing new academic programs, we frequently introduce existing academic programs to additional locations in our national platform of schools, allowing us to drive incremental enrollment growth, utilize our existing curriculum development in multiple locations and capitalize on identified market needs.
 
  •     Increase enrollments in online distance learning and blended-format programs
 
Our investments in online education have enabled us to increase the number of students enrolled in fully online academic programs from approximately 4,600 students as of July 2006 to approximately 26,200 students as of July 2009. We believe that the fully online programs offered by The Art Institute of Pittsburgh, Online Division, Argosy University and South University allow us to offer academic programs that meet the needs of a wide range of distance learning students. In addition, our 92 schools operate under brands that are well-known within various fields, and we believe that our online programs benefit from our strong campus presence and related marketing expenditures. Online offerings are also a cost effective means for us to utilize many of our existing education curricula and generate attractive returns on capital. We intend to continue to invest in the expansion of our online program offerings and enhance our marketing efforts to capitalize on our well-known branded schools and further expand our online presence.
 
  •     Develop new school locations in attractive markets
 
We believe that many attractive locations are available to open additional campuses across the United States. We have identified target locations in new geographic markets, as well as opportunities to open additional campuses within existing large metropolitan areas. Because of the relatively large number of potential markets available for opening new campuses, we focus our efforts on markets that we believe offer the most attractive projected growth and return on capital. We rigorously analyze employment statistics and demographic data in order to align our new schools with the specific educational needs of a targeted market. This focus enables penetration and presence for new schools. After entering a market, we drive incremental growth through the introduction of new academic programs and degrees, which


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enhance return on investment in new markets. We pursue additional efficiencies through our centralized and standardized infrastructure, systems and processes.
 
In addition, although we believe that our diverse platform of program and degree offerings provides significant future growth opportunities, we routinely consider acquisition opportunities to increase the breadth of our education systems or provide unique programmatic exposure within new markets.
 
Student Recruitment and Marketing
 
Our diverse and metrics-based marketing activities are designed to position us as a leading provider of high quality educational programs, build strong brand recognition for our education systems and disciplines, differentiate us from other educational providers and stimulate enrollment inquiries. We target a large and diverse market, including traditional college students, working adults seeking a high quality education in a traditional college setting and working adults focused on the practicality and convenience of online education and career advancement goals. In marketing our programs to prospective students, we emphasize the value of the educational experience and the academic rigor of the programs, rather than the cost or speed to graduation.
 
Our marketing personnel employ an integrated marketing approach that utilizes a variety of lead sources to identify prospective students. These lead generation sources include web-based advertising, which generates the majority of our leads, and further include purchasing leads from aggregators, television and print media advertising, radio, local newspaper, telephone campaigns and direct mail campaigns. In addition, referrals from current students, alumni and employers are important sources of new students. We also employ approximately 250 representatives who present at high schools. These representatives also participate in college fairs and other inquiry-generating activities. In fiscal 2009, our marketing efforts generated inquiries from approximately 3.5 million prospective students as compared to approximately 2.4 million inquiries in fiscal 2008. Marketing and admissions expense represented approximately 21.9% and 21.0% of net revenues in fiscal 2009 and fiscal 2008, respectively.
 
Upon a prospective student’s initial indication of interest in enrolling at one of our schools, an admissions representative initiates communication with the student. The admissions representative serves as the primary contact for the prospective student and helps the student assess the compatibility of his or her goals with our educational offerings. Our student services personnel work with applicants to gain acceptance, arrange financial aid and prepare the student for matriculation. Each admissions representative undergoes a standardized training program, which includes a full competency assessment at the program’s conclusion. Since the Transaction, we have significantly increased our number of admissions representatives. As of June 30, 2009, we employed approximately 2,600 admissions representatives throughout our schools, representing a 180% increase since June 30, 2006.
 
Student Admissions and Retention
 
The admissions and entrance standards of each school are designed to identify those students who are best equipped to meet the requirements of their chosen fields of study and successfully complete their programs. In evaluating prospective students, we seek individuals with, among other things, a strong desire to learn, passion for their area of interest and initiative. We believe that a success-oriented student body results in higher retention and placement rates, increased student and employer satisfaction and lower student default rates on government loans. To be qualified for admission to one of our schools, each applicant must have received a high school diploma or a General Education Development certificate. Applicants to our graduate and Doctorate programs are required to have received an undergraduate degree as a condition to admission. Most of our schools interview prospective students to assess their qualifications, their interest in the programs offered by the school and their commitment to their education. In addition, the curricula, student services, education costs, available financial resources and student housing options, if applicable, are reviewed during interviews.


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Due to our broad program offerings, our students come from a wide variety of backgrounds. The estimated average age of a student at all of our schools during fiscal 2009 was approximately 28 years old.
 
Our students may fail to finish their programs for a variety of personal, academic or financial reasons. To reduce the risk of student withdrawals, each of our schools devotes staff resources to advising students regarding academic and financial matters, part-time employment and, if applicable, housing. Remedial courses are mandated for our undergraduate and graduate students with lower academic skill levels, and tutoring is encouraged for students experiencing academic difficulties. Our net annual persistence rate, which measures the number of students who are enrolled during a fiscal year and either graduate or advance to the next fiscal year, for all of our students was approximately 66% in fiscal 2009 as compared to approximately 68% in fiscal 2008 due primarily to the increase in fully online students during fiscal 2009.
 
Education Programs
 
The relationship of each of our schools with potential employers for our students plays a significant role in the development and adaptation of the school curriculum. Most of our schools have one or more program advisory boards composed of members of the local and regional communities or employers in the fields which we serve. These boards provide valuable input to the school’s education department, which allows the school to keep programs current and provide students with the training and skills that employers seek.
 
Our wide range of academic programs culminate in the awarding of diploma certificates and a variety of degrees. In the fall of 2008 and 2007, the enrollment by degree for all our schools was as follows:
 
                         
   
2008
   
2007
       
 
Bachelor’s degrees
    49.5 %     48.8 %        
Associate’s degrees
    27.3 %     26.2 %        
Diploma and Certificates
    8.7 %     10.3 %        
Doctorate degrees
    7.9 %     8.4 %        
Master’s degrees
    6.6 %     6.3 %        
 
The type of degrees and programs we offer vary by each of our schools. The following summarizes the principal academic programs offered at each of our education systems as of June 30, 2009. Not all programs are offered at each school location within an education system.


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The Art Institutes.  The Art Institutes offer the following degree programs. For internal purposes, we classify the degree programs at The Art Institutes according to four schools or areas of study.
 
     
The School of Design
   
Associate’s Degree
Graphic Design
Industrial Design Technology
Interior Design
 
Bachelor’s Degree
Advertising
Design Management
Graphic Design

Master’s Degree
Graphic Design
Interior Design
 
  Illustration & Design
Interior Design
Visual Communications
 
The School of Fashion
     
Associate’s Degree
Fashion Design
Fashion Marketing
Fashion Merchandising
 
Bachelor’s Degree
Apparel Design
Fashion Design
Fashion Marketing & Management
Fashion Marketing
Fashion Merchandising
Fashion & Retail Management
 
The School of Media Arts
     
Associate’s Degree
Animation
Animation Art & Design
Audio Production
Broadcasting
Computer Animation
Digital Arts
Digital Filmmaking & Video Production
Digital Photography
Photography
Photographic Imaging
Video Production
Web Design & Interactive Media Design
 
Bachelor’s Degree
Audio Production
Digital Filmmaking & Video Production
Digital Media Production
Film & Digital Production
Game Art & Design
Media Arts & Animation
Photography
Visual Effects & Motion Graphics
Visual & Game Programming
Web Design & Interactive Media Design
 
The School of Culinary Arts
     
Associate’s Degree
Baking and Pastry
Culinary Arts
Restaurant & Catering Management
 
Bachelor’s Degree
Culinary Management
Culinary Arts Management
Culinary Arts
Food & Beverage Management
Hospitality Management
 
Argosy University.  The following degree programs are offered by Argosy University.
 
School of Undergraduate Studies
     
Bachelor of Arts
Psychology
Liberal Arts
 
Bachelor of Science
Business Administration
Criminal Justice


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Psychology and Behavioral Sciences
     
Master of Arts
Clinical Psychology
Counseling Psychology
Community Counseling
 
Doctor of Psychology
Clinical Psychology
Marriage & Family Therapy
Forensic Psychology
Industrial Organizational Psychology
Marriage and Family Therapy
Mental Health Counseling
Psychopharmacology
Sport-Exercise Psychology
 
Doctor of Education
Counselor Education and Supervision
Counseling Psychology
Pastoral Community Counseling
 
Health Sciences
     
Associate of Applied Science
Diagnostic Medical Sonography
Histotechnology
Medical Assisting
Radiologic Technology
Veterinary Technology
 
Associate of Science
Dental Hygiene
Medical Laboratory Technology
Radiation Therapy

Master of Science
Health Services Management
Bachelor of Science
Medical Technology (degree completion)
   
 
Education
     
Educational Specialist
Instructional Leadership
Educational Leadership
Educational Leadership Principal Certification

Master of Arts in Education
Adult Education & Training
Instructional Leadership
Educational Leadership
Educational Leadership Principal Certification
School Counseling
School Psychology
 
Doctor of Education
Instructional Leadership
Educational Leadership
Community College Executive Leadership
Educational Leadership Principal Certification
School Psychology
 
Business
     
Master of Science
Management
Master of Business Administration
 
Doctor of Business Administration
Doctorate of Education in Organizational  Leadership
 
Brown Mackie Colleges.  Brown Mackie College schools offer the following primary degree programs.
 
Health Sciences
     
Associate’s Degrees
Dietetics Technology
Health & Fitness Training
Health & Therapeutic Massage
Healthcare Administration
Medical Assisting
Nursing
Occupational Therapy Assistant
Pharmacy Technology
Physical Therapist Assistant
Surgical Technology
Veterinary Technology
 
Bachelor’s Degrees
Healthcare Management


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Education
     
Associate’s Degree
Early Childhood Education
   
 
Legal Studies
     
Associate’s Degrees
Criminal Justice
Paralegal
 
Bachelor’s Degrees
Criminal Justice
Legal Studies
 
Business
     
Associate’s Degrees
Accounting Technology
Business Management
Office Management
 
Bachelor’s Degrees
Business Administration
 
Information Technology
     
Associate’s Degrees
Biomedical Equipment Technology
Electronics
Computer Networking and Applications
Information Technology
 
Bachelor’s Degrees
Information Technology
 
Design Technologies
     
Associate’s Degrees
Architectural Drafting & Design Technology
Computer Aided Design & Drafting
  Technology
   
 
South University.  South University offers the following degree programs.
 
College of Arts and Sciences
     
Associate’s Degrees
Graphic Design
Paralegal Studies
 
Master’s Degrees
Criminal Justice
Professional Counseling
Bachelor’s Degrees
Criminal Justice
Graphic Design
Legal Studies
Psychology
   
 
College of Business
     
Associate’s Degrees
Accounting
Business Administration
Information Technology

Bachelor’s Degrees
Business Administration
Healthcare Management
Information Technology
 
Master’s Degrees
Business Administration
Information Systems Technology
Healthcare Administration
Leadership
Public Administration


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College of Health Professions
     
Associate’s Degrees
Allied Health Science
Medical Assisting
Physical Therapist Assisting
 
Master’s Degrees
Anesthesiologist Assistant
Physician Assistant Studies

Bachelor’s Degrees
Health Science
   
 
College of Nursing
     
Bachelor’s Degrees
Health Sciences
Nursing
Nursing RN to BSN (degree completion)
 
Master’s Degrees
Nursing
 
School of Pharmacy
     
Doctorate Degrees
Doctor of Pharmacy
   
 
In addition to the programs listed above, we own Western State University College of Law, which offers Juris Doctor degrees, and the Ventura Group, which provides courses and materials for post-graduate licensure examinations in the human services fields and continuing education courses for K-12 educators.
 
Graduate Employment
 
We measure our success as an educator of students to a significant extent by the ability of our students to find jobs in their chosen field of employment upon graduation from our schools. Most of our schools provide career development instruction to our students in order to assist the students in developing essential job-search skills. In addition to individualized training in interviewing, networking techniques and resume-writing, most of our schools require students to take a career development course. Additionally, we provide ongoing placement resources to our students and recent graduates. Career services departments also assist current students in finding part-time employment while attending school. Students in certain of our Doctorate programs spend up to a year in a paid internship in their chosen field.
 
Each school’s career services department plays a role in marketing the school’s curriculum to the community in order to produce job leads for graduates. Career services advisors educate employers about the caliber of our graduates. These advisors participate in professional organizations, trade shows and community events to keep apprised of industry trends and maintain relationships with key employers. Career services staff visit employer sites to learn more about their operations and better understand their employment needs. As of June 30, 2009, the career services departments of our schools had approximately 300 full-time employees. We estimate that our career services departments maintain contact with approximately 70,000 employers nationwide.
 
Based on information collected by us from graduating students and employers, we believe that, of the approximately 16,000 undergraduate students who graduated from our schools during the calendar year ended December 31, 2008, approximately 87% of the available graduates obtained employment in their fields of study, or in related fields of study, within six months of graduation. The graduate employment rates presented in this prospectus exclude students who are pursuing further education, who are deceased, who are in active military service, who have medical conditions that prevent them from working, who are continuing in a career unrelated to their program of study because they currently earn salaries which exceed those paid to entry-level employees in their field of study, who choose to stay at home full-time or who are international students no longer residing in the country in which their school is located. The average salary paid to our available graduating undergraduate students from The Art Institutes, the Brown Mackie Colleges and South University for calendar year 2008 who obtained employment in their fields of study, or in related fields of study, was approximately $30,200.


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Accreditation
 
In the United States, accreditation is a process through which an institution submits itself to qualitative review by an organization of peer institutions. Accrediting agencies primarily examine the academic quality of the instructional programs of an institution, and a grant of accreditation is generally viewed as reliable authority that an institution’s programs meet generally accepted academic standards. Accrediting agencies also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources to perform its educational mission.
 
Pursuant to provisions of the HEA, the U.S. Department of Education relies on accrediting agencies to determine whether the academic quality of an institution’s educational programs is sufficient to qualify the institution to participate in federal financial aid programs under Title IV of the HEA. The HEA and its implementing regulations specify certain standards that all recognized accrediting agencies must adopt in connection with their review of post-secondary institutions. All of our U.S. schools are accredited by an institutional accrediting agency recognized by the U.S. Department of Education.
 
In addition to the institutional accreditations described above, a number of our institutions have specialized programmatic accreditation for particular educational programs. For example, ten Art Institutes offer interior design programs that have programmatic accreditation by the Council for Interior Design Accreditation and 14 Art Institutes offer culinary programs accredited by the American Culinary Federation. Ten Argosy University locations have received accreditation by the American Psychological Association for their Doctor of Psychology programs and three Argosy University locations are accredited by the Council for Accreditation of Counseling and Related Educational Programs. Eight of our medical assisting programs (three at South University, four at Brown Mackie Colleges and one at Argosy University) are accredited by the Commission on Accreditation of Allied Health Education Programs. While these programmatic accreditations cannot be relied upon for our schools to obtain and maintain certification to participate in Title IV programs, they are commonly relied upon in the relevant professions as indicators of the quality of the academic program.
 
The following table shows the location of each of our campuses at June 30, 2009, the name under which it operates, the year of its establishment, the date we opened or acquired it and the institutional accrediting agency (for schools accredited by more than one recognized accrediting agency, the primary accrediting agency is listed first).
 
                 
        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
                 
The Art Institutes
               
The Art Institute of Atlanta
  Atlanta, GA   1949   1971   Commission on Colleges of the Southern Association of Colleges and Schools (“SACS”)
                 
The Art Institute of Atlanta — Decatur
  Decatur, GA   2007   2008   SACS (as an additional location of The Art Institute of Atlanta)
                 
The Art Institute of Austin
  Austin, TX   2008   2008   SACS (as a branch of The Art Institute of Houston)


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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
The Art Institute of California — Hollywood (formerly California Design College)
  Los Angeles, CA   1991   2003   Accrediting Council of Independent Colleges and Schools (“ACICS”)
                 
The Art Institute of California — Inland Empire
  San Bernardino, CA   2006   2006   Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”) (as a branch of The Art Institute of California — San Diego)
                 
The Art Institute of California — Los Angeles
  Los Angeles, CA   1997   1998   ACICS
                 
The Art Institute of California — Orange County
  Orange County, CA   2000   2001   ACICS (as a branch of The Art Institute of California — Los Angeles)
                 
The Art Institute of California — Sacramento
  Sacramento, CA   2007   2007   ACICS (as a branch of The Art Institute of California — Los Angeles)
                 
The Art Institute of California — San Diego
  San Diego, CA   1981   2001   ACCSCT
                 
The Art Institute of California — San Francisco
  San Francisco, CA   1939   1998   ACICS (as a branch of The Art Institute of California — Los Angeles)
                 
The Art Institute of California — Sunnyvale
  Sunnyvale, CA   2008   2008   ACICS (as a branch of The Art Institute of California — Hollywood)
                 
The Art Institute of Charleston
  Charleston, SC   2007   2007   SACS (as a branch of The Art Institute of Atlanta)

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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
The Art Institute of Charlotte
  Charlotte, NC   1973   2000   ACICS
                 
The Art Institute of Colorado
  Denver, CO   1952   1976   Higher Learning Commission (“HLC”) of the North Central Association
                 
The Art Institute of Dallas
  Dallas, TX   1964   1985   SACS
                 
The Art Institute of Fort Lauderdale
  Fort Lauderdale, FL   1968   1974   ACICS
                 
The Art Institute of Houston
  Houston, TX   1974   1979   SACS
                 
The Art Institute of Houston — North
  Houston, TX   2008   2009   SACS (as a branch of The Art Institute of Houston)
                 
The Art Institute of Indianapolis
  Indianapolis, IN   2006   2006   ACCSCT (as a branch of The Art Institute of Las Vegas)
                 
The Art Institute of Jacksonville
  Jacksonville, FL   2007   2007   SACS (as a branch of Miami International University of Art & Design)
                 
The Art Institute of Las Vegas
  Las Vegas, NV   1983   2001   ACCSCT
                 
The Art Institute of Michigan
  Detroit, MI   2007   2008   HLC and ACCSCT (as a branch of The Illinois Institute of Art — Chicago)
                 
The Art Institute of Tennessee — Nashville
  Nashville, TN   2006   2007   SACS (as a branch of The Art Institute of Atlanta)
                 
The Art Institute of New York City
  New York, NY   1980   1997   ACICS
                 
The Art Institute of Ohio — Cincinnati
  Cincinnati, OH   2004   2005   HLC and ACCSCT (as a branch of The Illinois Institute of Art — Chicago)
                 
The Art Institute of Philadelphia
  Philadelphia, PA   1971   1980   ACICS
                 
The Art Institute of Phoenix
  Phoenix, AZ   1995   1996   ACICS

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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
The Art Institute of Pittsburgh
  Pittsburgh, PA   1921   1970   Middle States Association of Colleges & Schools of the Commission on Higher Education
                 
The Art Institute of Portland
  Portland, OR   1963   1998   Northwest Commission on Colleges and Schools Universities (“NWCCU”)
                 
The Art Institute of Raleigh-Durham
  Durham, NC   2008   2008   ACICS (as a branch of The Art Institute of Charlotte)
                 
The Art Institute of Salt Lake City
  Salt Lake City, UT   2007   2007   ACCSCT (as a branch of The Art Institute of Las Vegas)
                 
The Art Institute of Seattle
  Seattle, WA   1946   1982   NWCCU
                 
The Art Institute of Tampa
  Tampa, FL   2004   2004   SACS (as a branch of the Miami International University of Art & Design)
                 
The Art Institute of Tucson
  Tucson, AZ   2002   2007   ACICS
                 
The Art Institute of Vancouver
  Vancouver, BC   1979   2003   Private Career Training Institutions Agency of British Columbia
                 
The Art Institute of Washington
  Arlington, VA   2000   2001   SACS (as a branch of The Art Institute of Atlanta)
                 
The Art Institute of Washington — Northern Virginia(1)
  Sterling, VA   2009   2009   SACS (as a branch of The Art Institute of Atlanta)
                 
The Art Institute of York — Pennsylvania
  York, PA   1952   2004   ACCSCT
                 
The Art Institutes International — Kansas City
  Kansas City, KS   2008   2008   ACICS (as a branch of The Art Institute of Phoenix)

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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
The Art Institutes International Minnesota
  Minneapolis, MN   1964   1997   ACICS
                 
The Illinois Institute of Art — Chicago
  Chicago, IL   1916   1996   HLC and ACCSCT
                 
The Illinois
Institute of Art — Schaumburg
  Schaumburg, IL   1983   1996   HLC and ACCSCT (as a branch of The Illinois Institute of Art — Chicago)
                 
Miami International University of Art & Design
  Miami, FL   1965   2002   SACS
                 
The New England Institute of Art
  Boston, MA   1988   2000   New England Association of Schools and Colleges
                 
Argosy University
              HLC (all locations)
                 
Argosy University, Atlanta
  Atlanta, GA   1990   2002    
                 
Argosy University, Chicago
  Chicago, IL   1976   2002    
                 
Argosy University, Dallas
  Dallas, TX   2002   2002    
                 
Argosy University, Denver
  Denver, CO   2006   2006    
                 
Argosy University, Honolulu
  Honolulu, HI   1979   2002    
                 
Argosy University, Inland Empire
  San Bernardino, CA   2006   2006    
                 
Argosy University, Nashville
  Nashville, TN   2001   2001    
                 
Argosy University, Orange County
  Orange, CA   1999   2002    
                 
Argosy University, Phoenix
  Phoenix, AZ   1997   2002    
                 
Argosy University, Salt Lake City
  Salt Lake City, UT   2008   2008    
                 
Argosy University, San Diego
  San Diego, CA   2006   2006    
                 
Argosy University, San Francisco
  Point Richmond, CA   1998   2002    

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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
Argosy University, Santa Monica
  Santa Monica, CA   2006   2006    
                 
Argosy University, Sarasota
  Sarasota, FL   1969   2002    
                 
Argosy University, Schaumburg
  Schaumburg, IL   1979   2002    
                 
Argosy University, Seattle
  Seattle, WA   1997   2002    
                 
Argosy University, Tampa
  Tampa, FL   1997   2002    
                 
Argosy University, Twin Cities
  Eagan, MN   1961   2002    
                 
Argosy University, Washington D.C. 
  Arlington, VA   1994   2002    
                 
South University
              SACS (all locations)
                 
South University/
Savannah
  Savannah, GA   1899   2004    
                 
South University/
Montgomery
  Montgomery, AL   1997   2004    
                 
South University/
West Palm Beach
  West Palm Beach, FL   1974   2004    
                 
South University/
Columbia
  Columbia, SC   1935   2004    
                 
South University/
Tampa
  Tampa, FL   2006   2006    
                 
South University/
Richmond(1)
  Richmond, VA   2009   2009    
                 
The Brown Mackie Colleges
               
                 
Brown Mackie College — Akron
  Akron, OH   1980   2004   ACICS (as a branch of Brown Mackie College — Cincinnati)
                 
Brown Mackie College — Cincinnati
  Cincinnati, OH   1927   2004   ACICS
                 
Brown Mackie College — Findlay
  Findlay, OH   1986   2004   ACICS
                 
Brown Mackie College — Northern Kentucky
  Ft. Mitchell, KY   1927   2004   ACICS (as a branch of Brown Mackie College — Cincinnati)

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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
Brown Mackie College — North Canton
  North Canton, OH   1984   2004   ACICS (as a branch of Brown Mackie College — Tucson)
                 
Brown Mackie College — Atlanta
  Norcross, GA   1969   2004   ACICS (as a branch of The Art Institute of Charlotte
                 
Brown Mackie College — Lenexa
  Lenexa, KS   1984   2004   HLC (as a branch of Brown Mackie College — Salina)
                 
Brown Mackie College — Salina
  Salina, KS   1892   2004   HLC
                 
Brown Mackie College — Merrillville
  Merrillville, IN   1984   2004   ACICS (as a branch of Brown Mackie College — Cincinnati)
                 
Brown Mackie College — Michigan City
  Michigan City, IN   1890   2004   ACICS (as a branch of Brown Mackie College — Cincinnati)
                 
Brown Mackie College — Moline
  Moline, IL   1985   2004   ACICS (as a branch of Brown Mackie College — Cincinnati)
                 
Brown Mackie College — Fort Wayne
  Fort Wayne, IN   1991   2004   ACICS (as a branch of Brown Mackie College — South Bend)
                 
Brown Mackie College — South Bend
  South Bend, IN   1882   2004   ACICS
                 
Brown Mackie College — Louisville
  Louisville, KY   1935   2004   ACICS (as a branch of Brown Mackie College — Findlay)
                 
Brown Mackie College — Hopkinsville
  Hopkinsville, KY   1995   2004   ACICS (as a branch of Brown Mackie College — Findlay)
                 
Brown Mackie College — Miami
  Miami, FL   2004   2005   ACICS (as a branch of Brown Mackie College — Cincinnati)
                 
Brown Mackie College — Tucson
  Tucson, AZ   1972   2007   ACICS
                 
Brown Mackie College — Indianapolis
  Indianapolis, IN   2007   2008   ACICS (as a branch of Brown Mackie College — Findlay)

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        Calendar
  Fiscal Year
   
        Year
  Acquired
   
School
 
Location
 
Established
 
or Opened
 
Accrediting Agency
 
Brown Mackie College — Boise
  Boise, ID   2008   2008   ACICS (as a branch of Brown Mackie College — South Bend)
                 
Brown Mackie College — Tulsa
  Tulsa, OK   2008   2009   ACICS (as a branch of Brown Mackie College — South Bend)
                 
Brown Mackie College — Phoenix
  Phoenix, AZ   2009   2009   ACICS (as a branch of Brown Mackie College — Tucson)
                 
Brown Mackie College — Greenville(1)
  Greenville, SC   2009   2009   ACICS (as a branch of Brown Mackie College — Tucson)
                 
Western State University College of Law
  Fullerton, CA   1966   2002   Commission on Colleges of the Western Association of Schools and Colleges;
American Bar Association
 
 
(1) First class of students scheduled to start in October 2009.
 
Accrediting agencies monitor each educational institution’s performance across a broad range of areas. Monitoring is generally performed through annual self-reporting and through the conduct of periodic site visits by representatives of the accrediting agency and qualified persons from peer institutions. In the event an accrediting agency determines that such school’s performance in one or more areas falls below certain parameters, the accrediting agency may require the school to supply it with supplemental reports on the accrediting agency’s specific areas of concern until that school meets the accrediting agency’s performance guideline or standard. As of June 30, 2009, four of our schools were required to provide such supplemental reports. Of these four schools on supplemental reporting status, two schools are required to request and receive permission from their accrediting agency prior to filing an application for a new location or program offering. In addition, based upon reports recently filed with one of our accrediting agencies, we believe that an additional three schools will be placed on reporting for student completion or placement rates. An accrediting agency also may order an institution to show cause why its accreditation should not be revoked or conditioned if it receives information leading it to question whether the institution satisfies the requirements of continued accreditation. An institution found not to be in compliance with required standards may have its accreditation revoked or withdrawn, or it may be placed on probation to more closely monitor its compliance with accrediting requirements.
 
Student Financial Assistance
 
Many students at our U.S. schools rely, at least in part, on financial assistance to pay for the cost of their education. In the United States, the largest sources of such support are the federal student aid programs under Title IV of the HEA. Additional sources of funds include other federal grant programs, state grant and loan programs, private loan programs and institutional grants and

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scholarships. To provide students access to financial assistance resources available through Title IV programs, a school must be (i) authorized to offer its programs of instruction by the relevant agency of the states in which it is physically located, (ii) institutionally accredited by an agency recognized by the U.S. Department of Education, and (iii) certified as an eligible institution by the U.S. Department of Education. In addition, the school must ensure that Title IV program funds are properly accounted for and disbursed in the correct amounts to eligible students and remain in compliance generally with the Title IV program regulations.
 
As in the United States, there are certain risks associated with operating post-secondary institutions in Canada, including, among other risks:
 
  •     if our schools fail to comply with extensive regulations, we could be subject to financial penalties, restrictions on our operations or loss of external financial aid funding for our students;
 
  •     the provinces or national government may change the law or reduce funding for student financial aid programs, which could harm our student population and revenue;
 
  •     if our schools do not maintain their approvals, they may not operate or participate in federal student financial aid programs; and
 
  •     government and regulatory agencies may conduct compliance reviews, bring claims or initiate litigation against us.
 
While most states in the U.S. support public colleges and universities primarily through direct state subsidies, the U.S. federal government provides a substantial part of its support for post-secondary education in the form of grants and loans to students who can use this support at any institution that has been certified as eligible by the U.S. Department of Education. Students at our U.S. schools receive loans, grants and work-study funding to fund their education under several Title IV programs, of which the three largest are the FFEL program, the Direct Loan program and the Pell program. Most of our U.S. schools also participate in the Federal Supplemental Educational Opportunity Grant (“FSEOG”) program, the Federal Perkins Loan (“Perkins”) program, the Federal Work-Study program and the Academic Competitive Grant program. A smaller number of our U.S. schools also participate in the National SMART (Science and Mathematics Access to Retain Talent) Grant program.


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During fiscal 2009 and 2008, the net cash receipts from the financial sources that funded our revenue from tuition and fees for attending our post-secondary institutions were as follows (dollars in millions):
 
                                                 
    Fiscal 2009     Fiscal 2008  
          % of
                % of
       
    Gross Cash
    Gross
    % of Net
    Gross Cash
    Gross
    % of Net
 
    Receipts(1)     Receipts     Revenue     Receipts(1)     Receipts     Revenue  
 
Federal Title IV Aid(2):
                                               
FFEL — Stafford Loans(3)
  $ 1,201.4       50.1 %     59.7 %   $ 838.2       42.2 %     49.8 %
FFEL — PLUS Loans(3)
    204.8       8.6 %     10.2 %     175.5       8.9 %     10.4 %
Pell Grants
    188.2       7.9 %     9.4 %     131.4       6.6 %     7.8 %
Grad Plus Loans
    25.2       1.1 %     1.3 %     16.1       0.8 %     1.0 %
FSEOG Awards
    12.2       0.5 %     0.6 %     11.5       0.6 %     0.7 %
Perkins Loans
    5.0       0.2 %     0.2 %     7.4       0.4 %     0.4 %
Other Title IV Aid(4)
    2.8       0.1 %     0.1 %     2.1       0.1 %     0.1 %
                                                 
Total Federal Title IV Aid
    1,639.6       68.5 %     81.5 %     1,182.2       59.6 %     70.2 %
                                                 
Private Loans
    263.6       11.0 %     13.1 %     374.8       18.9 %     22.3 %
Education Finance Loan Program
    19.2       0.8 %     1.0 %                  
Cash Payments
    410.2       17.1 %     20.4 %     368.0       18.6 %     21.8 %
State Grants
    52.7       2.2 %     2.6 %     48.2       2.4 %     2.9 %
Canadian Financial Aid
    8.5       0.4 %     0.4 %     9.1       0.5 %     0.5 %
                                                 
Total Cash Receipts(5)
  $ 2,393.8       100.0 %     119.0 %   $ 1,982.3       100.0 %     117.7 %
                                                 
Net Revenue(6)
                  $ 2,011.5                     $ 1,684.2  
                                                 
 
 
(1) Cash receipts are net of the return to the federal student financial aid programs of all unearned funds from students who withdraw from a program of study.
 
(2) Equals Title IV financial aid received by students attending (i) The Art Institutes during quarters starting during the fiscal year except for The New England Institute of Art, where the summer semester beginning in May was included in the following fiscal year; (ii) Argosy University during the summer semester that began in May prior to the beginning of the fiscal year and the fall and winter semesters that began during the fiscal year; (iii) South University during the quarters starting during the fiscal year, except that campus based students attending the summer quarter beginning at the end of June and fully online students attending the quarter beginning in May were included in the following fiscal year; (iv) Brown Mackie Colleges during quarters starting during the fiscal year; and (v) Western States University during semesters starting during the fiscal year.
 
(3) Includes loans received by students under the Direct Loan program.
 
(4) Includes receipts from the Academic Competitive Grant program and the National SMART Grant program.
 
(5) Total cash receipts include stipends, or financing received by students in excess of the tuition and fees that they pay to our schools, which we receive from financing sources on behalf of students. Stipends are generally used by students to fund living expenses while attending school. Total stipends paid to students during fiscal 2009 and 2008 were $403.0 million and $340.9 million, respectively. Aid received from the Federal Work Study program is excluded from total cash receipts along with institutional aid, employee reimbursement of tuition payments and institutional scholarships.
 
(6) The difference between net revenue and gross cash receipts paid by students to attend our post-secondary institutions primarily relates to stipends received on behalf of students and the effect of timing differences between cash-basis and accrual-basis accounting, including changes in student accounts receivable balances.
 
FFEL and Direct Loans.  The FFEL and Direct Loan programs consist of two types of loans: Stafford loans, which are made available to students regardless of financial need, and Parent Loan for


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Undergraduate Students (“PLUS”) loans, which are made available to parents of undergraduate students classified as dependents and to graduate and professional students. The primary difference between the FFEL and the Direct Loan programs is that the FFEL program is administered and funded by private sources while the U.S. Department of Education provides the administration and funds for the Direct Loan program. While all of our schools are eligible to participate in the Direct Loan program, as of June 30, 2009 only Brown Mackie College — Tucson and The Art Institute of Tucson actively participate in the program. We anticipate that each of our U.S. based schools will participate in the Direct Loan program by June 30, 2010.
 
Effective July 1, 2008, under the Stafford loan program an undergraduate student may borrow up to $5,500 for the first academic year, $6,500 for the second academic year and, in certain educational programs, $7,500 for each of the third and fourth academic years. Students who are classified as independent can obtain up to an additional $4,000 for each of the first and second academic years and, depending upon the educational program, an additional $5,000 for each of the third and fourth academic years. Students enrolled in programs higher than a bachelor-level program can borrow up to $20,500 per academic year. Students enrolled in certain graduate-level health professions can receive an additional $12,500 per academic year. During fiscal 2008, undergraduate students only were permitted to borrow up to $3,500 for the first academic year, $4,500 for the second academic year and, in certain educational programs, $5,500 for each of the third and fourth academic years under the Stafford loan program. Currently, PLUS loans may be obtained by parents of a dependent student in an amount not to exceed the difference between the total cost of that student’s education (including allowable educational expenses) and other aid to which that student is entitled.
 
Pell.  Pell grants are the primary component of Title IV programs under which the U.S. Department of Education makes grants to undergraduate students who demonstrate financial need. Every eligible student is entitled to receive a Pell grant; there is no institutional allocation or limit. Effective as of July 1, 2009, the maximum amount of availability of a Pell grant increased to $5,350 per year from a maximum of $4,731 per year in fiscal 2009. Additionally, effective as of July 1, 2009, certain students who attend school for an entire fiscal year in some cases will be eligible for additional Pell grant awards. The maximum available to an eligible student under the Pell grant program depends on student need and other factors.
 
FSEOG.  FSEOG awards are designed to supplement Pell grants for the neediest undergraduate students. FSEOG grants at our schools generally range in amount from $300 to $1,200 per year. However, the availability of FSEOG awards is limited by the amount of those funds allocated to an institution under a formula that takes into account the size of the institution, its costs and the income levels of its students. We are required to make a 25% matching contribution for all FSEOG program funds disbursed. Resources for this institutional contribution may include institutional grants and scholarships and, in certain U.S. states, portions of state grants and scholarships.
 
Perkins.  Eligible undergraduate students may borrow up to $5,500 under the Perkins program during each academic year, with an aggregate maximum of $27,500 for students with at least two years of study. Eligible graduate students may borrow up to $8,000 in Perkins loans each academic year, with an aggregate maximum of $60,000. Perkins loans have a 5% interest rate and repayment is delayed until nine months after a student ceases enrollment as at least a half-time student. Perkins loans are made available to those students who demonstrate the greatest financial need. Perkins loans are made from a revolving account. Congress has not supplied any new federal capital contributions to the Perkins program in several years. When Congress last funded the program, 75% of the new funding was contributed by the U.S. Department of Education and the remainder by the applicable school. Each school collects payments on Perkins loans from its former students and re-lends those funds to currently enrolled students. Collection and disbursement of Perkins loans is the responsibility of each participating institution. During fiscal 2009, we collected approximately $4.4 million from our former students. We were not required to make any matching contributions in fiscal 2009.


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Federal Work-Study.  Under the Federal Work-Study program, federal funds are made available to pay up to 75% of the cost of part-time employment of eligible students, based on their financial need, to perform work for the institution or for off-campus public or non-profit organizations. Most of our schools participate in the Federal Work-Study program. In order to participate in the program, each year a school must have at least 7% of the school’s Federal Work-Study program allocation paid to students performing community service work and at least one student in a literacy job. In fiscal 2009, all of our schools met this requirement.
 
New Title IV Programs.  Effective July 1, 2006, Congress enacted two new Title IV federal aid programs, the Academic Competitive Grant (“ACG”) and the National SMART (Science and Mathematics Access to Retain Talent) Grant. Both of these new programs require students to be eligible for a Pell grant and to attend school on a full-time basis. The ACG is designed for students in degree programs who recently have graduated from a high school at which they were enrolled in a rigorous curriculum. Students may receive a maximum of $750 under ACG during their first academic year and $1,300 during their second academic year. The National SMART Grant is designed for students in their third or fourth academic year with a cumulative grade point average of 3.0 or greater in certain designated bachelor’s degree or higher programs, primarily focused on science and math programs. Eligible students may receive up to $4,000 in each of their third and fourth academic year.
 
Legislative Action.  Political and budgetary concerns can significantly affect Title IV programs. Congress generally reauthorizes the HEA approximately every six years. In August 2008, the HEA was reauthorized through at least September 30, 2014. The HEA reauthorization, among other things, revised the 90/10 Rule, as described in more detail under “— Federal Oversight of Title IV Programs — The ‘90/10 Rule’ ”, revised the calculation of an institution’s cohort default rate, required additional disclosures and certifications with respect to non-Title IV private loans and prohibited certain activities or relations between lenders and schools to discourage preferential treatment of lenders based on factors not in students’ best interests. In addition, Congress determines federal appropriations for Title IV programs on an annual basis. Congress also can make changes in the laws affecting Title IV programs in those annual appropriations bills and in other laws it enacts between HEA reauthorizations. In September 2007, legislation was enacted which, among other things, decreased private lender and guaranty agency yields for participation in the FFEL program, decreased student interest rates on Stafford loans and limited repayment obligations for students who receive loans pursuant to Title IV programs. Since a significant percentage of our revenue is derived from Title IV programs, any action by Congress that significantly reduces Title IV program funding or the ability of our schools or students to participate in Title IV programs would have a material adverse effect on our business, results of operations or financial condition.
 
Legislative action also could increase our administrative costs and require us to adjust our practices in order for our schools to comply fully with Title IV program requirements. For example, President Obama has introduced a budget proposal and a committee in the U.S. House of Representatives has approved a bill that would require all new federal student loans after July 1, 2010 to be made through the Direct Loan program. While all of our schools are eligible to participate in the Direct Loan program, only Brown Mackie College — Tucson and The Art Institute of Tucson actively participated in the Direct Loan program as of June 30, 2009.
 
     Other Financial Assistance Sources
 
Students at several of our U.S. schools participate in state aid programs. In addition, certain students at some of our U.S. schools receive financial aid provided by the U.S. Department of Veterans Affairs, the U.S. Department of the Interior (Bureau of Indian Affairs) and the Rehabilitative Services Administration of the U.S. Department of Education (vocational rehabilitation funding). Effective August 1, 2009, the Post 9/11 Veterans Educational Assistance Act of 2008 will provide additional educational funding to eligible veterans who served in the U.S. military. Our schools also provide institutional grants and scholarships to qualified students. In fiscal 2009, institutional scholarships had a value equal to approximately 3% of our net revenues.


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There are private supplemental loan programs available to our students, and those programs allow students to repay a portion of their loans after graduation and make loans available to students with lower than average credit ratings. The primary objective of these loan programs is to facilitate funding which students can use to pay a portion of their tuition and fees that they are unable to pay through personal resources or government-backed loan programs. Such loans are without recourse to us or our schools, except for repurchase obligations under the Education Finance Loan program that we introduced in August 2008. Revenues derived indirectly from private loans to students at our schools, excluding loans under the Education Finance Loan program, represented approximately 13.1% and 22.3% of our net revenues in fiscal 2009 and 2008, respectively. During fiscal 2009, loans under the Education Finance Loan program represented approximately 1.0% of our net revenues.
 
Approximately 79% of the private loans in fiscal 2009 were offered by Sallie Mae and its affiliates and serviced by its affiliated loan servicer. During fiscal 2009, adverse market conditions for consumer student loans have resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. In order to provide student loans to certain of our students who do not satisfy the new standard underwriting, we pay credit enhancement fees to certain lenders (including Sallie Mae) based on the principal balance of each loan disbursed by the lender. An agreement we entered into with Sallie Mae to provide loans to certain students who received a private loan from Sallie Mae prior to April 17, 2008 and are continuing their education but who do not satisfy Sallie Mae’s current standard underwriting criteria expires in June 2010.
 
The Education Finance Loan program enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses. Students or a co-borrower must meet certain eligibility and underwriting criteria. Under the program, we purchase loans made by a private lender to students who attend our schools. We estimate that additional disbursements under this program during fiscal 2010 will be approximately $75 million.
 
     Availability of Lenders
 
While students attending our U.S. schools may choose any private provider of federally guaranteed student loans, students use a limited number of lending institutions to obtain their federally guaranteed loans to help pay their direct costs of attendance. While we believe that other lenders or the Direct Loan program would be willing to make federally guaranteed student loans to our students if federally guaranteed loans were no longer available from our current lenders, there can be no assurances in this regard. In addition, the HEA requires the establishment of lenders of last resort in every state to ensure that loans are available to students at any school that cannot otherwise identify lenders willing to make federally guaranteed loans to its students.
 
We estimate that four student loan guaranty agencies guaranteed over 90% of all federally guaranteed student loans made to students enrolled at our U.S. schools during fiscal 2009. We believe that other guaranty agencies would be willing to guarantee federal loans to our students if any of the current agencies ceased guaranteeing those loans or reduced the volume of loans they guarantee, although there can be no assurances in this regard.
 
     Federal Oversight of Title IV Programs
 
Our U.S. schools are subject to audits or program compliance reviews by various external agencies, including the U.S. Department of Education, its Office of Inspector General and state, guaranty and accrediting agencies. The HEA and its implementing regulations also require that an institution’s administration of Title IV program funds be audited annually by an independent accounting firm. If the U.S. Department of Education or another regulatory agency determines that an institution has improperly disbursed Title IV or state program funds or violated a provision of the HEA or state law or their implementing regulations, the affected institution may be required to repay such funds to


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the U.S. Department of Education or the appropriate state agency or lender and may be assessed an administrative fine and be subject to other sanctions. Although we endeavor to comply with all federal and state laws and implementing regulations, we cannot guarantee that our interpretation of the relevant rules will be upheld by the U.S. Department of Education or other agencies, or upon judicial review.
 
If the U.S. Department of Education is dissatisfied with an institution’s administration of Title IV programs, it can transfer, without prior notice or judicial review, the institution from the advance system of receiving Title IV program funds to the cash monitoring or reimbursement method of payment, under which a school may have to advance its own funds to students and provide documentation to the U.S. Department of Education that the funds were properly disbursed prior to receiving reimbursement from Title IV programs.
 
Violations or alleged violations of Title IV program requirements also could subject us to other civil and criminal proceedings and sanctions, suits under the federal False Claims Act, limitations on our operations and ability to open new locations, or administrative proceedings to impose fines or limit, suspend or terminate our eligibility for participation in Title IV programs. The U.S. Department of Education also may initiate an emergency action to temporarily suspend an institution’s participation in Title IV programs without advance notice if it determines that a regulatory violation creates an imminent risk of material loss of public funds.
 
The HEA requires each accrediting agency recognized by the U.S. Department of Education to undergo comprehensive periodic review by the U.S. Department of Education to ascertain whether such accrediting agency is adhering to required standards. We are not aware of any reason why any of the agencies that accredit our institutions would not be approved as a result of such review. In any event, if an accreditation agency is not approved by the U.S. Department of Education, the HEA grants affected institutions reasonable opportunity to apply for accreditation from a different agency.
 
Cohort Default Rates.  If an institution’s FFEL/Direct Loan cohort default rate equals or exceeds 25% for each of the three most recent federal fiscal years, it no longer will be eligible to participate in the FFEL/Direct Loan and Pell programs for the remainder of the federal fiscal year in which the U.S. Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If an institution’s FFEL/Direct Loan cohort default rate exceeds 40% for any single fiscal year, it no longer will be eligible to participate in the FFEL and Direct Loan programs for the remainder of the federal fiscal year in which the U.S. Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If, at any given point, an institution’s Perkins cohort default rate equals or exceeds 50% for each of the three most recent federal fiscal years it no longer will be eligible to participate in the Perkins programs for the remainder of the federal fiscal year, in which the U.S. Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years.
 
None of our schools has had an FFEL/Direct cohort default rate of 25% or greater for any of the last three consecutive federal fiscal years. The most recent year for which FFEL/Direct cohort default rates have been calculated is federal fiscal year 2006. The official weighted average combined FFEL/Direct cohort default rate for borrowers at our schools for federal fiscal year 2006 was 5.4%, and our individual schools’ rates ranged from 1.0% to 11.3%. The draft weighted average combined FFEL/Direct cohort default rates for borrowers at our schools for fiscal 2007, which will be finalized in September 2009, was 8.1% and our individual schools’ rates ranged from 1.7% to 14.4%.
 
Under the recently enacted HEA reauthorization, an institution’s cohort default rate for the 2009 federal fiscal year, as well as subsequent federal fiscal years, will be based on the rate at which its former students who enter repayment during the year default on their FFEL and Direct loans on or before the end of the second year following the year in which they entered repayment. The 2009 cohort default rate will include students who enter repayment between October 1, 2008 and September 30, 2009 and who default on or before September 30, 2011. As a result of the extended default period, most institutions’ respective cohort default rates are expected to materially increase when rates based upon the new calculation method first are published after October 1, 2011. The recently


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enacted HEA reauthorization provides some relief from the anticipated increase in cohort default rates by increasing the default rate threshold from 25% to 30% effective October 1, 2011 and by requiring that the rate as calculated under the old methodology will be used in determining sanctions associated with high cohort default rates until the federal fiscal year beginning October 1, 2013.
 
If an institution’s FFEL/Direct cohort default rate equals or exceeds 25% in any of the three most recent federal fiscal years, or if its cohort default rate for loans under the Perkins program exceeds 15% for the most recent federal award year (July 1 through June 30), that institution may be placed on provisional certification status for up to three years. Provisional certification by itself does not limit an institution’s access to Title IV program funds but does subject that institution to closer review by the U.S. Department of Education and possible summary adverse action if that institution commits a material violation of Title IV program requirements.
 
To our knowledge, the U.S. Department of Education considers provisional certification based on an institution’s exceeding the cohort default rate thresholds described in the previous paragraph only when that institution is otherwise subject to a U.S. Department of Education renewal of certification review. As of June 30, 2009, 22 of our schools had Perkins cohort default rates in excess of 15% for students who were to begin repayment during the federal award year ended June 30, 2008, the most recent year for which such rates have been calculated. Funds from the Perkins program did not exceed 3% of these schools’ respective net revenues in fiscal 2009. None of these schools has been placed on provisional certification for this reason.
 
Each of our schools whose students participate in the FFEL/Direct program maintains a student loan default management plan if its default rate equals or exceeds 5%. Those plans provide for extensive loan counseling, methods to increase student persistence and completion rates and graduate employment rates, strategies to increase graduate salaries and, for most schools, the use of external agencies to assist the school with loan counseling and loan servicing after a student ceases to attend that school. These activities are in addition to the loan servicing and collection activities of FFEL/Direct lenders and guaranty agencies. The historical default rates experienced by Argosy University and Western State University College of Law have been relatively low, and therefore these schools have engaged in significantly fewer default management activities.
 
Regulatory Oversight.  The U.S. Department of Education is required to conduct periodic reviews to determine whether to renew the eligibility and certification of every institution participating in Title IV programs. Generally such reviews occur every six years, although it typically occurs after three years for an institution on provisional certification. A denial of renewal of certification precludes a school from continuing to participate in Title IV programs. Currently all of our schools are operating under a Provisional Program Participation Agreement with the U.S. Department of Education due to the change of control of the Company which occurred in connection with the Transaction.
 
Financial Responsibility Standards.  Education institutions participating in Title IV programs must satisfy a series of specific standards of financial responsibility. The U.S. Department of Education has adopted standards to determine an institution’s financial responsibility to participate in Title IV programs. The regulations establish three ratios: (i) the equity ratio, intended to measure an institution’s capital resources, ability to borrow and financial viability; (ii) the primary reserve ratio, intended to measure an institution’s ability to support current operations from expendable resources; and (iii) the net income ratio, intended to measure an institution’s profitability. Each ratio is calculated separately, based on the figures in the institution’s most recent annual audited financial statements, and then weighted and combined to arrive at a single composite score. The composite score must be at least 1.5 in order for the institution to be deemed financially responsible without conditions or additional oversight. If an institution fails to meet any of these requirements, the U.S. Department of Education may set restrictions on the institution’s eligibility to participate in Title IV programs. Institutions are evaluated for compliance with these requirements as part of the U.S. Department of Education’s renewal of certification process and also annually as each institution submits its audited financial statements to the U.S. Department of Education. Following the Transaction, the U.S. Department of Education separately considered our and our schools’ compliance with the financial


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responsibility requirements at our consolidated level. Our financial statements did not satisfy the financial responsibility standards for fiscal 2009 on a consolidated basis and will not for the foreseeable future. We are required by the U.S. Department of Education to post a letter of credit and are subject to provisional certification and additional financial and cash monitoring of our disbursements of Title IV funds due to our failure on a consolidated basis to satisfy the financial responsibility standards after the completion of the Transaction resulting from the amount of debt we incurred to complete the Transaction. The amount of this letter of credit is currently set at 10% of the Title IV program funds received by students at our schools during the prior fiscal year. As a result, we posted an $87.9 million letter of credit in October 2006. Due to increases in the aggregate amount of Title IV funds received by our students, we currently post a $120.5 million letter of credit with the U.S. Department of Education. The letter of credit, provisional certification and financial and heightened cash monitoring will be in effect until at least June 2010 and are likely to continue beyond that date. The implementation of heightened cash monitoring has not materially impacted our cash flows from operations.
 
Return of Title IV Funds.  Institutions that receive Title IV funds must follow requirements that ensure the return to the federal student financial aid programs of all unearned funds of a student who withdraws from a program. If refunds are not properly calculated and timely paid, institutions are subject to adverse actions by the U.S. Department of Education. We posted a letter of credit for three of our schools because our fiscal 2008 independent audit indicated that such schools had exceeded federal thresholds for allowable number of late refunds during at least one of its two most recent fiscal years. Our independent audits for fiscal 2009 are currently in process. We have instituted practices and procedures at recently acquired schools to expedite refunds of federal program funds, including payment of refunds by electronic fund transfers.
 
Administrative Capability Requirements.  Regulations of the U.S. Department of Education specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. These criteria require, among other things, that the institution comply with all applicable federal student financial aid regulations, have capable and sufficient personnel to administer Title IV programs, have acceptable methods of defining and measuring the satisfactory academic progress of its students, provide financial aid counseling to its students and submit all reports and financial statements required by the regulations. If an institution fails to satisfy any of these criteria, the U.S. Department of Education may require the repayment of federal student financial aid funds, transfer the institution from the advance system of payment of Title IV program funds to the cash monitoring or reimbursement method of payment, place the institution on provisional certification status or commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.
 
Restrictions on Operating Additional Schools.  The HEA generally requires that certain educational institutions be in full operation for two years before applying to participate in Title IV programs. However, under the HEA and applicable regulations, an institution that is certified to participate in Title IV programs may establish an additional location and apply to participate in Title IV programs at that location without reference to the two-year requirement if such additional location satisfies all other applicable requirements. In addition, a school that undergoes a change of ownership resulting in a change of control (as defined under the HEA) must be reviewed and recertified for participation in Title IV programs under its new ownership. All of our schools are currently provisionally certified due to the Transaction. During the time when a school is provisionally certified, it may be subject to summary adverse action for a material violation of Title IV program requirements and may not establish additional locations without prior approval from the U.S. Department of Education. However, provisional certification does not otherwise limit an institution’s access to Title IV program funds. Our expansion plans are based, in part, on our ability to add additional locations and acquire schools that can be recertified. The U.S. Department of Education has informed us that it will not seek to impose growth restrictions on any of our schools as a result of the Transaction.
 
The “90/10 Rule”.  Under a provision of the HEA commonly referred to as the “90/10 Rule”, an institution will cease to be eligible to participate in Title IV programs if, on a cash accounting basis,


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more than 90% of its revenues for each of two consecutive fiscal years were derived from Title IV programs. If an institution loses its Title IV eligibility under the 90/10 Rule, it may not reapply for eligibility until the end of two fiscal years. Institutions which fail to satisfy the 90/10 Rule for one fiscal year are placed on provisional certification. For our schools that disbursed federal financial aid during fiscal 2009, the percentage of revenues derived from Title IV programs on a cash accounting basis ranged from approximately 55% to 86%, with a weighted average of approximately 70% as compared to a weighted average of approximately 65% in fiscal 2008. We anticipate that our 90/10 rates will continue to increase in fiscal 2010 due to recent increases in grants from the Pell program and other Title IV loan limits, coupled with decreases in the availability of state grants and private loans and the inability of households to pay cash due to the current economic climate. While our consolidated 90/10 rate for fiscal 2010 is projected to remain under the 90% threshold, we project that some of our institutions will exceed the 90% threshold if we do not continue to successfully implement certain changes to these institutions during the fiscal year which would decrease their 90/10 rate, such as increases in international and military students and certain internal restructuring designed to achieve additional operational efficiencies. In prior years, we have successfully addressed 90/10 rate issues when they have arisen through similar changes to operations. Additionally, the revised rules included in the new HEA reauthorization include relief through June 30, 2011 from a $2,000 increase in the annual Stafford loan availability for undergraduate students which became effective July 1, 2008. We anticipate that our 90/10 rate will increase substantially in fiscal 2012 in the event that relief from this additional $2,000 is not extended beyond June 30, 2011, which would adversely affect our ability to comply with the 90/10 Rule.
 
The U.S. House of Representative Committee on Education and Labor passed a bill in July 2009 which, among other things, would extend relief from the recent $2,000 increase in undergraduate Stafford / Direct loans until July 1, 2012, would not deem an institution ineligible to participate in Title IV programs for violating the 90/10 Rule until it violated the rule for three consecutive fiscal years, and would not place an institution on provisional certification for violating the 90/10 Rule until it violated the rule for two consecutive fiscal years. The bill is subject to further consideration and revision by the House and Senate and has not been enacted into law.
 
Restrictions on Payment of Bonuses, Commissions or Other Incentives.  An institution participating in the Title IV programs may not provide any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any person or entity engaged in any student recruiting or admission activities or in making decisions regarding the awarding of Title IV program funds. Effective July 2003, the U.S. Department of Education published regulations to attempt to clarify this so-called “incentive compensation” law. The regulations identify 12 compensation arrangements that the U.S. Department of Education has determined are not in violation of the incentive compensation law, including the payment and adjustment of salaries, bonuses and commissions in certain circumstances. The regulations do not establish clear criteria for compliance in all circumstances, and the U.S. Department of Education has announced that it no longer will review and approve individual schools’ compensation plans prior to their implementation. Although we cannot provide any assurances that the U.S. Department of Education will not find deficiencies in our compensation plans, we believe that our current compensation plans are in compliance with the HEA and the regulations promulgated by the U.S. Department of Education.
 
State Authorization and Accreditation Agencies
 
Each of our U.S. campuses, including our campuses that provide online programs, is authorized to offer education programs and grant degrees or diplomas by the state in which such school is physically located. The level of regulatory oversight varies substantially from state to state. In some U.S. states, the schools are subject to licensure by the state education agency and also by a separate higher education agency. Some states have sought to assert jurisdiction over online educational institutions that offer educational services to residents in the state or that advertise or recruit in the state, notwithstanding the lack of a physical location in the state. State laws may establish standards for instruction, qualifications of


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faculty, location and nature of facilities, financial policies and responsibility and other operational matters. State laws and regulations may limit our ability to obtain authorization to operate in certain states or to award degrees or diplomas or offer new degree programs. Certain states prescribe standards of financial responsibility that are different from those prescribed by the U.S. Department of Education. If we are found not to be in compliance with an applicable state regulation and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or enroll students in that state and may have to cease providing services and advertising in that state, which could have a material adverse effect on our student enrollment and revenues.
 
Each of our U.S. schools is accredited by a national or regional accreditation agency recognized by the U.S. Department of Education, and some educational programs are also programmatically accredited. The level of regulatory oversight and standards can vary based on the agency. Certain accreditation agencies prescribe standards that are different from those prescribed by the U.S. Department of Education.
 
If a school does not meet its accreditation or state requirements, its accreditation and/or state licensing could be limited, modified, suspended or terminated. Failure to maintain licensure or institutional accreditation makes a school ineligible to participate in Title IV programs.
 
Certain of the state authorizing agencies and accrediting agencies with jurisdiction over our schools also have requirements that may, in certain instances, limit our ability to open a new school, acquire an existing school, establish an additional location of an existing school or add new educational programs.
 
Canadian Regulation and Financial Aid
 
The Art Institute of Vancouver is subject to regulation in the Province of British Columbia and in the provinces in which it recruits students. Depending on their province of residence, our Canadian students may receive loans under the federally funded Canada Student Loan Program and/or provincial funding from their province of residence. Canadian schools must meet eligibility standards to administer these programs and must comply with all relevant statutes, rules, regulations and requirements. We believe that The Art Institute of Vancouver currently holds all necessary registrations, approvals and permits and meets all eligibility requirements to administer these governmental financial aid programs. If The Art Institute of Vancouver cannot meet these and other eligibility standards or fails to comply with applicable requirements, it could have a material adverse effect on our business, results of operations, cash flows or financial condition.
 
The British Columbia government, through its Ministry of Advanced Education, regulates private career colleges through an arms length accreditation and registration body called the Private Career Training Institutions Agency of British Columbia (“PCTIA”) and provides financial assistance to eligible students through the StudentAid BC (“SABC”). The student aid program includes a federal component under the Canada Student Loan Program and a provincial portion administered through the provincial SABC program. In order to maintain the right to administer student assistance, The Art Institute of Vancouver must abide by the rules, regulations and administrative manuals and Memorandum of Agreements with the Canada Student Loan Program and the SABC Student Loans Plan.
 
Institutions cannot automatically acquire student aid designation through the acquisition of other student aid eligible institutions. In the event of a change of ownership, including a change in controlling interest, the Ministry of Advanced Education as well as SABC require evidence that the institution has continued capacity and a formal undertaking to comply with registration and student aid eligibility requirements. Given that the Province of British Columbia and PCTIA periodically revise their respective regulations and other requirements and change their respective interpretations of existing laws and regulations, we cannot assure you that the provincial government and PCTIA will agree with our interpretation of each requirement.
 
Canadian schools are required to audit their administration of student aid programs annually or as otherwise directed by SABC. We believe that we have complied with these requirements.


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Employees
 
At June 30, 2009, we employed approximately 11,300 full time employees, of whom approximately 2,700 were faculty members, and approximately 2,100 part-time employees, of whom approximately 1,800 were faculty members. In addition, we also employed approximately 5,600 adjunct faculty members at June 30, 2009. Adjunct faculty members are employed on a term-to-term basis, while part-time faculty members work a regular part-time schedule.
 
Competition
 
The post-secondary education market is highly fragmented and competitive. Our schools compete for students with traditional public and private two-year and four-year colleges and universities and other for-profit providers, including those that offer distance learning programs. Many public and private colleges and universities, as well as other for-profit providers, offer programs similar to those we offer. Public institutions receive substantial government subsidies, and both public and private institutions have access to government and foundation grants, tax-deductible contributions and other financial resources generally not available to for-profit providers. Accordingly, public and private institutions may have facilities and equipment superior to those in the for-profit sector and often can offer lower effective tuition prices. Some of our competitors in both the public and private sectors also have substantially greater financial and other resources than we do.
 
Seasonality in Results of Operations
 
Our quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments at our schools. The seasonality of our business has decreased over the last several years due to an increased percentage of students enrolling in online programs, which generally experience fewer seasonal fluctuations than campus-based programs. Our first quarter is typically our lowest revenue recognition quarter due to student vacations.


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MANAGEMENT
 
In connection with this offering, we amended and restated our articles of incorporation and intend to amend and restate our by-laws. The following summary contains references to provisions of our by-laws, including the composition of the Board of Directors and its committees, the election and term of service of directors and compensation committee interlocks, that will be in effect upon the completion of this offering or within the time period prescribed by the Nasdaq listing rules.
 
Directors and Executive Officers
 
The following table sets forth information regarding our directors, nominees for director and executive officers, including their ages as of August 31, 2009. Our directors are elected annually to serve until the next annual meeting of the shareholders or until their successors are duly elected and qualified. Executive officers serve at the request of the Board of Directors. The Board of Directors has determined that Samuel C. Cowley, Leo F. Mullin and Michael K. Powell are independent in accordance with the listing standards for companies with securities listed on Nasdaq.
 
             
Name
 
Age
  Position
 
Todd S. Nelson
    50     Chief Executive Officer and Director
Robert A. Carroll
    44     Senior Vice President — Chief Information Officer
Joseph A. Charlson
    39     Senior Vice President — Strategic Operations
Anthony F. Digiovanni
    59     Senior Vice President — Chief Marketing Officer
Danny D. Finuf
    49     President, Brown Mackie Colleges
Anthony J. Guida Jr.
    47     Senior Vice President — Regulatory Affairs and Strategic Development
John R. Kline
    46     President, EDMC Online Higher Education
J. Devitt Kramer
    45     Senior Vice President, General Counsel and Secretary
John M. Mazzoni
    46     President, The Art Institutes
Stacey R. Sauchuk
    49     Senior Vice President — Academic Programs and Student Affairs
John T. South, III
    62     Senior Vice President, Chancellor, South University and Chairman of the Board of Directors of Argosy University
Craig D. Swenson
    56     President, Argosy University
Roberta L. Troike
    43     Senior Vice President — Human Resources
Edward H. West
    43     President and Chief Financial Officer
Mick J. Beekhuizen
    33     Director Nominee
Samuel C. Cowley
    49     Director Nominee
Adrian M. Jones
    45     Director
Jeffrey T. Leeds
    53     Director
John R. McKernan, Jr. 
    61     Chairman of the Board of Directors
Leo F. Mullin </