S-4 1 ds4.htm FORM S-4 REGISTRATION STATEMENT Form S-4 Registration Statement
Table of Contents

As filed with the Securities and Exchange Commission on September 27, 2006

Registration No. 333-            

 


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 


Education Management LLC

Education Management Finance Corp.

(Exact name of registrant issuer as specified in its charter)

SEE TABLE OF ADDITIONAL REGISTRANTS

 

Delaware   8249   20-4506022
Delaware   8249   20-4887689
(State or other jurisdiction
of incorporation)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

 


c/o Education Management Corporation

210 Sixth Avenue, 33rd Floor, Pittsburgh, Pennsylvania 15222

(412)-562-0900

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

J. Devitt Kramer, Esq.

Senior Vice President, General Counsel and Secretary

210 Sixth Avenue, 33rd Floor, Pittsburgh, Pennsylvania 15222

(412)-562-0900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

With a copy to:

Richard A. Fenyes, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017-3954

Tel: (212) 455-2000

 


Approximate date of commencement of proposed exchange offers:  As soon as practicable after this Registration Statement is declared effective.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, please check the following box.  ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

 


CALCULATION OF REGISTRATION FEE

 


Title of Each Class of
Securities to be Registered
   Amount
to be
Registered
  Proposed
Maximum
Offering Price
Per Note
  Proposed
Maximum
Aggregate
Offering
Price(1)
   Amount of
Registration
Fee

8 3/4% Senior Notes due 2014

   $375,000,000   100%   $375,000,000    $40,125

10 1/4% Senior Subordinated Notes due 2016

   $385,000,000   100%   $385,000,000    $41,195

Guarantees of 8 3/4% Senior Notes due 2014(3)

   N/A(3)   (3)   (3)    (3)

Guarantees of 10 1/4% Senior Subordinated Notes due 2016(3)

   N/A(3)   (3)   (3)    (3)

(1) Estimated solely for the purpose of calculating the registration fee under Rule 457(f) of the Securities Act of 1933, as amended (the “Securities Act”).
(2) See inside facing page for additional registrant guarantors.
(3) Pursuant to Rule 457(n) under the Securities Act, no separate filing fee is required for the guarantees.

The Registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 



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Table of Additional Registrant Guarantors

 

Exact Name of
Registrant Guarantor as
Specified in its Charter

  

State or Other Jurisdiction of
Incorporation or Organization

  

I.R.S. Employer
Identification Number

  

Address, Including Zip Code
and Telephone Number,
Including Area Code, of
Registrant Guarantor’s
Principal Executive Offices

AID Restaurant, Inc.     

Texas

  

01-0691168

  

8080 Park Lane

Suite 100

Dallas, Texas 75231

214-692-8080

AIH Restaurant, Inc.     

Texas

  

76-0431417

  

1900 Yorktown

Houston, Texas 77056

713-623-2040

AIIM Restaurant, Inc.     

Minnesota

  

41-1977654

  

15 S. 9th St.

LaSalle Building

Minneapolis, Minnesota 55409

612-332-3361

Argosy University Family Center, Inc.     

Minnesota

  

16-1665500

  

310 East 38th St.

Minneapolis, MN 55409

612-827-5981

Brown Mackie Holding Company   

Delaware

  

20-3108775

  

210 Sixth Avenue, 33rd Floor,

Pittsburgh, Pennsylvania 15222

412-562-0900

The Connecting Link, Inc.     

Georgia

  

58-1987235

  

5126 Ralston St.

Ventura, CA 93003

805-654-0739

EDMC Aviation, Inc.     

Pennsylvania

  

20-0212231

  

210 Sixth Avenue, 33rd Floor,

Pittsburgh, Pennsylvania 15222

412-562-0900

EDMC Marketing and Advertising, Inc.     

Georgia

  

58-1591601

  

210 Sixth Avenue, 33rd Floor,

Pittsburgh, Pennsylvania 15222

412-562-0900

Higher Education Services, Inc.     

Georgia

  

58-1983881

  

709 Mall Avenue

Savanah, GA 31406

803-799-9082

MCM University Plaza, Inc.     

Illinois

  

36-4118464

  

210 Sixth Avenue, 33rd Floor, Pittsburgh, Pennsylvania 15222

412-562-0900


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 27, 2006

PRELIMINARY PROSPECTUS

LOGO

Education Management LLC

Education Management Finance Corp.

Offers to Exchange

$375,000,000 aggregate principal amount of its 8 3/4% Senior Notes due 2014 and $385,000,000 of its 10 1/4% Senior Subordinated Notes due 2016, each of which have been registered under the Securities Act of 1933, for any and all of its outstanding 8 3/4% Senior Notes due 2014 and 10 1/4% Senior Subordinated Notes due 2016, respectively.

 


We are conducting the exchange offers in order to provide you with an opportunity to exchange your unregistered notes for freely tradable notes that have been registered under the Securities Act.

The Exchange Offers

 

    We will exchange all outstanding notes that are validly tendered and not validly withdrawn for an equal principal amount of exchange notes that are freely tradable.

 

    You may withdraw tenders of outstanding notes at any time prior to the expiration date of the exchange offers.

 

    The exchange offers expire at 12:00 a.m. midnight, New York City time, on                     , 2006, unless extended. We do not currently intend to extend the expiration date.

 

    The exchange of outstanding notes for exchange notes to be issued in the exchange offer will not be a taxable event for United States federal income tax purposes.

 

    The terms of the exchange notes to be issued in the exchange offer are substantially identical to the outstanding notes, except that the exchange notes will be freely tradable.

Results of the Exchange Offers

 

    The exchange notes may be sold in the over-the-counter market, in negotiated transactions or through a combination of such methods. We do not plan to list the notes on a national market.

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the applicable indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offers, we do not currently anticipate that we will register the outstanding notes under the Securities Act.

 


See “ Risk Factors” beginning on page 23 for a discussion of certain risks that you should consider before participating in the exchange offers.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the exchange notes to be distributed in the exchange offers or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is                     , 2006.


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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. The prospectus may be used only for the purposes for which it has been published and no person has been authorized to give any information not contained herein. If you receive any other information, you should not rely on it. We are not making an offer if these securities in any state where the offer is not permitted.

 


TABLE OF CONTENTS

 

Industry and Market Data

   i

Trademarks

   i

Prospectus Summary

   1

Ownership and Corporate Structure

   8

Summary Historical and Unaudited Pro Forma Consolidated Financial and Other Data

   20

Risk Factors

   23

Forward-Looking Statements

   37

The Transactions

   38

Use of Proceeds

   40

Capitalization

   40

Unaudited Pro Forma Condensed Consolidated Financial Information

   41

Selected Historical Consolidated Financial and Other Data

   44

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   46

Business

   66

Management

   91

Principal Stockholders

   97

Certain Relationships and Related Party Transactions

   99

Description of Other Indebtedness

   101

The Exchange Offers

   104

Description of Notes

   114

Certain United States Federal Income Tax Consequences of the Exchange Offers

   173

Certain Erisa Considerations

   174

Plan of Distribution

   175

Legal Matters

   176

Experts

   176

Where You Can Find More Information

   176

Index to Consolidated Financial Statements

   F-1

INDUSTRY AND MARKET DATA

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 initial purchasers 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 and the U.S. Department of Labor—Bureau of Labor Statistics.

TRADEMARKS

We have proprietary rights to a number of trademarks used in this prospectus which are important to our business, including Argosy University, Brown Mackie College, The Art Institute Online, as well as the names of certain of our schools. We have omitted the “®” and “” trademark designations for such trademarks in this prospectus. Nevertheless, all rights to such trademarks named in this prospectus circular are reserved.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you in making your investment decision. You should carefully read the entire prospectus, including the financial data and related notes and section entitled “Risk Factors,” before making an investment decision.

On June 1, 2006, EM Acquisition Corporation, a Pennsylvania corporation (“EM Acquisition”) formed by investment funds associated with Providence Equity Partners and Goldman Sachs Capital Partners (the “Sponsors”), merged with and into Education Management Corporation (the “Merger”), and investment funds designated by the Sponsors became the owners of Education Management Corporation. Unless the context otherwise requires, references in this prospectus to “we,” “our,” “us,” “the Successor” and “the Company” refer to Education Management LLC and its consolidated subsidiaries (including Education Management Finance Corp.), which consist of all of EDMC’s operations prior to the Merger. References to “EDMC” and “the Predecessor” refer to Education Management Corporation, our indirect parent company. References to our fiscal year refer to the twelve month period ended June 30 of the year referenced.

Our Company

We are among the largest providers of post-secondary education in North America, with more than 72,000 active students as of the fall of 2005. Our educational institutions offer students the opportunity to earn undergraduate and graduate degrees in a broad range of disciplines, including media arts, design, psychology and behavioral sciences, education, information technology, legal studies, business, health sciences and culinary arts. Since 1996, we have generated a compounded annual enrollment growth rate of 18.4% and a compounded annual revenue growth rate of 23.0%.

Over our 35-year operating history, we have expanded the reach of our educational systems and currently operate 71 schools across 24 states in the United States and two Canadian provinces. Additionally, we offer an online education platform, enabling our students to pursue degrees online or through a flexible combination of both online and local campuses. Our programs enable students to earn various degrees, including Doctorate, Master’s, Bachelor’s and Associate’s, as well as certain specialized non-degree diplomas. These academic programs are designed with a distinct emphasis on applied, career-oriented content and are primarily taught by faculty members that possess practical and relevant professional experience in their respective fields.

Our student population includes both traditional students, typically recent high school graduates pursuing their first higher education degree, and working adults, who are pursuing additional education in their current field or preparing for a new profession. Based on information collected by us from graduating students and employers, we believe that of the approximately 12,300 undergraduate students who graduated from our institutions during the calendar year ended December 31, 2005, approximately 88% of those available for employment obtained employment in their fields of study or a related field within six months of graduation. Similar to traditional public and private colleges and universities, each of our schools located in the United States is recognized by accreditation agencies 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 schools are organized and managed through four educational systems, each focused on specific programmatic and degree areas:

 

   

The Art Institutes. The Art Institutes offer Master’s, Bachelor’s and Associate’s degree programs, as well as certain non-degree diploma programs, in graphic design, media arts and animation, multimedia and web design, game art and design, video and digital media production, interior and industrial design,

 

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culinary arts, photography and fashion. Students can pursue their degree at one of our 31 Art Institute campuses in 18 states and two Canadian provinces, including The Art Institute Online, a division of The Art Institute of Pittsburgh.

 

    Argosy University. Argosy University is primarily focused on Doctorate and Master’s degree programs in clinical psychology, counseling, education and business administration. It also offers Bachelor’s and Associate’s degrees in similar fields. There are 18 Argosy University locations in twelve states.

 

    Brown Mackie Colleges. The Brown Mackie Colleges offer Associate’s degree programs, as well as certain non-degree diploma programs, in health sciences, business, information technology, legal studies and design technologies. There are 16 Brown Mackie College campuses in seven states, primarily in the Midwestern United States.

 

    South University. South University offers undergraduate and graduate degree programs in business, legal studies, information technology and health sciences fields through five campuses in the Southeastern United States and online programs.

In addition to the educational systems listed above, we also operate Western State University College of Law in California, which offers Juris Doctor degrees.

We have provided educational services for more than 35 years since the acquisition of our first Art Institute in Pittsburgh in 1970. Throughout our history, we have selectively pursued acquisitions to augment our network, program and degree offerings with established franchises such as Argosy University in 2001 and South University and American Education Centers (renamed the Brown Mackie Colleges) in 2003. Of the 26 acquisitions we have completed, the majority have been select acquisitions of single campuses where the economics of acquiring an existing school were more favorable than opening a new school.

Industry Overview

We believe the post-secondary education market in the U.S. is a $320 billion annual market, which includes public and private two-year and four-year degree granting institutions, graduate and professional schools, and non-degree vocational schools offering specialized diplomas. In the U.S., there are over 17 million students enrolled in over 6,000 institutions that offer Doctorate, Master’s, Bachelor’s and Associate’s degrees and diploma programs. According to the National Center of Education Statistics, traditional students, typically recent high school graduates under 25 years of age who are pursuing their first higher education degree, represent approximately 61% of the national student population, with the remaining 39% comprising non-traditional students, who are largely working adults pursuing additional education in their current field or preparing for a new profession.

We believe there are a number of factors contributing to the long-term growth of the post-secondary industry. First, the shift toward a services-based economy increases the demand for higher levels of education. According to the Bureau of Labor Statistics, over the next decade 61% of projected growth in employment is expected to come from jobs that require at least some college experience. Second, according to the U.S. Census Bureau, the median annual income in 2004 for a person with a Bachelor’s degree was 62% higher than that of a high school graduate. This income benefit of education has helped increase the percentage of adults over 25 years of age with Bachelor’s degrees from 11% in 1970 to 28% in 2004. Third, government and private financial aid in various forms, including loan guarantees, grants and tax benefits for post-secondary students, has consistently increased from $4.4 billion to $142.7 billion between 1971 and 2005, representing a compounded annual growth rate of 10.7%. We believe this support will continue as the 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, with public four-year colleges increasing tuition and fees by 6.9% annually on average over the last ten years, according to the College Board.

 

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We believe that for-profit providers will capture an increasing share of the growing demand for post-secondary education, as this demand has been largely unaddressed by traditional public and private universities. Non-profit public and private institutions may face limited financial capability to expand their offerings in response to the growing demand for education, due to a mix of state funding challenges, declining contributions and significant expenditures on research and the professor tenure system. Certain private institutions may also control enrollments to preserve the perceived prestige and exclusivity of their degree offerings. Additionally, we believe traditional non-profit institutions generally have not emphasized flexible course schedules and online offerings that appeal to working adults, nor have they aggressively pursued fully online course offerings.

As a result, for-profit post-secondary education providers continue to have significant opportunities for growth. The National Center of Education Statistics has reported that, over the last 7 years, enrollments at for-profit post-secondary education institutions have experienced a compounded annual growth rate of approximately 11%, compared to compounded annual growth rate of approximately 2% for traditional non-profit colleges and universities over the same time period. For-profit providers have continued their strong growth, principally due to the higher flexibility of their programmatic offerings and learning structure, their emphasis on applied, career-oriented content and their ability to consistently roll out new campuses and programs. Despite rapid growth, the market share of post-secondary education captured by for-profit providers remains relatively modest with ample room for continued growth. In 2003, according to the National Center for Education Statistics, for-profit institutions accounted for approximately 6% of all post-secondary enrollments, up from 4% in 1997. In addition, for-profit post-secondary providers continue to enlarge the size of the education market through targeting underserved students who might otherwise forgo post-secondary education, increasing marketing budgets and investment in online education, which is the fastest growing segment of the post-secondary market.

The post-secondary education industry is highly fragmented, with no one provider controlling significant market share. Students choose among providers based on programs and degrees offered, program flexibility and convenience, quality of instruction, placement rates, reputation and recruiting effectiveness. Such 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, career-oriented schools.

Our Strengths

We believe that the combination of the following strengths differentiates our business:

 

    Flexible, diverse program offerings and broad degree capabilities. Our operational infrastructure and management approach are highly flexible and enable us to adapt quickly to changing market trends. We continuously monitor and adjust our programs based on changes in demand for new programs, degrees, schedules and delivery methods. We provide education to our students through traditional classroom settings as well as through online instruction. Our educational institutions offer a diverse range of academic programs in the following areas:

 

— Business    — Health sciences
— Information technology    — Media arts
— Education    — Design
— Law and legal studies    — Fashion
— Psychology and behavioral science    — Culinary arts

 

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Our breadth of programmatic and degree offerings enables us to appeal to a diverse range of potential students. This helps to reduce our exposure to a decline in popularity in any one area of study. Our online education platform enables us to leverage our unique educational systems to expand our total addressable market, reaching new students who would otherwise not have the opportunity to attend classes at one of our local campuses.

 

    National presence. We have 71 school locations in 24 states and two Canadian provinces. Our schools are located primarily in major metropolitan areas and we focus our marketing efforts on generating demand within a 100-mile radius of the campus. Throughout our history, we have invested in our schools in order to develop what we believe is an exceptional portfolio of schools, offering state-of-the-art facilities and learning infrastructure. Our schools provide attractive and efficient learning environments including many elements found in traditional colleges, such as libraries, bookstores and laboratories, as well as the modern equipment necessary for the various programs we offer. This aids us in recruiting and retaining students and faculty. For the fiscal year ended June 30, 2006, no single campus accounted for more than 5.5% of our total revenues.

 

    Strong reputation for positive student outcomes. We believe that the success of our business is based upon our ability to generate positive outcomes for our students in terms of education, graduate employment and starting salary. We use these performance metrics to determine a part of our management compensation both at the corporate and campus level. This focus on student achievement has resulted in a consistent record of high student retention and graduate employment rates, which have been critically important in maintaining a strong reputation among students, faculty and employers. Based on information collected by us from graduating students and employers, we believe that, of the approximately 12,300 undergraduate students who graduated from our institutions during the calendar year ended December 31, 2005, approximately 88% of those available for employment obtained employment in their fields of study or a related field within six months of graduation. Employers of our graduates include companies such as Nordstrom, Electronic Arts, Expo Design Center, Ethan Allen and Nike.

 

    Strong regulatory reputation and recognition. Each of our schools located in the United States is authorized to offer educational programs and grant degrees or diplomas by the state in which the school is located and is accredited by a national or regional accreditation agency recognized by the U.S. Department of Education. Authorization by the state and accreditation by a recognized accrediting agency enables our students to access federal student loans, grants and other forms of public and private financial aid. In the regulated post-secondary education market, maintaining accreditation and state authorization at various levels is critical for operating existing schools, opening new schools and introducing new programs. We have established a culture of compliance and devote substantial resources to ensure that we meet applicable rules, standards and laws. Our success in this regard is evidenced by the success we have had maintaining the licensing and accreditation of our schools.

 

    Highly attractive business model. We have predictable and consistent revenue growth, a scalable operating cost structure and significant operating cash flow generation.

Predictable and consistent revenue growth. We believe that our revenue model is highly predictable given the extended period of student enrollment, historically stable retention rates and annual tuition increases. Since 1996, we have demonstrated a compounded annual enrollment growth rate of 18.4% while increasing our tuition on average by 5.7% annually. This combination of enrollment growth and tuition increases has resulted in a compounded annual revenue growth rate of 23.0% since 1996.

Margin expansion from scalable cost structure. Management’s focus on increasing the efficiency of our existing physical infrastructure and leveraging the costs of operating these facilities over a broader student population is a key component of our operating margin improvement. The scalable nature of our cost structure at the campus level has enabled us to consistently expand our EBITDA margins in each of the last

 

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10 years, improving from 15.4% in the fiscal year 1996 to 18.9% in the fiscal year 2006, which we refer to as fiscal 2006, an average of more than 30 basis points of annual improvement. With an aim towards maximizing utilization, we monitor and make adjustments to our facilities’ operation plan based on changes in demand for new programs, class schedules and other elements of our operations. In addition, we expect our shared location strategy to allow us to continue to leverage our historical investment in school facilities and to control our ongoing operational and maintenance costs.

Significant operating cash flow generation. The combination of moderate maintenance capital requirements and a positive benefit from working capital enables us to convert a significant portion of our revenue to cash available for investment in existing campuses, organic growth initiatives and debt service. Additionally, given the advanced payment of tuition and fees which is customary for the post-secondary education industry, our working capital is on average a source of cash, although subject to significant seasonal fluctuations.

Our Business Strategy

We intend to pursue the following key elements of our current business strategy:

 

    Augment and improve our academic curricula and programs

Create new and revise existing academic programs. We continually strive to identify emerging industry trends in order to understand the evolving educational needs of our students and the employment market. We rapidly develop and introduce new programs in response to these needs with the assistance of our curriculum advisory teams, which consist of over 1,200 industry experts and employers. For example, during fiscal 2006, we introduced six new academic programs, including criminal justice, fashion and retail management, simulation and virtual environments, and community college executive leadership. We also regularly evaluate our existing program offerings and revise existing courses to meet changing market needs.

Rollout existing programs to additional schools. Our broad base of 71 schools enables us to drive growth through introducing programs that have been successful at one school to other schools within our systems. During fiscal 2006, we successfully rolled out 87 existing educational programs to additional schools. The rollout of existing programs at additional campuses allows us to drive enrollment growth at existing locations with minimal incremental costs, leverage existing curriculum development and quickly capitalize on identified market needs.

 

    Continue to improve our marketing and student services

Increase and optimize the use of marketing resources. We continuously evaluate the efficiency of various marketing media channels by student, program, campus and school systems, which enables us to rapidly optimize the allocation of our marketing budget. We also put significant emphasis on recruiting qualified admission officers. During fiscal 2006, we increased the number of admissions officers at our schools by approximately 36%.

Continue to emphasize student services. In student services, we focus on student retention and assisting our students in obtaining full-time employment. We maintain dedicated career services personnel at our schools, who provide assistance by establishing relationships with potential employers and preparing students for interviews and post-graduate employment. We also evaluate the placement of our students from each of our programs to assist us in determining how to allocate our resources in the future. Our focus on student outcomes also helps us to maintain a strong student retention rate and manage our cohort loan default rates, enhancing profitability and regulatory compliance. It also helps us to attract new students, because approximately 26% of the new students at our Art Institutes first come to us through referrals, generally from satisfied existing students and alumnus.

 

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    Expand the number of online students

We believe that a significant growth opportunity exists in offering fully-online programs to students who may not otherwise have attended our schools. As the quality and acceptance of online education continues to increase, we continue to invest in both expanding our online course offerings and enhancing our online marketing presence. Online programs primarily target students who are not able to pursue campus-based post-secondary education, due to schedule and location constraints, and thus address an additional market beyond our campus-based target demographics. Online courses provide these students flexible schedules which can be tailored around a student’s working hours and can be combined with traditional on-campus classes. Online offerings represent an attractive avenue for growth that utilizes many of our existing education curricula while requiring less capital expenditures relative to campus-based expansion. Our online efforts continue to experience significant success, with approximately 4,100 students taking all of their courses online and approximately 9,100 students taking at least one of their courses online during the fall term of 2005, compared to approximately 2,500 and 6,400 students, respectively, during the same term in 2004.

 

    Grow our portfolio of schools in a capital-efficient manner

Develop new school locations. We believe that there are many attractive opportunities available to us to develop new school locations in the United States. Prior to opening a new campus, we perform a detailed analysis of the geographic area, including ranking the statistical attractiveness of a metropolitan area based on population size and growth, the percentage of the population likely to pursue education in a particular program area and the level of unmet demand represented by a student population not served by existing local post-secondary educational institutions. In opening new campuses, we utilize our centralized infrastructure and existing curricula to cost-effectively expedite the opening and ramp-up of a location. Since the beginning of fiscal year 2005, we have opened eight new school locations.

Utilize shared services locations. Since fiscal 2004, we have combined the facilities and administrative functions of some of our schools that are located in the same geographic regions. The administrative services which are combined for two or more schools located within a single facility may include career services, finance, human resources and information technology, among other functions. Currently, 24 of our schools are in shared services locations, and we plan to continue to utilize this model for new campuses in order to minimize capital expenditures and operating expenses, and increase facility utilization.

 


Education Management Corporation was incorporated under Pennsylvania law in 1962. EM Acquisition Corporation was incorporated under Pennsylvania law on February 3, 2006. Education Management Holdings LLC and Education Management LLC were organized under Delaware law on March 15, 2006. Education Management Finance Corp. was incorporated under Delaware law on May 2, 2006. EDMC’s principal executive offices are located at 210 Sixth Avenue, 33rd Floor, Pittsburgh, Pennsylvania 15222 and its telephone number is (412) 562-0900.

 

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The Transactions

On March 3, 2006, EM Acquisition, formed by investment funds associated with the Sponsors, entered into the Merger Agreement with EDMC pursuant to which EM Acquisition merged with and into EDMC (the “Merger”). As a result of the Merger, investment funds designated by the Sponsors own EDMC.

At the effective time of the Merger, each share of EDMC’s common stock outstanding immediately prior to the Merger (other than shares held in treasury or shares held by any of our respective subsidiaries) was cancelled and converted into the right to receive $43.00 in cash. As described below, our Chief Executive Officer and our Chief Financial Officer entered into agreements with the Sponsors pursuant to which they agreed, among other things, to participate in the equity of EDMC in connection with the Transactions (as defined below). These executive officers are referred to in this prospectus as the “senior management participants.” Investment funds designated by Providence Equity and Goldman Sachs Capital Partners each invested $500.0 million in equity securities of EDMC for a total equity investment by the Sponsors of $1,000.0 million as part of the Transactions. Certain other investors, including certain affiliates of Goldman Sachs Capital Partners, co-invested with the investment funds designated by the Sponsors (the “Co-Investors,” and together with investment funds designated by the Sponsors and the senior management participants, the “Investors”), invested an aggregate of $300.0 million of equity in EDMC as part of the Transactions. Upon the consummation of the Transactions, the senior management participants purchased an aggregate of $3.5 million of the Sponsors’ equity interests in EDMC. We anticipate selling an additional $9.5 million of equity interests to other members of senior management pursuant to an employee stock purchase plan. In July 2006, Leeds Equity Partners IV, L.P. (“Leeds Equity Partners”) exercised an option (the “Leeds Option”) to purchase $100.0 million of EDMC securities from the Sponsors ($50.0 million from each of Providence Equity and Goldman Sachs Capital partners), which reduced the Sponsors’ total investment to $896.5 million. (From and after the exercise of the Leeds Option, the term “Co-Investors” includes Leeds Equity Partners). The Merger was approved at a special meeting held on May 25, 2006 by the affirmative vote of a majority of the votes cast by holders of shares of EDMC’s common stock entitled to vote thereon. The Merger became effective upon the closing of the Transactions on June 1, 2006.

The purchase of EDMC by the Investors was financed by borrowings under our new senior secured credit facilities, the issuance of the notes offered in the Transactions, the equity investment and participation described above and cash on hand.

The offering of the notes, the initial borrowings under our senior secured credit facilities, the equity investment and participation by the Investors in EDMC, the Merger and other related transactions are collectively referred to in this prospectus as the “Transactions.” For a more complete description of the Transactions, see “Ownership and Corporate Structure,” “The Merger” and “Description of Other Indebtedness.”

 

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OWNERSHIP AND CORPORATE STRUCTURE

The following diagram below sets forth our corporate structure. Subsidiaries of Education Management LLC own all of the operating assets of EDMC. See “The Merger” and “Principal Stockholders.” This structure was achieved through a series of equity contributions that occurred in connection with the Merger.

LOGO


(1) Includes $1,000.0 million of cash equity contributed by investment funds designated by the Sponsors and $300.0 million of cash equity contributed by the Co-Investors. Upon the consummation of the Transactions, the senior management participants purchased an aggregate of $3.5 million of the Sponsors’ equity interests in EDMC. In July 2006, the Sponsors sold $100.0 million of their EDMC securities to the Co-Investors, reducing the Sponsors’ total investment to $896.5 million.
(2) The obligations under our senior 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 exchange 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.
(3) Upon the closing of the Transactions, we entered into a $300.0 million revolving credit facility with a six-year maturity, of which $50.0 million was drawn on the closing date of the Transactions. To satisfy certain regulatory requirements, EDMC and its subsidiaries will be required to maintain a letter of credit in favor of the U.S. Department of Education, which will be provided and reduce availability under our revolving credit facility. The U.S. Department of Education has notified us that the letter of credit will be approximately $87.9 million during the first year after the Transactions and is due on October 28, 2006.
(4) Upon the closing of the Transactions, we entered into a $1,185.0 million term loan facility with a seven-year maturity.
(5) 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 outstanding notes.

 

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Sources and Uses

The sources and uses of the funds for the Transactions are shown in the table below (in thousands).

 

Sources of funds

        

Uses of funds:

    

Revolving credit facility(1)

   $50,000    

Equity purchase price(4)

   $3,380,598

Cash and cash equivalents from
Predecessor(5)

   374,078    

Cash and cash equivalents to Successor(5)

   147,750

Senior secured term loan facilities(2)

   1,185,000    

Transaction costs(6)

   140,730

Senior Notes due 2014 at 8.75%

   375,000       

Senior Subordinated Notes due 2016 at 10.25%

   385,000       

Equity contribution by Sponsors and other investors(3)

   1,300,000       
             

Total sources of funds

   $3,669,078 (7)  

Total uses of funds

   $3,669,078
             

(1) Upon the closing of the Transactions, we entered into a $300.0 million revolving credit facility with a six-year maturity, of which $50.0 million was drawn on the closing date of the Transactions in order to satisfy certain regulatory financial ratios. The U.S. Department of Education has notified us that we will be required to maintain an $87.9 million letter of credit in favor of the U.S. Department of Education due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transactions. The letter of credit, which is due by October 28, 2006, will be provided and reduce availability under our revolving credit facility.
(2) Upon the closing of the Transactions, we entered into a $1,185.0 million term loan facility with a seven-year maturity.
(3) Represents $1,000.0 million invested in equity securities of EDMC by investment funds designated by the Sponsors and $300.0 million invested in equity securities of EDMC by the Co-Investors. Upon the consummation of the Transactions, the senior management participants purchased an aggregate of $3.5 million of the Sponsors’ equity interests in EDMC. Following the closing of the Transactions, the Sponsors sold an additional $100.0 million of their EDMC securities to the Co-Investors, reducing the Sponsors’ total investment to $896.5 million.
(4) The holders of outstanding shares of common stock received $43.00 in cash per share in connection with the Transactions. Includes 76.0 million shares outstanding and 0.6 million of restricted shares plus intrinsic value of options outstanding of $88.6 million, which is calculated based on approximately 4.4 million options outstanding with an average exercise price of $22.82 per share.
(5) Excludes restricted cash.
(6) Fees and expenses associated with the Transactions, including placement and other financing fees, advisory fees, transaction fees paid to affiliates of the Sponsors, compensation expenses, payroll taxes and other transaction costs and professional fees. These amounts have been derived from Education Management LLC’s audited consolidated financial statements and related notes appearing elsewhere in this prospectus.
(7) We anticipate selling an additional $9.5 million of equity interests to other members of senior management in September 2006 pursuant to an employee stock purchase plan.

 

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The Sponsors

Providence Equity Partners Inc.

Providence Equity Partners Inc. (“Providence Equity”) is a global private investment firm specializing in equity investments in media, communications and information companies around the world. The principals of Providence Equity manage funds with over $9 billion in equity commitments and have invested in more than 80 companies operating in over 20 countries since the firm’s inception in 1990. Significant investments include Bresnan Broadband Holdings, Casema, Comhem, eircom, Kabel Deutschland, Metro-Goldwyn-Mayer, Ono, PanAmSat, ProSiebenSat.1, Recoletos, SunGard, VoiceStream Wireless, Warner Music Group, and Western Wireless. Providence Equity is headquartered in Providence, Rhode Island and also has offices in New York and London.

Goldman Sachs Capital Partners

Founded in 1869, Goldman Sachs is one of the oldest and largest investment banking firms. Goldman Sachs is also a global leader in private equity and mezzanine investing. Established in 1986, the GS Capital Partners Funds are part of the firm’s Principal Investment Area in the Merchant Banking Division. Goldman Sachs’ Principal Investment Area has formed 12 investment vehicles aggregating $35 billion of capital to date. Significant investments include Allied World Assurance, Burger King, Coffeyville Resources, Kabel Deutschland, Nalco Company, Sanyo Electric, SunGard, VoiceStream Wireless, Western Wireless, and YES Network. With $8.5 billion in committed capital, GS Capital Partners V is the current primary investment vehicle for Goldman Sachs to make privately negotiated equity investments. Goldman Sachs’ Principal Investment Area is headquartered in New York and also has offices in London, San Francisco, Hong Kong and Tokyo.

 

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The Exchange Offers

In this prospectus, the term “outstanding senior notes” refers to the 8 3/4% Senior Notes due 2014 and the term “outstanding senior subordinated notes” refers to the 10 1/4% Senior Subordinated Notes due 2016, both of which are referred to together as the “outstanding notes.” The term “exchange senior notes” refers to the 8 3/4% Senior Notes due 2014 and the term “exchange senior subordinated notes” refers to the 10 1/4% Senior Subordinated Notes due 2016, each as registered under the Securities Act of 1933, as amended (the “Securities Act”) and both of which are referred to together as the “exchange notes.” The terms “senior notes” and “senior subordinated notes” refer collectively to the outstanding senior notes and exchange senior notes and to the outstanding senior subordinated notes and exchange senior subordinated notes, respectively. The term “notes” refers collectively to the outstanding notes and the exchange notes.

On June 1, 2006, Education Management LLC and Education Management Finance Corp. issued $375 million aggregate principal amount of 8 3/4% Senior Notes due 2014 and $385 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2016 in a private offering.

 

General

In connection with the private offering, Education Management LLC, Education Management Finance Corp. and the guarantors of the outstanding notes entered into registration rights agreements with the initial purchasers in which they agreed, among other things, to deliver this prospectus to you and make the exchange offers. You are entitled to exchange in the applicable exchange offer your outstanding notes for exchange notes which are identical in all material respects to the outstanding notes except:

 

    the exchange notes have been registered under the Securities Act;

 

    the exchange notes are not entitled to any registration rights which are applicable to the outstanding notes under the registration rights agreements; and

 

    the liquidated damages provisions of the registration rights agreements are no longer applicable.

 

The Exchange Offers

Education Management LLC and Education Management Finance Corp. are offering to exchange:

 

    $375 million aggregate principal amount of 8 3/4% Senior Notes due 2014 which have been registered under the Securities Act for any and all of its existing 8 3/4% Senior Notes due 2014; and

 

    $385 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2016 which have been registered under the Securities Act for any and all of its existing 10 1/4% Senior Subordinated Notes due 2016;

 

 

You may only exchange outstanding notes in minimum denominations of $2,000 and integral multiples of $1,000 in excess of $2,000.

 

Resale

Based on an interpretation by the staff of the Securities and Exchange Commission (the “SEC”) set forth in no-action letters issued to third parties, we believe that the exchange notes issued pursuant to the exchange offers in exchange for outstanding notes may be offered for

 

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resale, resold and otherwise transferred by you (unless you are our “affiliate” within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that:

 

    you are acquiring the exchange notes in the ordinary course of your business; and

 

    you have not engaged in, do not intend to engage in, and have no arrangement or understanding with any person to participate in, a distribution of the exchange notes.

 

 

If you are a broker-dealer and receive exchange notes for your own account in exchange for outstanding notes that you acquired as a result of market-making activities or other trading activities, you must acknowledge that you will deliver this prospectus in connection with any resale of the exchange notes. See “Plan of Distribution.”

 

 

Any holder of outstanding notes who:

 

    is our affiliate;

 

    does not acquire exchange notes in the ordinary course of its business; or

 

    tenders its outstanding notes in the exchange offers with the intention to participate, or for the purpose of participating, in a distribution of exchange notes

 

 

cannot rely on the position of the staff of the SEC enunciated in Morgan Stanley & Co. Incorporated (available June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988), as interpreted in the SEC’s letter to Shearman & Sterling, dated available July 2, 1993, or similar no-action letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale of the exchange notes.

 

Expiration Date

The exchange offers will expire at 12:00 a.m. midnight, New York City time, on                    , 2006, unless extended by Education Management LLC and Education Management Finance Corp. Education Management LLC and Education Management Finance Corp. do not currently intend to extend the expiration date.

 

Withdrawal

You may withdraw the tender of your outstanding notes at any time prior to the expiration of the applicable exchange offer. Education Management LLC and Education Management Finance Corp. will return to you any of your outstanding notes that are not accepted for any reason for exchange, without expense to you, promptly after the expiration or termination of the applicable exchange offer.

 

Conditions to the Exchange Offers

Each exchange offer is subject to customary conditions, which Education Management LLC and Education Management Finance Corp. may waive. See “The Exchange Offers—Conditions to the Exchange Offers.”

 

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Procedures for Tendering Outstanding Notes

If you wish to participate in either exchange offer, you must complete, sign and date the applicable accompanying letter of transmittal, or a facsimile of such letter of transmittal, according to the instructions contained in this prospectus and the letter of transmittal. You must then mail or otherwise deliver the applicable letter of transmittal, or a facsimile of such letter of transmittal, together with the outstanding notes and any other required documents, to the exchange agent at the address set forth on the cover page of the letter of transmittal.

 

 

If you hold outstanding notes through The Depository Trust Company (“DTC”) and wish to participate in the exchange offers, you must comply with the Automated Tender Offer Program procedures of DTC by which you will agree to be bound by the letter of transmittal. By signing, or agreeing to be bound by, the letter of transmittal, you will represent to us that, among other things:

 

    you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

 

    you do not have an arrangement or understanding with any person or entity to participate in the distribution of the exchange notes;

 

    you are acquiring the exchange notes in the ordinary course of your business; and

 

    if you are a broker-dealer that will receive exchange notes for your own account in exchange for outstanding notes that were acquired as a result of market-making activities, that you will deliver a prospectus, as required by law, in connection with any resale of such exchange notes.

 

Special Procedures for Beneficial Owners

If you are a beneficial owner of outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee, and you wish to tender those outstanding notes in the applicable exchange offer, you should contact the registered holder promptly and instruct the registered holder to tender those outstanding notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the applicable letter of transmittal and delivering your outstanding notes, either make appropriate arrangements to register ownership of the outstanding notes in your name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time and may not be able to be completed prior to the expiration date.

 

Guaranteed Delivery Procedures

If you wish to tender your outstanding notes and your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the applicable letter of transmittal or any other required documents, or you cannot comply with the procedures under

 

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DTC’s Automated Tender Offer Program for transfer of book-entry interests, prior to the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures set forth in this prospectus under “The Exchange Offers—Guaranteed Delivery Procedures.”

 

Effect on Holders of Outstanding Notes

As a result of the making of, and upon acceptance for exchange of all validly tendered outstanding notes pursuant to the terms of the exchange offers, Education Management LLC, and Education Management Finance Corp. and the guarantors of the notes will have fulfilled a covenant under the applicable registration rights agreement. Accordingly, there will be no increase in the interest rate on the outstanding notes under the circumstances described in the registration rights agreements. If you do not tender your outstanding notes in the applicable exchange offer, you will continue to be entitled to all the rights and limitations applicable to the outstanding notes as set forth in the applicable indenture, except Education Management LLC, Education Management Finance Corp. and the guarantors of the notes will not have any further obligation to you to provide for the exchange and registration of the outstanding notes under the applicable registration rights agreement. To the extent that outstanding notes are tendered and accepted in the exchange offers, the trading market for outstanding notes could be adversely affected.

 

Consequences of Failure to Exchange

All untendered outstanding notes will continue to be subject to the restrictions on transfer set forth in the outstanding notes and in the applicable indenture. In general, the outstanding notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. Other than in connection with the exchange offers, Education Management LLC, Education Management Finance Corp. and the guarantors of the notes do not currently anticipate that they will register the outstanding notes under the Securities Act.

 

United States Federal Income Tax Consequences

The exchange of outstanding notes for exchange notes in the exchange offers will not be a taxable event for United States federal income tax purposes. See “Certain United States Federal Income Tax Consequences of the Exchange Offers.”

 

Use of Proceeds

We will not receive any cash proceeds from the issuance of exchange notes in the exchange offers. See “Use of Proceeds.”

 

Exchange Agent

The Bank of New York is the exchange agent for the exchange offers. The addresses and telephone numbers of the exchange agent are set forth in the section captioned “The Exchange Offers—Exchange Agent.”

 

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The Exchange Notes

The summary below describes the principal terms of the exchange notes. Certain of the terms and conditions described below are subject to important limitations and exceptions. The “Description of Notes” section of this prospectus contains a more detailed description of the terms and conditions of the outstanding notes and the exchange notes. The exchange notes will have terms identical in all material respects to the outstanding notes, except that the exchange notes will not contain terms with respect to transfer restrictions, registration rights and additional interest for failure to observe certain obligations in the applicable registration rights agreement.

 

Issuers

Education Management LLC and Education Management Finance Corp., a newly formed wholly-owned subsidiary of Education Management LLC, jointly and severally issued the outstanding notes. 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 outstanding notes.

 

Securities Offered

$760.0 million aggregate principal amount of notes, consisting of:

 

    $375.0 million aggregate principal amount of 8 3/4% Senior Notes due 2014; and

 

    $385.0 million aggregate principal amount of 10 1/4% Senior Subordinated Notes due 2016.

 

Maturity

The exchange senior notes will mature on June 1, 2014.

 

 

The exchange senior subordinated notes will mature on June 1, 2016.

 

Interest Rate

The exchange senior notes will bear interest at a rate of 8 3/4% per annum.

 

 

The exchange senior subordinated notes will bear interest at a rate of 10 1/4% per annum.

 

Interest Payment Dates

June 1 and December 1, beginning on December 1, 2006. Interest will accrue from the issue date of the exchange notes.

 

Ranking

The exchange senior notes will be our senior unsecured obligations and will:

 

    rank senior in right of payment to our future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the exchange senior notes, including the exchange senior subordinated notes;

 

    rank equally in right of payment to all of our existing and future senior debt and other obligations that are not, by their terms, expressly subordinated in right of payment to the exchange senior notes; and

 

   

be effectively subordinated in right of payment to all of our existing and future secured debt (including obligations under our senior secured credit facilities), to the extent of the value of the

 

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assets securing such debt, and be structurally subordinated to all obligations of each of our subsidiaries that is not a guarantor of the exchange senior notes.

 

 

Similarly, the guarantees of the exchange senior notes will be senior unsecured obligations of the guarantors and will:

 

    rank senior in right of payment to all of the applicable guarantor’s future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the exchange senior notes, including such guarantor’s guarantee under the exchange senior subordinated notes;

 

    rank equally in right of payment to all of the applicable guarantor’s existing and future senior debt and other obligations that are not, by their terms, expressly subordinated in right of payment to the exchange senior notes; and

 

    be effectively subordinated in right of payment to all of the applicable guarantor’s existing and future secured debt (including such guarantor’s guarantee under our senior secured credit facilities), to the extent of the value of the assets securing such debt, and be structurally subordinated to all obligations of any subsidiary of a guarantor if that subsidiary is not also a guarantor of the exchange senior notes.

 

 

The exchange senior subordinated notes will be our unsecured senior subordinated obligations and will:

 

    be subordinated in right of payment to our existing and future senior debt, including our senior secured credit facilities and the exchange senior notes;

 

    rank equally in right of payment to all of our future senior subordinated debt;

 

    be effectively subordinated in right of payment to all of our existing and future secured debt (including our senior secured credit facilities), to the extent of the value of the assets securing such debt, and be structurally subordinated to all obligations of each of our subsidiaries that is not a guarantor of the exchange senior subordinated notes; and

 

    rank senior in right of payment to all of our future debt and other obligations that are, by their terms, expressly subordinated in right of payment to the exchange senior subordinated notes.

 

 

Similarly, the guarantees of the exchange senior subordinated noted will be unsecured senior subordinated obligations of the guarantors and will:

 

    be subordinated in right of payment to all of the applicable guarantor’s existing and future senior debt, including such guarantor’s guarantee under our senior secured credit facilities and the exchange senior notes;

 

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    rank equally in right of payment to all of the applicable guarantor’s future senior subordinated debt;

 

    be effectively subordinated in right of payment to all of the applicable guarantor’s existing and future secured debt (including such guarantor’s guarantee under our senior secured credit facilities), to the extent of the value of the assets securing such debt, and be structurally subordinated to all obligations of any subsidiary of a guarantor if that subsidiary is not also a guarantor of the exchange senior subordinated notes; and

 

    rank senior in right of payment to all of the applicable guarantor’s future subordinated debt and other obligations that are, by their terms, expressly subordinated in right of payment to the exchange senior subordinated notes.

 

 

As of June 30, 2006 (1) the senior notes and related guarantees would have ranked senior to the $385.0 million of senior subordinated notes, (2) the senior subordinated notes and related guarantees would have ranked junior to approximately $1,185.0 million of senior indebtedness under the senior secured credit agreement, $160.0 million outstanding under the revolving credit facility and the $375.0 million senior notes and (3) we had an additional $140.0 million of unutilized capacity under our senior secured revolving credit facility.

 

Guarantees

The exchange notes will be fully and unconditionally guaranteed by all of Education Management LLC’s existing direct and indirect domestic restricted subsidiaries, other than any subsidiary that directly owns or operates a school or has been formed for such purpose and has no material assets, and will also be guaranteed by certain future restricted subsidiaries that guarantee other debt. Our guarantor subsidiaries accounted for approximately $9.7 million, or 0.8%, of our total revenue, and a loss of approximately $5.4 million, or 2.4%, of our total EBITDA, in each case for the year ended June 30, 2006, and approximately $0.5 million, or less than 0.1%, of our total assets, and approximately $3.3 million, or 0.1%, of our total liabilities, in each case as of June 30, 2006.

 

 

Since our non-guarantor subsidiaries are our primary source of revenue, the guarantors will have limited ability to make payments in respect of the exchange notes if the issuers are unable to satisfy their payment obligations. As a result, the guarantees will be of limited value.

 

Optional Redemption

Prior to June 1, 2010, we will have the option to redeem some or all of the exchange senior notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium (as described in “Description of Notes—Optional Redemption—Senior Notes”) plus accrued and unpaid interest to the redemption date. Beginning on June 1, 2010, we may redeem some or all of the exchange senior notes at the redemption prices listed under “Description of Notes—Optional Redemption—Senior Notes” plus accrued interest on the exchange senior notes to the date of redemption.

 

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Prior to June 1, 2011, we will have the option to redeem some or all of the exchange senior subordinated notes for cash at a redemption price equal to 100% of their principal amount plus an applicable make-whole premium (as described in “Description of Notes—Optional Redemption—Senior Subordinated Notes”) plus accrued and unpaid interest to the redemption date. Beginning on June 1, 2011, we may redeem some or all of the exchange senior subordinated notes at the redemption prices listed under “Description of Notes—Optional Redemption—Senior Subordinated Notes” plus accrued interest on the exchange senior subordinated notes to the date of redemption.

 

Optional Redemption After Certain Equity Offerings

At any time (which may be more than once) (i) before June 1, 2009, we may choose to redeem up to 35% of the exchange senior notes at a redemption price equal to 108.75% of the face amount thereof and (ii) before June 1, 2009 we may choose to redeem up to 35% of the exchange senior subordinated notes at a redemption price equal to 110.25% of the face amount thereof, in each case, with proceeds that we raise in one or more equity offerings, as long as at least 50% of the aggregate principal amount of the exchange notes issued of the applicable series remains outstanding afterwards.

 

 

See “Description of Notes—Optional Redemption.”

 

Change of Control

Upon the occurrence of a change of control, you will have the right, as holders of the exchange notes, to require us to repurchase some or all of the exchange notes at 101% of their face amount, plus accrued and unpaid interest to the repurchase date. See “Description of Notes—Repurchase at the Option of Holders—Change of Control.”

 

 

We may not be able to pay you the required price for exchange notes you present to us at the time of a change of control, because:

 

    we may not have enough funds at that time; or

 

    terms of our senior debt, including, in the case of the exchange senior subordinated notes, the indenture governing the exchange senior notes, may prevent us from making such payment.

 

 

Your right to require us to repurchase a series of notes upon the occurrence of a change of control will be suspended during any time that the applicable series of notes has investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s.

 

Restrictive Covenants

We will issue the exchange senior notes and the exchange senior subordinated notes under separate indentures. The indentures governing the notes contain covenants limiting our ability and the ability of our restricted subsidiaries to:

 

    incur additional debt or issue certain preferred shares;

 

    pay dividends on or make distributions in respect of our capital stock or make other restricted payments;

 

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    make certain investments;

 

    sell certain assets;

 

    create liens on certain assets to secure debt;

 

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

 

    enter into certain transactions with our affiliates; and

 

    designate our subsidiaries as unrestricted subsidiaries.

 

 

These covenants are subject to a number of important limitations and exceptions. See “Description of Notes.” These covenants will be superseded with respect to a series of notes at all times when the applicable series of notes have investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s but will be reinstated if such notes cease to have an investment grade rating.

 

No Public Market

The exchange notes will be freely transferable but will be new securities for which there will not initially be a market. Accordingly, we cannot assure you whether a market for the exchange notes will develop or as to the liquidity of the market. The initial purchasers in the private offering of the outstanding notes have advised us that they currently intend to make a market in the exchange notes. The initial purchasers are not obligated, however, to make a market in the exchange notes, and any such market-making may be discontinued by the initial purchasers in their discretion without notice.

Risk Factors

Investing in the notes involves substantial risks. See “Risk Factors” for a description of some of the risks you should consider before investing in the notes.

 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA

Set forth below is summary historical consolidated financial data and summary unaudited pro forma consolidated financial data of our business, at the dates and for the periods indicated. The historical data for the fiscal years ended June 30, 2004 and 2005 and the period from July 1, 2005 through May 31, 2006 have been derived from Education Management Corporation’s historical consolidated financial statements included elsewhere in this prospectus and the historical data for the period June 1 through June 30, 2006 and as of June 30, 2006 have been derived from Education Management LLC’s historical consolidated financial statements included elsewhere in this prospectus. All such periods which have been audited by Ernst & Young LLP. The Predecessor financial data contain information relating to Education Management Corporation prior to the consummation of the Transactions. The Successor financial data contain information relating to Education Management LLC after consummation of the Transactions.

The summary unaudited pro forma consolidated financial statement of operations and other financial data for the twelve months ended June 30, 2006 have been prepared to give effect to the Transactions as if they had occurred on July 1, 2005. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The summary unaudited pro forma consolidated financial data are for informational purposes only and do not purport to represent what our results of operations or financial position actually would have been if the Transactions had occurred at any date, and such data do not purport to project the results of operations for any future period.

The summary historical and unaudited pro forma consolidated financial data should be read in conjunction with “Pro Forma Condensed Consolidated Financial Information,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes appearing elsewhere in this prospectus.

The combined results for the fiscal year ended June 30, 2006 (fiscal 2006) represent the combination of the Predecessor period from July 1, 2005 through May 31, 2006 and the Successor period from June 1, 2006 through June 30, 2006. This combination does not comply with GAAP or with the rules for unaudited pro forma presentation, but is presented because we believe it provides the most meaningful comparison of our results.

 

      Predecessor     Successor     Combined    Pro Forma  
      Year Ended
June 30,
    July 1, 2005
through
May 31,
2006
    June 1, 2006
through
June 30,
2006
    Year Ended
June 30,
2006
   Year Ended
June 30,
2006
 
      2004    2005           
      (dollars in millions)       

Statement of Operations Data:

                    

Net revenues

   $ 853.0    $ 1,019.3     $ 1,095.8            $ 74.4     $ 1,170.2    $ 1,170.2  
                                                

Costs and expenses:

                    

Educational services

     546.1      640.4       644.6       64.7       709.3      709.0  

General and administrative

     167.0      203.8       278.5       26.0       304.5      309.1  

Amortization of intangible assets

     6.9      6.5       4.0       1.7       5.7      18.8  
                                                

Total costs and expenses

     720.0      850.7       927.1       92.4       1,019.5      1,036.9  
                                                

Income (loss) before interest and income taxes

     133.0      168.6       168.7       (18.0 )     150.7      133.3  

Interest (income) expense, net

     2.5      (0.2 )     (5.3 )     14.1       8.8      173.4  
                                                

Income (loss) before income taxes

     130.5      168.8       174.0       (32.1 )     141.9      (40.1 )

Provision (benefit) for income taxes

     53.5      67.2       73.6       (12.4 )     61.2      (6.7 )
                                                

Net income (loss)

   $ 77.0    $ 101.6     $ 100.4     $ (19.7 )   $ 80.7    $ (33.4 )
                                                

 

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     Predecessor     Successor     Combined     Pro Forma
    

Year Ended

June 30,

   

July 1, 2005
through

May 31,
2006

   

June 1, 2006
through

June 30,
2006

    Year Ended
June 30,
2006 (3)
   

Year Ended

June 30,
2006 (3)

     2004 (1)     2005 (2)          
     (dollars in millions)       

Statement of Cash Flows Data:

                 

Net cash flows provided by (used in):

                 

Operating activities

   $ 166.3     $ 192.5     $ 301.7     $ (22.4 )   $ 279.3      

Investing activities

     (239.9 )     (98.1 )     (56.4 )     (3,534.1 )     (3,590.5 )    

Financing activities

     102.0       (39.0 )     (43.2 )     3,445.5       3,402.3      

Effect of foreign exchange on cash

     (0.6 )     (0.2 )     0.0       0.1       0.1      
 

Other Data:

                     

EBITDA(4)

   $ 188.3     $ 252.7     $ 231.6        $ (10.6 )   $ 221.0     $ 218.0

Capital expenditures(5)

     82.3       74.9       57.9       7.7       65.6       65.6

Enrollment at beginning of fall quarter

     58,828       66,179       72,471         72,471      

Campus locations (at period end)(6)

     66       70       71       71       71      
 

Balance Sheet Data (as of the period ended):

                     

Cash and cash equivalents, excluding restricted cash

            $ 263.3       $ 263.3

Total assets

              3,945.4         3,945.4

Total debt(7)

              2,110.0         2,110.0

Net debt(8)

              1,846.7         1,846.7

Total shareholders’ equity

              1,282.8         1,282.8

(1) South University and the Brown Mackie Colleges are included as of their respective acquisition dates during fiscal 2004. Note 1 to the consolidated financial statements for the fiscal year ended 2004 provides pro forma results as if the acquisitions had been acquired and consolidated as of July 1, 2002. A charge of $2.2 million was recognized in fiscal 2004 to increase the valuation allowance related to our Canadian net deferred tax assets.
(2) Results for the fiscal year 2005, which we refer to as fiscal 2005, include non-cash, pretax charges of approximately $4.2 million related to fixed asset impairments. Also, cumulative adjustments for lease accounting recorded in fiscal 2005 increased educational services expense by approximately $3.8 million. These adjustments are comprised of $19.5 million of amortization expense and $15.7 million of reductions to rent expense.
(3) Fiscal 2006 and pro forma year ended June 30, 2006 include $32.2 million in compensation costs resulting from the implementation of SFAS No. 123(R). We adopted the modified prospective method and, therefore, results of operations in prior fiscal periods were not affected by the implementation of the standard. Also reflects $40.1 million of costs incurred as a result of the Transactions, including $30.2 million of accounting, placement, other financing, investment banking, legal and other professional fees and costs and $9.9 million of employee compensation and payroll taxes.
(4)

EBITDA, a measure used by management to measure operating performance, is defined as net income plus interest expense (income), net, taxes, depreciation and amortization. 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 flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Management believes EBITDA 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. In addition, EBITDA provides more comparability between the

 

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historical results of EDMC and future results that will 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.

Historical EBITDA is calculated as follows:

 

     Predecessor     Successor             
     Year Ended
June 30,
   

July 1, 2005
through
May 31,

2006

    June 1, 2006
through
June 30,
2006
    Combined
Year Ended
June 30,
2006
   Pro Forma
Year Ended
June 30,
2006
 
     2004    2005           
     (dollars in millions)  

Net income (loss)

   $ 77.0    $ 101.6     $ 100.4          $ (19.7 )   $ 80.7    $ (33.4 )

Interest (income) expense, net

     2.5      (0.2 )     (5.3 )     14.1       8.8      173.4  

Provision (benefit) for income taxes

     53.5      67.2       73.6       (12.4 )     61.2      (6.7 )

Depreciation and amortization, including amortization of intangible assets(a)

     55.3      84.1       62.9       7.4       70.3      84.7  
                                              

EBITDA

   $ 188.3    $ 252.7     $ 231.6     $ (10.6 )   $ 221.0    $ 218.0  
                                              

  (a) Depreciation and amortization includes non-cash charges related to fixed asset impairments and write-offs of $0.9 million in fiscal 2006 and $4.2 million in fiscal 2005. The year ended June 30, 2005 includes $19.5 million related to cumulative adjustments for changes in lease accounting.

 

(5) Capital expenditures include net cash paid for property and equipment, leasehold improvements, online curriculum development, software and other assets.
(6) Brown Mackie College-Dallas and Brown Mackie College-Fort Worth discontinued accepting new enrollments effective August 4, 2005 and completed the teach-out of all students at each school by June 30, 2006. Upon completion of the teach-out, each school closed. Brown Mackie College-Los Angeles, Brown Mackie College-Orange County, Brown Mackie College-San Diego and Brown Mackie College-Denver have discontinued new enrollments. We established a degree site of Argosy University at each location which assumed the non-diploma Brown Mackie College class offerings. The Brown Mackie College locations closed once current students completed their classes. Except for Argosy University-Denver, the Argosy University degree sites that assumed the students of the closed Brown Mackie College locations do not constitute campus locations of Argosy University.
(7) Total debt at June 30, 2006 consists of the current portion of long term debt, existing long-term debt, the term loan facility, the senior notes and senior subordinated notes and $160.0 million of our revolving credit facility that was borrowed in order to satisfy certain year-end regulatory financial ratios and repaid on July 3, 2006.
(8) Net debt is not a defined term under GAAP. Net debt is total debt less cash and cash equivalents at June 30, 2006.

 

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RISK FACTORS

You should carefully consider the risk factors set forth below as well as the other information contained in this prospectus before deciding to tender your outstanding notes in the exchange offers. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.

Any of the following risks could materially and adversely affect our business, financial condition or results of operations. In that case, the trading price of the exchange notes could decline or we may not be able to make payments of interest and principal on the exchange notes, and you may lose some or all of your investment.

Risks Relating to the Exchange Offers

There may be adverse consequences if you do not exchange your outstanding notes.

If you do not exchange your outstanding notes for exchange notes in the exchange offers, you will continue to be subject to restrictions on transfer of your outstanding notes as set forth in the prospectus distributed in connection with the private offering of the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act. You should refer to “Prospectus Summary—The Exchange Offers” and “The Exchange Offers” for information about how to tender your outstanding notes.

The tender of outstanding notes under the exchange offers will reduce the outstanding amount of each series of the outstanding notes, which may have an adverse effect upon, and increase the volatility of, the market prices of the outstanding notes due to a reduction in liquidity.

Risks Related to Our Indebtedness

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, expose us to interest rate risk to the extent of our variable rate debt and prevent us from meeting our debt obligations.

The following chart shows our level of indebtedness as of June 30, 2006.

 

     As of June 30,
2006
     (in millions)

Revolving credit facility(1)

   $ 160.0

Senior Secured term loan facilities due 2013

     1,185.0

Senior Notes due 2014

     375.0

Senior Subordinated Notes due 2016

     385.0

Capital leases

     3.1

Mortgage debt of consolidated entity

     1.9
      

Total

   $ 2,110.0
      

(1) Upon the closing of the Transactions, we entered into a $300.0 million revolving credit facility with a six-year maturity, of which $160.0 million was drawn at June 30, 2006 to satisfy certain year-end regulatory requirements and repaid on July 3, 2006. The U.S. Department of Education has notified us that we will be required to maintain an $87.9 million letter of credit in favor of the U.S. Department of Education due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transactions. The letter of credit, which is due by October 28, 2006, will be provided and reduce availability under the revolving credit facility.

 

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Our high degree of leverage could have important consequences for you, including:

 

    making it more difficult for us to make payments on the notes;

 

    increasing our vulnerability to general economic and industry conditions;

 

    requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our indebtedness, therefore reducing our ability to use our cash flow to fund our operations, capital expenditures and future business opportunities;

 

    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, product 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.

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 the notes. If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

Our pro forma interest, not including non-cash amortization of deferred financing fees, for the twelve months ended June 30, 2006 would have been $165.7 million.

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 our and our restricted subsidiaries’ ability to, among other things:

 

    incur additional indebtedness or issue certain preferred shares;

 

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

 

    make certain investments;

 

    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 our affiliates.

In addition, under the 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 to be 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. We have pledged a significant portion of our assets as collateral under the senior secured credit agreement. If the lenders under the senior secured credit agreement accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our indebtedness under the senior secured credit facilities, as well as our unsecured indebtedness.

 

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Risks Related to Our Business

Opening additional new schools and growing our online student programs could be difficult for us.

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. 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, 2006, The Art Institute Online offers a broad suite of programs in the creative fields and South University offers online bachelor’s degree programs in business administration, information technology and health sciences. In future years we plan to continue to roll out new online programs at The Art Institutes and South University along with online classes at Argosy University. Further, 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 online programs may not be accepted by students or the online education market.

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, the state licensing agencies and the accrediting bodies. Such requirements and limitations may or may not be related to the Transactions. The imposition of restrictions on the initiation of new educational programs by any of our regulatory agencies as a result of the Transactions may delay such expansion plans.

Our success depends, in part, on the effectiveness of our marketing and advertising programs in recruiting new students.

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 fiscal year, we have increased the amounts spent on marketing and advertising, and we anticipate this trend to 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 to promote The Art Institutes. 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, current student and/or employer dissatisfaction with our program offerings and diminished access to high school campuses.

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

The success of our schools depends to a large extent on the willingness of prospective employers to employ our students upon graduation. Our schools must keep current with changing technological needs and skills demanded by prospective employers. If we fail to respond to changes in industry requirements by offering new programs to our students or investing in new technology, it could have a material adverse effect on our ability to attract students.

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

Our success also 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

 

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personnel, and retaining such personnel once hired. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could cause our business to suffer.

In June 2006, we experienced certain changes in our executive management. Upon consummation of the Transactions, Robert T. McDowell retired as our Executive Vice President—Chief Financial Officer and was replaced by Edward H. West. Robert B. Knutson, our Chairman of the Board of Directors, retired and J. William Brooks, formerly our President and Chief Operating Officer, resigned from the Company effective June 30, 2006. We do not anticipate hiring a new President or Chief Operating Officer.

Failure to obtain additional capital in the future could reduce 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 sellers’ willingness to provide financing for acquisitions, and the amount of cash flow 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.

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 proprietary schools, including those that offer online learning programs. Many public and private colleges and universities, as well as other private career-oriented schools, offer programs similar to those we offer. 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 proprietary schools. Accordingly, public and private institutions may have instructional and support resources superior to those in the proprietary 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.

Failure to effectively manage our growth could harm our business.

Our business has grown rapidly. Our continued rapid growth may place a strain on our management, operations, employees, or resources. 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.

Failure to integrate acquired schools could harm our business.

From time to time, we engage in evaluations of, and discussions with, possible acquisition candidates. We may not continue to be able to identify suitable acquisition opportunities or to acquire any such schools on favorable terms. Additionally, we may not be able to successfully integrate any acquired schools into our operations profitably. Continued growth through acquisition may also subject us to unanticipated business or regulatory uncertainties, barriers or liabilities. Acquired schools may not enhance our business and, if we do not successfully address associated risks and uncertainties, may ultimately have a material adverse effect on our growth and ability to compete.

In the event we decide to acquire an institution, the U.S. Department of Education and most applicable state authorizing and accrediting agencies would consider that a change of ownership or control of the institution has

 

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occurred. A change of ownership or control of an institution under the standards of the U.S. Department of Education may result in the imposition of requirements for the posting of a letter of credit in favor of the U.S. Department of Education. It may also result in the imposition of limitations on the growth of the institution and could result in the temporary suspension of the institution’s participation in the federal student financial aid programs until the U.S. Department of Education issues a temporary certification document. State authorizing agencies and accrediting agencies may likewise impose restrictions or deny or delay approval of an acquisition. If we were unable to promptly reestablish the state authorization, accreditation or U.S. Department of Education certification of an institution we acquired, depending on the size of the acquisition, that failure could have a material adverse effect on our business.

We may be unable to operate one or more of our schools due to a natural disaster.

A number of our schools are located in Florida and elsewhere in the Southeastern United States. We also have a number of schools located in southern California. 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. The failure of one or more of our schools to operate for a substantial period of time could have a material adverse effect on our results of operations.

The Sponsors, acting collectively, have the right to control us and may have conflicts of interest with us or you in the future.

Investment funds designated by the Sponsors collectively own approximately 80.5% of our capital stock. While the Sponsors are not under common control, either directly or indirectly, were the Sponsors to act collectively they would have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders regardless of whether noteholders believe that any such transactions are in their own best interests. For example, the Sponsors could collectively cause us to make acquisitions that increase the amount of indebtedness that is secured or that is senior to the exchange senior subordinated notes or to sell assets.

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. So long as investment funds designated by the Sponsors collectively continue to indirectly own 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.

Risks Related to Our Industry

Failure of our schools to comply with extensive regulations could result in financial penalties, restrictions on our operations, or loss of external financial aid funding for our students.

Approximately 70% of our revenues in fiscal 2004, 2005 and 2006 were 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 the Title IV programs is subject to oversight by the U.S. Department of Education and is conditioned by approvals granted by other agencies as well as subject to independent certification by the U.S. Department of Education. Each of our schools must also obtain and maintain approval to enroll students, offer instruction and grant credentials from the state oversight 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 the Title IV programs. Participation in the 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 on each school maintaining applicable state authorization. Our schools must also comply with the requirements of any loan guarantee agencies which guarantee certain federal student loans made to our schools’ students, the requirements of such state grant programs as may be available to our students, and the requirements of specialized accrediting agencies which oversee institutional quality in

 

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particular program areas. 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 or 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulations.”

If one of our schools were to violate or fail to meet any of these regulatory requirements, we could suffer financial penalty, limitations on our operating activities or termination of the school’s ability to grant degrees and certificates or the school’s eligibility to receive federal student financial aid funds on behalf of its students. 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 the regulatory body, or whether each of our schools will be able to comply with all of the requirements in the future.

Congress may change the law or reduce funding for federal student financial aid programs, which could harm our student population and revenue.

Political and budgetary concerns can significantly affect the Title IV programs and other laws governing the federal student financial aid programs. The Title IV programs are made available pursuant to the provisions of the Higher Education Act of 1965, as amended (“HEA”), and the HEA must be reauthorized by the Congress approximately every six years. Independent of reauthorization, Congress must annually appropriate funds to fund the Title IV programs. The HEA is currently expected to be reauthorized or extended (and funded for the following fiscal year) during 2006. Reauthorization may result in numerous legislative changes, including funding reductions. Congress may also impose certain requirements upon the state or accrediting agencies respecting their approval of our schools. Any action by Congress 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 may also increase our administrative costs and require us to modify our practices in order for our schools to comply fully with applicable 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.

To participate in the federal student financial aid programs, an institution 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 and/or limitations on its participation in the federal student financial aid programs. As of June 30, 2006, three of our schools did not satisfy the quantitative measures of financial responsibility on an individual school basis and three other of our schools were required to post letters of credit for other reasons.

Certain transactions such as those associated with the Merger Agreement may give rise to a separate U.S. Department of Education review of financial responsibility. We have been notified by the U.S. Department of Education that we will be required to post a $87.9 million letter of credit by October 28, 2006 and will be subject to provisional certification and additional financial and cash monitoring on our disbursements of Title IV funds due to EDMC’s failure on a consolidated basis to satisfy the financial responsibility standards after the completion of the Transactions. The amount of the letter of credit is currently set at 10% of the Title IV funds received by students at our schools during our most recent fiscal year. The U.S. Department of Education’s evaluation of our schools financial responsibility on the basis of EDMC’s consolidated financial statements may continue through future annual reviews, and result in continuation of the letter of credit, provisional certification, and financial and cash monitoring in future years. Any conditions and/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. Although the initial

 

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letter of credit will expire in March 2008, there can be no assurance that the letter of credit requirement will not be extended or that additional restrictions will not be imposed in the future, including an increase of the percentage or dollar amount of the letter of credit. Our inability to obtain a required letter of credit in the future could result in a loss of access to the 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 the Company or its institutions. Additionally, a school is ineligible to participate in the federal student financial aid programs if it derives more than 90% of its revenue from these Title IV programs in any fiscal year. Though we believe our schools do not exceed 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 of our schools could have a material adverse effect on our student population and revenue.

Additionally, in the event of a bankruptcy filing by any of our schools, such schools 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.

If our schools do not maintain their state authorizations and accreditations, they may not operate or participate in federal student financial aid programs.

A school that grants degrees, diplomas, or certificates must be authorized by the relevant agencies of the state in which it is located and, in some cases, other states where the school is deemed to be operating. State authorization and accreditation by an accrediting agency recognized by the U.S. Department of Education also are required for an institution to participate in the federal student financial aid programs. The failure by one or more of our schools to maintain their state authorizations and accreditations could have a material adverse effect on our business.

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

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. Certain of these regulatory agencies considered the Transactions to constitute a change of ownership or control. Though we anticipate receiving all required regulatory approvals, some of these agencies have yet to provide final approval of the Transactions. The failure of any of our schools to reestablish its state authorization, accreditation or U.S. Department of Education certification 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. We have obtained assurances from the U.S. Department of Education that it will not implement such growth restrictions solely as a result of the Transactions. However, such assurances do not apply to future changes of ownership or control or to the state or accrediting agencies. Such growth restrictions could have a material adverse impact on our student population and revenue and future growth plans.

Loss of or reductions in state grants and the availability of alternative loans for our students could negatively impact our revenues from students.

In fiscal 2006, approximately 3% of our net revenues were indirectly derived from state grant programs. State grant programs are generally subject to annual appropriation by the state legislature which may lead to the

 

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state eliminating or significantly decreasing the amount of state aid to students at our schools. 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.

Federal, state and Canadian financial aid grants have not kept up with increases in the cost of living and the growth of tuition rates. As a result, an increasing number of our students who need additional funds to attend our schools rely on alternative loans to fund tuition payments. During fiscal 2006, alternative loans to students at our schools represented approximately 19% of our revenue. The loans are credit-based so not all potential students satisfy the qualification standards. Third party lenders may impose terms on these loans which make them less attractive to our students or may impose additional restrictions on the loan terms to our students or schools. The inability of our students to obtain alternative loans from third party lenders could have a material adverse effect on our business due to enrollment losses at our schools.

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

Our schools located in British Columbia and Ontario derive a significant percentage of their revenue from Canadian governmental financial programs. These schools must meet eligibility standards to administer these programs and must comply with extensive statutes, rules, regulations and requirements. If our Canadian schools cannot meet these and other eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our business and results of operations.

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

If we fail to demonstrate “administrative capability” to the U.S. Department of Education, our business could suffer.

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 the 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, 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 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.

 

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If one or more of our schools loses or is limited in its access to, or is required to re-pay, federal student financial aid funds due to a failure to demonstrate administrative capability, our business could be materially adversely affected.

Government and regulatory agencies may conduct compliance reviews, bring claims or initiate litigation against us.

The post-secondary education industry is highly regulated. From time to time, we may be subject to program reviews, investigations, claims of non-compliance, or lawsuits by governmental agencies or third parties, which may allege statutory violations, regulatory infractions, or common law causes of action. If the results of the investigations are unfavorable to us or if we are unable to successfully defend against third-party lawsuits, we may be required to pay material monetary damages or be subject to material 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 investigation or successfully defend a third-party lawsuit, we may have to devote significant money and management resources to address these issues, which could harm our business.

Risks Related to the Exchange Notes

We may not be able to generate sufficient cash to service all of our indebtedness, including the notes, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will 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, including the notes.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Our senior secured credit facilities and the indentures under which the exchange notes will be issued restrict our ability to use the proceeds from the disposition. We may not be able to consummate those dispositions or to obtain the proceeds that we could realize from them and these proceeds may not be adequate to meet any debt service obligations then due.

Despite our current leverage, we may still be able to incur substantially more debt. This could further exacerbate the risks that we and our subsidiaries face.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. If we incur any additional indebtedness that ranks equally with the exchange senior notes or the exchange senior subordinated notes, the holders of that additional debt will be entitled to share ratably with the holders of the exchange senior notes and the exchange senior subordinated notes, respectively, in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds paid to you. If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify.

 

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Your right to receive payments on each series of notes is effectively junior to those lenders who have a security interest in our assets.

Our obligations under the exchange notes and our guarantors’ obligations under their guarantees of the exchange notes are unsecured, but our obligations under our senior secured credit facilities and each guarantor’s obligations under their respective guarantees of the senior secured credit facilities are secured by a security interest in substantially all of the domestic tangible and intangible assets of us and the guarantors, including the stock of most of our wholly-owned U.S. subsidiaries, and a portion of the stock of certain of our non-U.S. subsidiaries. If we are declared bankrupt or insolvent, or if we default under our senior secured credit agreement, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of the notes, even if an event of default exists under the indentures governing the notes at such time. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under the notes, then that guarantor will be released from its guarantee of the notes automatically and immediately upon such sale. In any such event, because the notes will not be secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which your claims could be satisfied or, if any assets remained, they might be insufficient to satisfy your claims fully. See “Description of Other Indebtedness.”

As of June 30, 2006, we had $1,345.0 million of senior secured indebtedness, all of which was indebtedness under our credit facilities, including $160.0 million outstanding under our senior secured revolving credit facility that was repaid on July 3, 2006, leaving us with significant additional borrowing capacity under that facility. We will be required to post a letter of credit of $87.9 million with the U.S. Department of Education by October 28, 2006 due to our failure to meet certain regulatory financial ratios after giving effect to the Transactions. The indentures governing the exchange notes permit us and our restricted subsidiaries to incur substantial additional indebtedness in the future, including senior secured indebtedness.

Claims of noteholders will be structurally subordinate to claims of creditors of all of our non-U.S. subsidiaries and some of our U.S. subsidiaries because they will not guarantee the notes.

The exchange notes will be 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. The exchange notes will not be guaranteed by any of our non-U.S. subsidiaries or future subsidiaries, unless they guarantee other debt. Accordingly, claims of holders of the exchange notes will be structurally subordinate to the claims of creditors of these non-guarantor subsidiaries, including trade creditors. All obligations of our non-guarantor subsidiaries will have to be satisfied before any of the assets of such subsidiaries would be available for distribution, upon a liquidation or otherwise, to us or a guarantor of the exchange notes.

Our guarantor subsidiaries accounted for approximately $9.7 million, or 0.8%, of our total revenue, and a loss of approximately $5.4 million, or 2.4%, of our total EBITDA, in each case for the year ended June 30, 2006, and approximately $0.5 million, less than 0.1% of our total assets, and approximately $3.3 million, or 0.1% of our total liabilities, in each case as of June 30, 2006.

Since our non-guarantor subsidiaries are our primary source of revenue, the guarantors will have limited ability to make payments in respect of the exchange notes if the issuers are unable to satisfy their payment obligations. As a result, the guarantees will be of limited value.

Your right to receive payments on the exchange senior subordinated notes will be junior to the rights of the lenders under our senior secured credit facilities and all of our other senior debt and any of our future senior indebtedness.

The exchange senior subordinated notes will be general unsecured obligations that will be junior in right of payment to all of our existing and future senior indebtedness. As of June 30, 2006, we had approximately

 

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$1,345.0 million of senior indebtedness under our senior secured credit facilities, including $160.0 million outstanding on our revolving credit facility that was repaid on July 3, 2006 and $375.0 million of senior indebtedness under the senior notes. An additional $140.0 million was available to be drawn under our revolving credit facility at June 30, 2006.

We may not pay principal, premium, if any, interest or other amounts on account of the exchange senior subordinated notes in the event of a payment default or certain other defaults in respect of certain of our senior indebtedness, including debt under the senior secured credit facilities, unless the senior indebtedness has been paid in full or the default has been cured or waived. In addition, in the event of certain other defaults with respect to the senior indebtedness, we may not be permitted to pay any amount on account of the exchange senior subordinated notes for a designated period of time.

Because of the subordination provisions in the exchange senior subordinated notes, in the event of our bankruptcy, liquidation or dissolution, our assets will not be available to pay obligations under the exchange senior subordinated notes until we have made all payments in cash on our senior indebtedness. We cannot assure you that sufficient assets will remain after all these payments have been made to make any payments on the exchange senior subordinated notes, including payments of principal or interest when due.

If we default on our obligations to pay our indebtedness, we may not be able to make payments on the exchange notes.

Any default under the agreements governing our indebtedness, including a default under the senior secured credit agreement, that is not waived by the required lenders, and the remedies sought by the holders of such indebtedness, could prevent us from paying principal, premium, if any, and interest on the exchange notes and substantially decrease the market value of the exchange notes. If we are unable to generate sufficient cash flow and are otherwise unable to obtain funds necessary to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we otherwise fail to comply with the various covenants, including financial and operating covenants, in the instruments governing our indebtedness (including covenants in our senior secured credit facilities and the indentures governing the exchange notes), we could be in default under the terms of the agreements governing such indebtedness, including our senior secured credit agreement and the indentures governing the exchange notes. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, the lenders under our senior secured credit facilities could elect to terminate their commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets, and we could be forced into bankruptcy or liquidation. If our operating performance declines, we may in the future need to obtain waivers from the required lenders under our senior secured credit facilities to avoid being in default. If we breach our covenants under our senior secured credit facilities and seek a waiver, we may not be able to obtain a waiver from the required lenders. If this occurs, we would be in default under our senior secured credit agreement, the lenders could exercise their rights, as described above, and we could be forced into bankruptcy or liquidation.

We may not be able to repurchase the exchange notes upon a change of control.

Upon the occurrence of specific kinds of change of control events, we will be required to offer to repurchase all outstanding notes at 101% of their principal amount plus accrued and unpaid interest. The source of funds for any such purchase of the exchange notes will be our available cash or cash generated from our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the exchange notes upon a change of control because we may not have sufficient financial resources to purchase all of the exchange notes that are tendered upon a change of control. Further, we will be contractually restricted under the terms of our senior secured credit agreement from repurchasing all of the exchange senior subordinated notes tendered by holders upon a change of control. Accordingly, we may not be able to satisfy our obligations to purchase the exchange senior subordinated notes unless we are able to refinance or obtain waivers under our senior secured credit agreement. Our failure to repurchase the exchange notes upon a change of control

 

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would cause a default under the indentures governing the exchange notes and a cross-default under the senior secured credit agreement. The senior secured credit agreement also provides that a change of control will be a default that permits lenders to accelerate the maturity of borrowings thereunder. Any of our future debt agreements may contain similar provisions.

The lenders under the senior secured credit facilities will have the discretion to release the guarantors under the senior secured credit agreement in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the exchange notes.

While any obligations under the senior secured credit facilities remain outstanding, any guarantee of the exchange notes may be released without action by, or consent of, any holder of the exchange notes or the trustee under the indentures governing the exchange notes, at the discretion of lenders under the senior secured credit facilities, if the related guarantor is no longer a guarantor of obligations under the senior secured credit facilities or any other indebtedness. See “Description of Notes.” The lenders under the senior secured credit facilities will have the discretion to release the guarantees under the senior secured credit facilities in a variety of circumstances. You will not have a claim as a creditor against any subsidiary that is no longer a guarantor of the exchange notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to claims of noteholders.

Federal and state fraudulent transfer laws may permit a court to void the exchange notes and related guarantees, and, if that occurs, you may not receive any payments on the exchange notes.

Federal and state fraudulent transfer and conveyance statutes may apply to the issuance of the exchange notes and the incurrence of the related guarantees. Under federal bankruptcy law and comparable provisions of state fraudulent transfer or conveyance laws, which may vary from state to state, the exchange notes or related guarantees could be voided as a fraudulent transfer or conveyance if (1) we or any of the guarantors, as applicable, issued the exchange notes or incurred the related guarantees with the intent of hindering, delaying or defrauding creditors or (2) we or any of the guarantors, as applicable, received less than reasonably equivalent value or fair consideration in return for either issuing the exchange notes or incurring the related guarantees and, in the case of (2) only, one of the following is also true at the time thereof:

 

    we or any of the guarantors, as applicable, were insolvent or rendered insolvent by reason of the issuance of the exchange notes or the incurrence of the related guarantees;

 

    the issuance of the exchange notes or the incurrence of the related guarantees left us or any of the guarantors, as applicable, with an unreasonably small amount of capital to carry on the business;

 

    we or any of the guarantors intended to, or believed that we or such guarantor would, incur debts beyond our or such guarantor’s ability to pay as they mature; or

 

    we or any of the guarantors was a defendant in an action for money damages, or had a judgment for money damages docketed against us or such guarantor if, in either case, after final judgment, the judgment is unsatisfied.

If a court were to find that the issuance of the exchange notes or the incurrence of the related guarantees was a fraudulent transfer or conveyance, the court could void the payment obligations under the exchange notes or such related guarantees or further subordinate the exchange notes or such related guarantees to presently existing and future indebtedness of ours or of the related guarantor, or require the holders of the exchange notes to repay any amounts received with respect to such related guarantees. In the event of a finding that a fraudulent transfer or conveyance occurred, you may not receive any repayment on the exchange notes. Further, the voidance of the exchange notes could result in an event of default with respect to our and our subsidiaries’ other debt that could result in acceleration of such debt.

As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied. A debtor will generally not be

 

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considered to have received value in connection with a debt offering if the debtor uses the proceeds of that offering to make a dividend payment or otherwise retire or redeem equity securities issued by the debtor. Because we will use most of the proceeds to fund the merger consideration to our parent’s shareholders, a court could conclude that we received less than full value for incurring the indebtedness represented by the notes.

We cannot be certain as to the standards a court would use to determine whether or not we or the guarantors were solvent at the relevant time or, regardless of the standard that a court uses, that the issuance of the related guarantees would not be further subordinated to our or any of our guarantors’ other debt. Generally, however, an entity would be considered solvent if, at the time it incurred indebtedness:

 

    the sum of its debts, including contingent liabilities, was greater than the fair saleable value of all its assets; or

 

    the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

 

    it could not pay its debts as they become due.

Our obligations under the exchange notes will be guaranteed by certain of our existing domestic restricted subsidiaries, and the guarantees may also be subject to review under various laws for the protection of creditors. It is possible that creditors of the guarantors may challenge the guarantees as a fraudulent transfer or conveyance. The analysis set forth above would generally apply, except that the guarantees could also be subject to the claim that, since the guarantees were incurred for our benefit, and only indirectly for the benefit of the guarantors, the obligations of the guarantors thereunder were incurred for less than reasonably equivalent value or fair consideration. A court could void a guarantor’s obligation under its guarantee, subordinate the guarantee to the other indebtedness of a guarantor, direct that holders of the exchange notes return any amounts paid under a guarantee to the relevant guarantor or to a fund for the benefit of its creditors, or take other action detrimental to the holders of the exchange notes. In addition, the liability of each guarantor under each indenture is limited to the amount that will result in its guarantee not constituting a fraudulent conveyance or improper corporate distribution, and there can be no assurance as to what standard a court would apply in making a determination as to what would be the maximum liability of each guarantor.

We are dependent upon dividends from our subsidiaries to meet our debt service obligations.

We are a holding company and conduct all of our operations through our subsidiaries. Our ability to meet our debt service obligations will be dependent on receipt of dividends from our direct and indirect subsidiaries. Subject to the restrictions contained in the indentures, future borrowings by our subsidiaries may contain restrictions or prohibitions on the payment of dividends by our subsidiaries to us. See “Description of Notes—Certain Covenants.” In addition, federal and state regulations governing our regulated subsidiaries and applicable state corporate law may limit the ability of our subsidiaries to pay dividends to us on their capital stock. We cannot assure you that the agreements governing the current and future indebtedness of our subsidiaries and these applicable laws will permit our subsidiaries to provide us with sufficient dividends, distributions or loans to fund payments on these exchange notes when due. Additionally, we are required to maintain a majority of independent directors on the board of several of our non-guarantor subsidiaries. As a result, we may not be able to require such subsidiaries to pay us dividends. Our ability to satisfy obligations under the exchange notes may be impaired if the issuers’ or the guarantors’ ability to receive dividends from these subsidiaries is limited.

Your ability to transfer the exchange notes may be limited by the absence of an active trading market, and there is no assurance that any active trading market will develop for the exchange notes.

We are offering the exchange notes to holders of the outstanding notes. The outstanding notes were offered and sold in June 2006 to institutional investors and are eligible for trading in the PORTALsm Market.

 

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We do not intend to apply for a listing of the exchange notes on a securities exchange or on any automated dealer quotation system. There is currently no established market for the exchange notes and we cannot assure you as to the liquidity of markets that may develop for the exchange notes, your ability to sell the exchange notes or the price at which you would be able to sell the exchange notes. If such markets were to exist, the exchange notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operating performance and other factors. The initial purchasers in the private offering of the outstanding notes have advised us that they currently intend to make a market with respect to the exchange notes. However, these initial purchasers are not obligated to do so, and any market making with respect to the exchange notes may be discontinued at any time without notice. In addition, such market making activity may be limited during the pendency of the exchange offerss or the effectiveness of a shelf registration statement in lieu thereof. Therefore, we cannot assure you that an active market for the exchange notes will develop or, if developed, that it will continue. Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the exchange notes may experience similar disruptions and any such disruptions may adversely affect the prices at which you may sell your notes.

 

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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 (“cautionary statements”) 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 cautionary statements. Some of the factors that we believe could affect our results include:

 

    our substantial indebtedness following consummation of the Transactions described in this prospectus;

 

    certain covenants in our debt documents following the consummation of the Transactions described in this prospectus;

 

    general economic and market conditions;

 

    government and regulatory changes, including revised interpretations of regulatory requirements, that affect the post-secondary education industry;

 

    the integration of acquired businesses, the performance of acquired businesses and the prospects for future acquisitions;

 

    the effect of war, terrorism, natural disasters or other catastrophic events;

 

    the effect of disruptions to our systems and infrastructure;

 

    transition of certain of our senior management personnel following the Transactions and the failure to attract, retain and integrate qualified management personnel;

 

    failure to maintain relationships with key industry participants and/or key customers and/or loss of significant customer revenues;

 

    failure to effectively compete;

 

    failure to comply with regulations or maintain state authorizations and accreditations; 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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THE TRANSACTIONS

On March 3, 2006, EM Acquisition, formed by investment funds associated with the Sponsors, entered into the Merger Agreement with EDMC pursuant to which the parties agreed to the Merger. As a result of the Merger, investment funds designated by the Sponsors own EDMC.

At the effective time of the Merger, each share of EDMC’s common stock outstanding immediately prior to the Merger (other than shares held in treasury or shares held by any of our respective subsidiaries) was cancelled and converted into the right to receive $43.00 in cash. As described below, the senior management participants entered into agreements with the Sponsors, pursuant to which they agreed, among other things, to participate in the equity of EDMC in connection with the Transactions. Investment funds designated by Providence Equity and Goldman Sachs Capital Partners invested $500.0 million and $650.0 million, respectively, in equity securities of EDMC for a total equity investment by the Sponsors of $1,000.0 million as part of the Transactions. The Co-Investors invested an aggregate of $300.0 million of equity in EDMC as part of the Transactions. Upon the consummation of the Transactions, the senior management participants purchased an aggregate of $3.5 million of the Sponsors’ equity interests in EDMC. We anticipate selling an additional $9.5 million of equity interests to other members of senior management pursuant to an employee stock purchase plan. In July 2006, Leeds Equity Partners exercised an option to purchase $100.0 million of EDMC securities from the Sponsors ($50.0 million from each of Providence Equity and Goldman Sachs Capital partners), which reduced the Sponsors’ total investment to $896.5 million. The Merger was approved at a special meeting held on May 25, 2006 by the affirmative vote of a majority of the votes cast by holders of shares of EDMC’s common stock entitled to vote thereon. The Merger became effective upon the closing of the Transactions on June 1, 2006.

The purchase of the Company by the Investors was financed by borrowings under our new senior secured credit facilities, the issuance of the notes offered in the Transactions, the equity investment and participation described above, and cash on hand.

The following diagram below sets forth our corporate structure following consummation of the Transactions. See “The Merger” and “Principal Stockholders.” This structure was achieved through a series of equity contributions that occurred in connection with the Merger.

LOGO


(1) Includes $1,000.0 million of cash equity contributed by investment funds designated by the Sponsors and $300.0 million of cash equity contributed by the Co-Investors. Upon the consummation of the Transactions, the senior management participants purchased an aggregate of $3.5 million of the Sponsors’ equity interests in EDMC. Following the closing of the Transactions, the Sponsors sold $100.0 million of their EDMC securities to the Co-Investors, reducing the Sponsors’ total investment to $896.5 million.

 

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(2) The obligations under our new senior 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 exchange notes will be 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.
(3) Upon the closing of the Transactions, we entered into a $300.0 million revolving credit facility with a six-year maturity, $50.0 million of which was drawn on the closing date of the Transactions. We have been notified by the U.S. Department of Education that we will be required to maintain an $87.9 million letter of credit in favor of the U.S. Department of Education due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transactions. The letter of credit, which will be provided and reduce availability under our revolving credit facility, is due by October 28, 2006.
(4) Upon the closing of the Transactions, we entered into a $1,185.0 million term loan facility with a seven-year maturity.
(5) 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 outstanding notes.

Pursuant to the Merger Agreement at the effective time of the Merger, each outstanding option, whether or not vested or exercisable, to acquire our common stock was canceled, and the holder of each stock option was entitled to receive from EDMC an amount in cash, without interest and less applicable withholding taxes, equal to: (a) the number of shares of our common stock subject to each option as of the effective time of the Merger, multiplied by (b) the excess, if any, of $43.00 over the exercise price per share of common stock subject to such option. If the exercise price per share of common stock under a stock option is greater than or equal to $43.00, no payment was made in respect of the cancellation of that option. Pursuant to the Merger Agreement, at the effective time of the Merger, all shares of restricted stock then outstanding were canceled, and the holder of each such share received a cash payment of $43.00 per share of restricted stock, without interest and less any applicable withholding taxes.

In connection with the Merger, we (i) entered into new senior secured credit facilities, consisting of a $1,185.0 million term loan facility and a $300.0 million revolving credit facility and (ii) issued the $760.0 million aggregate principal amount of outstanding notes. See “Description of Other Indebtedness.”

 

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USE OF PROCEEDS

We will not receive any cash proceeds from the issuance of the exchange notes pursuant to the exchange offers. In consideration for issuing the exchange notes as contemplated in this prospectus, we will receive in exchange a like principal amount of outstanding notes, the terms of which are identical in all material respects to the exchange notes. The outstanding notes surrendered in exchange for the exchange notes will be retired and canceled and cannot be reissued. Accordingly, the issuance of the exchange notes will not result in any change in our capitalization.

CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2006. The information in this table should be read in conjunction with “The Transactions,” “Pro Forma Condensed Consolidated Financial Information,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the June 30, 2006 consolidated financial statements included elsewhere in this prospectus.

 

     As of June 30,
2006
     (in millions)

Cash and cash equivalents, excluding restricted cash

   $ 263.3
      

Capital leases and existing long-term debt, including current portion

   $ 5.0

Long-term debt, including current portion:

  

Revolving credit facility(1)

     160.0

Term loan facility(2)

     1,185.0

Senior notes

     375.0

Senior subordinated notes

     385.0
      

Total long-term debt, including current portion

   $ 2,110.0
      

Total shareholders’ equity

     1,282.8
      

Total capitalization

   $ 3,392.8
      

(1) Upon the closing of the Transactions, we entered into a $300.0 million senior secured revolving credit facility with a six-year maturity, of which $160.0 million was drawn at June 30, 2006 to meet certain year-end regulatory financial ratios and was repaid on July 3, 2006. The U.S. Department of Education has notified us that we will be required to maintain an $87.9 million letter of credit in favor of the U.S. Department of Education due to our failure to satisfy certain regulatory financial ratios after giving effect to the Transactions. The letter of credit, which is due by October 28, 2006, will be provided and reduce availability under our revolving credit facility.
(2) Upon the closing of the Transactions, we entered into a $1,185.0 million term loan facility with a seven-year maturity.

 

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma condensed consolidated statement of operations has been developed by applying pro forma adjustments to the historical audited consolidated financial statements of EDMC and Education Management LLC appearing elsewhere in this prospectus. The unaudited pro forma consolidated statement of operations gives effect to the Transactions as if they had occurred on July 1, 2005. Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with this unaudited pro forma condensed consolidated financial statement of income.

The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable under the circumstances. The unaudited pro forma condensed consolidated statement of operations is presented for informational purposes only and does not purport to represent what our results of operations or financial condition would have been had the Transactions actually occurred on the dates indicated and does not purport to project our results of operations or financial condition for any future period or as of any future date. The unaudited pro forma condensed consolidated statement of operations should be read in conjunction with the information contained in “The Transactions,” “Selected Historical Consolidated Financial Data and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. The pro forma adjustments give effect to the offering of the notes, the initial borrowings under our new senior secured credit facilities, the equity investment and participation by the Investors in EDMC, the Merger and other related transactions. All pro forma adjustments and their underlying assumptions are described more fully in the notes to the unaudited pro forma condensed consolidated statements of operations.

The Transactions were accounted for using purchase accounting. The total purchase price was allocated to our net tangible and identifiable intangible assets based on their fair values as of June 1, 2006. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The preliminary allocation of the purchase price for property and equipment, intangible assets and deferred income taxes was based upon preliminary valuation data and the estimates and assumptions are subject to change.

 

     July 1, 2005
through
May 31, 2006
    June 1, 2006
through
June 30, 2006
          Pro Forma
Year Ended
June 30, 2006
 
     Education
Management
Corporation
    Education
Management
LLC
    Pro Forma
Adjustments
    Education
Management
LLC
 
     (Dollars in millions)  

Net Revenues

   $ 1,095.8     $ 74.4     $ —       $ 1,170.2  
                                

Costs and expenses:

        

Educational Services(1)

     644.6       64.7       (0.3 )     709.0  

General and administrative(2)

     278.5       26.0       4.6       309.1  

Amortization of intangible assets(3)

     4.0       1.7       13.1       18.8  
                                
     927.1       92.4       17.4       1,036.9  
                                

Income before interest and taxes

     168.7       (18.0 )     (17.4 )     133.3  

Interest (income) expense, net(4)

     (5.3 )     14.1       164.6       173.4  
                                

Income (loss) before income taxes

     174.0       (32.1 )     (182.0 )     (40.1 )

Provision (benefit) for income taxes(5)

     73.6       (12.4 )     (67.9 )     (6.7 )
                                

Net income (loss)

   $ 100.4     $ (19.7 )   $ (114.1 )   $ (33.4 )
                                

See accompanying “—Notes to Unaudited Pro Forma Condensed Consolidated Statements of Operations”

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS

OF OPERATIONS

 

(1) Reflects net adjustment to depreciation of $1.3 million less reduction in rent expense due to the amortization of unfavorable lease liabilities recognized as part of purchase accounting of $ 1.6 million for the year ended June 30, 2006.

Net adjustment to depreciation represents pro forma effect on depreciation on a straight-line basis of property and equipment as a result of purchase accounting related to the acquisition of EDMC less the elimination of the historical EDMC depreciation as follows:

 

    

Year Ended June 30,

2006

 
     (in thousands)  

Pro forma depreciation expense(a)

   $ 65,908  

Less historical depreciation expense

     (64,612 )
        

Net adjustment to depreciation expense

   $ 1,296  
        
 
  (a) Pro forma depreciation represents depreciation on $360.9 million of property and equipment over the estimated average remaining useful life of approximately 12 years.

 

(2) Reflects pro forma effect on advisory fees in the period July 1, 2005 to May 31, 2006.

 

(3) Reflects pro forma amortization of finite-lived intangible assets related to the acquisition of EDMC less the elimination of the historical EDMC amortization to reflect the application of purchase accounting. Pro forma amortization represents amortization on $75.1 million of finite-lived intangible assets over their estimated average life of approximately 5.2 years.

 

(4) Reflects pro forma interest expense resulting from our new capital structure as follows:

 

     Year Ended June 30,
2006
 
     (in thousands)  

Pro forma interest expense(a)

   $ 165,686  

Less: interest expense recorded in historical financial statements

     (14,631 )
        
     151,055  
        

Pro forma amortization of deferred financing fees

     7,670  

Less: historical amortization of deferred financing fees

     (1,934 )
        

Net adjustment to amortization of deferred financing fees

     5,736  
        

Elimination of historical interest income

     7,809  
        

Net adjustment to interest expense

   $ 164,600  
        

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS—(Continued)

 

(a) Reflects pro forma interest expense excluding amortization of deferred financing fees, resulting from the Transactions as follows:

 

    

Fiscal Year Ended

June 30,

2006

     (in thousands)

Senior credit facilities:

  

Revolving credit facility(i)

   $ —  

Term loan facility(ii)

     90,017

Senior notes

     32,813

Senior subordinated notes

     39,463

Existing debt(iii)

     317

Commitment fees(iv)

     1,049

Letters of credit(v)

     2,027
      

Total pro forma interest expense

   $ 165,686
      
 
  (i) Assumes no borrowings under the revolving credit facility. $160.0 million of our revolving credit facility was borrowed at the fiscal year end in order to satisfy certain year-end regulatory financial ratios and was repaid on the next business day, July 3, 2006, the interest expense of which was immaterial.
  (ii) Reflects pro forma interest, not including non-cash amortization of deferred financing fees, on our term loan facility at an assumed rate of LIBOR (rate of 5.125% based on a one month LIBOR effective June 30, 2006) plus 2.5%, and repayment of 0.25 percent per quarter of the aggregate principal amount of term loan outstanding.
  (iii) Reflects interest expense on pre-existing debt that remained in place after the Transactions.
  (iv) Reflects commitment fees on the undrawn portion of our senior credit facilities.
  (v) Reflects fees on outstanding letters of credit, including an $87.9 million letter of credit in favor of the U.S. Department of Education and $2.2 million in other letters of credit used primarily for insurance purposes.

At June 30, 2006, on a pro forma basis, we had $1,185.0 million of floating rate debt under our senior secured credit facility. A 0.125% change in interest rates would change pro forma interest, not including non-cash amortization of deferred financing fees, on our floating rate indebtedness by approximately $1.5 million on an annual basis. Effective July 2006, we entered into interest rate swap agreements to manage the variable rate portion of $750.0 million of debt under our term loan facility. Under the terms of the interest rate swap agreements, 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% plus the applicable margin.

Deferred financing fees and other issuance costs incurred as a result of the financing arrangements put in place in connection with the Transactions are amortized over the terms of the related arrangements, which range from 7-10 years, using the straight-line method, which approximates the effective yield method.

 

(5) Reflects the income tax benefit on pro forma adjustments using a combined federal and state effective income tax rate of 37.3%. This rate differs from the overall fiscal 2006 effective tax rate of 43.1% to account for the fact that we would not have realized Pennsylvania state tax benefits on a majority of the pro forma adjustments because these adjustments would have created Pennsylvania net operating losses. As it would have been more likely than not that we would not have realized the benefit of the deferred tax asset associated with the Pennsylvania net operating loss carry forward, we would have recorded a full valuation allowance against the related deferred tax asset. Therefore, we have computed the income tax benefit on the pro forma adjustments using only the federal and unitary state effective tax rates.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following table sets forth selected historical consolidated financial data as of the dates and for the periods indicated. The Predecessor financial data contain information relating to Education Management Corporation prior to the consummation of the Transactions. The Successor financial data contain information relating to Education Management LLC after consummation of the Transactions. The selected historical consolidated balance sheet data as of June 30, 2005 and consolidated statement of operations data for the fiscal years ended June 30, 2004 and 2005 and the period from July 1, 2005 through May 31, 2006 have been derived from Education Management Corporation’s audited consolidated financial statements and related notes appearing elsewhere in this prospectus and the selected historical consolidated balance sheet data as of June 30, 2006 and statement of operations data for the period from June 1 through June 30, 2006 have been derived from Education Management LLC’s audited consolidated financial statements and related notes appearing elsewhere in this prospectus. The selected historical consolidated statement of operations data as of June 30, 2002, 2003 and 2004 and the consolidated balance sheet for the periods ended June 30, 2002, 2003 and 2004 presented in this table have been derived from audited consolidated financial statements not included in this prospectus. The results of operations for any period are not necessarily indicative of the results to be expected for any future period. The selected historical consolidated financial data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

 

     Predecessor     

Successor

    Combined  
     Fiscal Years Ended June 30,    

July 1,
2005

through

May 31,

2006

    

June 1

through

June 30,

2006

   

Year

Ended

June 30,

2006 (5)

 
     2002 (1)     2003 (2)     2004 (3)     2005 (4)         
                       (dollars in millions)               

Statement of Operations Data:

                    

Net revenues

  $ 500.6     $ 640.0     $ 853.0     $ 1,019.3     $ 1,095.8      $ 74.4     $ 1,170.2  

Costs and expenses:

                    

Educational services

    325.0       417.5       546.1       640.4       644.6        64.7       709.3  

General and administrative

    102.5       125.3       167.0       203.8       278.5        26.0       304.5  

Amortization of intangible assets

    4.1       4.4       6.9       6.5       4.0        1.7       5.7  
                                                          

Total costs and expenses

    431.6       547.2       720.0       850.7       927.1        92.4       1,019.5  
                                                          

Income (loss) before interest and income taxes

    69.0       92.8       133.0       168.6       168.7        (18.0 )     150.7  

Interest (income) expense, net

    1.6       1.3       2.5       (0.2 )     (5.3 )      14.1       8.8  
                                                          

Income (loss) before income taxes

    67.4       91.5       130.5       168.8       174.0        (32.1 )     141.9  

Provision for income taxes

    25.1       35.2       53.5       67.2       73.6        (12.4 )     61.2  
                                                          

Net income (loss)

  $ 42.3     $ 56.3     $ 77.0     $ 101.6     $ 100.4      ($ 19.7 )   $ 80.7  
                                                          

Balance Sheet Data (as of period ended):

                    

Cash and cash equivalents (excludes
restricted cash)

  $ 92.1     $ 89.0     $ 116.7     $ 172.0                $ 263.3  

Total assets

    492.7       577.6       828.0       956.0                  3,945.5  

Total debt, including current portion

    28.6       38.5       128.6       70.4                  2,110.0  

Total shareholders’ equity

    346.6       427.8       528.7       666.0                  1,282.8  

Statement of Cash Flows Data:

                    

Net cash flows provided by (used in):

                    

Operating activities

  $ 100.4     $ 79.4     $ 166.3     $ 192.5     $ 301.7      $ (22.4 )   $ 279.3  

Investing activities

    (154.2 )     (108.4 )     (239.9 )     (98.1 )     (56.4 )      (3,534.1 )     (3,590.5 )

Financing activities

    98.5       24.3       102.0       (39.0 )     (43.2 )      3,445.5       3,402.3  

Effect of foreign exchange on cash

    0.3       1.6       (0.6 )     (0.2 )     0.0        0.1       0.1  

Other Data:

                    

EBITDA(6)

  $ 103.1     $ 137.7     $ 188.3     $ 252.7     $ 231.6      $ (10.6 )   $ 221.0  

Capital expenditures(7)

    45.4       80.8       82.3       74.9       57.9        7.7       65.6  

Enrollment at beginning of fall quarter(8)

    32,180       43,784       58,828       66,179       72,471                72,471  

Campus locations (at period end)(9)

    23       42       66       70       71        71       71  

Ratio of earnings to fixed charges(10)

    5.9 x     6.6 x     7.7 x     9.2 x     9.4 x      —         4.8 x

(1)   Results for Argosy University are included as of the acquisition date of December 21, 2001.
(2)   Fiscal 2003 results reflect a change in accounting estimate due to our evaluation and adjustment of the useful lives for our property and equipment to more closely reflect actual usage. The useful life adjustment decreased income before interest and taxes by $3.2 million.

 

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(3)   South University and the Brown Mackie Colleges are included as of their respective acquisition dates during fiscal 2004.
(4)   Fiscal 2005 results include non-cash, pretax charges of approximately $4.2 million related to fixed asset impairments and write-offs. Also, cumulative adjustments for lease accounting recorded in fiscal 2005 increased pretax expense by approximately $3.8 million.
(5)   Our combined results for the year ended June 30, 2006 represent the addition of the Predecessor period from July 1, 2005 through May 31, 2006 and the Successor period from June 1, 2006 through June 30, 2006. This combination does not comply with GAAP or with the rules for pro forma presentation, but is presented because we believe it provides the most meaningful comparison of our results. Fiscal 2006 includes $32.2 million in compensation costs resulting from the implementation of SFAS 123(R). We adopted the modified prospective method and, therefore, results of operations in prior fiscal periods were not affected by the implementation of the standard. Additionally, fiscal 2006 includes $40.1 million of costs associated with the Transactions, including $30.2 million of accounting, placement, other financing, investment banking, legal and other professional fees and costs and $9.9 million of employee compensation and payroll taxes.
(6)   EBITDA, a measure expected to be used by management to measure operating performance, is defined as net income plus interest expense (income), net, taxes, depreciation and amortization. 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 flow available for management’s discretionary use, as it does not consider certain cash requirements such as interest payments, tax payments and debt service requirements. Management believes EBITDA 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. In addition, EBITDA provides more comparability between the historical results of EDMC 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

   Combined
      Year Ended June 30,   

July 1, 2005
through
May 31,

2006

  

June 1
through
June 30,

2006

  

Year
Ended
June 30,

2006 (10)

      2002    2003    2004    2005         
      (dollars in millions)

Net income

   $42.3    $56.3    $77.0    $101.6    $100.4    $(19.7)    $80.7

Interest (income) expense, net

   1.6    1.3    2.5    (0.2)    (5.3)    14.1    8.8

Taxes

   25.1    35.2    53.5    67.2    73.6    (12.4)    61.2

Depreciation and amortization, including amortization of intangible assets(a)

   34.1    44.9    55.3    84.1    62.9    7.4    70.3

EBITDA

   $103.1    $137.7    $188.3    $252.7    $231.6    $(10.6)    $221.0
 
  (a)   Depreciation and amortization includes non-cash charges related to property and equipment impairments and write-offs. The year ended June 30, 2005 also include $19.5 million related to cumulative adjustments for changes in lease accounting.

 

(7)   Capital expenditures represent net cash paid for property and equipment, leasehold improvements, online curriculum development, software, and other assets.
(8)   Represents the number of students enrolled in our schools as of the first week in October of the preceding calendar year. Excludes students enrolled at The National Center for Paralegal Training (“NCPT”), which has completed instruction for all programs. NCPT had 45 students enrolled at the beginning of the fall quarter of fiscal 2003 and no students at the beginning of the fall quarters of 2004.
(9)   Brown Mackie College-Dallas and Brown Mackie College-Fort Worth discontinued accepting new enrollments effective August 4, 2005 and the completion of instruction for all students at each school in June 2006. Upon completion of the instruction of students enrolled at August 4, 2005, each school closed. Brown Mackie College-Los Angeles, Brown Mackie College-Orange County, Brown Mackie College-San Diego and Brown Mackie College-Denver have discontinued new enrollments. We established a degree site of Argosy University at each location which assumed the non-diploma Brown Mackie College class offerings. The Brown Mackie College location closed once current students completed their classes. Except for Argosy University-Denver, the Argosy University degree sites that assumed the students of the closed Brown Mackie College locations do not constitute campus locations of Argosy University. We do not count our online schools as separate campuses.
(10)   For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges include interest expense, whether expensed or capitalized; amortization of debt issuance cost; and the portion of rental expense representative of the interest factor. During the period June 1 through June 30, 2006, the Successor’s losses exceeded the fixed charges by $16.1 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 more than 72,000 active students as of the fall of 2005. We offer education through four different educational systems and through online platforms at three of our four educational systems. Our schools offer students a wide variety of programmatic and degree choices in a flexible learning environment. Our curriculum is designed with a distinct emphasis on applied career-oriented content and is primarily taught by faculty members that possess practical and relevant professional experience in their respective fields.

Education Management LLC is a wholly owned subsidiary of Education Management Holdings LLC, which is wholly owned by EDMC. On June 1, 2006, EDMC was acquired by a consortium of private equity investment funds led by the Sponsors. The acquisition was accomplished through the merger of EM Acquisition into EDMC, with EDMC being the surviving company. Although EDMC continued as the same legal entity after the Transactions, EDMC contributed substantially all of its assets and liabilities to the Successor in connection with the Transactions.

Pursuant to the terms of the merger agreement, all outstanding shares of EDMC’s common stock were cancelled in exchange for $43.00 per share in cash by investment funds designated by the Sponsors. The Sponsors, together with certain other investors, became the owners of EDMC. As described in Note 3 to the accompanying consolidated financial statements, the Transactions were accounted for as a purchase in accordance with Statement of Financial Accounting Standards SFAS No. 141, “Business Combinations”. The accompanying consolidated balance sheets and consolidated statements of operations, cash flows and shareholders’ equity are presented for the Predecessor and Successor periods, which relate to the periods preceding the Transactions (July 1, 2003 through May 31, 2006) and the period after completion of the Transactions (June 1, 2006 through June 30, 2006), respectively. Accordingly, the Predecessor periods included in the accompanying consolidated financial statements relate to EDMC.

The largest component of our revenue is tuition collected from our students which is presented 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, reduced for student refunds and scholarships. We recognize revenue on a pro rata basis over the term of instruction or occupancy or when 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 the average student population. Bookstore and housing revenues are largely a function of the average student population.

The two main determinates of our revenue are average student population and tuition rates. Factors impacting our average student population include the number of continuing students attending school at the beginning of a period and the number of new students entering school during such period. We believe that the size of our student population at our campuses is influenced by the number of graduating high school students, the attractiveness of our program offerings, the effectiveness of our marketing efforts, changes in technology, the persistence of our students, the length of the education programs, our overall educational reputation and general economic conditions. We seek to grow our average student population through offering additional programs at existing schools and through establishing new school locations, whether through acquisition or new facility start-up. With regard to tuition rates, historically we have been able to pass along cost increases through increases in tuition.

The 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. For the last three completed fiscal years approximately 70% of our net revenues were indirectly

 

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derived from Title IV programs. Because of the dependence on government sponsored programs, we participate in industry groups and monitor the impact of newly proposed legislation on our business.

Our quarterly revenues and income will fluctuate primarily as a result of the pattern of student enrollments. Student enrollment at the Art Institute schools has typically peaked in the fall, our fiscal second quarter, when the largest number of recent high school and college graduates traditionally begin post-secondary education programs. The fiscal first quarter is typically the lowest revenue quarter due to student vacations. The seasonality of our business has decreased over the last several years due to an increased percentage of students at our schools enrolling in Bachelor’s programs and the effect of recent acquisitions.

Educational services expense, the largest component of our operating expense, consists primarily of costs related to the development, delivery and administration of our education programs. Major cost components are faculty compensation, salaries of administrative and student services staff, costs of educational materials, facility occupancy costs, information systems costs, bad debt expense and depreciation and amortization of property and equipment. Many of these items are relatively fixed in nature and are not subject to volatile input pricing. We anticipate these expenses to decrease as a percentage of revenue in the future due to economies of scale as our schools grow through the introduction of new programs at our existing schools and continued growth in the number of students taking classes online as well as costs savings at our shared services locations.

The second largest expense line item, general and administrative expense, consists of marketing and student admissions expenses and certain central staff departmental costs such as executive management, finance and accounting, legal, 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, 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. Internet inquiries, which generally cost less than leads from traditional media sources like TV and print, convert at a lower rate than traditional media sources.

Results of Operations

Our combined results for the fiscal year ended June 30, 2006 represent the combination of the Predecessor period from July 1, 2005 through May 31, 2006 and the Successor period from June 1, 2006 through June 30, 2006. This combination does not comply with GAAP or with the rules for pro forma presentation, but is presented because we believe it provides the most meaningful comparison of our results. The following table sets forth for the periods indicated the percentage relationship of certain statements of income items to net revenues.

 

     Predecessor    

Successor

   

Combined

 
     For the fiscal years ended
June 30,
   

Period from

July 1, 2005

through May 31,
2006

    Period from
June 1, 2006
through June 30,
2006
   

Period from
July 1, 2005
through June 30,
2006

 
         2004             2005            

Net revenues

  100.00 %   100.00 %   100.00 %   100.00 %   100.00 %

Costs and expenses:

         

Educational services

  64.0 %   62.8 %   58.8 %   87.0 %   60.6 %

General and administrative

  19.6 %   20.0 %   25.4 %   34.9 %   26.0 %

Amortization of intangible assets

  0.8 %   0.6 %   0.4 %   2.3 %   0.5 %
                               

Total Costs and Expenses

  84.4 %   83.4 %   84.6 %   124.2 %   87.1 %
                               

Income (loss) before interest and income taxes

  15.6 %   16.6 %   15.4 %   (24.2 %)   12.9 %

Interest (income) expense, net

  0.3 %   0.0 %   (0.5 %)   18.9 %   0.7 %
                               

Income (loss) before income taxes

  15.3 %   16.6 %   15.9 %   (43.1 %)   12.1 %

Provision (benefit) for income taxes

  6.3 %   6.6 %   6.7 %   (16.7 %)   5.2 %
                               

Net income (loss)

  9.0 %   10.0 %   9.2 %   (26.4 %)   6.9 %
                               

 

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Combined Period from July 1, 2005 through June 30, 2006 compared with Year Ended June 30, 2005

Net Revenues

Revenues for fiscal 2006 increased 14.8% to $1,170.2 million, compared to $1,019.3 million for the same period a year ago, primarily resulting from a 9.8% growth in average total student enrollment and an approximate 6.0% increase in tuition rates. Tuition revenue generally varies based on the average tuition charge per credit hour, average credits per student and the average student population. Average student enrollment for fiscal 2006 increased to approximately 68,500 students compared to approximately 62,400 students for the same period last year. We derived 91.2% and 90.6% of our net revenues from tuition and fees paid by, or on behalf of, our students in fiscal 2006 and fiscal 2005, respectively.

Bookstore and housing revenue is largely a function of the average student population. Net housing revenues increased by 14.2% to $50.1 million in fiscal 2006 compared to $43.9 million in fiscal 2005 and revenues from bookstore sales (which includes supplies and other items) in fiscal 2006 grew by 9.0% to $40.2 million.

Educational Services

Our educational services expense increased by $68.9 million, or 10.8%, to $709.3 million in fiscal 2006 from $640.4 million in fiscal 2005, due primarily to the incremental costs incurred to support higher student enrollment. Educational services expense includes faculty and certain administrative compensation, rent and other facility operating costs, cost of sales, bad debt, and depreciation and amortization. As a percentage of revenue, educational services expense decreased approximately 220 basis points to 60.6% in fiscal 2006 from 62.8% in fiscal 2005. A cumulative lease accounting adjustment of $3.8 million that was recorded in March 2005 accounted for 30 basis points of this decrease and a reduction in fixed asset impairments and write-offs of $1.8 million from $2.7 million in fiscal 2005 to $0.9 million in fiscal 2006 contributed a 19 basis points reduction as a percentage of revenue. Further, continued leverage on administrative personnel and facilities drove 100 basis points improvement as a percentage of revenue and supply store margins grew from 34.0% in fiscal 2005 to 37.5% in fiscal 2006 which drove improvement in supply store costs of 24 basis points as a percentage of revenue. Bad debt expense decreased 79 basis points as a percentage of revenue compared to the prior year due to a continued strength in accounts receivable collections as well as increases in alternative loans received by our students which are used to pay tuition. These private loans are made to our students by financial institutions and are non-recourse to the institution. The use of these loans by our students results in the reduction of student receivable balances. Other components of educational services decreased as a percentage of revenue, including supplies, travel and other operating expenses as a result of cost control efforts. These decreases were partially offset by the effect of non-cash share based compensation, which increased by $13.1 million, or 110 basis points as a percentage of revenue.

General and Administrative

General and administrative expense was $304.5 million in fiscal 2006, an increase of 49.4% from $203.8 million in fiscal 2005. The increase was primarily due to costs associated with the Transactions, non-cash compensation expenses (including SFAS No. 123(R) expense) and higher advertising expenditures. As a percentage of net revenue, general and administrative expense increased 602 basis points over fiscal 2005. Costs associated with the Transactions during fiscal 2006 were $40.1 million, or 343 basis points, consisting of $30.2 million of accounting, placement, other financing investment banking, legal and other professional fees and costs, and $9.9 million of employee compensation and payroll taxes. Non-cash share-based compensation expense was $19.1 million in fiscal 2006 compared to $1.2 million in fiscal 2005, an increase of 150 basis points as a percentage of net revenue. A reduction in fixed asset impairments and write-offs from $1.4 million in fiscal 2005 to zero in fiscal 2006 also contributed 14 basis points reduction as a percentage of revenue. Additionally, we increased our investment in advertising by $27.6 million, an increase of 157 basis points as a percentage of net revenue. These increases were offset slightly by decreases in telecommunications, audit, travel and supplies as a percentage of net revenue as a result of cost control efforts.

 

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Amortization of Intangible Assets

Amortization of intangibles decreased $0.8 million to $5.7 million in fiscal 2006, as compared to $6.5 million in fiscal 2005. The decrease was due to certain intangible assets becoming fully amortized, partially offset by higher amortization expense relating to the fair market value of definite-lived intangibles recorded as a result of the Transactions.

Income before Interest and Income Taxes

Income before interest and taxes (operating income) decreased by $17.9 million to $150.7 million in fiscal 2006 from $168.6 million in the prior year period. The corresponding margin decreased approximately 366 basis points to 12.9% for the fiscal year as compared to 16.6% for the prior year due to the factors described above.

Interest Expense, Net

Interest expense for fiscal 2006 including the Transactions was $16.6 million, partially offset by interest income of $7.8 million resulting in $8.8 million of net interest expense compared to net interest income of $0.2 million in fiscal year 2005. The increase in net interest expense was due primarily to the new debt and amortization of financing costs related to the Transactions.

Provision for Income Taxes

Our effective tax rate was 43.1% for fiscal 2006, as compared to 39.8% for fiscal 2005. The change in the tax rate as compared to the prior year was primarily due to an increase in permanent items (specifically nondeductible costs incurred with respect to the Transactions) and valuation allowances that were recorded against deferred tax assets associated with state net operating loss carry forwards. It was determined that it is no longer “more likely than not” that these deferred tax assets will be realized as a result of anticipated state tax net operating losses arising from interest expense on acquisition-related debt.

The effective tax rate differed from the combined federal and state statutory rates due primarily to the valuation allowance related to deferred tax assets arising from operating losses, expenses that are non-deductible for tax purposes, and the tax impact of the expensing of equity compensation pursuant to SFAS No. 123(R).

Net Income

Net income decreased by $20.9 million to $80.7 million in fiscal 2006 from $101.6 million the year ago period due to the factors described above.

 

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Year Ended June 30, 2005 compared with Year Ended June 30, 2004

Net Revenues

Our net revenues increased by 19.5% to $1,019.3 million in fiscal 2005 from $853.0 million in fiscal 2004 primarily due to increases in student enrollment and tuition rates. Average quarterly student enrollment was approximately 62,400 in fiscal 2005 compared to approximately 53,700 in fiscal 2004, an increase of 16.1%. Average final 2005 student enrollment growth and revenue growth was favorably affected by the full year results of acquisitions that occurred in early fiscal 2004. Average tuition rates increased by approximately 6.8% compared to fiscal 2004. Tuition revenue generally varies based on the average tuition charge per credit hour, type of program, specific curriculum and the average student population. We derived 90.6% and 90.8% of our net revenues from tuition and fees paid by, or on behalf of, our students in fiscal 2005 and fiscal 2004, respectively.

Bookstore and housing revenue is largely a function of the average student population. Net housing revenues increased by 15.5% to $43.9 million in fiscal 2005 compared to $38.0 million in fiscal 2004 and revenues from bookstore sales (which include supplies and other items) in fiscal 2005 grew by 16.1% to $36.9 million.

Educational Services

Our educational services expense increased by $94.3 million, or 17.3%, to $640.4 million in fiscal 2005 from $546.1 million in fiscal 2004, due primarily to the incremental costs incurred to support higher levels of student enrollment. Educational services expense includes faculty and certain administrative compensation, rent and other facility operating costs, cost of sales, bad debt, and depreciation and amortization. Overall, educational services expense as a percentage of net revenue decreased approximately 120 basis points to 62.8% in fiscal 2005 from 64.0% in fiscal 2004. The decrease was primarily due to salaries expense and rent expense declining as a percentage of net revenue, both resulting from improved operating leverage. This operating leverage was partially offset by higher depreciation and amortization expense as a percentage of net revenue along with the net impact of the cumulative lease accounting adjustment recorded during the third quarter of fiscal 2005 to comply with a recent interpretation of the lease accounting rules. This lease accounting adjustment increased depreciation expense and reduced rent expense, resulting in a net $3.8 million non-cash cumulative charge. Fiscal 2005 results also include non-cash, pretax charges of approximately $4.2 million related to fixed asset impairments and write-offs. Other improvements as a percentage of net revenue include legal, supplies and telecommunication expenses. Other components of educational services expenses, including bad debt expense, as a percentage of revenue were relatively flat compared to the comparable period in fiscal 2004.

General and Administrative

General and administrative expense was $203.8 million for fiscal 2005, an increase of 22.1% from $167.0 million in fiscal 2004. The increase was primarily due to costs associated with higher levels of student enrollment, including higher advertising and salaries. Other expense categories missing as a percentage of revenue include audit, consulting and Sarbanes-Oxley compliance expenses. As a percentage of net revenue, general and administrative expense increased approximately 40 basis points to 20.0% as compared to 19.6% in fiscal 2004. This increase as a percentage of net revenue was primarily a result of higher advertising expense in fiscal 2005 as compared with fiscal 2004. The increase in advertising expense was primarily due to the need to generate increased inquiries from perspective students and marketing efforts for start-ups. We focused on new sources of inquiries such as the Internet to better target advertising spending. We also continued to utilize other advertising mediums such as television and print media.

Amortization of Intangible Assets

Amortization of intangibles decreased to $6.5 million in fiscal 2005, as compared to $6.9 million in fiscal 2004 due to certain short-lived intangible assets becoming fully amortized, partially offset by higher amortization expense for deferred software costs related to online curriculum programs.

 

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Interest Expense, Net

Net interest income was $0.2 million in fiscal 2005 as compared to net interest expense of $2.5 million in comparable year ago period. Net interest income on short-term investments was offset in part by $0.4 million of amortization of fees paid in connection with securing our revolving credit agreement and interest expense on mortgage indebtedness at two of our schools. We expensed $0.5 million in commitment fees related to our revolving credit agreement in fiscal 2005.

We had borrowings under mortgage obligations of approximately $5.3 million and $3.4 million at June 30, 2005 and June 30, 2004, respectively.

Provision for Income Taxes

Our effective tax rate was 39.8% for fiscal 2005, as compared to 41.0% for fiscal 2004. The change in the tax rate as compared to the prior year was primarily due to a reduction in tax reserves recorded during fiscal 2005 related to the favorable resolution of a tax audit. The tax rate in fiscal 2004 was higher than the prior year because we established a valuation allowance against the deferred tax assets related to the cumulative Canadian net operating losses. It was determined that it was no longer “more likely than not” that these deferred tax assets would be realized. We continued to fully reserve against all deferred tax assets related to our Canadian operations during fiscal 2005. The favorable impact of the resolution of the audit on the fiscal 2005 tax rate was partially offset by valuation allowances established with regard to deferred tax assets arising from fiscal 2005 Canadian and certain state net operating losses, and by the distribution of taxable income to states with higher tax rates.

The effective tax rate differed from the combined federal and state statutory rates due primarily to the reduction in tax reserves related to the favorable resolution of a tax audit, the increase in the valuation allowance related to deferred tax assets arising from operating losses, and expenses that are non-deductible for tax purposes.

Net Income

Net income increased by $24.6 million to $101.6 million in fiscal 2005 from $77.0 million in fiscal 2004. The increase is attributable to improved results from operations and, to a lesser extent, net interest income and a lower effective tax rate in fiscal 2005 as compared to fiscal 2004.

Quarterly Financial Results

Our quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. Student enrollment at our Art Institute schools has typically peaked in the fall (fiscal second quarter), when the largest number of recent high school and college graduates traditionally begin post-secondary education programs. The first quarter is typically the lowest revenue recognition quarter due to student vacations. The seasonality of our business has decreased over the last several years due to an increased percentage of students at our schools enrolling in bachelor’s programs and the effect of recent acquisitions.

 

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The following table sets forth our quarterly results for fiscal 2004, 2005 and 2006.

 

Quarterly Financial Data (in thousands)

 

Predecessor

   Quarter ended
Fiscal 2004    September 30    December 31    March 31    June 30

Net Revenues

   $ 168,976    $ 232,980    $ 235,150    $ 215,913

Income before interest and income taxes

     8,069      54,468      44,668      25,781

Income before income taxes

     7,379      53,648      44,085      25,399

Net income

     4,501      32,157      25,447      14,909

Predecessor

   Quarter ended
Fiscal 2005    September 30    December 31    March 31    June 30

Net Revenues

   $ 213,594    $ 275,808    $ 274,599    $ 255,337

Income before interest and income taxes

     14,471      65,110      55,467      33,540

Income before income taxes

     13,748      64,850      55,743      34,467

Net income

     8,153      39,580      34,226      19,615

 

      Predecessor     Successor     Combined  
Fiscal 2006    Quarter ended
September 30
   Quarter ended
December 31
   Quarter ended
March 31
   Period from
April 1 through
May 31
   

Period from
June 1 through
June 30

    Period from
April 1, 2006
through
June 30, 2006
 

Net Revenues

   $ 252,985    $ 312,611    $ 312,533    $ 217,634     $ 74,397     $ 292,031  

Income (loss) before interest and income taxes

     20,655      77,852      64,624      5,528       (17,962 )     (12,434 )

Income (loss) before income taxes

     21,359      79,296      66,800      6,554       (32,068 )     (25,514 )

Net income (loss)

     13,952      47,629      40,358      (1,533 )     (19,659 )     (21,192 )

During fiscal 2005, we changed our method of accounting for marketing and admissions activity to expense the costs when incurred rather than allocate the expense to each quarter during a fiscal year. This change had no effect on the annual results.

Liquidity and Funds of Capital Resources

Our primary source of cash is tuition collected from our students. We finance our operating activities primarily from cash generated from operations. Acquisitions have historically been financed through cash generated from operations as well as borrowing on our revolving credit facility. We believe that cash flow from operations, supplemented from time to time with borrowings under our $300.0 million revolving credit agreement, will provide adequate funds for ongoing operations, planned expansion to new locations, planned capital expenditures and debt service during the next twelve months.

Year Ended June 30, 2006 Compared with Year Ended June 30, 2005

As of June 30, 2006, our net working capital deficit was $34.1 million as compared to a net working capital of $47.0 million as of June 30, 2005, an overall reduction of $81.1 million. Net working capital is calculated based on total current assets less total current liabilities. Advanced payments and amounts outstanding under our revolving credit facility are directly offset in cash and cash equivalents and do not contribute to the change in net working capital. The change in net working capital from June 30, 2005 to June 30, 2006 was primarily a result of the following changes in financial position:

Cash, cash equivalents and restricted cash. Cash, cash equivalents and restricted cash, excluding the impact of amounts outstanding under our revolving credit facility and advanced payments, decreased by $57.5 million as

 

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of June 30, 2006 as compared to June 30, 2005, primarily as a result of incremental costs associated with the Transactions. This was slightly offset by an increase of $5.1 million of restricted cash over the same period as a result of an increase in Title IV funds received in excess of charges applied to respective students’ accounts and cash held to collateralize certain outstanding letters of credits.

Prepaid income taxes. Prepaid income taxes increased by $10.5 million to $26.6 million as of June 30, 2006 from $16.2 million as of June 30, 2005 due to an overpayment of fiscal 2006 income taxes in the third quarter. This overpayment was a result of uncertainty related to the close of the Transactions at the time the estimated payment for fiscal 2006 was due.

Current deferred income taxes. Deferred income taxes increased by $9.8 million to $23.6 million as of June 30, 2006 from $13.9 million as of June 30, 2005 primarily as a result of deferred tax assets associated with restricted share compensation recognized in fiscal 2006 offset by additional valuation allowances on certain state net operating losses as a result of the Transactions.

Accrued interest. Accrued interest on outstanding indebtedness increased by $13.4 million as of June 30, 2006 as compared to June 30, 2005, which was a result of the debt related to the Transactions.

Accrued advertising. Accrued advertising expense increased by $3.3 million as of June 30, 2006 as compared to June 30, 2005 primarily a result of investment in advertising spending.

Payroll and related tax accruals (including management incentive compensation). Payroll and related taxes increased by $3.7 million, or 13.0%, from $28.7 million as of June 30, 2005 primarily as a result of our overall growth.

Unearned tuition. The increase in unearned tuition of $7.2 million, or 24.5%, is a result of growth in our student population as well as slight differences in timing of the summer academic terms in fiscal 2006 as compared to fiscal 2005 at our Argosy University and South University campuses.

Accounts payable. Accounts payable increased by $11.4 million to $41.5 million as of June 30, 2006 from $30.1 million as of June 30, 2005 due to overall company growth as well as differences in the timing of payments on expenditures in fiscal 2006 as compared to fiscal 2005.

Cash generated from operations for fiscal 2006 and higher borrowings led to a higher cash balance as of June 30, 2006, as compared to the prior fiscal year. Net cash flow from operations was $279.3 million and $192.5 million in fiscal 2006 and 2005, respectively. Our primary source of cash flow from operations is tuition collected from and on behalf of our students. The increase in cash flow from operations in fiscal 2006 compared to fiscal 2005 was the result of the 14.8% growth in net tuition revenue coupled with improved operating expense management. Additionally, advanced payments increased $56.0 million in fiscal 2006 as compared to fiscal 2005 primarily as a result of timing of drawdowns on Title IV funds. These increases were offset by Transaction costs of $40.1 million, including $30.2 million of accounting, placement, other financings, investment banking, legal and other professional fees and costs and $9.9 million of employee compensation and payroll taxes.

In fiscal 2006, cash on hand and net cash flow from operations were primarily used to fund the cash component of the Transactions of $227.7 million and invest $65.6 million in capital expenditures. During fiscal 2005, cash on hand, net cash flow from operations and $21.2 million from the exercise of stock options were primarily used to fund the repayment of $125.1 million outstanding on our revolving credit facility as of June 30, 2004, invest in $74.9 million in capital expenditures and fund the repayment of a note issued in connection with our acquisition of Brown Mackie College as well as fund an escrow payment associated with the acquisition of South University.

Net accounts receivable increased by $0.3 million compared to fiscal 2005, which represented a decrease as a percentage of revenue from 5.7% in fiscal 2005 to 5.0% in fiscal 2006. Net accounts receivable can be affected

 

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significantly by the changes in the start dates of academic terms from year to year. As of June 30, 2006, there were no significant changes to the start dates of academic terms in session. Days sales outstanding (“DSO”) in receivables decreased from 20.6 days at June 30, 2005 to 18.1 days at June 30, 2006. We calculate DSO by dividing net accounts receivable by average daily revenue for the preceding quarter. Quarterly average daily revenue is determined by taking the total revenue for a quarter and dividing by the number of days in a quarter. The decrease in DSO was primarily due to better collections along with greater use of third party loans by our students. As a means of controlling our credit risk, we have established alternative loan programs with student loan lenders. These programs, which are non-recourse to us, help bridge the funding gap created by tuition rates that rise faster than financial aid sources. We believe that these loans are attractive to our students because they provide for repayment post graduation and are available to borrowers with lower than average credit ratings.

Capital expenditures were $65.6 million, or 5.6% of revenue, for fiscal 2006 as compared to $74.9 million, or 7.3% of revenue, in fiscal 2005. The reduction of capital expenditures as a percentage of revenue was due to our continued focus on capital efficiency as well as delays in certain information technology and facility related projects. We expect fiscal 2007 capital expenditures to increase back to the level in fiscal 2005 as a percentage of revenue, primarily due to increased investment in our start up campuses and online operations as well as spending carried over to fiscal 2007 from fiscal 2006 projects.

Our existing revolving credit facility allows for borrowings of up to $300 million. As of June 30, 2006, we had $160 million outstanding under this facility and were in compliance with all covenants. All amounts outstanding on the revolving credit facility were repaid on July 3, 2006.

We lease most of our facilities and anticipate that future commitments on existing leases will be paid from cash provided from operating activities. We also expect to extend the terms of leases that will expire or enter into similar long term commitments for comparable space. We guarantee a significant portion of real estate lease obligations for our subsidiaries.

We paid off a mortgage on the building occupied by Western State University College of Law in March 2006, which resulted in approximately $3.3 million in principal payments in fiscal 2006.

The following table describes our commitments at June 30, 2006 under various contracts and agreements (in thousands):

 

    

Total

amounts

committed

   Payments due by period
        2007    2008-2009    20010-2011   

2012-

Thereafter

Revolving credit loans(1)

   $ 160,000    $                 $                 $                 $ 160,000

Term loan(2)

     1,185,000      11,850      23,700      23,700      1,125,750

Senior notes(3)

     375,000      —        —        —        375,000

Senior subordinated notes(4)

     385,000      —        —        —        385,000

Standby letters of credit(5)

     —        —        —        —        —  

Mortgage debt of consolidated entity(6)

     1,864      174      389      453      848

Capital leases

     3,101      771      1,659      671      —  
                                  

Sub-total long-term debt

     2,109,965      12,795      25,748      24,824      2,046,598

Interest payments(7)

     1,273,885      165,495      328,164      324,436      455,790

Operating leases(8)

     581,615      86,955      155,256      113,553      225,851

Unconditional purchase obligations(9)

     21,338      12,426      7,093      917      902
                                  

Total commitments

   $ 3,986,803    $ 277,671    $ 516,261    $ 463,730    $ 2,729,141
                                  

(1) Our revolving loans, if any, mature on June 1, 2012. The $160 million of borrowing outstanding under our revolving credit facility was repaid on July 3, 2006.
(2) Our term loan matures on June 1, 2013.

 

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(3) Our Senior Notes are due June 1, 2014.
(4) Our Senior Subordinated Notes are due June 1, 2016.
(5) As of June 30, 2006 there were no standby letters of credit.
(6) Our mortgage debt of consolidated entity matures on January 2, 2014.
(7) Interest payments are based on either the fixed rate or the variable rate as of June 30, 2006 and assume that repayments are in accordance with the loan agreements without giving effect to mandatory prepayments.
(8) Our operating lease obligations extend through 2020.
(9) We have various contractual obligations that extend through 2014 for services.

As of June 30, 2006, we were highly leveraged and had an outstanding $2,110.0 million in aggregate indebtedness with an additional $140.0 million of borrowing capacity available under our revolving credit facility. Our liquidity requirements are significant and include debt service and capital expenditures. For fiscal 2006, pro forma interest expense, not including non-cash amortization of deferred financing fees, was $165.7 million.

Effective July 2006, we entered into interest rate swap agreements to manage the variable rate portion of $750.0 million of debt under our term loan facility. Under the terms of the interest rate swap agreements, we receive payments based on variable interest rates based on the three-month LIBOR and make payments on a fixed rate of 5.397% plus the applicable margin.

Management expects our cash flows from operations, combined with cash on hand and availability under our new revolving credit facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending for a period that includes the next 12 months.

Year Ended June 30, 2005 Compared with Year Ended June 30, 2004

At June 30, 2005, our working capital was approximately $47.0 million. This is compared to a working capital deficit of $76.5 million at June 30, 2004.

Cash generated from operations for fiscal 2005 led to higher cash and lower borrowing balances at June 30, 2005, as compared to the prior fiscal year. Partially offsetting the significant decrease in debt was the growth in advance payments and unearned tuition due to an increase in enrollment. During fiscal 2005, cash on hand, net cash flow from operations, and $21.2 million from the exercise of stock options were primarily used to fund the repayment of a note issued in connection with our acquisition of Brown Mackie College, an escrow payment associated with the acquisition of South University, repayment of $125.1 million outstanding on our revolving credit facility at June 30, 2004, as well as invest in $74.9 million in capital expenditures. In fiscal 2004 cash on hand and $166.3 million of net cash flow from operations, along with proceeds from both the net increase in debt of $90.1 million and the issuance of stock of $12.0 million were primarily used to fund the cash component of acquisitions of $157.8 million, repay $35 million outstanding on our revolving credit facility at June 30, 2003, and invest $82.3 in capital expenditures.

Net cash flow from operations was $192.5 million and $166.3 million in fiscal 2005 and 2004, respectively. The increase from prior year net cash flow from operations was primarily attributable to an increase in net income of $24.6 million and an increase in non-cash items of $26.6 million. These increases were partially offset by $24.9 million less cash generated from working capital primarily due to the timing of income tax installment payments.

Net accounts receivable increased by $5.8 million compared to fiscal 2004, which represented a decrease as a percentage of revenue from 6.1% in fiscal 2004 to 5.7% in fiscal 2005. Days sales outstanding (“DSO”) in receivables decreased from 22.0 days at June 30, 2004 to 20.6 days at June 30, 2005. We calculate DSO by dividing net accounts receivable by average daily revenue for the preceding quarter. Quarterly average daily revenue is determined by taking the total revenue for a quarter and dividing by the number of days in a quarter.

 

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The decrease in DSO was primarily due to better collections along with greater use of third party loans by our students. As a means of controlling our credit risk, we have established alternative loan programs with student loan lenders. These programs, which are non-recourse to us, help bridge the funding gap created by tuition rates that rise faster than financial aid sources. We believe that these loans are attractive to our students because they provide for repayment post graduation and are available to borrowers with lower than average credit ratings.

Capital expenditures were $74.9 million or 7.3% of revenue for of fiscal 2005, compared to $82.3 million, or 9.6% of revenue in fiscal 2004. The reduction of capital expenditures as a percentage of revenue was due to our continued focus on capital efficiency as well as decreased spending in fiscal 2005 resulting from delays in the commencement of capital projects. The fiscal 2005 capital expenditures include investments in schools acquired or started during the previous several years and schools added in fiscal 2005, continued expansion and improvements to current facilities, additional or replacement school and housing facilities, and classroom and administrative technology.

Contingencies

The Art Institute of Dallas has been placed on probation by the Commission on Colleges of the Southern Association of Colleges and Schools (the “Commission”) due to the school’s failure to satisfactorily document clearly identified expected outcomes and assessments for its programs and services as required by the Commission’s institutional effectiveness comprehensive standard. The Commission, in connection with reaffirming the accreditation of The Art Institute of Dallas for a ten year period in December 2003, required the school to provide evidence of compliance with this standard by December 2005. The probationary period is through at least December 2006 and may be extended for an additional year for good cause. The Commission may remove its grant of accreditation to The Art Institute of Dallas if the school does not satisfactorily address the issues raised by the Commission. As of October 2005, approximately 1,300 students attended The Art Institute of Dallas, which is one of 32 Art Institute schools.

In addition to the matter 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, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Senior Secured Credit Facilities

Overview. Our senior secured credit facilities consists of a $1,185.0 million term loan facility and a $300.0 million revolving credit facility of which we are the primary borrower. 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.

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 and (y) the federal funds rate plus  1/2 of 1%. The initial applicable margin for borrowings under the revolving credit facility is 1.25% with respect to base rate borrowings and 2.25% with respect to LIBOR borrowings and, under the term loan facility, 1.50% with respect to base rate borrowings and 2.50% with respect to LIBOR borrowings. The applicable margin for borrowings under the senior secured credit facilities may be reduced subject to our attaining certain leverage ratios.

We utilize interest rate swap agreements, which are contractual agreements to exchange payments based on underlying interest rates, to manage the floating rate portion of our debt under our term loan facility. On June 6, 2006, we entered into two five year interest rate swap agreements, for the total notional amount of $750 million, in order to hedge a portion of its exposure to variable interest payments associated with the senior secured credit

 

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facilities. The interest rate swaps are for $375.0 million effective July 1, 2006 and $375.0 million effective July 3, 2006. 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% plus the applicable margin.

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. The initial commitment fee rate is 0.50% per annum. The commitment fee rate may be reduced to 0.375% subject to our attaining certain leverage ratios. We must also pay customary letter of credit fees.

Amortization. We are required to repay installments on the loans under the term loan facility in quarterly principal amounts equal to 0.25% of their initial total funded principal amount calculated as of the closing date for the first six years and nine months, with the remaining amount payable on the date that is seven years from the date of the closing of the senior secured credit facilities.

Principal amounts outstanding under the revolving credit facility are due and payable in full at maturity, six years from the date of the closing of the senior secured credit facilities.

Certain Covenants and Events of Default. The senior secured credit agreement contains a number of covenants that, among other things, restrict, subject to certain exceptions, our ability to:

 

    incur additional indebtedness;

 

    create liens on assets;

 

    engage in mergers or consolidations;

 

    sell assets;

 

    pay dividends and distributions or repurchase our capital stock;

 

    make investments, loans or advances;

 

    make capital expenditures;

 

    repay subordinated indebtedness (including the senior subordinated notes offered hereby);

 

    make certain acquisitions;

 

    engage in certain transactions with affiliates;

 

    enter into certain restrictive agreements;

 

    amend agreements governing our subordinated indebtedness (including the senior subordinated notes offered hereby) and our constitutive documents;

 

    change the nature of our business; and

 

    change the status of Education Management Holdings LLC as a passive holding company.

In addition, the senior secured credit agreement requires us to maintain the following financial covenants:

 

    a maximum total leverage ratio; and

 

    a minimum interest coverage ratio.

The senior secured credit agreement also contains certain customary affirmative covenants and events of default.

 

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Senior Notes and Senior Subordinated Notes

The indentures governing the senior notes and senior subordinated notes being offered hereby will limit our (and most or all of our subsidiaries’) ability to:

 

    incur additional indebtedness;

 

    pay dividends on or make other distributions or repurchase our capital stock;

 

    make certain investments;

 

    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 certain exceptions, the indentures governing the notes will permit us and our restricted subsidiaries to incur additional indebtedness, including secured indebtedness. See “Description of Notes.”

Covenant Compliance

Under the senior secured credit facilities, we are required to satisfy and a maximum total leverage ratio, a minimum interest coverage ratio and other financial conditions tests. As of June 30, 2006, we were in compliance with the financial and nonfinancial covenants. Our continued ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests. A breach of any of these covenants could result in a default under the senior secured credit facilities. Upon the occurrence of an event of default under the senior secured credit facilities, the lenders could elect to declare all amounts outstanding under the senior secured credit facilities to be immediately due and payable and terminate all commitments to extend further credit.

Adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) is a non-GAAP measure used to determine our compliance with certain covenants contained in the indentures governing the notes and in 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 the indentures governing the notes and our senior secured credit facilities. 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 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 amounts borrowed due and payable. Any such acceleration would also result in a default under our indentures governing the notes. Additionally, under our senior secured credit facilities and the indentures governing the notes, our ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on Adjusted EBITDA.

Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently 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 the senior credit facilities and the indentures allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income (loss). 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 disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

 

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The following is a reconciliation of net income (loss), which is a GAAP measure of our operating results, to Adjusted EBITDA as defined in our debt agreements, and the calculation of the fixed charge coverage ratio, net debt and net debt to Adjusted EBITDA ratio under the indentures governing the notes. The terms and related calculations are defined in the indentures governing the notes.

 

     Predecessor      Successor    

Combined

 

(in millions)

   Year ended
June 30,
2005
    Period from
July 1, 2005
through
May 31,
2006
     Period from
June 1, 2006
through
June 30,
2006
    Year Ended
June 30,
2006
 

Net income (loss)

   $ 101.6     $ 100.4      $ (19.7 )   $ 80.7  

Interest (income) expense, net

     (0.2 )     (5.3 )      14.1       8.8  

Taxes

     67.2       73.6        (12.4 )     61.2  

Depreciation and amortization(1)

     84.1       62.9        7.4       70.3  
                                 

EBITDA

     252.7       231.6        (10.6 )     221.0  

Reversal of impact of unfavorable lease liabilities(2)

            (0.2 )

Equity compensation expense(3)

            32.2  

Transaction and advisory fees(4)

            40.1  
               

Adjusted EBITDA

          $ 293.1  
               

(1) Depreciation and amortization includes non-cash charges related to fixed asset impairments and write offs of $0.9 million in fiscal 2006 and $4.2 million in fiscal 2005. The year ended June 30, 2005 also includes $19.5 million related to cumulative adjustments for changes in lease accounting.
(2) Represents non-cash income due to the amortization of $7.3 million of unfavorable lease liabilities resulting from fair value adjustments required under purchase accounting as part of the Transactions.
(3) Represents non-cash equity compensation recognized in accordance with Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.”
(4) Represents costs associated with the Transactions of $30.2 million of accounting, placement, other financing, investment banking, legal and other professional fees and costs, and $9.9 million of employee compensation and payroll taxes. Also includes advisory fees paid to Sponsors of $0.4 million under our management agreement with Providence Equity and Goldman Sachs Capital Partners.

Our covenant requirements and pro forma ratios for the twelve months ended June 30, 2006 are as follows:

 

     Covenant
Requirements
   Pro Forma Ratios

Senior secured credit facilities(1)

     

Minimum Adjusted EBITDA to consolidated interest expense ratio

   1.40x    1.77x

Maximum consolidated total debt to Adjusted EBITDA

   8.25x    6.30x

Notes

     

Minimum Adjusted EBITDA to fixed charges ratio required to incur additional debt pursuant to ratio provisions

   2.00x    1.77x

(1) These covenants are not required under the credit agreement until December 31, 2006.

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,

 

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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. Such 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, it may be deemed to be not financially responsible by the U.S. Department of Education, or otherwise ineligible to participate in Title IV programs.

Regulations promulgated under the HEA also require all proprietary education institutions to comply with the 90/10 Rule, which prohibits participating schools from deriving 90% or more of total revenue from Title IV programs in any year. An institution that violates the 90/10 Rule becomes immediately ineligible to participate in the Title IV programs, and may not reapply for eligibility until the following fiscal year.

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 and liabilities, and the reported amounts of revenue 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 condensed consolidated financial statements appearing elsewhere in this prospectus.

Our management makes judgments and estimates on an ongoing basis that include, but are not limited to, revenue recognition, allowance for doubtful accounts, valuations of goodwill and indefinite-lived intangible assets, valuations of acquired finite-lived intangible assets and loss contingencies. Further description of how these estimates are developed is provided below.

We believe that the following critical accounting policies comprise the more significant judgments and estimates used in the preparation of the consolidated financial statements.

Purchase Accounting

As discussed above, the Transactions were completed on June 1, 2006 and was financed by a combination of equity invested by the Sponsors and other investors, borrowings under our senior secured credit facilities, the issuance of the notes and EDMC’s cash on hand. These funds, net of proceeds from the exercise of outstanding stock options, were used to purchase all EDMC’s shares of common stock that were issued and outstanding, immediately prior to the completion of the Transactions. The purchase price included the $3.4 billion purchase of the outstanding common stock and settlement of stock options outstanding, and transaction costs of $105.0 million, of which $59.6 million was allocated to the cost of issuing debt while the remaining $45.4 million was

 

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included in the overall purchase price. Under business combination accounting, the total purchase price was allocated to our net tangible and identifiable intangible assets based on their estimated fair values established by an independent appraisal firm as of June 1, 2006. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill. The preliminary allocation of the purchase price for property and equipment, intangible assets and deferred income taxes was based upon valuation data at the date of the Transactions and the estimates and assumptions are subject to change.

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. For most of our programs, the academic and fiscal quarters are the same; therefore, unearned revenue is not significant at the end of a fiscal quarter. However, Argosy University and Brown Mackie College and to a lesser degree South University and certain Art Institutes have educational programs with starting and ending dates that differ from our fiscal quarters. Therefore, at the end of the fiscal quarter, we have revenue from these programs that has not yet been earned in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements.”

Refunds are calculated and paid in accordance with federal, state and accrediting agency standards.

The trade receivable balances are comprised of individually insignificant amounts due primarily from students throughout the United States and Canada. Our accounts receivable balances at each balance sheet date consist of amounts related to revenue from current or former students for classes which have occurred or prior periods of occupancy in our housing facilities for which payment has not been received; or obligations of current students for tuition, housing and other items related to academic terms in progress for which payment has not been received.

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, considering our historical experience. Student accounts are monitored through an aging process whereby past due accounts are pursued. When certain criteria are met (primarily aging 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 range of 85% to 100% and are evaluated on a case-by-case basis before being written off. If current collection trends differ significantly from historical collections, an adjustment would be required to our allowance. Historically, however, the allowance for doubtful accounts has been within our estimate of uncollectible accounts.

Share-Based Payment

Beginning on July 1, 2005, we began accounting for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)) using the modified prospective method.

We are now required to record the fair value of stock-based compensation awards as expenses in the consolidated statement of operations. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. For current and past grants of stock options, we utilized the Black-Scholes valuation model in determining the fair value of share-based awards at the grant date. This valuation requires judgment, including estimating the risk free interest rate, expected life of the option and expected volatility rate. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

 

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During the fiscal year 2006, we granted employees restricted shares instead of issuing stock options. These restricted shares also resulted in compensation expense under SFAS No. 123(R).

As a result of the Transactions, the vesting restrictions on all stock options and shares of restricted stock were removed. We accelerated the recognition of compensation expense under SFAS No. 123(R) to fully recognize the remaining expense on all equity instruments.

In August 2006, our board of directors approved a new stock option plan for executive management and key personnel. No options under this plan were awarded as of June 30, 2006.

Leases

We lease most of our administrative and educational facilities under operating lease agreements. Before entering into a lease, an analysis is performed to determine whether a lease should be classified as a capital or an operating lease according to SFAS No. 13, “Accounting for Leases”, as amended. These lease agreements typically contain tenant improvement allowances and rent holidays. Tenant improvement allowances are recorded as a leasehold improvement asset (which is included in Property and Equipment, net) when the leasehold asset is placed in service and both the tenant improvement asset and related deferred rent liability are amortized on a straight-line basis over the shorter of the term of the lease or useful life of the asset as additional depreciation expense and a credit to rent expense, respectively. For leases that contain a rent holiday, total rent payments are recognized straight-line over the entire lease term. Lease agreements sometimes contain quantifiable rent escalation clauses, which are accounted for on a straight-line basis over the life of the lease. Our lease terms generally range from one to twenty years with one or more renewal options. For leases with renewal options, we record rent expense on a straight-line basis over the original lease term, exclusive of the renewal period. When a renewal occurs, we record rent expense over the new term. Rent is expensed as we gain “possession and/or control” over the new space regardless of whether the facility is substantially complete or whether a build out occurs because rent capitalization during construction ceased on January 1, 2006 due to updated accounting rules. We also lease space from time to time on a short-term basis in order to provide specific courses or programs.

Capitalization of Internally Developed Software Costs

Statement of Position 98-1 (SOP 98-1), “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” requires the capitalization of direct costs incurred in connection with developing or obtaining software for internal use, including external direct costs of materials and services and payroll and payroll related costs for employees who are directly associated with and devote time to an internal use software development project. We capitalize our online curriculum development costs under this standard.

Long-Lived Assets

Property and equipment are recorded at their estimated cost less accumulated depreciation. Buildings are depreciated over the estimated useful life of 30 years using the straight-line method. Leasehold improvement and capitalized lease costs are amortized over the shorter of the original lease term exclusive of any renewal periods, or their estimated useful lives. The majority of our property and equipment are depreciated over estimated useful lives ranging from three to ten years using the straight-line method. Accelerated depreciation methods are generally used for income tax purposes. The Predecessor applied the straight-line method using the half year convention which was not materially different than using the date the assets were placed in service. Amortization of intangibles relates to the values assigned to identifiable intangible assets. These intangible assets arose principally from the Transactions, acquisition of schools and development of curriculum for various online programs.

We evaluate the recoverability of the goodwill and indefinite lived intangible assets attributable to each reporting unit as required under SFAS No. 142, “Goodwill and Other Intangible Assets”, by comparing the fair value of each reporting unit with its carrying value. The evaluation is performed at least annually and

 

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additionally when potential impairment indicators exist as required by SFAS No. 142. Management applies judgment when performing these evaluations to determine the financial projections used to assess the fair value of each reporting unit. The fair market value of the reporting units is estimated by applying multiples to earnings before interest, taxes and depreciation. To validate the multiples used we compare the multiples to recent identified transactions where similar businesses were sold.

Effective April 1, 2005, the Predecessor changed its regional structure to form seven operating divisions by geographic locations within North America. These regions were the Northeast, Southeast, North Central, Central, South Central, Northwest and Southwest regions. Due to the reorganization of the division structure, the Predecessor reallocated goodwill for impairment testing purposes based upon the new operating division structure in the fiscal fourth quarter of 2005. In connection with the reallocation of goodwill, the Predecessor performed an impairment test as of April 1, 2005 and determined goodwill was not impaired. Shortly thereafter, in July 2005, the Predecessor refined the regional structure from seven to six operating divisions. At that time, the Predecessor completed its annual impairment test for the fiscal year beginning July 1, 2005 and determined goodwill was not impaired. The Successor maintained the same organizational structure as the Predecessor relative to determination of reporting units as of June 30, 2006.

We evaluate the recoverability of property and equipment and intangible assets with finite lives whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Changes in circumstances may include economic conditions or operating performance. When impairment indicators arise from changing conditions, we perform an evaluation based upon assumptions about the estimated future cash flows. If the projected undiscounted future cash flows are less than the carrying value, we determine the fair value of the asset based upon a discounted cash flow model or a third-party valuation. When utilizing a discounted cash flow model to determine fair value, if the discounted cash flows are less than the carrying value of the asset, an impairment loss is recognized. See Note 5 of the audited financial statements for additional information regarding the change in estimates for useful lives and fair market values of as a result of business combination accounting.

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 federal income tax reporting requirements, and (ii) differences between the recorded value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases.

As of June 30, 2006, we had state net operating loss carry forwards of approximately $68.2 million available to offset future taxable income and a related deferred tax asset of $4.9 million. The carry forwards expire at varying dates beginning in fiscal 2007 through fiscal 2026. We have determined that it is currently “more likely than not” that the deferred tax assets associated with $53.7 million of its state net operating loss carry forwards will not be realized and have established a valuation allowance equal to the gross deferred tax asset balance of $4.0 million related to these net operating loss carry forwards. In addition, certain of our state net operating losses may be subject to annual limitation due to these states’ adoption of the ownership change limitations imposed by Internal Revenue Code Section 382 or similar state provisions, which could result in the expiration of these state net operating loss carry forwards before they can be utilized.

As of June 30, 2006, we had Canadian net operating loss carry forwards of approximately $5.1 million available to offset future taxable income and a related deferred tax asset of $1.6 million. The carry forwards expire at varying dates beginning in fiscal 2009 through fiscal 2016. As of June 30, 2006, we had additional Canadian deferred tax assets of $2.0 million related to temporary items. We have determined that it is currently more likely than not that the deferred tax assets related to our Canadian net operating losses and temporary items will not be realized and have established a valuation allowance equal to the gross deferred tax assets.

 

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Accrued health insurance and incentive compensation

We are self-insured for health benefits provided to our employees, requiring us to exercise significant judgment to record the estimated liability. We record an accrual for known claims and an estimate for incurred but not yet reported claims based upon information received from third parties, including professional actuaries.

We maintain a cash bonus program for some of our senior employees. The expense for this bonus plan is based upon our financial performance as well as other factors. All payments under this bonus plan are subject to our Board of Directors’ approval.

Internal Controls over Financial Reporting

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

New Accounting Standards

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”, which changes the requirements for the accounting and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principles as well as to changes required by an accounting pronouncement that does not include specific transition provisions. SFAS No. 154 eliminates the requirement to include the cumulative effect of changes in accounting principle in the income statement and instead requires that changes in accounting principle be retroactively applied. A change in accounting estimate continues to be accounted for in the period of change and future periods if necessary. A correction of an error continues to be reported by restating prior period financial statements. SFAS No. 154 is effective for us as of July 1, 2006.

On July 13, 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN No. 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We are in the process of evaluating the potential impact of FIN No. 48, if any.

Effect of Inflation

We do not believe our operations have been materially affected by inflation.

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 U.S. dollar. We do not believe we are subject to material risks from reasonably possible near-term change in exchange rates.

The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximated carrying values because of the short-term nature of these instruments. The derivative financial instrument is carried at fair value, which is based on the amount we would pay to terminate the agreement. The fair value and carrying amounts of our long-term debt are approximately equivalent.

 

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We have a 1% partnership interest in an entity that is consolidated in our statements and has an outstanding mortgage on one of our leased facilities in the amount of $1.9 million at June 30, 2006.

As of June 30, 2006, we had total debt of $2,110.0 million, including $1,345.0 million in variable rate debt. Effective July 2006, $750.0 million of the variable rate portion of this debt was hedged by the interest rate swaps. In fiscal 2006, our weighted average interest rate was 8.483% on outstanding debt on a combined basis. As of June 30, 2005, we had $62.0 million in variable rate debt. In fiscal 2005, weighted average interest rate was 4.16% on outstanding debt. A hypothetical change of 1.25% in interest rates from June 30, 2006 levels would have increased or decreased interest expense by approximately $1.2 million for the variable-rate debt in fiscal 2006. On a pro forma basis the annualized impact of a change of 1.25% in interest rates would be an increase or decrease of $14.8 million for the variable rate debt.

On June 6, 2006, in order to minimize the effect of variable interest rates, we entered into two five year interest rate swap agreements that fixed the interest rate for $750.0 million of our variable rate debt starting July 2006, which will impact interest expense in the fiscal year 2007. The interest rate swaps are for $375.0 million, effective July 1, 2006 and $375.0 million, effective July 3, 2006, and fix our interest rates at 5.397% plus the applicable margin. The swap agreements expire on July 1, 2011. In fiscal 2007, we will have variable rate debt of $435.0 million, excluding $160.0 million under our revolving credit facility, which will be subject to market rate risk, due to the fact that our interest payments will fluctuate as market changes cause the underlying interest rates to change. Under the terms of the interest rate swap agreements, 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%. The net receipt or payment from the interest rate swap agreement is recorded in interest expense. The interest rate swap agreements are designated and qualify as cash flow hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As such, the swap agreements are accounted for as an asset in the consolidated balance sheet at fair value, net of tax. The fair value of the swap agreements are estimated based on current settlement prices and quoted market prices of comparable contracts. For the period ended June 30, 2006, we recorded an unrealized after-tax gain of $2.5 million in other comprehensive income (loss) related to the change in market value on the swap agreements. The change in market value of the swap agreements may be recognized in the statement of operations if certain terms of the senior secured credit facility change, if the loan is extinguished or if the swap agreements are terminated prior to maturity.

 

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BUSINESS

Our Company

We are among the largest providers of post-secondary education in North America, with more than 72,000 active students as of the fall of 2005. Our educational institutions offer students the opportunity to earn undergraduate and graduate degrees in a broad range of disciplines, including media arts, design, psychology and behavioral sciences, education, information technology, legal studies, business, health sciences and culinary arts. Since 1996, we have generated a compounded annual enrollment growth rate of 18.4% and a compounded annual revenue growth rate of 23.0%. For the twelve months ended June 30, 2006, we generated revenues and Adjusted EBITDA of $1,170.2 million and $293.1 million, respectively.

Over our 35-year operating history, we have expanded the reach of our educational systems and currently operate 71 schools across 24 states in the United States and two Canadian provinces. Additionally, we offer an online education platform, enabling our students to pursue degrees online or through a flexible combination of both online and local campuses. Our programs enable students to earn various degrees, including Doctorate, Master’s, Bachelor’s and Associate’s, as well as certain specialized non-degree diplomas. These academic programs are designed with a distinct emphasis on applied, career-oriented content and are primarily taught by faculty members that possess practical and relevant professional experience in their respective fields.

Our student population includes both traditional students, typically recent high school graduates pursuing their first higher education degree, and working adults, who are pursuing additional education in their current field or preparing for a new profession. Based on information collected by us from graduating students and employers, we believe that of the approximately 12,300 undergraduate students who graduated from our institutions during the calendar year ended December 31, 2005, approximately 88% of those available for employment obtained employment in their fields of study or a related field within six months of graduation. Similar to traditional public and private colleges and universities, each of our schools located in the United States is recognized by accreditation agencies 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 schools are organized and managed through four educational systems, each focused on specific programmatic and degree areas:

 

    The Art Institutes. The Art Institutes offer Master’s, Bachelor’s and Associate’s degree programs, as well as certain non-degree diploma programs, in graphic design, media arts and animation, multimedia and web design, game art and design, video and digital media production, interior and industrial design, culinary arts, photography and fashion. Students can pursue their degree at one of our 31 Art Institute campuses in 18 states and two Canadian provinces, including online programs through The Art Institute Online, a division of The Art Institute of Pittsburgh.

 

    Argosy University. Argosy University is primarily focused on Doctorate and Master’s degree programs in clinical psychology, counseling, education and business administration. It also offers Bachelor’s and Associate’s degrees in similar fields. There are 18 Argosy University locations in 12 states and online programs.

 

    Brown Mackie Colleges. The Brown Mackie Colleges offer Associate’s degree programs, as well as certain non-degree diploma programs, in health sciences, business, information technology, legal studies and design technologies. There are 16 Brown Mackie College campuses in seven states, primarily in the Midwestern United States.

 

    South University. South University offers undergraduate and graduate degree programs in business, legal studies, information technology and health sciences fields through five campuses in the Southeastern United States and online programs.

In addition to the educational systems listed above, we also operate Western State University College of Law in California, which offers Juris Doctor degrees.

 

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We have provided educational services for more than 35 years since the acquisition of our first Art Institute in Pittsburgh in 1970. Throughout our history, we have selectively pursued acquisitions to augment our network, program and degree offerings with established franchises such as Argosy University in 2001 and South University and American Education Centers (renamed the Brown Mackie Colleges) in 2003. Of the 26 acquisitions we have completed, the majority have been select acquisitions of single campuses where the economics of acquiring an existing school were more favorable than opening a new school.

Industry Overview

We believe the post-secondary education market in the U.S. is a $320 billion annual market, which includes public and private two-year and four-year degree granting institutions, graduate and professional schools, and non-degree vocational schools offering specialized diplomas. In the U.S., there are over 17 million students enrolled in over 6,000 institutions that offer Doctorate, Master’s, Bachelor’s and Associate’s degrees and diploma programs. According to the National Center of Education Statistics, traditional students, typically recent high school graduates under 25 years of age who are pursuing their first higher education degree, represent approximately 61% of the national student population, with the remaining 39% comprising non-traditional students, who are largely working adults pursuing additional education in their current field or preparing for a new profession.

We believe there are a number of factors contributing to the long-term growth of the post-secondary industry. First, the shift toward a services-based economy increases the demand for higher levels of education. According to the Bureau of Labor Statistics, over the next decade 61% of projected growth in employment is expected to come from jobs that require at least some college experience. Second, according to the U.S. Census Bureau, the median annual income in 2004 for a person with a Bachelor’s degree was 62% higher than that of a high school graduate. This income benefit of education has helped increase the percentage of adults over 25 years of age with Bachelor’s degrees from 11% in 1970 to 28% in 2004. Third, government and private financial aid in various forms, including loan guarantees, grants and tax benefits for post-secondary students, has consistently increased from $4.4 billion to $142.7 billion between 1971 and 2005, representing a compounded annual growth rate of 10.7%. We believe this support will continue as the 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, with public four-year colleges increasing tuition and fees by 6.9% annually on average over the last ten years, according to the College Board.

We believe that for-profit providers will capture an increasing share of the growing demand for post-secondary education, as this demand has been largely unaddressed by traditional public and private universities. Non-profit public and private institutions may face limited financial capability to expand their offerings in response to the growing demand for education, due to a mix of state funding challenges, declining contributions and significant expenditures on research and the professor tenure system. Certain private institutions may also control enrollments to preserve the perceived prestige and exclusivity of their degree offerings. Additionally, we believe traditional non-profit institutions generally have not emphasized flexible course schedules and online offerings that appeal to working adults, nor have they aggressively pursued fully online course offerings.

As a result, for-profit post-secondary education providers continue to have significant opportunities for growth. The National Center of Education Statistics has reported that, over the last 7 years, enrollments at for-profit post-secondary education institutions have experienced a compounded annual growth rate of approximately 11%, compared to compounded annual growth rate of approximately 2% for traditional non-profit colleges and universities over the same time period. For-profit providers have continued their strong growth, principally due to the higher flexibility of their programmatic offerings and learning structure, their emphasis on applied, career-oriented content and their ability to consistently roll out new campuses and programs. Despite rapid growth, the market share of post-secondary education captured by for-profit providers remains relatively modest with ample room for continued growth. In 2003, according to the National Center for Education

 

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Statistics, for-profit institutions accounted for approximately 6% of all post-secondary enrollments, up from 4% in 1997. In addition, for-profit post-secondary providers continue to enlarge the size of the education market through targeting underserved students who might otherwise forgo post-secondary education, increasing marketing budgets and investment in online education, which is the fastest growing segment of the post-secondary market.

The post-secondary education industry is highly fragmented, with no one provider controlling significant market share. Students choose among providers based on programs and degrees offered, program flexibility and convenience, quality of instruction, placement rates, reputation and recruiting effectiveness. Such 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, career-oriented schools.

Our Strengths

We believe that the combination of the following strengths differentiates our business:

 

    Flexible, diverse program offerings and broad degree capabilities. Our operational infrastructure and management approach are highly flexible and enable us to adapt quickly to changing market trends. We continuously monitor and adjust our programs based on changes in demand for new programs, degrees, schedules and delivery methods. We provide education to our students through traditional classroom settings as well as through online instruction. Our educational institutions offer a diverse range of academic programs in the following areas:

 

— Business   — Health sciences
— Information technology   — Media arts
— Education   — Design
— Law and legal studies   — Fashion
— Psychology and behavioral science   — Culinary arts

Our breadth of programmatic and degree offerings enables us to appeal to a diverse range of potential students. This helps to reduce our exposure to a decline in popularity in any one area of study. Our online education platform enables us to leverage our unique educational systems to expand our total addressable market, reaching new students who would otherwise not have the opportunity to attend classes at one of our local campuses.

 

    National presence. We have 71 school locations in 24 states and two Canadian provinces. Our schools are located primarily in major metropolitan areas and we focus our marketing efforts on generating demand within a 100-mile radius of the campus. Throughout our history, we have invested in our schools in order to develop what we believe is an exceptional portfolio of schools, offering state-of-the-art facilities and learning infrastructure. Our schools provide attractive and efficient learning environments including many elements found in traditional colleges, such as libraries, bookstores and laboratories, as well as the modern equipment necessary for the various programs we offer. This aids us in recruiting and retaining students and faculty. For the fiscal year ended June 30, 2006, no single campus accounted for more than 5.5% of our total revenues.

 

   

Strong reputation for positive student outcomes. We believe that the success of our business is based upon our ability to generate positive outcomes for our students in terms of education, graduate employment and starting salary. We use these performance metrics to determine a part of our management compensation both at the corporate and campus level. This focus on student achievement has resulted in a consistent record of high student retention and graduate employment rates, which have been critically important in maintaining a strong reputation among students, faculty and employers.

 

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Based on information collected by us from graduating students and employers, we believe that, of the approximately 12,300 undergraduate students who graduated from our institutions during the calendar year ended December 31, 2005, approximately 88% of those available for employment obtained employment in their fields of study or a related field within six months of graduation. Employers of our graduates include companies such as Nordstrom, Electronic Arts, Expo Design Center, Ethan Allen and Nike.

 

    Strong regulatory reputation and recognition. Each of our schools located in the United States is authorized to offer educational programs and grant degrees or diplomas by the state in which the school is located and is accredited by a national or regional accreditation agency recognized by the U.S. Department of Education. Authorization by the state and accreditation by a recognized accrediting agency enables our students to access federal student loans, grants and other forms of public and private financial aid. In the regulated post-secondary education market, maintaining accreditation and state authorization at various levels is critical for operating existing schools, opening new schools and introducing new programs. We have established a culture of compliance and devote substantial resources to ensure that we meet applicable rules, standards and laws. Our success in this regard is evidenced by the success we have had maintaining the licensing and accreditation of our schools.

 

    Highly attractive business model. We have predictable and consistent revenue growth, a scalable operating cost structure and significant operating cash flow generation.

 

    Predictable and consistent revenue growth. We believe that our revenue model is highly predictable given the extended period of student enrollment, historically stable retention rates and annual tuition increases. Since 1996, we have demonstrated a compounded annual enrollment growth rate of 18.4% while increasing our tuition on average by 5.7% annually. This combination of enrollment growth and tuition increases has resulted in a compounded annual revenue growth rate of 23.0% since 1996.

 

    Margin expansion from scalable cost structure. Management’s focus on increasing the efficiency of our existing physical infrastructure and leveraging the costs of operating these facilities over a broader student population is a key component of our operating margin improvement. The scalable nature of our cost structure at the campus level has enabled us to consistently expand our EBITDA margins in each of the last 10 years, improving from 15.4% in fiscal 1996 to 18.9% in fiscal 2006, an average of more than 30 basis points of annual improvement. With an aim towards maximizing utilization, we monitor and make adjustments to our facilities’ operation plan based on changes in demand for new programs, class schedules and other elements of our operations. In addition, we expect our shared location strategy to allow us to continue to leverage our historical investment in school facilities and to control our ongoing operational and maintenance costs.

 

    Significant operating cash flow generation. The combination of moderate maintenance capital requirements and a positive benefit from working capital enables us to convert a significant portion of our revenue to cash available for investment in existing campuses, organic growth initiatives and debt service. Additionally, given the advanced payment of tuition and fees which is customary for the post-secondary education industry, our working capital is on average a source of cash, although subject to significant seasonal fluctuations.

Our Business Strategy

We intend to pursue the following key elements of our current business strategy:

 

    Augment and improve our academic curricula and programs

Create new and revise existing academic programs. We continually strive to identify emerging industry trends in order to understand the evolving educational needs of our students and the employment market. We rapidly develop and introduce new programs in response to these needs with the assistance of our curriculum advisory teams, which consist of over 1,200 industry experts and employers. For example, during fiscal 2006, we introduced six new academic programs, including

 

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criminal justice, fashion and retail management, simulation and virtual environments, and community college executive leadership. We also regularly evaluate our existing program offerings and revise existing courses to meet changing market needs.

Rollout existing programs to additional schools. Our broad base of 71 schools enables us to drive growth through introducing programs that have been successful at one school to other schools within our systems. During fiscal 2006, we successfully rolled out 87 existing educational programs to additional schools. The rollout of existing programs at additional campuses allows us to drive enrollment growth at existing locations with minimal incremental costs, leverage existing curriculum development and quickly capitalize on identified market needs.

 

    Continue to improve our marketing and student services

Increase and optimize the use of marketing resources. We continuously evaluate the efficiency of various marketing media channels by student, program, campus and school systems, which enables us to rapidly optimize the allocation of our marketing budget. We also put significant emphasis on recruiting qualified admission officers. During fiscal 2006, we increased the number of admissions officers at our schools by approximately 36%.

Continue to emphasize student services. In student services, we focus on student retention and assisting our students in obtaining full-time employment. We maintain dedicated career services personnel at our schools, who provide assistance by establishing relationships with potential employers and preparing students for interviews and post-graduate employment. We also evaluate the placement of our students from each of our programs to assist us in determining how to allocate our resources in the future. Our focus on student outcomes also helps us to maintain a strong student retention rate and manage our cohort loan default rates, enhancing profitability and regulatory compliance. It also helps us to attract new students, because approximately 26% of the new students at our Art Institutes first come to us through referrals, generally from satisfied existing students and alumnus.

 

    Expand the number of online students. We believe that a significant growth opportunity exists in offering fully-online programs to students who may not otherwise have attended our schools. As the quality and acceptance of online education continues to increase, we continue to invest in both expanding our online course offerings and enhancing our online marketing presence. Online programs primarily target students who are not able to pursue campus-based post-secondary education, due to schedule and location constraints, and thus address an additional market beyond our campus-based target demographics. Online courses provide these students flexible schedules which can be tailored around a student’s working hours and can be combined with traditional on-campus classes. Online offerings represent an attractive avenue for growth that utilizes many of our existing education curricula while requiring less capital expenditures relative to campus-based expansion. Our online efforts continue to experience significant success, with approximately 4,100 students taking all of their courses online and approximately 9,100 students taking at least one of their courses online during the fall term of 2005, compared to approximately 2,500 and 6,400 students, respectively, during the same term in 2004.

 

    Grow our portfolio of schools in a capital-efficient manner

Develop new school locations. We believe that there are many attractive opportunities available to us to develop new school locations in the United States. Prior to opening a new campus, we perform a detailed analysis of the geographic area, including ranking the statistical attractiveness of a metropolitan area based on population size and growth, the percentage of the population likely to pursue education in a particular program area and the level of unmet demand represented by a student population not served by existing local post-secondary educational institutions. In opening new campuses, we utilize our centralized infrastructure and existing curricula to cost-effectively expedite the opening and ramp-up of a location. Since the beginning of fiscal year 2005, we have opened eight new school locations.

Utilize shared services locations. Since fiscal 2004, we have combined the facilities and administrative functions of some of our schools that are located in the same geographic regions. The administrative

 

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services which are combined for two or more schools located within a single facility may include career services, finance, human resources and information technology, among other functions. Currently, 24 of our schools are in shared services locations, and we plan to continue to utilize this model for new campuses in order to minimize capital expenditures and operating expenses, and increase facility utilization.

Student Recruitment and Marketing

We use marketing tools such as the Internet, radio, local newspaper, television and print media advertising, telephone campaigns, and direct mail campaigns to attract new students to our schools. In addition, the general reputation of our schools and referrals from current students, alumni and employers is an important source of new students. We also employ approximately 150 representatives who make presentations at high schools to promote The Art Institutes. These representatives also participate in college fairs and other inquiry-generating activities. In fiscal 2006, representatives conducted over 20,000 high school visits and attended approximately 2,700 career events. We estimate that new students at the Art Institutes made their initial inquiry based on the following percentages in fiscal 2006 and 2005:

 

     Year ended
June 30,
 
     2006     2005  

Internet advertising and our websites

   44 %   35 %

Referrals from other students and graduates

   26 %   30 %

High school recruitment programs

   15 %   17 %

Broadcast advertising

   7 %   9 %

Print media

   2 %   3 %

Direct mail campaigns

   2 %   2 %

Other recruiting efforts

   4 %   4 %

In recent years we have experienced significant increases in the number of inquiries from prospective students due to our increased reliance on marketing through internet advertising and our websites, which convert at a lower rate than other forms of marketing. We expect this increased reliance on the internet to obtain initial inquiries from students to continue.

Our internal advertising agency creates publications, television and radio commercials, videos and other promotional materials for our schools. The agency is also responsible for inquiry generation, media planning and placement, online marketing, website development and branding.

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. Our graduate and Doctorate programs require an undergraduate degree. 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.

Due to our broad program offerings, our students come from a wide variety of backgrounds. The estimated average age of a new student at all of our schools during fiscal 2006 was 26 years old.

 

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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 67.5% in fiscal 2006 as compared to 67.4% in fiscal 2005.

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 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 through Doctorate degrees. In the fall of 2005, the enrollment by degree for all our schools was as follows:

 

    Bachelor’s degrees—46%

 

    Associate’s degrees—31%

 

    Doctorate degrees—9%

 

    Diploma and Certificates—9%

 

    Master’s degrees—5%

The type of degrees and programs we offer vary by each of our schools. The following summarizes the programs offered at each of our educational systems. Not all programs are offered at each school location within an educational system.

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

Advertising

Graphic Design

Graphic Design Production

Industrial Design Technology

Interior Design

Interior Planning with AutoCAD

Home Furnishings Merchandising

Kitchen & Bath Design

Bachelor’s Degree

Advertising

Advertising Design

Design Management

Entertainment Design

Graphic Design

Illustration

 

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Illustration & Design

Industrial Design

Industrial Design & Technology

Interior Design

Visual Communications

Web Design

Yacht & Marine Design

Master’s Degree

Graphic Design

Interior Design

The School of Fashion

Associate’s Degree

Accessory Design

Apparel Design

Apparel Accessory Design

Fashion Design

Fashion Marketing

Fashion Merchandising

Fashion Production

Visual 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

Digital Arts

Drafting Technology with AutoCAD

Interactive Media Design

Interactive Media Design Production

Photography

Photographic Imaging

Video Production

Bachelor’s Degree

Audio Production

Audio & Media Technology

Computer Animation

Digital Filmmaking & Video Production

 

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Digital Media Production

Digital Photography

Film & Digital Production

Game Art & Design

Interactive Media Design

Media Arts & Animation

Photography

Photographic Imaging

Visual Effects & Motion Graphics

Visual & Game Programming

Visual & Entertainment Arts

Video Production

Master’s Degree

Computer Animation

Film

Visual Arts

The School of Culinary Arts

Arts Associate’s Degree

Culinary Arts

Culinary Arts & Restaurant Management

Hotel & Restaurant Management

Restaurant & Catering Management

Restaurant & Catering Operations

Baking and Pastry

Bachelor’s Degree

Culinary Management

Culinary Arts Management

Culinary Arts

Argosy University. The following degree programs are offered by Argosy University.

Psychology and Behavioral Sciences

Doctor of Psychology

Clinical Psychology

School Psychology

Doctor of Education

Counselor Education and Supervision

Counseling Psychology

Organizational Leadership

Pastoral Community Counseling

Master of Arts

Clinical Psychology

Clinical Psychology/Marriage and Family Therapy

Counseling Psychology

Counseling Psychology/Marriage and Family Therapy

 

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Forensic Psychology

Guidance Counseling

Marriage and Family Therapy

Mental Health Counseling

Professional Counseling

Sport-Exercise Psychology

School Psychology

Education Specialist Degree

School Counseling

Bachelor of Arts

Psychology (degree completion)

Associate of Applied Science

Criminal Justice

Paralegal

Education

Doctor of Education

Instructional Leadership

Educational Leadership

Community College Executive Leadership

Master of Arts in Education

Instructional Leadership

Educational Leadership

Educational Specialist

Instructional Leadership

Educational Leadership

Business

Doctor of Business Administration

Master of Business Administration

Master of Science

Health Services Management

Management

Bachelor of Science

Business Administration (degree completion)

Associate of Applied Science

Accounting Technology

Business Management

Computer Programming and Applications

Computer Software Technology

 

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Health Sciences

Associate of Applied Science

Diagnostic Medical Sonography

Histotechnology

Medical Assisting

Radiologic Technology

Veterinary Technology

Associate of Science

Dental Hygiene

Medical Laboratory Technician

Radiation Therapy

Western State College of Law

Law

Juris Doctor

Brown Mackie Colleges. Brown Mackie College schools offer the following primary degree programs.

Health Sciences

Associate’s Degrees

Administration in Gerontology

Healthcare Administration

Gerontology

Medical Assisting

Medical Office Management

Nursing

Occupational Therapy Assistant

Optical Science

Pharmacy Technology

Physical Therapist Assistant

Surgical Technology

Legal Studies

Associate’s Degrees

Criminal Justice

Paralegal

Business

Associate’s Degrees

Accounting Technology

Business Management

Sales and Marketing

Information Technology

Associate’s Degrees

Electronics

Computer Networking and Applications

Computer Programming and Applications

 

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Computer Software Technology

Database Technology

Information Technology

Design Technologies

Associate’s Degrees

Audio/Video Production

Computer Aided Design and Drafting Technology

Graphic Design

South University. South University offers the following degree programs.

School of Health Professions

Master’s Degrees

Anesthesiologist Assistant

Business Administration

Nursing

Physician Assistant Studies

Professional Counseling

Bachelor’s Degrees

Health Science

Physician Assistant Studies

Nursing

RN-BSN

Associate’s Degrees

Allied Health Science

Medical Assisting

Physical Therapist Assisting

School of Pharmacy

Doctorate Degrees

Doctor of Pharmacy

School of Business

Master’s Degrees

Healthcare Administration

Criminal Justice

Masters in Business Administration

Bachelor’s Degrees

Business Administration

Criminal Justice

Graphic Design

Healthcare Management

Legal Studies

Information Technology

 

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Associate’s Degrees

Accounting

Business Administration

Graphic Design

Information Technology

Paralegal Studies

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, 2006, the career services departments of our schools had approximately 220 employees. We estimate that our career services departments maintain contact with over 60,000 employers nationwide.

Based on information collected by us from graduating students and employers, we believe that of the approximately 12,300 undergraduate students who graduated from our schools during the calendar year ended December 31, 2005, approximately 88% 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, deceased, 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, or who are international students no longer residing in the United States. The average salary paid to our available graduating undergraduate students from The Art Institutes, the Brown Mackie Colleges and South University for calendar year 2005 who obtained employment in their fields of study, or in related fields of study, was approximately $28,700.

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 certification 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 Higher Education Act of 1965, as amended (“HEA”), the U.S. Department of Education relies on accrediting agencies to determine whether institutions’ educational programs qualify the institutions 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.

 

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In addition to the institutional accreditations described above, eight Art Institutes offer interior design programs that have programmatic accreditation by the Council for Interior Design Accreditation and fourteen 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 one Argosy University location is accredited by the Council for Accreditation of Counseling and Related Educational Programs (CACREP). While these programmatic accreditations cannot be relied upon for our schools to obtain and maintain certification to participate in the 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 schools at June 30, 2006, 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). No accreditation is shown for The Art Institute of Toronto as the Province of Ontario has no accreditation process for post-secondary schools. The Art Institute of Toronto is registered with the Ontario Ministry of Training, Colleges and Universities.

 

School

  

Location

   Calendar
Year
Established
   Fiscal Year
EDMC
Acquired/
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 California—Los Angeles

   Los Angeles, CA    1997    1998    Accrediting Council of Independent Colleges and Schools (“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—San Diego

   San Diego, CA    1981    2001    Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”)

The Art Institute of California—Inland Empire

   San Bernardino, CA    2006    2006    ACCSCT (as a branch of The Art Institute of California-San Diego)

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 Charlotte

   Charlotte, NC    1973    2000    ACICS

The Art Institute of Colorado

   Denver, CO    1952    1976    ACICS

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 Indianapolis

   Indianapolis, IN    2006    2006    ACCSCT (as a branch of The Art Institute of Las Vegas)

The Art Institute of Las Vegas

   Las Vegas, NV    1983    2001    ACCSCT

The Art Institute of New York City

   New York, NY    1980    1997    ACICS

 

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School

  

Location

   Calendar
Year
Established
   Fiscal Year
EDMC
Acquired/
Opened
  

Accrediting Agency

The Art Institute of Ohio—Cincinnati

   Cincinnati, OH    2004    2005    ACICS (as a branch of Brown Mackie College—Findlay)

The Art Institute of Philadelphia

   Philadelphia, PA    1971    1980    ACICS

The Art Institute of Phoenix

   Phoenix, AZ    1995    1996    ACICS (as a branch of The Art Institute of Colorado)

The Art Institute of Pittsburgh

   Pittsburgh, PA    1921    1970    ACICS; candidate with 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 Universities (“NWCCU”)

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 Toronto

   Toronto, Ontario    1997    2002    None

The Art Institute of Vancouver

   Vancouver, BC    1998    2003    Private Career Training Institutions Agency of British Columbia (“PCTIA”)

The Art Institute of Washington

   Arlington, VA    2000    2001    SACS (as a branch of The Art Institute of Atlanta)

The Art Institutes International Minnesota

   Minneapolis, MN    1964    1997    ACICS

Bradley Academy for the Visual Arts

   York, PA    1952    2004    ACCSCT

California Design College

   Los Angeles, CA    1991    2003    ACICS

The Illinois Institute of Art—Chicago

   Chicago, IL    1916    1996    ACCSCT; Higher Learning Commission (HLC) of the North Central Association

The Illinois Institute of Art—Schaumburg

   Schaumburg, IL    1983    1996    ACCSCT (as a branch of The Illinois Institute of Art-Chicago); HLC

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   

 

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School

  

Location

   Calendar
Year
Established
   Fiscal Year
EDMC
Acquired/
Opened
  

Accrediting Agency

Argosy University/Phoenix

   Phoenix, AZ    1997    2002   

Argosy University/San Diego

   San Diego, CA    2006    2006   

Argosy University/San Francisco

   Point Richmond, CA    1998    2002   

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   

Western State University College of Law

   Fullerton, CA    1966    2002    Commission on Colleges of the Western Association of Schools and Colleges; provisionally accredited by American Bar Association

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   

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)

Brown Mackie College—North Canton

   North Canton, OH    1984    2004    ACICS

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 The Brown Mackie College—Salina)

Brown Mackie College—Salina

   Salina, KS    1892    2004    HLC

Brown Mackie College—Merrillville

   Merrillville, IN    1984    2004    ACICS

Brown Mackie College—Michigan City

   Michigan City, IN    1890    2004    ACICS (as a branch of Brown Mackie College—Merrillville)

 

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School

  

Location

   Calendar
Year
Established
   Fiscal Year
EDMC
Acquired/
Opened
  

Accrediting Agency

Brown Mackie College—Moline

   Moline, IL    1985    2004    ACICS (as a branch of Brown Mackie College—Merrillville)

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

Brown Mackie College—Hopkinsville

   Hopkinsville, KY    1995    2004    ACICS (as a branch of Brown Mackie College—Louisville)

Brown Mackie College—Miami

   Miami, FL    2004    2005    ACICS (as a branch of Brown Mackie College—Cincinnati)

Accrediting agencies monitor each educational institution’s performance across a broad range of areas. Monitoring is performed through generally 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 August 31, 2006, eleven of our schools were required to provide such supplemental reports. Of these eleven schools on supplement reporting status, six schools (including The Art Institute of Dallas which was placed on probation by SACS in December 2005) are required to request and receive permission from their accrediting agency prior to filing an application for a new location or program offering.

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 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 located, (ii) 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. During fiscal 2006, approximately 68% of our net revenues were indirectly derived from Title IV programs.

As in the U.S., there are certain risks associated with operating post-secondary institutions in Canada, including but not limited to: failure of our schools to comply with extensive regulations, violations of which could result in 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. Government and regulatory agencies may conduct compliance reviews, bring claims or initiate litigation against us. During fiscal 2006, less than 2% of our net revenues were from our schools located in Canada.

 

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Nature of Federal Support for Post-Secondary Education

While the states support public colleges and universities primarily through direct state subsidies, the 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 two largest are the Federal Family Education Loan (“FFEL”) program and the Federal Pell Grant (“Pell”) program. Our U.S. schools also participate in the Federal Supplemental Educational Opportunity Grant (“FSEOG”) program, the Federal Perkins Loan (“Perkins”) program, and the Federal Work-Study (“FWS”) program.

FFEL. The FFEL program consists of two types of loans: Stafford loans, which are made available to students regardless of financial need, and PLUS loans, which are made available to parents of undergraduate students classified as dependents and, as of July 1, 2006, graduate students. Under the Stafford loan program, an undergraduate student may 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. 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. Prior to July 1, 2006, undergraduate students were only permitted to borrow up to $2,625 for the first academic year and $3,500 for the second academic year under the Stafford loan program. Students enrolled in programs higher than a bachelor-level were limited to borrowing up to $18,500 per academic year prior to July 1, 2006. Amounts received by students in our U.S. schools under the Stafford loan program equaled approximately 45% of our net revenues in fiscal 2006. Currently, PLUS loans may be obtained by the parent(s) 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. Amounts received by parents of students in our U.S. schools under the PLUS loan program in fiscal 2006 equaled approximately 14% of our net revenues in fiscal 2006.

Pell. Pell grants are the primary component of the Title IV programs under which the U.S. Department of Education makes grants to students who demonstrate financial need. Every eligible student is entitled to receive a Pell grant; there is no institutional allocation or limit. During fiscal 2006, Pell grants ranged up to $4,050 per year, depending on student need and other factors. Amounts received by students enrolled in our U.S. schools in fiscal 2005 under the Pell program represented approximately 8% of our net revenues in fiscal 2006.

FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest 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 states, portions of state grants and scholarships. Amounts received by students in our U.S. schools under the FSEOG program in fiscal 2006 represented less than 1% of our net revenues.

Perkins. Eligible undergraduate students may borrow up to $4,000 under the Perkins program during each academic year, with an aggregate maximum of $20,000. Eligible graduate students may borrow up to $6,000 in Perkins loans each academic year, with an aggregate maximum of $40,000. 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, with 75% of new funding contributed by the U.S. Department of Education and the remainder by the applicable school. Subsequent federal capital contributions, which must be matched by school funds, may be received if an institution meets certain requirements. Each school collects payments on

 

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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 2006, we collected approximately $8.2 million from our former students. We were not required to make any matching contributions in fiscal 2006. The Perkins loans disbursed to students in our U.S. schools in fiscal 2006 represented less than 1% of our net revenues

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 2006, ten of our schools did not meet this requirement. To our knowledge, there have not been any penalties assessed to schools who have not met this requirement, but we cannot be assured that a penalty will not be assessed in the future. In fiscal 2005, Federal Work-Study funds represented less than 1% of our net revenues.

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 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 have recently graduated from a high school with a rigorous curriculum. Students may receive a maximum of $750 of 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 degree or higher programs. Eligible students 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 the Title IV programs. The U.S. Congress generally reauthorizes the HEA approximately every six years. The next reauthorization of the HEA is being discussed in Congress and may result in numerous legislative changes. In addition, the U.S. Congress determines federal appropriations for Title IV programs on an annual basis. The U.S. Congress can also make changes in the laws affecting Title IV programs in those annual appropriations bills and in other laws it enacts between HEA reauthorizations. Since a significant percentage of our revenue is derived from Title IV programs, any action by the U.S. Congress that significantly reduced Title IV program funding or the ability of our schools or students to participate in the 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.

Other Financial Assistance Sources

Students at several of our U.S. schools participate in state grant programs. In fiscal 2006, approximately 3% of our net revenues were indirectly derived from state grant 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). In fiscal 2006, financial assistance from such federal programs equaled less than 1% of our net revenues. Our schools also provide institutional grants and scholarships to qualified students. In fiscal 2006, institutional scholarships had a value equal to approximately 2% of our net revenues.

We have also arranged alternative supplemental loan programs that allow students to repay a portion of their loans after graduation and allow students with lower than average credit ratings to obtain loans. The primary objective of these loan programs is to lower the monthly payments required of students. Such loans are without recourse to us or our schools. In fiscal 2006, alternative loans represented approximately 19% of our net revenues as compared to approximately 15% of net revenues in fiscal 2005.

 

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Availability of Lenders

A limited number of lending institutions provide a substantial majority of the federally guaranteed loans obtained by our students to help pay their direct costs of attendance. While we believe that other lenders or the Federal 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 three student loan guaranty agencies guaranteed over 90% of all federally guaranteed student loans made to students enrolled at our U.S. schools during fiscal 2006. We believe that other guaranty agencies would be willing to guarantee federal loans to our students if any of the three 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 the U.S. Department of Education or the appropriate state agency or lender and may be assessed an administrative fine. Although we endeavor to comply with the 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, other agencies, or upon judicial review.

If the U.S. Department of Education is dissatisfied with an institution’s administration of the Title IV programs, it can also transfer 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 the Title IV programs.

Violations or alleged violations of Title IV program requirements also could subject us to other civil and criminal sanctions, including a proceeding to impose a fine, place restrictions on an institution’s participation in Title IV programs or terminate its eligibility to participate 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 that 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, at any given point, an institution’s FFEL cohort default rate equals or exceeds 25% for each of the three most recent federal fiscal years, it will no longer be eligible to participate in the Title IV 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

 

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institution’s Perkins cohort default rate equals or exceeds 50% for each of the three most recent federal fiscal years it will no longer 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 cohort default rate of 25% or greater for any of the last three consecutive federal fiscal years. The most recent year for which FFEL cohort default rates have been calculated is the official rates for federal fiscal year 2004. The official combined FFEL cohort default rate for borrowers at our schools for federal fiscal year 2004 was 5.8% and our individual schools’ rates ranged from 1.4% to 13.9%.

If an institution’s FFEL 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 does not by itself 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, 2006, 20 of our schools had Perkins cohort default rates in excess of 15% for students who were to begin repayment during the federal award year ending June 30, 2006, the most recent year for which such rates have been calculated. Funds from the Perkins program did not exceed 3% of these schools’ net revenues in fiscal 2006. None of these schools has been placed on provisional certification solely for this reason. During the year ended June 30, 2006, six of our schools that recently entered the Perkins program had Perkins cohort default rates which exceeded 50% for such year. Each of these schools had less than 20 students in the cohort year.

Each of our schools whose students participate in the FFEL 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 lenders and guaranty agencies. The historical default rates experienced by Argosy University and Western State University College of Law have been quite 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 three to six years. 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 Temporary Provisional Program Participation Agreement with the U.S. Department of Education due to the change in control which occurred in connection with the Transactions.

Financial Responsibility Standards. All institutions participating in Title IV programs must satisfy certain standards of financial responsibility. 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. For the year ended June 30, 2006, we believe that, with the exception of three schools, on an individual institution basis, each of our schools then participating in Title IV programs satisfied the financial responsibility standards. At our consolidated parent company level, our financial statements will not satisfy the financial responsibility standards for the fiscal year ended June 30, 2006 and for the foreseeable future. Following the Transactions, the U.S. Department of Education separately considered our and our schools’ compliance with the financial responsibility requirements at our consolidated parent company level. The U.S. Department of Education has informed us that we will be

 

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required to post a letter of credit of approximately $87.9 million and will be subject to provisional certification and additional financial and cash monitoring with respect to our disbursement of Title IV funds due to our failure to satisfy the financial responsibility standards at our consolidated parent company level after the completion of the Transactions. The letter of credit, provisional certification and financial and heightened cash monitoring will be in effect until at least March 2008 and may continue beyond that date.

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 have posted letters of credit for three of our schools because independent audits indicated that they had exceeded federal thresholds for allowable number of late refunds during at least one of their two most recent fiscal years. Our 2006 annual financial aid compliance audits have not been completed, therefore the number of schools requiring a letter of credit may increase. We have instituted practices and procedures at recently acquired schools to expedite refunds of FFEL 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 the 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 in control (as defined under the HEA) must be reviewed and recertified for participation in Title IV programs under its new ownership. Following the Transactions, the Department issued Temporary Provisional Program Participation Agreements allowing each of our school’s students to continue to receive federal funding, subject to the Department’s final review of the applications submitted by the schools for new Provisional Program Participation Agreements following the Transactions. We currently are awaiting issuance of the new Provisional Program Participation Agreements but anticipates that all of our schools will be provisionally certified due to the Transactions. During the time 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 solely as a result of the Transactions.

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, more than 90% of its revenues for the prior fiscal year were derived from Title IV programs. Any school that violates the 90/10 Rule immediately becomes ineligible to participate in Title IV programs and is unable to apply to regain eligibility until the following fiscal year. For our schools that disbursed federal financial aid during fiscal 2006, the percentage of revenues derived from Title IV programs ranged from approximately 45.7% to 85.9%, with a weighted average of approximately 65%.

 

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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 new regulations to attempt to clarify this so-called “incentive compensation” law. The new regulations identify twelve 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 new regulations do not establish clear criteria for compliance in all circumstances, and the Department has announced that it will no longer review and approve individual schools’ compensation plans prior to their implementation. Although we can not 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 new regulations promulgated by the Department of Education.

State Authorization and Accreditation Agencies

Each of our U.S. schools is authorized to offer education programs and grant degrees or diplomas by the state in which such school is located. The level of regulatory oversight varies substantially from state to state. In some states, the schools are subject to licensure by the state education agency and also by a separate higher education agency. 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.

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

Our Canadian schools are subject to regulation in the provinces in which they operate and in the provinces in which they recruit 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 our Canadian schools currently hold all necessary registrations, approvals, and permits and meet all eligibility requirements to administer these governmental financial aid programs. If our Canadian schools cannot meet these and other eligibility standards or fail to comply with applicable requirements, it could have a material adverse effect on our business, results of operations or 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

 

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Agency of British Columbia (“PCTIA”) and provides financial assistance to eligible students through the British Columbia Student Assistance Program (“BCSAP”). In Ontario, the government regulates private career colleges through the Ministry of Training Colleges and Universities and provides student assistance through the Ontario Student Assistance Program (“OSAP”). In both provinces, the student aid programs are substantially the same and include two main components a federal component under the Canada Student Loan Program, which is combined with a provincial portion and administered through the respective provincial OSAP or the BCSAP programs. In order to maintain the right to administer student assistance; our schools must abide by the rules, regulations, and administrative manuals and Memorandum of Agreements with the Canada Student Loan Program and the respective OSAP/BCSAP Student Loans Plans.

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 respective ministries as well as OSAP or BCSAP, as applicable, require evidence of the institution has continued capacity and a formal undertaking to comply with registration and student aid eligibility requirements. Given that the provincial governments and PCTIA (in the case of British Columbia) 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 governments and/or 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 OSAP or BCSAP, as the case may be. We believe we have complied with these requirements.

Employees

At June 30, 2006, we employed approximately 6,700 full time employees, of whom approximately 1,900 were faculty members, and approximately 1,800 part-time employees excluding student employees, of whom approximately 1,600 were faculty members. In addition, we also had approximately 2,500 adjunct faculty members at June 30, 2006. Adjunct faculty members work on a term-to-term basis, while part-time faculty members work a regular part-time schedule. We had approximately 1,500 part-time student employees as of June 30, 2006, including approximately 1,400 under the federal work-study program.

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 proprietary schools, including those that offer distance learning programs. Many public and private colleges and universities, as well as other private career-oriented schools, 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 proprietary schools. Accordingly, public and private institutions may have facilities and equipment superior to those in the proprietary sector, and can often 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. Student enrollment at the Art Institute schools has typically peaked in the fall (fiscal second quarter), when the largest number of recent high school and college graduates traditionally begin post-secondary education programs. The first quarter is typically the lowest revenue recognition quarter due to student vacations. The seasonality of our business has decreased over the last several years due to an increased percentage of students at our schools enrolling in bachelor’s programs and the effect of recent acquisitions.

 

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Properties

Our corporate headquarters are located in Pittsburgh, Pennsylvania. At June 30, 2006, our schools were located in major metropolitan areas in 24 states and two Canadian provinces. Typically, an Art Institute occupies an entire building or several floors or portions of floors in a building. Argosy University campuses, the Brown Mackie Colleges and South University schools are smaller and typically located in office or commercial buildings.

We currently lease most of our administrative and educational facilities under operating lease arrangements. We own a student housing facility in Fort Lauderdale, Florida; buildings occupied by The Art Institutes of Pittsburgh, Colorado and Seattle, by Western State University College of Law in Fullerton, California, by Argosy University in Egan, Minnesota and Sarasota, Florida, and by the Brown Mackie Colleges in Lenexa, Kansas and Akron, Ohio. At June 30, 2006, we owned approximately 0.6 million square feet and leased approximately 3.4 million square feet. The leases typically have remaining terms ranging from less than one year to 20 years.

Many of our facility leases contain provisions prohibiting a change in control of the lessee or permitting the landlord to terminate the lease upon a change in control of the lessee. The Merger Agreement requires us to use commercially reasonable efforts to obtain consents from our landlords, but these consents are not a condition to closing of the Merger. Based primarily upon our belief that (1) we maintain good relations with the substantial majority of our landlords, (2) most of our leases are at market rates and (3) we have historically been able to secure suitable leased property at market rates when needed, we believe that these provisions will not, individually or in the aggregate, have a material adverse effect on our business or financial position.

Legal Proceedings

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, will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

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MANAGEMENT

Our executive officers and directors together with their ages as of September 15, 2006 are as follows:

 

Name (1)

  

Age

  

Position

John R. McKernan, Jr.  

   58    Chairman of the Board of Directors and Chief Executive Officer

Joseph A. Charlson

  

36

   Senior Vice President—Strategic Marketing and Chief Marketing Officer

John M. Mazzoni

   43    President, The Art Institutes

Stacey R. Sauchuk

   46    Senior Vice President—Academic Programs and Student Affairs

John T. South, III

   59    Senior Vice President and Chancellor, South University

Stephen J. Weiss

   43    President, EDMC Online Higher Education

Edward H. West

   40    Executive Vice President and Chief Financial Officer

Adrian M. Jones

   42    Director

Leo F. Mullin

   64    Director

Paul J. Salem

   42    Director

Peter O. Wilde

   38    Director

(1) Leeds Equity Partners has the right to appoint a representative on our Board of Directors subject to the receipt of any required approvals pursuant to the terms of the shareholders’ agreement we entered into with the Sponsors upon the closing of the Transactions. Jeffrey T. Leeds currently serves as an observer at the Board meetings on behalf of Leeds Equity Partners under the terms of that agreement.

John R. McKernan, Jr. became our Chief Executive Officer on September 1, 2003. Mr. McKernan joined us as our Vice Chairman and a member of the Board of Directors in June 1999 and continues to serve as Vice Chairman. In March 2003 he became our President and served in that office until September 11, 2003. Mr. McKernan served as Governor of the State of Maine from 1987 to 1995.

Joseph A. Charlson was hired as Senior Vice President—Strategic Marketing in February 2005, was appointed Chief Marketing Officer in August 2005 and named an executive officer in September 2005. Prior to joining us, Mr. Charlson was a Strategy Lead and then Senior Manager—Pharmacy at Target Corporation from July 2003 through February 2005, a management consultant with McKinsey & Company from August 2001 through July 2003 and President of United States Building Technology Inc. from January 1997 through January 2001.

John M. Mazzoni has been our President of The Art Institutes since October 17, 2005. Mr. Mazzoni has been with us for 18 years. From March 2005 to October 2005, he served as Senior Vice President Group Operations. From August 2004 to March 2005, he served as Group Vice President for EDMC. From July 2001 through August 2004 he served as Group Vice President for The Art Institutes. From August 1987 through July 2001, he held several senior management level positions in the areas of Operations, Finance and Information Systems. Prior to joining us, he held a Financial Systems positions at Mellon Bank, NA.

Stacey R. Sauchuk has been our Senior Vice President—Academic Programs and Student Affairs since July 2003 and was appointed as an executive officer in September 2005. Ms. Sauchuk was our Group Vice President from August 2001 through July 2003 and President of The Art Institute of Philadelphia from January 1997 through July 2000. From August 2000 through July 2001, Ms. Sauchuk was an executive search consultant with Witt/Kieffer.

John T. South, III, joined us in July 2003 when we acquired South University, which was owned by Mr. South. Mr. South has served as Chancellor of South University since October 2001 and was appointed the Chairman of the Board of Trustees of Argosy University in February 2006. In his current role with us, Mr. South also oversees the Brown Mackie Colleges. Prior to our acquisition of South University, Mr. South was stockholder and CEO of various affiliated private colleges and Chief Executive Officer of South University since 1975. Mr. South also served as President of South University prior to being appointed Chancellor in October

 

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2001. From 1971 to 1975, he was a banking officer with Citizens and Southern National Bank in Atlanta, Ga. From 1969 to 1971, Mr. South served as a First Lieutenant in the U.S. Army. Mr. South currently is on the advisory board of Sun Trust Bank of Savannah.

Stephen J. Weiss joined us as President, EDMC Online Higher Education in October 2003. Prior to joining us, Mr. Weiss served as President and Chief Operating Officer of Capella Education Company from October 1998 to June 2003 and Director, Education Business Unit of Honeywell Corporation from July 1997 to October 1998. Mr. Weiss also serves on the board of directors of AWS Convergence Technologies and on the advisory board of Rittenhouse Capital Partners.

Edward H. West became our Executive Vice President and Chief Financial Officer upon the consummation of the Transactions. Mr. West is the former Chairman and Chief Executive Officer of ICG Commerce, a position he held from 2002 until 2006. Prior to joining ICG Commerce, Mr. West served as President and Chief Operating Officer from 2001 to 2002 and Chief Financial Officer of Internet Capital Group from 2000 to 2001. Prior to joining Internet Capital Group, Mr. West was an employee of Delta Air Lines from 1994 to 2000, and most recently served as its Executive Vice President and Chief Financial Officer. Mr. West currently serves on the board of Entercom Communications Corp. and chairs its Audit Committee.

Adrian M. Jones joined Goldman, Sachs & Co. in 1994, and has been a Managing Director within the Principal Investment Area of its Merchant Banking Division since 2002. He serves on the board of directors of Autocam Corporation, Burger King Holding Inc. and Signature Hospital Holding, LLC.

Leo F. Mullin retired as Chief Executive Officer of Delta Air Lines in January 2004 and Chairman in April 2004, after having served as Chief Executive Officer of Delta since 1997 and Chairman since 1999. Mr. Mullin currently serves as a Senior Advisor, on a part-time basis, to Goldman Sachs Capital Partners. Mr. Mullin was Vice Chairman of Unicom Corporation and its principal subsidiary, Commonwealth Edison Company, from 1995 to 1997. He was an executive of First Chicago Corporation from 1981 to 1995, serving as that company’s President and Chief Operating Officer from 1993 to 1995, and as Chairman and Chief Executive Officer of American National Bank, a subsidiary of First Chicago Corporation, from 1991 to 1993. Mr. Mullin is also a Director of Johnson & Johnson, BellSouth Corporation, the Juvenile Diabetes Research Foundation and The Field Museum. He is a member of The Business Council and a member of the Advisory Board of the Carter Center.

Paul J. Salem is a Senior Managing Director and a co-founder of Providence Equity. Prior to Providence Equity in 1992, Mr. Salem worked for Morgan Stanley & Co. in corporate finance and mergers and acquisitions. Prior to that time, Mr. Salem spent four years with Prudential Investment Corporation, an affiliate of Prudential Insurance, where his responsibilities included leveraged buyout transactions and establishing Prudential’s European investment office.

Peter O. Wilde is a Managing Director of Providence Equity. Prior to joining Providence Equity in 2002, Mr. Wilde had been a General Partner at BCI Partners, where he began his career in private equity investing in 1992. Mr. Wilde is also a director of Kerasotes Theatres, Inc., Medical Media Holdings, Pluris Inc. and Survey Sampling International and is chairman of Colorado Cinema Group and The Vendome Group.

Providence Equity and Goldman Sachs each have the right to appoint two representatives to our Board of Directors under the terms of an agreement entered into among our shareholders. The shareholders agreement also provides that Leeds Equity Partners has the right to appoint a representative on our Board of Directors subject to the receipt of any required approvals. Jeffrey T. Leeds currently serves as an observer at the Board meetings on behalf of Leeds Equity Partners under the terms of the shareholders agreement.

 

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Executive Compensation

Summary Compensation Table

The following table contains certain information about compensation earned during the last three fiscal years by our chief executive officer, six other executive officers who were the most highly compensated during fiscal 2006 (two of whom have left) and our new Executive Vice President and Chief Financial Officer who was hired on June 1, 2006 (the “Named Executive Officers”).

 

                    Long Term
Compensation (1)
   
   

Annual Compensation

 

Restricted

Stock
Award(s)
($)

 

Securities

Underlying
Options (#)

   
   

Fiscal
Year

  Salary ($)   Bonus ($)   Other
Compensation ($)
      All Other
Compensation ($)
(2)

John R. McKernan, Jr.  

Chairman and Chief Executive Officer

 

2006

2005

2004

  $
 
 
452,607
452,747
390,209
  $
 
 
783,390
640,967
637,327
 

  $
 
 
1,306,875
—  
—  
  —  
9,254
350,000
  $
 
 
109,683
10,350
13,275

J. William Brooks

President and Chief Operating Officer(3)

 

2006

2005

2004

   
 
 
363,603
368,440
191,576
   
 
 
490,236
314,331
313,159
  — —
   
 
 
307,500
—  
3,083,000
  —  
—  
334,766
   
 
 
1,442,907
11,359
2,406

Joseph A. Charlson

Senior Vice President— Strategic Marketing and Chief Marketing Officer(4)

 

2006

2005

   
 
235,651
78,282
   
 
215,929
90,000
 
   
 
153,750
—  
  —  
15,000
   
 
11,203
—  

John M. Mazzoni

President, The Art Institutes

 

2006

2005

2004

   
 
 
254,965
215,089
200,104
   
 
 
315,017
142,028
171,819
 

   
 
 
305,820
—  
—  
  —  
—  
25,000
   
 
 
23,725
13,373
10,728

John T. South(5)

Senior Vice President and Chancellor, South University

 

2006

2005

2004

   
 
 
261,950
260,337
233,334
   
 
 
307,790
231,019
251,064
  109,794
110,044
98,328
   
 
 
243,600
—  
—  
  —  
—  
16,000
   
 
 
36,254
15,056
549

Stephen J. Weiss

President—EDMC Online Higher Education(6)

 

2006

2005

2004

   
 
 
260,202
261,511
178,519
   
 
 
244,637
208,769
157,500
 

   
 
 
169,125
—  
—  
  —  
—  
30,000
   
 
 
18,584
7,809
405

Edward H. West

Executive Vice President and Chief Financial Officer(7)

  2006     20,769     225,000       —     —       —  

(1) Shares of common stock underlying options have been adjusted for a two-for-one stock split which occurred on December 22, 2003. Restricted stock grants are valued based on the closing price of the Predecessor’s stock on Nasdaq on the day of the grant.
(2) Such amounts represent, to the extent applicable, our matching contributions to our deferred compensation and retirement plans, the dollar value of life insurance premiums we paid with respect to term life insurance and severance benefits received in connection with the Transactions.

 

     Deferred
Compensation
Plan
   Retirement
Plan
   Group Life
Insurance
Premiums
   Severance
Payments
   Total

John R. McKernan, Jr.  

   $ 99,135    $ 9,888    $ 660    —      $ 109,683

J. William Brooks

     43,361      5,952      660    1,392,934      1,442,907

Joseph A. Charlson

     —        10,585      618    —        11,203

John M. Mazzoni

     15,666      7,399      660    —        23,725

John T. South, III

     26,443      9,151      660    —        36,254

Stephen J. Weiss

     11,945      5,979      660    —        18,584

Edward H. West

     —        —        —      —        —  
(3) Mr. Brooks served as President and Chief Financial Officer until June 30, 2006.
(4) Mr. Charlson was hired as Senior Vice President of Marketing in February 2005.

 

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(5) We reimburse Mr. South for up to $107,000 per year of expenses incurred in connection with business use of a plane owned in part by Mr. South and for certain private club dues under the terms of his employment agreement.
(6) Mr. Weiss was hired as President, EDMC Online Higher Education in October 2003.
(7) Mr. West was hired as Executive Vice President – Chief Financial Officer on June 1, 2006.

Employment Agreements

In connection with the Transactions, we introduced an equity incentive plan and entered into new employment agreements with Mr. McKernan and Mr. West. Additionally, we currently have employment agreements with Joseph A. Charlson, John M. Mazzoni, Stacey R. Sauchuk and John T. South, as well as several other of our officers.

McKernan Employment Agreement. We entered into an employment agreement with Mr. McKernan, dated as of June 1, 2006 (the “McKernan Agreement”). The McKernan Agreement cancelled and superseded Mr. McKernan’s prior employment agreement, dated as of August 5, 2003. The McKernan Agreement is for a five-year term, unless Mr. McKernan is terminated as described below. Under the terms of the McKernan Agreement, Mr. McKernan serves as Chief Executive Officer and Chairman of the Board of Directors. He currently receives a base salary at an annual rate of approximately $550,000, subject to review and discretionary increases by the Board of Directors, plus incentive compensation and other employee benefits under the various benefit plans and programs we maintain for our employees.

Mr. McKernan also purchased $3,000,000 of our common stock pursuant to a purchase agreement with Goldman Sachs and Providence Equity. We granted Mr. McKernan time-vesting and performance-vesting options to purchase 342,105 shares of common stock.

We may terminate the McKernan Agreement with or without cause and Mr. McKernan may resign in each case, other than a termination for cause, upon 30 days advance written notice to the other party. Upon an eligible termination for any reason, Mr. McKernan will continue to receive payment of any base salary earned but unpaid through the date of termination and any other payment or benefit to which he is entitled under the applicable terms of any applicable company arrangements.

If Mr. McKernan is terminated during his term other than for cause (as defined in the McKernan Agreement), or by Mr. McKernan for good reason, Mr. McKernan is entitled to a lump sum severance payment of (i) one and one-half times (or three times if the date of termination is within the first two-year period, or if it is in anticipation of or within two years following a change of control) the sum of Mr. McKernan’s base salary plus the target annual bonus and (ii) a pro-rata annual bonus based on his target annual bonus. “Good reason,” as that term is used above, includes (i) any material diminution of authorities, titles or offices, (ii) any change in the reporting structure such that Mr. McKernan reports to someone other than the Board of Directors, (iii) a relocation of primary place of employment by more than 50 miles, (iv) a material breach of ours of any material obligation to Mr. McKernan and (v) any failure of ours to obtain the assumption in writing of its obligation to perform the McKernan Agreement by any successor following a change of control.

After June 1, 2007, the Board of Directors may request Mr. McKernan to serve as Chairman of the Board of Directors and no longer serve as our Chief Executive Officer. If this occurs, Mr. McKernan will continue being our employee in addition to serving as Chairman of the Board of Directors for the remaining term of his employment agreement, but his work hours will be reduced to 30 hours per week and his salary will be decreased by 40%.

In addition, the McKernan Agreement will terminate prior to its scheduled expiration date in the event of death or disability. In the event of Mr. McKernan’s death during the employment term, we will continue to pay any base salary earned but unpaid through the date of termination and any other payment or benefit to which he is entitled under the applicable terms of any applicable company arrangements in addition to a pro-rata annual bonus payment based on his target annual bonus for the year of such termination.

The McKernan Agreement contains non-competition, non-solicitation and confidentiality covenants. The non-competition provision continues for a period of twenty-four months following termination of employment.

 

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West Employment Agreement. We entered into an employment agreement with Edward H. West, dated as of June 1, 2006 (the “West Agreement”), under which Mr. West serves as our Executive Vice President and Chief Financial Officer. The West Agreement is for a term of three years ending on June 1, 2009 and is subject at the end of that initial term to successive, automatic one-year extensions unless either party gives notice of non-extension to the other party at least 180 days prior to any renewal date. Mr. West currently receives a base salary at an annual rate of $450,000, which is reviewed annually and may be adjusted upward by the Board of Directors, plus an annual bonus and a signing bonus of $225,000 and other employee benefits under the various benefit plans and programs we maintain for our employees.

Mr. West also purchased $500,000 of EDMC common stock pursuant to a purchase agreement with Goldman Sachs and Providence Equity. We granted Mr. West time-vesting and performance-vesting options to purchase 136,842 shares of our common stock.

We may terminate the West Agreement with or without cause and Mr. West may resign in each case, other than a termination for cause, upon 30 days advance written notice to the other party. Upon an eligible termination for any reason, Mr. West will continue to receive payment of any base salary earned but unpaid through the date of termination and any other payment or benefit to which he is entitled under the applicable terms of any applicable company arrangements. Under the West Agreement, if Mr. West is terminated during his term other than for cause (as defined in the West Agreement), or by Mr. West for good reason, Mr. West is entitled to a lump sum severance payment of (i) one and one-half times (or two times if the date of termination is within the first two-year period, or if it is in anticipation of or within two years following a change of control) the sum of Mr. West’s base salary plus the target annual bonus and (ii) a pro-rata annual bonus based on his target annual bonus. “Good reason,” as that term is used above, includes (i) any material diminution of authorities, titles or offices, (ii) any change in the reporting structure such that Mr. West reports to someone other than the Board of Directors, (iii) a relocation of primary place of employment by more than 50 miles, (iv) a material breach of ours of any material obligation to Mr. West and (v) any failure of ours to obtain the assumption in writing of its obligation to perform the West Agreement by any successor following a change of control.

In addition, the West Agreement will terminate prior to its scheduled expiration date in the event of death or disability. In the event of Mr. West’s death during the employment term, we will continue to pay any base salary earned but unpaid through the date of termination and any other payment or benefit to which he is entitled under the applicable terms of any applicable company arrangements in addition to a pro-rata annual bonus payment based on his target annual bonus for the year of such termination.

The West Agreement contains non-competition, non-solicitation and confidentiality covenants. The non-competition provision continues for a period of eighteen months following termination of employment.

Other Employment Agreements. Our employment agreements with Mr. Charlson and Ms. Sauchuck are dated as of September 28, 2005 and our employment agreements with Mr. South and Mr. Mazzoni are dated as of July 14, 2003 and October 12, 2005, respectively. Those agreements include terms similar to the West Agreement, except that such agreements provide for (i) an initial three-year term, with successive automatic one year extensions under terms similar to the West Agreement, (ii) each such officer’s individual position and current compensation, (iii) 12 months of severance and continued fringe benefits following an eligible termination, (iv) continued vesting of outstanding stock awards for a period of 12 months, (v) payment of two times the officer’s salary and average incentive compensation upon an eligible termination in anticipation of or within a two-year period following a change in control of EDMC (including the Merger), (vi) continuation of the non-solicitation and non-competition provisions for a period of twelve months (rather than 18 months) following termination of employment and (vii) the definition of “good reason” is more narrow from the executive’s perspective (making it more difficult for the executive to resign for good reason). Mr. South’s agreement also provides that we will reimburse him for certain private club dues and up to $107,000 per fiscal year in business expenses incurred in connection with use of an airplane of which he is a co-owner. We expect to enter into new employment agreements with all of our executive officers, including Mr. Charlson, Ms. Sauchuck, Mr. South, Mr. Mazzoni and Mr. Weiss.

 

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Option Exercises and Sales of Restricted Shares

All outstanding restricted shares and options to acquire shares of common stock of the Predecessor, to the extent not vested before closing of the Transactions, became fully vested and immediately exercisable as a result of the Transactions.

The following table contains, for each of the named executive officers, (1) the number of shares of common stock of the Predecessor subject to options that had previously vested and had become exercisable before closing of the Transactions, (2) the value of such vested options, based on the Transactions consideration of $43.00 per share, (3) the number of shares of common stock of the Predecessor subject to options that became fully vested and exercisable as a result of the Transactions, (4) the value of such options that vested as a result of the Transactions, based on the Transactions consideration of $43.00 per share, (5) the total number of shares subject to previously vested options and options that vested as a result of the Transactions, and (6) the total realized from the exercise of stock options in connection with the Transactions, based on the Transactions consideration of $43.00 per share.

 

                           Total
     Previously Vested Options    

Options That Vested as a

Result of the Transactions

   Total
Shares (#)
   Total
Realized
Value ($)
     Shares (#)     Value ($)     Shares (#)    Value ($)      

John R. McKernan, Jr.  

   529,854     $ 12,650,385     100,000    $ 1,442,000    629,854    $ 14,092,385

J. William Brooks

   222,383 (1)     2,766,714 (1)   117,383      1,427,964    339,766      4,194,678

Joseph A. Charlson

   7,500       91,050     7,500      91,050    15,000      182,100

John M. Mazzoni

   29,000       430,500     —        —      29,000      430,500

John T. South, III

   16,000       204,000     —        —      16,000      204,000

Stephen J. Weiss

   30,000       382,500     —        —      30,000      382,500

Edward H. West(2)

   —         —       —        —      —        —  

(1) Includes vested options to purchase 5,000 shares of common stock at $30.25 per share held by Mr. Brooks’ wife who was also employed by the Predecessor.
(2) Mr. West was not employed by the Predecessor.

The following table contains, for each of the named executive officers, (1) the number of restricted shares that had previously vested and had become exercisable before closing of the Transactions, (2) the value of such vested restricted shares, based on the Transactions consideration of $43.00 per share, (3) the number of restricted shares that became fully vested and exercisable as a result of the Transactions, (4) the value of such restricted shares that vested as a result of the Transactions, based on the Transactions consideration of $43.00 per share, (5) the total number of restricted shares that previously vested and restricted shares that vested as a result of the Transactions, and (6) the total realized from the sale of restricted shares in connection with the Transactions, based on the Transactions consideration of $43.00 per share.

 

               Restricted Shares
That Vested as a
Result of the Transactions
   Total
     Previously Vested
Restricted Shares
     

Total

Shares (#)

   Total
Realized
Value ($)
     Shares (#)    Value ($)    Shares (#)    Value ($)      

John R. McKernan, Jr.  

   —      —      42,500    $ 1,827,500    42,500    $ 1,827,500

J. William Brooks(1)

   46,514    2,000,102    44,034      1,893,462    90,548      3,893,564

Joseph A. Charlson

   —      —      5,000      215,000    5,000      215,000

John M. Mazzoni

   —      —      10,000      430,000    10,000      430,000

John T. South, III

   —      —      7,500      322,500    7,500      322,500

Stephen J. Weiss

   —      —      5,500      236,500    5,500      236,500

Edward H. West(2)

   —      —      —        —      —        —  

(1) Includes 700 unvested restricted shares held by Mr. Brooks’ wife who was also employed by the Predecessor.
(2)