UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

For the fiscal year ended June 30, 2010

OR

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

For the transition period from                      to                     .

Commission File No: 001-34466

EDUCATION MANAGEMENT CORPORATION

Pennsylvania		21-1119571
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
210 Sixth Avenue, Pittsburgh, PA, 33rd Floor		15222
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (412) 562-0900

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

Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		The NASDAQ Global Select Market

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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o No þ

The aggregate market value of the voting and non-voting equity held by non-affiliates of the registrant at June 30, 2010 was approximately $352,020,000. The number of shares of common stock outstanding on August 31, 2010 was 142,874,389 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for its 2010 annual meeting of shareholders are incorporated by reference into Part III.

 

 

Table of Contents

INDEX

		PAGE
PART I —
ITEM 1 — BUSINESS			5
ITEM 1A — RISK FACTORS			34
ITEM 1B — UNRESOLVED STAFF COMMENTS			51
ITEM 2 — PROPERTIES			51
ITEM 3 — LEGAL PROCEEDINGS			51
ITEM 4 — (REMOVED AND RESERVED)			52
PART II —
ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES			53
ITEM 6 — SELECTED FINANCIAL DATA			55
ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			58
ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			78
ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA			80
ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			119
ITEM 9A — CONTROLS AND PROCEDURES			119
ITEM 9B — OTHER INFORMATION			119
PART III —
ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE			120
ITEM 11 — EXECUTIVE COMPENSATION			120
ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			120
ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE			120
ITEM 14 — PRINCIPAL ACCOUNTANT FEES AND SERVICES			120
PART IV —
ITEM 15 — EXHIBITS AND FINANCIAL STATEMENT SCHEDULES			121
Exhibit 10.28
Exhibit 10.29
Exhibit 10.30
Exhibit 10.31
Exhibit 10.32
Exhibit 10.33
Exhibit 12.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K (this “Form 10-K”) contains “forward-looking statements” within the meaning of the federal securities laws, which involve risks and uncertainties. You can identify forward-looking statements because they contain words such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates” or similar expressions that concern our strategy, plans or intentions. All statements we make relating to estimated and projected earnings, margins, costs, expenditures, cash flows, growth rates and financial results are forward-looking statements. In addition, we, through our senior management, from time to time make forward-looking public statements concerning our expected future operations and performance and other developments. All of these forward-looking statements are subject to risks and uncertainties that may change at any time, and, therefore, our actual results may differ materially from those we expected. We derive most of our forward-looking statements from our operating budgets and forecasts, which are based upon many detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and, of course, it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from our expectations are disclosed under “Risk Factors” and elsewhere in this Form 10-K, including, without limitation, in conjunction with the forward-looking statements included in this Form 10-K. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the factors discussed in this Form 10-K. Some of the factors that we believe could affect our results include:

•

compliance with extensive federal, state and accrediting agency regulations and requirements;

•

our ability to maintain eligibility to participate in Title IV programs;

•

government and regulatory changes including revised interpretations of regulatory requirements that affect the post-secondary education industry and new regulations currently proposed by the U.S. Department of Education;

•

regulatory and accrediting agency approval of transactions involving a change of ownership or control or a change in our corporate structure;

•

damage to our reputation or our regulatory environment caused by actions of other for-profit institutions;

•

availability of private loans for our students;

•

loans provided to students under our Education Finance Loan program with a private lender;

•

effects of a general economic slowdown or recession in the United States or abroad;

•

disruptions in the credit and equity markets worldwide;

•

difficulty in opening additional schools and expanding online academic programs;

•

our ability to improve existing academic programs or to develop new programs on a timely basis and in a cost-effective manner;

•

failure to effectively market and advertise to new students;

•

decline in the overall growth of enrollment in post-secondary institutions;

•

our ability to manage our substantial leverage;

•

compliance with restrictions and other terms in our debt agreements, some of which are beyond our control;

•

our ability to keep pace with changing market needs and technology;

•

our ability to raise additional capital in the future in light of our substantial leverage;

•

our ability to effectively manage our growth;

•

capacity constraints or system disruptions to our online computer networks;

•

the vulnerability of our online computer networks to security risks;

•

failure to attract, retain and integrate qualified management personnel;

•

our ability to integrate acquired schools;

•

inability to operate schools due to a natural disaster;

•

competitors with greater resources;

•

risks inherent in non-domestic operations; and

•

the other factors set forth under “Risk Factors”.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this Form 10-K 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.

ITEM 1. BUSINESS

On June 1, 2006, EDMC was acquired by a consortium of private investors through a merger of an acquisition company into EDMC, with EDMC surviving the merger. We sometimes refer to that transaction in this Form 10-K as the “Transaction”. Our principal shareholders are private equity funds affiliated with Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners, which we refer to in this Form 10-K collectively as the “Sponsors”. As used in this Form 10-K, unless otherwise stated or the context otherwise requires, references to “we”, “us”, “our”, the “Company”, “EDMC” and similar references refer collectively to Education Management Corporation and its subsidiaries. References to our fiscal year refer to the 12-month period ended June 30 of the year referenced.

Business Overview

We are among the largest providers of post-secondary education in North America, with over 136,000 enrolled students as of October 2009. We offer academic programs to our students through campus-based and online instruction, or through a combination of both. We are committed to offering quality academic programs and continuously strive to improve the learning experience for our students. We target a large and diverse market as our educational institutions offer students the opportunity to earn undergraduate and graduate degrees, including doctoral degrees, and certain specialized non-degree diplomas in a broad range of disciplines. These disciplines include design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Each of our schools located in the United States is licensed or permitted to offer post-secondary programs in the state in which it is located, accredited by a national or regional accreditation agency and certified by the U.S. Department of Education, enabling students to access federal student loans, grants and other forms of public and private financial aid. Our academic programs are designed with an emphasis on applied content and are taught primarily by faculty members who, in addition to having appropriate academic credentials, offer practical and relevant professional experience in their respective fields. Our net revenues for fiscal 2010 were $2,508.5 million.

Our schools comprise a national education platform that is designed to address the needs of a broad market, taking into consideration various factors that influence demand, such as programmatic and degree interest, employment opportunities, requirements for credentials in certain professions, demographics, tuition pricing points and economic conditions. We believe that our schools collectively enable us to provide access to a high quality education for potential students, at a variety of degree levels and across a wide range of disciplines.

We completed an initial public offering of our common stock on October 7, 2009 in which we sold 23.0 million shares of common stock for $18.00 per share. Net proceeds from the initial public offering were used to repay indebtedness with a face value of $316.0 million and pay a termination fee under a management agreement with the Sponsors.

During our more than 40-year operating history, we have expanded the reach of our education systems and currently operate 101 primary locations across 31 U.S. states and in Canada. In addition, we have offered online programs since 2000, enabling our students to pursue degrees fully online or through a flexible combination of both online and campus-based education. During the period from October 1999 through October 2009, we experienced a compounded annual enrollment growth rate of 18.9%. During the same time period, the schools that we have owned or operated for one year or more experienced a compounded annual enrollment growth rate of 13.1%. We seek to maintain growth in a manner that assures adherence to our high standard of educational quality and track record of student success.

We have undertaken multiple initiatives to address the growing demand for post-secondary education in the United States. During our fiscal year ended June 30, 2010, we opened nine new locations, developed eight new academic programs and introduced over 230 new or existing academic programs to locations that had not previously offered such programs. The average enrollment growth at our schools during fiscal 2010 was 22.5% as compared to fiscal 2009. We continue to make significant capital investments in technology and human resources designed to facilitate future enrollment growth while enhancing the effectiveness of our marketing efforts. We also continue to upgrade our infrastructure, student interfaces and student support systems to enhance the student experience, while providing greater operational transparency. We have also made considerable investments in our online education platform, which has resulted in strong enrollment growth. The average number of students enrolled in fully online academic programs grew 56.1% during fiscal 2010 as compared to the average student enrollment during fiscal 2009.

Each of our 101 schools provides student-centered education. Our schools are organized and managed to capitalize on recognized brands and align them with specific targeted markets based on field of study, employment opportunity, type of degree offering and student demographics:

•

The Art Institutes. The Art Institutes focus on applied arts in creative professions such as graphic design, interior design, web design and interactive media, digital filmmaking, media arts and animation, game art and design, fashion design and marketing and culinary arts. The Art Institutes offer Associate’s, Bachelor’s and Master’s degree programs, as well as selective non-degree diploma programs. Students pursue their degrees through local campuses, fully online programs through The Art Institute of Pittsburgh, Online Division and blended formats, which combine on campus and online education. There are 48 Art Institutes campuses in 24 U.S. states and in Canada. As of October 2009, students enrolled at The Art Institutes represented approximately 56% of our total enrollments.

•

Argosy University. Argosy University offers academic programs in psychology and behavioral sciences, education, business and health sciences disciplines. Argosy offers Doctoral, Master’s and undergraduate degrees. Argosy’s academic programs focus on graduate students seeking advanced credentials as a prerequisite to initial licensing, career advancement and/or structured pay increases. Students pursue their degrees through local campuses, fully online programs and blended formats. There are 19 Argosy University campuses in 13 U.S. states. As of October 2009, students enrolled at Argosy University represented approximately 18% of our total enrollments.

•

Brown Mackie Colleges. Brown Mackie Colleges offer flexible Associate’s and non-degree diploma programs that enable students to develop skills for entry-level positions in high demand vocational specialties and Bachelor’s degree programs that assist students to advance within the workplace. Brown Mackie Colleges offer programs in growing fields such as nursing, medical assisting, business, criminal justice, legal support and information technology. There are 25 Brown Mackie College campuses in 14 U.S. states. As of October 2009, students enrolled at Brown Mackie Colleges represented approximately 14% of our total enrollments.

•

South University. South University offers academic programs in health sciences and business disciplines, including business administration, health services management, nursing, pharmacy, medical assisting, criminal justice and information technology. South University offers Doctoral, Master’s, Bachelor’s and Associate’s degrees through local campuses, fully online programs and blended formats. There are eight South University campuses in six U.S. states. As of October 2009, students enrolled at South University represented approximately 12% of our total enrollments.

The U.S. Department of Education has proposed a number of new regulations which could require us to make significant revisions to the way we operate our business and could adversely impact our ability to offer programs to students and have an adverse effect on our future growth prospects. These proposed regulations are described in “— Student Financial Assistance — Legislative and Regulatory Action”.

Industry Overview

The U.S. Department of Education estimates that the U.S. public and private post-secondary education market for degree-granting institutions was a $420 billion industry in 2008, representing approximately 19.1 million students enrolled at over 4,400 institutions. According to the National Center of Education Statistics, traditional students, who typically are recent high school graduates under 25 years of age and are pursuing their first higher education degree, represent approximately 62% of the national student population. The remaining 38% of the student population is comprised of non-traditional students, who are largely working adults pursuing further education in their current field or are preparing for a new career.

We believe that there are a number of factors contributing to the long-term growth of the post-secondary education industry. First, the shift toward a services-based economy increases the demand for higher levels of education. According to the U.S. Department of Labor — Bureau of Labor Statistics, the projected growth rate for total job openings from 2008 to 2018 for occupations that require post-secondary education is over 15%, nearly double the growth rate for occupations that do not require post-secondary education. Second, economic incentives are favorable for post-secondary graduates. According to the U.S. Census Bureau, in 2009, the median weekly earnings for individuals aged 25 years and older with a Bachelor’s degree was approximately 64% higher than for high school graduates of the same age with no college experience, and the average unemployment rate in 2008 for persons aged 25 years and older with a Bachelor’s degree was nearly half that of those without college experience. Third, government and private financial aid in various forms, including loan guarantees, grants and tax benefits for post-secondary students, has continued to increase.

For-profit providers have captured an increasing share of the growing demand for post-secondary education over the last several years which has not been fully addressed by traditional public and private universities. Non-profit public and private institutions can face limited financial capability to expand their offerings in response to the growing demand for education, due to a combination of state funding challenges, significant expenditures required for research and the professor tenure system. Certain private institutions also may control enrollments to preserve the perceived prestige and exclusivity of their degree offerings.

As a result, we believe that for-profit, post-secondary education providers continue to have significant opportunities to address the demand for post-secondary education. According to the National Center of Education Statistics, the number of students at for-profit, degree-granting institutions grew at an average annual rate of 15.0% from 1998 to 2008, compared to 2.8% growth for all degree-granting institutions over the same period. For-profit providers have continued their strong growth, primarily due to the higher flexibility of their programmatic offerings and learning structure, their emphasis on applied content and their ability to consistently introduce new campuses and academic programs. Despite rapid growth, the share of the post-secondary education market that has been captured by for-profit providers remains relatively small. In 2008, according to the National Center for Education Statistics, for-profit institutions accounted for 7.7% of all degree-granting, post-secondary enrollments, up from 2.5% in 1998.

We believe that growth in online education has been supported by favorable student outcomes, the flexibility and convenience associated with the instructional format and the higher penetration of broadband Internet access. According to Eduventures Inc., a leading information services company for the education market, online education programs generated an estimated $11.7 billion of revenues in 2008. Eduventures Inc. estimates that online enrollment grew by 25.3% annually from 2003 to 2008 and projects growth of 12.5% annually from 2008 to 2013.

The post-secondary education industry is highly fragmented, with no one provider controlling a significant share of the market. Students choose among providers based on programs and degrees offered, program flexibility and convenience, quality of instruction, graduate employment rates, reputation and recruiting effectiveness. This multi-faceted market fragmentation results in significant differentiation among various education providers, limited direct competition and minimal overlap between for-profit providers. The main competitors of for-profit, post-secondary education providers are local public and private two-year junior and community colleges, traditional public and private undergraduate and graduate colleges and, to a lesser degree, other for-profit providers.

Our Competitive Strengths

We believe that the following strengths differentiate our business:

•

Commitment to offering quality academic programs and student and graduate success

We are committed to offering quality academic programs, and we continuously strive to improve the learning experience for our students. We are dedicated to recruiting and retaining quality faculty and instructors with relevant industry experience and appropriate academic credentials. Our schools have an average student to instructor ratio of 16 to one. Our advisory boards help us to reassess and update our educational offerings on a regular basis in order to ensure the relevance of our curriculum and to design new academic programs. We do this with the goal of enabling students to either enter or advance in their chosen field. Our staff of trained, dedicated career services specialists maintains strong relationships with employers in order to improve our student graduate employment rates in their chosen fields.

•

Recognized brands aligned with specific fields of study and degree offerings

We offer academic programs primarily through four education systems. We have devoted significant resources to establishing, and continue to invest in developing, the brand identity for each education system. Through The Art Institutes, Argosy University, Brown Mackie Colleges and South University education systems, we have the ability to align our academic program offerings to address the unique needs of specific student groups. Our marketing strategy is designed to develop brand awareness among practitioners and likely prospects in particular fields of study. We believe that this comprehensive brand building approach in each specific market also enables us to gain economies of scale with respect to student acquisition and retention costs, assists in the recruitment and retention of quality faculty and staff members and accelerates our ability to expand online course offerings.

•

Diverse program offerings and broad degree capabilities

Our breadth of programmatic and degree offerings enables us to appeal to a diverse range of potential students. We currently offer academic programs in the following areas: design, media arts, health sciences, psychology and behavioral sciences, culinary, fashion, business, legal, education and information technology. Approximately 61% of our students as of October 2009 were enrolled in Doctorate, Master’s and Bachelor’s degree programs, which are typically multi-year programs that contribute to the overall stability of our student population. We monitor and adjust our education offerings based on changes in demand for new programs, degrees, schedules and delivery methods.

•

National platform of schools and integrated online learning platform

The combination of our national platform of schools and integrated online learning platform provides students at three of our education systems with flexible curriculum delivery options and academic programs taught on campus, online and in blended formats. This flexibility enables our academic programs to appeal to both traditional students and working adults who may seek convenience due to scheduling, geographical or other constraints.

We have 101 primary locations across 31 U.S. states and in Canada. Our campuses are located primarily in large metropolitan areas, and we focus our marketing efforts on demand for post-secondary education primarily within a 100-mile radius of the campus. Throughout our history, we have invested in our campuses in order to provide attractive and efficient learning environments. Our schools offer many amenities found in traditional colleges, including libraries, bookstores and laboratories, as well as the industry-specific equipment necessary for the various programs that we offer.

Our online presence offers a practical and flexible solution for our students without compromising quality. We have made a significant investment in online education by strengthening our online presence within The Art Institutes, Argosy University and South University education systems. We have introduced new online academic programs, strengthened our technology infrastructure, hired additional faculty and staff and increased our spending on marketing and admissions. We intend to continue to invest in the expansion of our online program offerings and our marketing efforts to capitalize on our well-known branded schools in order to expand our online presence. As of October 2009, approximately 31,200 students were enrolled in fully online programs.

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Strong management team with a focus on long-term performance

Our school presidents and senior operating executives have substantial experience in the sector and have contributed to our history of success. The current executive team has been instrumental in directing investments to enhance the student experience and build infrastructure to establish a platform for sustainable long-term growth. We plan to continue to build our strong management team as we execute on our long-term growth strategy.

Our Growth Strategy

We intend to support our growth through these three channels:

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Introduce new and existing academic programs across our national platform of schools

We seek to identify emerging industry trends in order to understand the evolving educational needs of our students and graduates. With the assistance of over 1,500 industry experts and employers who actively participate on curriculum advisory teams, we are able to rapidly develop new academic programs that address specific market opportunities. We are also able to tailor our existing proprietary content for courses across our degree programs. Examples of new academic programs that we have introduced during fiscal 2010 include Associate’s degree programs in Architectural Design and Drafting Technology, Health and Fitness Training and Dietetics Technology, a Bachelor’s degree program in Medical Technology, a Master’s degree program in Higher Postsecondary Education and a Doctoral program in Advanced Educational Administration.

In addition to developing new academic programs, we frequently introduce existing academic programs to additional locations in our national platform of schools, allowing us to drive incremental enrollment growth, utilize our existing curriculum development in multiple locations and capitalize on identified market needs.

•

Increase enrollments in online distance learning and blended-format programs

Our investments in online education have enabled us to increase the number of students enrolled in fully online academic programs from approximately 19,500 students as of October 2008 to approximately 31,200 students as of October 2009. We believe that the fully online programs offered by The Art Institute of Pittsburgh, Online Division, Argosy University and South University allow us to offer academic programs that meet the needs of a wide range of distance learning students. In addition, our 101 schools operate under brands that are well-known within various fields, and we believe that our online programs benefit from our strong campus presence and related marketing expenditures. Online offerings are also a cost effective means for us to utilize many of our existing education curricula and generate attractive returns on capital. We intend to continue to invest in the expansion of our online program offerings and enhance our marketing efforts to capitalize on our well-known branded schools and further expand our online presence.

•

Develop new school locations in attractive markets

We believe that many attractive locations are available to open additional campuses across the United States. We have identified target locations in new geographic markets, as well as opportunities to open additional campuses within existing large metropolitan areas. Because of the relatively large number of potential markets available for opening new campuses, we focus our efforts on markets that we believe offer the most attractive projected growth and return on capital. We rigorously analyze employment statistics and demographic data in order to align our new schools with the specific educational needs of a targeted market. This focus enables penetration and presence for new schools. After entering a market, we drive incremental growth through the introduction of new academic programs and degrees, which enhance return on investment in new markets. We pursue additional efficiencies through our centralized and standardized infrastructure, systems and processes.

In addition, although we believe that our diverse platform of program and degree offerings provides significant future growth opportunities, we routinely consider acquisition opportunities to increase the breadth of our education systems or provide unique programmatic exposure within new markets.

Student Recruitment and Marketing

Our diverse and metrics-based marketing activities are designed to position us as a leading provider of high quality educational programs, build strong brand recognition for our education systems and disciplines, differentiate us from other educational providers and stimulate interest in our programs from prospective students. We target a large and diverse market, including traditional college students, working adults seeking a high quality education in a traditional college setting and working adults focused on the practicality and convenience of online education and career advancement goals. In marketing our programs to prospective students, we emphasize the value of the educational experience and the academic rigor of the programs.

Our marketing personnel employ an integrated marketing approach that utilizes a variety of lead sources to identify prospective students. These lead generation sources include web-based advertising, which generates the majority of our leads, and further include purchasing leads from aggregators, television and print media advertising, radio, local newspaper, telephone campaigns and direct mail campaigns. In addition, referrals from current students, alumni and employers are important sources of new students. We also employ approximately 250 representatives who present at high schools. These representatives also participate in college fairs and other inquiry-generating activities. In fiscal 2010, our marketing efforts generated inquiries from approximately 4.6 million prospective students as compared to approximately 3.5 million inquiries in fiscal 2009. Marketing and admissions expense, which includes advertising expense, represented approximately 22% of net revenues in fiscal 2010 and fiscal 2009. Advertising expense represented approximately 10% of net revenues in fiscal 2010 and 2009.

Upon a prospective student’s initial indication of interest in enrolling at one of our schools, an admissions representative initiates communication with the student. The admissions representative serves as the primary contact for the prospective student and helps the student assess the compatibility of his or her goals with our educational offerings. Our student services personnel work with applicants to gain acceptance, arrange financial aid and prepare the student for matriculation. Each admissions representative undergoes a standardized training program, which includes a full competency assessment at the program’s conclusion.

Student Admissions and Retention

The admissions and entrance standards of each school are designed to identify those students who are best equipped to meet the requirements of their chosen fields of study and successfully complete their programs. In evaluating prospective students, we seek individuals with, among other things, a strong desire to learn, passion for their area of interest and initiative. We believe that a success-oriented student body results in higher retention and placement rates, increased student and employer satisfaction and lower student default rates on government loans. To be qualified for admission to one of our schools, each applicant must have received a high school diploma or a General Education Development certificate. Applicants to our graduate and Doctorate programs are required to have received an undergraduate degree as a condition to admission. Most of our schools interview prospective students to assess their qualifications, their interest in the programs offered by the school and their commitment to their education. In addition, the curricula, student services, education costs, available financial resources and student housing options, if applicable, are reviewed during interviews.

Due to our broad program offerings, our students come from a wide variety of backgrounds. The estimated average age of students at all of our schools as of the fall of 2009 was approximately 29 years old. The estimated average age of students at each of our education systems as of the fall of 2009 was as follows:

The Art Institutes		26 years old
Argosy University		36 years old
South University		33 years old
Brown Mackie Colleges		30 years old

Our students may fail to finish their programs for a variety of personal, academic or financial reasons. To reduce the risk of student withdrawals, each of our schools devotes staff resources to advising students regarding academic and financial matters, part-time employment and, if applicable, housing. Remedial courses are mandated for our undergraduate and graduate students with lower academic skill levels, and tutoring is encouraged for students experiencing academic difficulties. Our net annual persistence rate, which measures the number of students who are enrolled during a fiscal year and either graduate or advance to the next fiscal year, for all of our students was approximately 64% in fiscal 2010 as compared to approximately 67% in fiscal 2009 due primarily to the effect of a weak economy and an increase in the number of fully online students, who typically persist at a lower rate than students who attend onground schools. Fully online students represent 27.9% of our total student enrollment in July 2010 as compared to 23.2% in July 2009.

Education Programs

The relationship of each of our schools with potential employers for our students plays a significant role in the development and adaptation of the school curriculum. Most of our schools have one or more program advisory boards composed of members of the local and regional communities or employers in the fields which we serve. These boards provide valuable input to the school’s education department, which allows the school to keep programs current and provide students with the training and skills that employers seek.

Our wide range of academic programs culminate in the awarding of diploma certificates and a variety of degrees. In the fall of 2009 and 2008, the enrollment by degree for all our schools was as follows:

		2009				2008
Bachelor’s degrees			47	%			49	%
Associate’s degrees			31	%			27	%
Diploma and Certificates			8	%			9	%
Doctorate degrees			7	%			8	%
Master’s degrees			7	%			7	%

The type of degrees and programs we offer vary by each of our schools. The following summarizes the principal academic programs offered at each of our education systems as of October 2009. Not all programs are offered at each school location within an education 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		Bachelor’s Degree
Graphic Design		Advertising
Interior Design		Design Management
		Graphic Design
		Illustration & Design
		Industrial Design
		Interior Design
The School of Fashion
Associate’s Degree		Bachelor’s Degree
Fashion Design		Fashion Design
Fashion Marketing		Fashion Marketing
Fashion Merchandising		Fashion Merchandising
		Fashion & Retail Management
The School of Media Arts
Associate’s Degree		Bachelor’s Degree
Animation Art & Design		Animation Art & Design
Audio Production		Audio Production
Photography		Digital Filmmaking & Video Production
Video Production		Digital Media Production
Web Design & Interactive Media Design		Game Art & Design
		Media Arts & Animation
		Photography
		Visual Effects & Motion Graphics
		Visual & Game Programming
		Web Design & Interactive Media Design
The School of Culinary Arts
Associate’s Degree		Bachelor’s Degree
Baking and Pastry		Culinary Management
Culinary Arts		Hotel & Restaurant Management

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

School of Undergraduate Studies
Bachelor of Arts		Bachelor of Science
Psychology		Business Administration
Psychology and Behavioral Sciences
Master of Arts		Doctor of Psychology
Clinical Psychology		Clinical Psychology
Counseling Psychology
Community Counseling
Forensic Psychology		Doctor of Education
Industrial Organizational Psychology		Counselor Education and Supervision
Marriage and Family Therapy		Counseling Psychology
Mental Health Counseling		Pastoral Community Counseling
Health Sciences
Associate of Applied Science		Associate of Science
Diagnostic Medical Sonography		Dental Hygiene
Radiologic Technology		Medical Laboratory Technology
Veterinary Technology

Education
Master of Arts in Education		Doctor of Education
Instructional Leadership		Instructional Leadership
Educational Leadership		Educational Leadership
School Counseling		Organizational Leadership
Business
Master of Science
Management
Master of Business Administration

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

Healthcare and Wellness		Nursing
Associate’s Degrees		Associate’s Degrees
Healthcare Administration		Nursing
Medical Assisting
Occupational Therapy Assistant		Early Childhood Education
Pharmacy Technology		Associate’s Degree
Physical Therapist Assistant		Early Childhood Education
Surgical Technology
Veterinary Technology
Legal Studies
Associate’s Degrees		Bachelor’s Degrees
Criminal Justice		Criminal Justice
Paralegal
Business
Associate’s Degrees		Bachelor’s Degrees
Accounting		Business Administration
Business
Business Administration
Information Technology
Associate’s Degrees
Audio/Visual Production
Biomedical Equipment Technology
Computer Aided Design & Drafting Technology
Computer Networking and Applications
Information Technology

South University. South University offers the following degree programs.

College of Arts and Sciences
Associate’s Degrees		Master’s Degrees
Paralegal Studies		Professional Counseling
Bachelor’s Degrees
Criminal Justice
Legal Studies
Psychology
College of Business
Associate’s Degrees		Master’s Degrees
Accounting		Business Administration
Business Administration
Information Technology
Bachelor’s Degrees
Business Administration
Healthcare Management
Information Technology
College of Health Professions
Associate’s Degrees		Bachelor’s Degrees
Allied Health Science		Health Science
Medical Assisting
Physical Therapist Assisting
College of Nursing
Bachelor’s Degrees		Master’s Degrees
Nursing		Nursing
School of Pharmacy
Doctorate Degrees
Doctor of Pharmacy

In addition to the programs listed above, we own Western State University College of Law, which offers Juris Doctor degrees, and the Ventura Group, which provides courses and materials for post-graduate licensure examinations in the human services fields and continuing education courses for K-12 educators.

Graduate Employment

We measure our success as an educator of students to a significant extent by the ability of our students to find jobs in their chosen field of employment upon graduation from our schools. Most of our schools provide career development instruction to our students in order to assist the students in developing essential job-search skills. In addition to individualized training in interviewing, networking techniques and resume-writing, most of our schools require students to take a career development course. Additionally, we provide ongoing placement resources to our undergraduate 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, 2010, the career services departments of our schools had approximately 300 full-time employees. We estimate that our career services departments maintain contact with approximately 70,000 employers nationwide.

Based on information collected by us from graduating students and employers, we believe that, of the approximately 18,300 undergraduate students who graduated from our schools during the calendar year ended December 31, 2009, approximately 85% 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 Form 10-K exclude students who are pursuing further education, who are deceased, who are in active military service, who have medical conditions that prevent them from working, who are continuing in a career unrelated to their program of study because they currently earn salaries which exceed those paid to entry-level employees in their field of study, who choose to stay at home full-time or who are international students no longer residing in the country in which their school is located. The average salary paid to our available graduating undergraduate students from The Art Institutes, the Brown Mackie Colleges and South University for calendar year 2009 who obtained employment in their fields of study, or in related fields of study, was approximately $30,000.

Accreditation

In the United States, accreditation is a process through which an institution submits itself to qualitative review by an organization of peer institutions. Accrediting agencies primarily examine the academic quality of the instructional programs of an institution, and a grant of accreditation is generally viewed as reliable authority that an institution’s programs meet generally accepted academic standards. Accrediting agencies also review the administrative and financial operations of the institutions they accredit to ensure that each institution has the resources to perform its educational mission.

Pursuant to provisions of the Higher Education Act of 1965, as amended (“HEA”), the U.S. Department of Education relies on accrediting agencies to determine whether the academic quality of an institution’s educational programs is sufficient to qualify the institution to participate in federal student financial aid programs under Title IV of the HEA (“Title IV programs”). The HEA and its implementing regulations specify certain standards that all recognized accrediting agencies must adopt in connection with their review of post-secondary institutions. All of our U.S. schools are accredited by an institutional accrediting agency recognized by the U.S. Department of Education.

In addition to the institutional accreditations described above, a number of our institutions have specialized programmatic accreditation for particular educational programs. For example, 15 Art Institutes offer interior design programs that have programmatic accreditation by the Council for Interior Design Accreditation and 18 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 five Argosy University locations are accredited by the Council for Accreditation of Counseling and Related Educational Programs. Eight of our medical assisting programs (three at South University, four at Brown Mackie Colleges and one at Argosy University) are accredited by the Commission on Accreditation of Allied Health Education Programs. While these programmatic accreditations cannot be relied upon for our schools to obtain and maintain certification to participate in Title IV programs, they are commonly relied upon in the relevant professions as indicators of the quality of the academic program.

The following table shows the location of each of our campuses at June 30, 2010, the name under which it operates, the year of its establishment, the date we opened or acquired it and the institutional accrediting agency (for schools accredited by more than one recognized accrediting agency, the primary accrediting agency is listed first).

Calendar

Fiscal Year

Year

Acquired

School

Location

Established

or Opened

Accrediting Agency

The Art Institutes

The Art Institute of Atlanta

Atlanta, GA

1949

1971

Commission on Colleges of the Southern Association of Colleges and Schools (“SACS”)

The Art Institute of Atlanta — Decatur

Decatur, GA

2007

2008

SACS (as an additional location of The Art Institute of Atlanta)

The Art Institute of Austin

Austin, TX

2008

2008

SACS (as a branch of The Art Institute of Houston)

The Art Institute of California — Hollywood (formerly California Design College)

Los Angeles, CA

1991

2003

Accrediting Council of Independent Colleges and Schools (“ACICS”)

The Art Institute of California — Inland Empire

San Bernardino, CA

2006

2006

Accrediting Commission of Career Schools and Colleges of Technology (“ACCSCT”) (as a branch of The Art Institute of California — San Diego)

The Art Institute of California — Los Angeles

Los Angeles, CA

1997

1998

ACICS

The Art Institute of California — Orange County

Orange County, CA

2000

2001

ACICS (as a branch of The Art Institute of California — Los Angeles)

The Art Institute of California — Sacramento

Sacramento, CA

2007

2007

ACICS (as a branch of The Art Institute of California — Los Angeles)

The Art Institute of California — San Diego

San Diego, CA

1981

2001

ACCSCT

The Art Institute of California — San Francisco

San Francisco, CA

1939

1998

ACICS (as a branch of The Art Institute of California — Los Angeles)

The Art Institute of California — Sunnyvale

Sunnyvale, CA

2008

2008

ACICS (as a branch of The Art Institute of California — Hollywood)

The Art Institute of Charleston

Charleston, SC

2007

2007

SACS (as a branch of The Art Institute of Atlanta)

Calendar

Fiscal Year

Year

Acquired

School

Location

Established

or Opened

Accrediting Agency

The Art Institute of Charlotte

Charlotte, NC

1973

2000

ACICS

The Art Institute of Colorado

Denver, CO

1952

1976

Higher Learning Commission (“HLC”) of the North Central Association

The Art Institute of Dallas

Dallas, TX

1964

1985

SACS

The Art Institute of Fort Lauderdale

Fort Lauderdale, FL

1968

1974

ACICS

The Art Institute of Fort Worth

Fort Worth, TX

2009

2010

SACS (as a branch of The Art Institute of Dallas)

The Art Institute of Houston

Houston, TX

1974

1979

SACS

The Art Institute of Houston — North

Houston, TX

2008

2009

SACS (as a branch of The Art Institute of Houston)

The Art Institute of Indianapolis

Indianapolis, IN

2006

2006

ACCSCT (as a branch of The Art Institute of Las Vegas)

The Art Institute of Jacksonville

Jacksonville, FL

2007

2007

SACS (as a branch of Miami International University of Art & Design)

The Art Institute of Las Vegas

Las Vegas, NV

1983

2001

ACCSCT

The Art Institute of Michigan

Detroit, MI

2007

2008

HLC and ACCSCT (as a branch of The Illinois Institute of Art — Chicago)

The Art Institute of Tennessee — Nashville

Nashville, TN

2006

2007

SACS (as a branch of The Art Institute of Atlanta)

The Art Institute of New York City

New York, NY

1980

1997

ACICS

The Art Institute of Ohio — Cincinnati

Cincinnati, OH

2004

2005

HLC and ACCSCT (as a branch of The Illinois Institute of Art — Chicago)

The Art Institute of Philadelphia

Philadelphia, PA

1971

1980

ACICS

The Art Institute of Phoenix

Phoenix, AZ

1995

1996

ACICS

Calendar

Fiscal Year

Year

Acquired

School

Location

Established

or Opened

Accrediting Agency

The Art Institute of Pittsburgh

Pittsburgh, PA

1921

1970

Middle States Association of Colleges & Schools of the Commission on Higher Education

The Art Institute of Portland

Portland, OR

1963

1998

Northwest Commission on Colleges and Universities (“NWCCU”)

The Art Institute of Raleigh-Durham

Durham, NC

2008

2008

ACICS (as a branch of The Art Institute of Charlotte)

The Art Institute of San Antonio

San Antonio, TX

2010

2010

SACS (as a branch of the Art Institute of Houston)

The Art Institute of Salt Lake City

Salt Lake City, UT

2007

2007

ACCSCT (as a branch of The Art Institute of Las Vegas)

The Art Institute of Seattle

Seattle, WA

1946

1982

NWCCU

The Art Institute of Tampa

Tampa, FL

2004

2004

SACS (as a branch of the Miami International University of Art & Design)

The Art Institute of Tucson

Tucson, AZ

2002

2007

ACICS

The Art Institute of Vancouver

Vancouver, BC

1979

2003

Private Career Training Institutions Agency of British Columbia

The Art Institute of Virginia Beach

Virginia Beach, VA

2009

2010

SACS (as a branch of The Art Institute of Atlanta)

The Art Institute of Washington

Arlington, VA

2000

2001

SACS (as a branch of The Art Institute of Atlanta)

The Art Institute of Washington — Northern Virginia

Sterling, VA

2009

2009

SACS (as a branch of The Art Institute of Atlanta)

The Art Institute of Wisconsin (1)

Milwaukee, WI

2010

2010

ACICS (as a branch of The Art Institute of Phoenix)

The Art Institute of York — Pennsylvania

York, PA

1952

2004

ACCSCT

The Art Institutes International — Kansas City

Kansas City, KS

2008

2008

ACICS (as a branch of The Art Institute of Phoenix)

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

				Calendar				Fiscal Year
				Year				Acquired
School		Location		Established				or Opened				Accrediting Agency
Argosy University, Santa Monica		Santa Monica, CA			2006				2006
Argosy University, Sarasota		Sarasota, FL			1969				2002
Argosy University, Schaumburg		Schaumburg, IL			1979				2002
Argosy University, Seattle		Seattle, WA			1997				2002
Argosy University, Tampa		Tampa, FL			1997				2002
Argosy University, Twin Cities		Eagan, MN			1961				2002
Argosy University, Washington D.C.		Arlington, VA			1994				2002
South University												SACS (all locations)
South University/ Savannah		Savannah, GA			1899				2004
South University/ Montgomery		Montgomery, AL			1997				2004
South University/West Palm Beach		West Palm Beach, FL			1974				2004
South University/ Columbia		Columbia, SC			1935				2004
South University/ Tampa		Tampa, FL			2006				2006
South University/ Richmond		Richmond, VA			2009				2009
South University/Novi (1)		Novi, MI			2009				2010
South University/Virginia Beach		Virginia Beach, VA			2010				2010
The Brown Mackie Colleges
Brown Mackie College — Akron		Akron, OH			1980				2004			ACICS (as a branch of Brown Mackie College — Cincinnati)
Brown Mackie College — Cincinnati		Cincinnati, OH			1927				2004			ACICS

Calendar

Fiscal Year

Year

Acquired

School

Location

Established

or Opened

Accrediting Agency

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 (as a branch of Brown Mackie College — Tucson)

Brown Mackie College — Atlanta

Norcross, GA

1969

2004

ACICS (as a branch of The Art Institute of Charlotte)

Brown Mackie College — Kansas City

Lenexa, KS

1984

2004

HLC (as a branch of Brown Mackie College — Salina)

Brown Mackie College — Salina

Salina, KS

1892

2004

HLC

Brown Mackie College — Merrillville

Merrillville, IN

1984

2004

ACICS (as a branch of Brown Mackie College — Cincinnati)

Brown Mackie College — Michigan City

Michigan City, IN

1890

2004

ACICS (as a branch of Brown Mackie College — Cincinnati)

Brown Mackie College — Moline

Moline, IL

1985

2004

ACICS (as a branch of Brown Mackie College — Cincinnati)

Brown Mackie College — Fort Wayne

Fort Wayne, IN

1991

2004

ACICS (as a branch of Brown Mackie College — South Bend)

Brown Mackie College — South Bend

South Bend, IN

1882

2004

ACICS

Brown Mackie College — Louisville

Louisville, KY

1935

2004

ACICS (as a branch of Brown Mackie College — Findlay)

Brown Mackie College — Hopkinsville

Hopkinsville, KY

1995

2004

ACICS (as a branch of Brown Mackie College — Findlay)

Brown Mackie College — Miami

Miami, FL

2004

2005

ACICS (as a branch of Brown Mackie College — Cincinnati)

Brown Mackie College — Tucson

Tucson, AZ

1972

2007

ACICS

Brown Mackie College — Indianapolis

Indianapolis, IN

2007

2008

ACICS (as a branch of Brown Mackie College — Findlay)

Brown Mackie College — Boise

Boise, ID

2008

2008

ACICS (as a branch of Brown Mackie College — South Bend)

Brown Mackie College — Tulsa

Tulsa, OK

2008

2009

ACICS (as a branch of Brown Mackie College — South Bend)

Brown Mackie College — Phoenix

Phoenix, AZ

2008

2009

ACICS (as a branch of Brown Mackie College — Tucson)

Calendar

Fiscal Year

Year

Acquired

School

Location

Established

or Opened

Accrediting Agency

Brown Mackie College — Greenville

Greenville, SC

2009

2009

ACICS (as a branch of Brown Mackie College — Tucson)

Brown Mackie College — St. Louis

St. Louis, MO

2009

2010

ACICS (as a branch of Brown Mackie College — Tucson)

Brown Mackie College — Albuquerque

Albuquerque, NM

2010

2010

ACICS (as a branch of Brown Mackie College — Tucson)

Brown Mackie College — San Antonio (1)

San Antonio, TX

2010

2010

ACICS (as a branch of The Art Institute of Phoenix)

Western State University College of Law

Fullerton, CA

1966

2002

Commission on Colleges of the Western Association of Schools and Colleges; American Bar Association

Accrediting agencies monitor each educational institution’s performance across a broad range of areas. Monitoring is generally performed through annual self-reporting and through the conduct of periodic site visits by representatives of the accrediting agency and qualified persons from peer institutions. In the event an accrediting agency determines that such school’s performance in one or more areas falls below certain parameters, the accrediting agency may require the school to supply it with supplemental reports on the accrediting agency’s specific areas of concern until that school meets the accrediting agency’s performance guideline or standard. As of June 30, 2010, four of our schools were required to provide such supplemental reports. Each of these four schools is also required to request and receive permission from its accrediting agency prior to filing an application for a new location or program offering. In addition, based on internally generated reports that will be filed with one of our accrediting agencies, we believe that an additional 12 schools will be required to provide supplemental reports due to their failure to satisfy minimum student completion or placement rate thresholds.

An accrediting agency also may order an institution to “show cause” why its accreditation should not be revoked or conditioned if it receives information leading it to question whether the institution satisfies the requirements of continued accreditation. An institution found not to be in compliance with required standards may have its accreditation revoked or withdrawn, or it may be placed on probation to more closely monitor its compliance with accrediting requirements. None of our schools currently is on show cause status with its institutional accrediting agency. The American Psychological Association (“APA”) Council of Accreditation recently placed the Doctor of Psychology program at Argosy University’s Atlanta campus on “show cause” status. The Atlanta campus has until September 1, 2010 to provide information to the APA demonstrating that it has addressed the deficiencies in the Doctor of Psychology program noted by the APA. The APA will decide whether to place the program on probation, reaccredit the program or delay its decision in November 2010. The Doctor of Psychology program at Argosy University’s San Francisco campus was placed on probation by the American Psychological Association in August 2010. The San Francisco campus has not decided whether it will appeal the decision by the APA’s Council on Accreditation. Under a probationary status, the program remains accredited and has up to two years to address any deficiencies identified by the Council on Accreditation.

Student Financial Assistance

Most of the 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 physically located, (ii) institutionally accredited by an agency recognized by the U.S. Department of Education, and (iii) certified as an eligible institution by the U.S. Department of Education. In addition, the school must ensure that Title IV program funds are properly accounted for and disbursed in the correct amounts to eligible students and remain in compliance generally with the Title IV program regulations. Most of the U.S. Department of Education’s requirements, such as the 90/10 Rule and the cohort default rate test described below, are applied on an institutional basis, with an institution defined as a main campus and its additional locations, if any. Thirty of our 101 primary locations are recognized by the U.S. Department of Education as main campuses and the remaining locations, other than The Art Institute of Vancouver which is subject to the laws and regulations of the Canadian province of British Columbia, are additional locations.

As in the United States, there are certain risks associated with operating post-secondary institutions in Canada, including, among other risks:

•

if our schools fail to comply with extensive regulations, we could be subject to financial penalties, restrictions on our operations or loss of external financial aid funding for our students;

•

the provinces or national government may change the law or reduce funding for student financial aid programs, which could harm our student population and revenue;

•

if our schools do not maintain their approvals, they may not operate or participate in federal student financial aid programs; and

•

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

While most states in the U.S. support public colleges and universities primarily through direct state subsidies, the U.S. federal government provides a substantial part of its support for post-secondary education in the form of grants and loans to students who can use this support at any institution that has been certified as eligible by the U.S. Department of Education. Students at our U.S. schools receive loans, grants and work-study funding to fund their education under several Title IV programs, of which the three largest are the Federal Family Education Loan (“FFEL”) program, the William D. Ford Federal Direct Loan (“Direct Loan”) program and the Federal Pell Grant (“Pell”) program. Most of our U.S. schools also participate in the Federal Supplemental Educational Opportunity Grant (“FSEOG”) program, the Federal Perkins Loan (“Perkins”) program, the Federal Work-Study program and the Academic Competitive Grant program. A smaller number of our U.S. schools also participate in the National SMART (Science and Mathematics Access to Retain Talent) Grant program.

During fiscal 2010 and 2009, the gross cash receipts from the financial sources that funded our net revenues from tuition and fees for attending our post-secondary institutions were as follows (dollars in millions):

		Fiscal 2010												Fiscal 2009(6)
						% of												% of
		Gross Cash				Gross				% of Net				Gross Cash				Gross				% of Net
		Receipts(1)				Receipts				Revenue				Receipts(1)				Receipts				Revenue
Federal Title IV Aid(2):
FFEL — Stafford and Direct Loans		$	1,558.9				51.5	%			62.1	%		$	1,194.2				49.9	%			59.4	%
FFEL — PLUS Loans			265.1				8.8	%			10.6	%			203.8				8.5	%			10.1	%
Grad Plus Loans			37.7				1.2	%			1.5	%			25.2				1.1	%			1.3	%
Pell Grants			358.4				11.8	%			14.3	%			193.0				8.1	%			9.6	%
FSEOG Awards			13.0				0.4	%			0.5	%			12.3				0.5	%			0.6	%
Perkins Loans			1.7				0.1	%			0.1	%			5.0				0.2	%			0.2	%
Other Title IV Aid(3)			4.6				0.2	%			0.2	%			2.9				0.1	%			0.1	%
Total Federal Title IV Aid			2,239.4				74.0	%			89.3	%			1,636.4				68.4	%			81.3	%
Private Loans			112.0				3.7	%			4.5	%			261.5				10.9	%			13.0	%
Education Finance Loan Program			65.6				2.2	%			2.6	%			19.0				0.8	%			1.0	%
Cash Payments			552.2				18.2	%			22.0	%			413.4				17.3	%			20.6	%
State Grants			47.4				1.6	%			1.9	%			52.9				2.2	%			2.6	%
Canadian Financial Aid			9.6				0.3	%			0.4	%			8.4				0.4	%			0.4	%
Total Cash Receipts(4)		$	3,026.2				100.0	%			120.7	%		$	2,391.6				100.0	%			118.9	%
Net Revenue(5)										$	2,508.5											$	2,011.5

FFEL and Direct Loans. The FFEL and Direct Loan programs consist of two types of loans: Stafford loans, which are made available to students regardless of financial need, and Parent Loan for Undergraduate Students (“PLUS”) loans, which are made available to parents of undergraduate students classified as dependents and to graduate and professional students. The primary difference between the FFEL and the Direct Loan programs is that the FFEL program is administered and funded by private sources while the U.S. Department of Education provides the administration and funds for the Direct Loan program. As of July 1, 2010, all new Stafford and PLUS loans will be disbursed through the Direct Loan program.

Under the Stafford loan program an undergraduate student may borrow up to $5,500 for the first academic year, $6,500 for the second academic year and, in certain educational programs, $7,500 for each of the third and fourth academic years. Students who are classified as independent can obtain up to an additional $4,000 for each of the first and second academic years and, depending upon the educational program, an additional $5,000 for each of the third and fourth academic years. Students enrolled in programs higher than a bachelor-level program can borrow up to $20,500 per academic year. Students enrolled in certain graduate-level health professions can receive an additional $12,500 per academic year. PLUS loans may be obtained by parents of a dependent student in an amount not to exceed the difference between the total cost of that student’s education (including allowable educational expenses) and other aid to which that student is entitled.

Pell. Pell grants are the primary component of Title IV programs under which the U.S. Department of Education makes grants to undergraduate students who demonstrate financial need. Every eligible student is entitled to receive a Pell grant; there is no institutional allocation or limit. Effective as of July 1, 2010, the maximum amount of availability of a Pell grant increased to $5,550 per year from a maximum of $5,350 per year in fiscal 2010 and a maximum of $4,731 in fiscal 2009. Additionally, effective as of July 1, 2009, certain students who attend school for an entire fiscal year are in some cases eligible for additional Pell grant awards. The maximum available to an eligible student under the Pell grant program depends on student need and other factors.

FSEOG. FSEOG awards are designed to supplement Pell grants for the neediest undergraduate students. FSEOG grants at our schools generally range in amount from $300 to $1,200 per year. However, the availability of FSEOG awards is limited by the amount of those funds allocated to an institution under a formula that takes into account the size of the institution, its costs and the income levels of its students. We are required to make a 25% matching contribution for all FSEOG program funds disbursed. Resources for this institutional contribution may include institutional grants and scholarships and, in certain U.S. states, portions of state grants and scholarships.

Perkins. Eligible undergraduate students may borrow up to $5,500 under the Perkins program during each academic year, with an aggregate maximum of $27,500 for students with at least two years of study. Eligible graduate students may borrow up to $8,000 in Perkins loans each academic year, with an aggregate maximum of $60,000. Perkins loans have a 5% interest rate and repayment is delayed until nine months after a student ceases enrollment as at least a half-time student. Perkins loans are made available to those students who demonstrate the greatest financial need. Perkins loans are made from a revolving account. Congress has not supplied any new federal capital contributions to the Perkins program in several years. When Congress last funded the program, 75% of the new funding was contributed by the U.S. Department of Education and the remainder by the applicable school. Each school collects payments on Perkins loans from its former students and re-lends those funds to currently enrolled students. Collection and disbursement of Perkins loans is the responsibility of each participating institution. During fiscal 2010, we collected approximately $4.7 million from our former students. We were not required to make any matching contributions in fiscal 2010.

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 2010, all of our schools met this requirement.

ACG and National Smart Programs. Effective July 1, 2006, Congress enacted the Academic Competitive Grant (“ACG”) and the National SMART (Science and Mathematics Access to Retain Talent) Grant. Both of these 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 certificate or degree programs who recently have graduated from a high school at which they were enrolled in a rigorous curriculum. Students may receive a maximum of $750 under ACG during their first academic year and $1,300 during their second academic year. The National SMART Grant is designed for students in their third or fourth academic year with a cumulative grade point average of 3.0 or greater in certain designated bachelor’s degree or higher programs, primarily focused on science and math programs. Eligible students may receive up to $4,000 in each of their third and fourth academic year. Both the ACG and National SMART programs will terminate as of June 30, 2011 pursuant to the most recently adopted HEA reauthorization.

Legislative and Regulatory Action. Political and budgetary concerns can significantly affect Title IV programs. Congress generally reauthorizes the HEA approximately every six years. In August 2008, the HEA was reauthorized through at least September 30, 2014. The HEA reauthorization, among other things, revised the 90/10 Rule, as described in more detail under “— Federal Oversight of Title IV Programs — The ‘90/10 Rule’”, revised the calculation of an institution’s cohort default rate, required additional disclosures and certifications with respect to non-Title IV private loans and prohibited certain activities or relations between lenders and schools to discourage preferential treatment of lenders based on factors not in students’ best interests. In addition, Congress determines federal appropriations for Title IV programs on an annual basis. Congress also can make changes in the laws affecting Title IV programs in those annual appropriations bills and in other laws it enacts between HEA reauthorizations.

The U.S. Senate Committee on Health, Education, Labor and Pensions (“HELP”) held two hearings on the for-profit education industry during the Summer of 2010 and plans to hold more hearings in the Fall. We received a substantial request for documents from the HELP committee on August 5, 2010 in connection with the hearings and are currently responding to the request. The request seeks information and documents relating to our use of Federal resources, including how we recruit and enroll students, set program price or tuition, determine financial aid including private or institutional loans, track attendance, handle withdrawal of students and return of Title IV dollars and manage compliance with the 90/10 Rule. The request also seeks an understanding of the number of students who complete or graduate from programs offered by our schools, how many of those students find new work in their educational area, the debt levels of students enrolling and completing programs and how we track and manage the number of students who risk default within the cohort default rate window. In addition, the HELP committee requested that the Government Accountability Office (“GAO”) perform an independent study of the for-profit education industry. The study is not anticipated to be available until 2011. Since a significant percentage of our revenue is derived from Title IV programs, any action by Congress that significantly reduces Title IV program funding or the ability of our schools or students to participate in Title IV programs would have a material adverse effect on our business, results of operations and financial condition.

In connection with a hearing held by the HELP committee on August 4, 2010, the GAO conducted a series of undercover investigations into the enrollment and recruiting practices at fifteen for-profit institutions of higher education in which GAO investigators with hidden cameras posed as potential new student enrollees. The Chicago campus of Argosy University was included in the undercover investigation. The report presented by the GAO to the HELP committee stated that admissions representatives at all 15 of the for-profit institutions visited made “deceptive or otherwise questionable statements” to the GAO investigators. The statements made by our admissions representative cited by the GAO relate to the overall cost of the program of study and incomplete information about the qualifications of faculty members and student graduation rates. We have requested copies of the interactions between the GAO investigators and our campus personnel and have yet to receive a copy of the videotape.  We will review any evidence provided by the GAO and will take appropriate actions based on any evidence we obtain. Additionally, the President of Argosy University received a letter from HLC requesting a response to the allegations contained in the GAO report. In addition to seeking a response to the specific circumstances identified in the GAO report, HLC requested that Argosy University demonstrate that it has reasonable, sufficient, and effective systems in place to assure appropriate control of employees engaged in the recruiting, marketing or admissions process.  Argosy University is in the process of responding to HLC’s requests.

The hearings held by the HELP committee and the requested GAO review are not formally related to the rulemaking process currently undertaken by the U.S. Department of Education described below. However, the hearings and the requested GAO review could affect the final rules promulgated by the U.S. Department of Education or could lead to further investigations of proprietary schools and the proposal of additional regulations.

The U.S. Department of Education published Notices of Proposed Rulemaking (“NPRMs”) in the Federal Register on June 18, 2010 and July 26, 2010. Pursuant to the NPRMs, the U.S. Department of Education proposes to amend the regulations for institutional eligibility under the HEA, its recognition of accrediting agencies and a number of federal student financial assistance programs, including the FFEL Program, the Direct Loan program and the Pell program. The NPRMs were preceded by negotiated rulemaking sessions in which the U.S. Department of Education consulted with members of the higher education community to discuss issues and attempt to agree on regulatory revisions to address those issues. The public comment period for the NPRM published June 18, 2010 expired on August 2, 2010 and the public comment period for the NPRM published July 26, 2010 will expire on September 9, 2010. The U.S. Department of Education is expected to publish new final regulations by November 1, 2010, in which case the new regulations would take effect on July 1, 2011. The NPRMs address 14 areas and, if promulgated as final regulations consistent with the NPRMs, would make significant changes to certain of the current regulatory requirements, including the following:

•

As more fully described below, eliminating the 12 “safe harbors” for types of activities and payment arrangements of certain persons and entities involved in student recruiting and other activities that an institution may carry out without violating the HEA’s prohibition on the payment of incentive compensation to these persons and entities. One of the safe harbors permits the payment of fixed compensation, such as a fixed annual salary or hourly wage, so long as the fixed compensation is not adjusted up or down more than twice during any 12-month period, and any adjustment to the fixed compensation is not based solely on the number of students recruited, admitted, enrolled or awarded financial aid. The proposed regulation would prohibit an institution from making salary adjustments or providing anything of value to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the awarding of Title IV program funds if the salary adjustment or thing of value is based directly or indirectly upon success in securing enrollments or the award of financial aid.

•

As more fully described below, adopting a definition of “gainful employment” that would result in the ineligibility of programs where (i) students who attended the program have annual loan repayment rates on FFEL and Direct loans of less than 35%, and (ii) students who completed the program have an assumed debt-to-income ratio that is greater than 30% of their discretionary income and greater than 12% of their assumed average annual earnings. The proposed regulation would also impose growth restrictions and warning requirements and employer affirmation restrictions for programs that do not meet certain minimum debt-to-income ratios and FFEL/Direct loan repayment rates.

•

Revising the related definitions and provisions to expand the activities that constitute a substantial misrepresentation by an institution of the nature of its educational programs, its financial charges or the employability of its graduates. Under the proposed regulations, any false, erroneous, or misleading statement, or statement that has a capacity to mislead, that a representative of an institution or person or entity with whom the institution has an agreement makes directly or indirectly to any member of the public, an accrediting agency or a state licensing agency could constitute a misrepresentation by the institution. The proposed regulations also expand the type of statements and the manner in which statements can be made along with the U.S. Department of Education’s ability to enforce their regulation by revocation or limitation of an institution’s eligibility to participate in the Title IV programs.

•

Requiring states to legally authorize institutions through a state governmental agency or entity, subject institutions to adverse action by the state, and establish a process to review and act on complaints concerning institutions and enforce applicable state laws. There are no similar requirements under the existing regulations adopted by the U.S. Department of Education. The HEA requires post-secondary institutions to be authorized to offer programs within the state in which they are physically located in order to provide access to students to financial assistance resources through Title IV but does not require such authorization to be performed by a state agency or entity. One of our schools is located in a state that does not have an existing state agency or entity responsible for post-secondary education.

•

Limiting the percentage of an enrolling institution’s (the “home institution”) program that could be provided by another institution (the “host institution”) if the institutions have a common, for-profit parent. The preamble language to the proposed regulation states that, if the host institution delivers programs in a distinct format, such as distance education, the home institution’s accreditor must approve the mode of delivery. Some of our students take online courses at one of our three schools that offer fully online programs under an agreement between the two schools approved by the home institution’s accrediting agency even though the home institution does not have the capability or approval from its accrediting agency to offer online programs. We are unsure whether the new proposed regulation would limit students attending a home institution from taking online classes at a host institution we own.

•

Defining a “credit hour” and establishing the procedures that accrediting agencies must have in place to determine whether an institution’s assignment of a credit hour is acceptable.

The changes proposed in the NPRMs, or other legislative action and regulatory actions, 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 and could have a material adverse impact on our business. In addition, the failure of a material number of our programs to satisfy the minimum program eligibility standards under the gainful employment regulation would have a material adverse effect on our enrollments, revenues and results of operations.

Other Financial Assistance Sources

Students at several of our U.S. schools participate in state aid programs. In addition, certain students at some of our U.S. schools receive financial aid provided by the U.S. Department of Veterans Affairs, the U.S. Department of the Interior (Bureau of Indian Affairs) and the Rehabilitative Services Administration of the U.S. Department of Education (vocational rehabilitation funding). Effective August 1, 2009, the Post 9/11 Veterans Educational Assistance Act of 2008 provided additional educational funding to eligible veterans who served in the U.S. military. Our schools also provide institutional grants and scholarships to qualified students. In fiscal 2010, institutional scholarships had a value equal to approximately 3% of our net revenues.

There are private supplemental loan programs available to our students, and those programs allow students to repay a portion of their loans after graduation and make loans available to students with lower than average credit ratings. The primary objective of these loan programs is to facilitate funding which students can use to pay a portion of their tuition and fees that they are unable to pay through personal resources or government-backed loan programs. Such loans are without recourse to us or our schools, except for repurchase obligations under the Education Finance Loan program that we introduced in August 2008. Revenues derived indirectly from private loans to students at our schools, excluding loans under the Education Finance Loan program, represented approximately 4.5% and 13.0% of our net revenues in fiscal 2010 and 2009, respectively. Loans to students under the Education Finance Loan program represented approximately 2.6% and 1.0% of our net revenues in fiscal 2010 and 2009, respectively.

Approximately 43% of the private loans in fiscal 2010 were offered by Sallie Mae and its affiliates and serviced by its affiliated loan servicer. During the last two fiscal years, adverse market conditions for consumer student loans resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. In order to provide student loans to certain of our students who do not satisfy standard underwriting criteria, we paid credit enhancement fees to certain lenders (including Sallie Mae) based on the principal balance of each loan disbursed by the lender. An agreement we entered into with Sallie Mae to provide loans to certain students who received a private loan from Sallie Mae prior to April 17, 2008 and continued their education but who did not satisfy Sallie Mae’s current standard underwriting criteria expired in June 2010.

The Education Finance Loan program enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses. Students or a co-borrower must meet certain eligibility and underwriting criteria. Under the program, we purchase loans made by a private lender to students who attend our schools. During fiscal 2010, we awarded approximately $65.9 million of financial aid to students under the Education Finance Loan program. We do not anticipate awarding aid under the Education Finance Loan program in fiscal 2011 to students who had not received aid under the program as of June 30, 2010. We estimate that during fiscal 2011 total aid awarded under the program will be approximately $15 million and we will purchase approximately $25 million in loans under the program.

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 and be subject to other sanctions. Although we endeavor to comply with all federal and state laws and implementing regulations, we cannot guarantee that our interpretation of the relevant rules will be upheld by the U.S. Department of Education or other agencies, or upon judicial review.

If the U.S. Department of Education is dissatisfied with an institution’s administration of Title IV programs, it can transfer, without prior notice or judicial review, the institution from the advance system of receiving Title IV program funds to the cash monitoring or reimbursement method of payment, under which a school may have to advance its own funds to students and provide documentation to the U.S. Department of Education that the funds were properly disbursed prior to receiving reimbursement from Title IV programs.

Violations or alleged violations of Title IV program requirements also could subject us to other civil and criminal proceedings and sanctions, suits under the federal False Claims Act, limitations on our operations and ability to open new locations, or administrative proceedings to impose fines or limit, suspend or terminate our eligibility for participation in Title IV programs. The U.S. Department of Education also may initiate an emergency action to temporarily suspend an institution’s participation in Title IV programs without advance notice if it determines that a regulatory violation creates an imminent risk of material loss of public funds.

The HEA requires each accrediting agency recognized by the U.S. Department of Education to undergo comprehensive periodic review by the U.S. Department of Education to ascertain whether such accrediting agency is adhering to required standards. If an accreditation agency loses its approval by the U.S. Department of Education, the HEA grants affected institutions reasonable opportunity to apply for accreditation from a different agency.

Cohort Default Rates. If an institution’s FFEL/Direct Loan cohort default rate equals or exceeds 25% for each of the three most recent federal fiscal years, it no longer will be eligible to participate in the FFEL/Direct Loan and Pell programs for the remainder of the federal fiscal year in which the U.S. Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If an institution’s FFEL/Direct Loan cohort default rate exceeds 40% for any single fiscal year, it no longer will be eligible to participate in the FFEL, Direct Loan and Pell programs for the remainder of the federal fiscal year in which the U.S. Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. If, at any given point, an institution’s Perkins cohort default rate equals or exceeds 50% for each of the three most recent federal fiscal years, it no longer will be eligible to participate in the Perkins programs for the remainder of the federal fiscal year in which the U.S. Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years.

None of our schools has had an FFEL/Direct cohort default rate of 25% or greater for any of the last three consecutive federal fiscal years. The most recent year for which FFEL/Direct cohort default rates have been calculated is federal fiscal year 2007. The official weighted average combined FFEL/Direct cohort default rate for borrowers at our institutions for federal fiscal year 2007 was 8.0%, and our individual institutions’ rates ranged from 0.5% to 14.4%. The draft weighted average combined FFEL/Direct cohort default rates for borrowers at our schools for fiscal 2008, which will be finalized in September 2010, was 7.5% and our individual schools’ rates ranged from 1.3% to 13.0%.

Under the most recently enacted HEA reauthorization, an institution’s cohort default rate for the 2009 federal fiscal year, as well as subsequent federal fiscal years, will be based on the rate at which its former students who enter repayment during the year default on their FFEL and Direct loans on or before the end of the second year following the year in which they entered repayment. The 2009 cohort default rate will include students who enter repayment between October 1, 2008 and September 30, 2009 and who default on or before September 30, 2011. As a result of the extended default period, most institutions’ respective cohort default rates are expected to materially increase when rates based upon the new calculation method first are published after October 1, 2011. The HEA reauthorization provided some relief from the anticipated increase in cohort default rates by increasing the default rate threshold from 25% to 30% effective October 1, 2011 and by requiring that the rate as calculated under the old methodology will be used in determining sanctions associated with high cohort default rates until the federal fiscal year beginning October 1, 2013.

If an institution’s FFEL/Direct cohort default rate equals or exceeds 25% in any of the three most recent federal fiscal years, or if its cohort default rate for loans under the Perkins program exceeds 15% for the most recent federal award year (July 1 through June 30), that institution may be placed on provisional certification status for up to three years. Provisional certification by itself does not limit an institution’s access to Title IV program funds but does subject that institution to closer review by the U.S. Department of Education and possible summary adverse action if that institution commits a material violation of Title IV program requirements.

As of June 30, 2010, 22 of our schools had Perkins cohort default rates in excess of 15% for students who were to begin repayment during the federal award year ended June 30, 2009, the most recent year for which such rates have been calculated. Funds from the Perkins program did not exceed 0.5% of these schools’ respective net revenues in fiscal 2010. None of these schools has been placed on provisional certification for this reason.

Each of our schools whose students participate in the FFEL/Direct program maintains a student loan default management plan if its default rate equals or exceeds 5%. Those plans provide for extensive loan counseling, methods to increase student persistence and completion rates and graduate employment rates, strategies to increase graduate salaries and, for most schools, the use of external agencies to assist the school with loan counseling and loan servicing after a student ceases to attend that school. These activities are in addition to the loan servicing and collection activities of FFEL/Direct lenders and guaranty agencies. The historical default rates experienced by Argosy University and Western State University College of Law have been relatively low, and therefore these schools have engaged in significantly fewer default management activities.

Regulatory Oversight. The U.S. Department of Education is required to conduct periodic reviews to determine whether to renew the eligibility and certification of every institution participating in Title IV programs. Generally such reviews occur every six years, although it typically occurs after three years for an institution on provisional certification. A denial of renewal of certification precludes a school from continuing to participate in Title IV programs. Currently all of our schools are operating under a Provisional Program Participation Agreement with the U.S. Department of Education due to the change of control of the Company which occurred in connection with the Transaction.

During fiscal 2010, the U.S. Department of Education performed reviews of two of our thirty institutions. An additional program review was performed at one of our institutions in July 2010. We have not received a final report from the U.S. Department of Education for two of the three reviews. In addition, the U.S. Department of Education recently notified us that it plans to perform two additional program reviews in September 2010.

Financial Responsibility Standards. Education institutions participating in Title IV programs must satisfy a series of specific standards of financial responsibility. The U.S. Department of Education has adopted standards to determine an institution’s financial responsibility to participate in Title IV programs. The regulations establish three ratios: (i) the equity ratio, intended to measure an institution’s capital resources, ability to borrow and financial viability; (ii) the primary reserve ratio, intended to measure an institution’s ability to support current operations from expendable resources; and (iii) the net income ratio, intended to measure an institution’s profitability. Each ratio is calculated separately, based on the figures in the institution’s most recent annual audited financial statements, and then weighted and combined to arrive at a single composite score. The composite score must be at least 1.5 in order for the institution to be deemed financially responsible without conditions or additional oversight. If an institution fails to meet any of these requirements, the U.S. Department of Education may set restrictions on the institution’s eligibility to participate in Title IV programs. Institutions are evaluated for compliance with these requirements as part of the U.S. Department of Education’s renewal of certification process and also annually as each institution submits its audited financial statements to the U.S. Department of Education. Following the Transaction, the U.S. Department of Education separately considered our and our schools’ compliance with the financial responsibility requirements at our consolidated level. Our consolidated financial statements did not satisfy the financial responsibility standards for fiscal 2010 on a consolidated basis and will not for the foreseeable future. We are required by the U.S. Department of Education to post a letter of credit and are subject to provisional certification and additional financial and cash monitoring of our disbursements of Title IV funds due to our failure on a consolidated basis to satisfy the financial responsibility standards after the completion of the Transaction resulting from the amount of goodwill recorded and indebtedness we incurred in connection with the Transaction. The amount of this letter of credit is currently set at 10% of the Title IV program funds expected to be received by students at our schools during fiscal 2011. As a result, we posted a $259.8 million letter of credit with the U.S. Department of Education in May 2010. Prior to May 2010, the size of the letter of credit was set at 10% of the Title IV program funds received by students at our schools during the prior fiscal year. The letter of credit, provisional certification and financial and heightened cash monitoring will be in effect until at least June 2011 and are likely to continue beyond that date. The implementation of heightened cash monitoring has not materially impacted our cash flows from operations.

Return of Title IV Funds. Institutions that receive Title IV funds must follow requirements that ensure the return to the federal student financial aid programs of all unearned funds of a student who withdraws from a program. If refunds are not properly calculated and timely paid, institutions are subject to adverse actions by the U.S. Department of Education. We posted a letter of credit for two of our schools in the aggregate amount of $950,000 because our fiscal 2009 independent Title IV compliance audit indicated that such schools had exceeded federal thresholds for allowable number of late refunds during at least one of its two most recent fiscal years. Our independent Title IV compliance audits for fiscal 2010 are currently in process.

Administrative Capability Requirements. Regulations of the U.S. Department of Education specify extensive criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. These criteria require, among other things, that the institution comply with all applicable federal student financial aid regulations, have capable and sufficient personnel to administer Title IV programs, have acceptable methods of defining and measuring the satisfactory academic progress of its students, provide financial aid counseling to its students and submit all reports and financial statements required by the regulations. If an institution fails to satisfy any of these criteria, the U.S. Department of Education may require the repayment of federal student financial aid funds, transfer the institution from the advance system of payment of Title IV program funds to the cash monitoring or reimbursement method of payment, place the institution on provisional certification status or commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.

Restrictions on Operating Additional Schools. The HEA generally requires that certain educational institutions be in full operation for two years before applying to participate in Title IV programs. However, under the HEA and applicable regulations, an institution that is certified to participate in Title IV programs may establish an additional location and apply to participate in Title IV programs at that location without reference to the two-year requirement if such additional location satisfies all other applicable requirements. In addition, a school that undergoes a change of ownership resulting in a change of control (as defined under the HEA) must be reviewed and recertified for participation in Title IV programs under its new ownership. All of our schools are currently provisionally certified due to the Transaction. During the time when a school is provisionally certified, it may be subject to summary adverse action for a material violation of Title IV program requirements and may not establish additional locations without prior approval from the U.S. Department of Education. However, provisional certification does not otherwise limit an institution’s access to Title IV program funds. Our expansion plans are based, in part, on our ability to add additional locations and acquire schools that can be recertified. The U.S. Department of Education informed us following the Transaction that it would not seek to impose growth restrictions on any of our schools as a result of the Transaction. Additionally, in May 2010 the U.S. Department of Education notified us that it will process requests for new locations and programs under our existing expansion plans and requested notification from us of any expansion beyond our existing plans in order to analyze those plans.

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 each of two consecutive fiscal years were derived from Title IV programs. If an institution loses its Title IV eligibility under the 90/10 Rule, it may not reapply for eligibility until the end of two fiscal years. Institutions which fail to satisfy the 90/10 Rule for one fiscal year are placed on provisional certification. Compliance with the 90/10 Rule is measured at the end of each of our fiscal years. For our institutions that disbursed federal financial aid during fiscal 2010, the percentage of revenues derived from Title IV programs on a cash accounting basis ranged from approximately 89% to 58%, with a weighted average of approximately 77% as compared to a weighted average of approximately 70% in fiscal 2009. In order to ensure proper reporting of our 90/10 rates, we have engaged an independent accounting firm to perform a detailed review of the 90/10 rate of one of our institutions representing approximately 1.6% of our net revenues in fiscal 2010 which had a 90/10 rate of 89% in fiscal 2010. We expect to receive the results of the detailed review in the Fall of 2010. We anticipate that our 90/10 rates will continue to increase in fiscal 2011 due to recent increases in grants from the Pell program and other Title IV loan limits, coupled with decreases in the availability of state grants and private loans and the inability of households to pay cash due to the current economic climate. While our consolidated 90/10 rate for fiscal 2011 is projected to remain under the 90% threshold, we project that some of our institutions will exceed the 90% threshold if we do not continue to successfully implement certain changes to these institutions during the fiscal year which would decrease their 90/10 rate, such as increases in international and military students and certain internal restructuring designed to achieve additional operational efficiencies. Additionally, the revised rules included in the most recent HEA reauthorization include relief through June 30, 2011 from a $2,000 increase in the annual Stafford loan availability for undergraduate students which became effective July 1, 2008. We anticipate that our 90/10 rate will increase substantially in fiscal 2012 in the event that relief from this additional $2,000 is not extended beyond June 30, 2011, which would adversely affect our ability to comply with the 90/10 Rule.

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 1, 2003, the U.S. Department of Education adopted regulations to attempt to clarify this so-called “incentive compensation” law. The regulations identify 12 “safe harbor” 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. Although we cannot provide any assurances that the U.S. Department of Education will not find deficiencies in our compensation plans, we believe that our current compensation plans are in compliance with the HEA and the regulations currently promulgated by the U.S. Department of Education.

The U.S. Department of Education recently proposed regulations that would eliminate the current 12 safe harbors. The proposed regulations do not establish clear criteria for compliance in all circumstances. Among other things, the U.S. Department of Education has announced that under the proposed rules an institution would not be permitted to consider an employee’s success in securing student enrollments or the award of financial aid as a basis for a change in compensation, nor consider institutional goals based on such success; that an institution would not be permitted to pay bonuses to employees on the basis of students who complete their programs of instruction; and that the incentive compensation prohibition would apply to any activities that are conducted for the purpose of enrolling students or awarding financial aid. The proposed regulations broadly define employees considered to be “indirectly engaged” in student recruiting and could impact bonuses paid to all employees of a post-secondary institution, including executive officers. The U.S. Department also has stated that it will not review individual schools’ compensation plans prior to their implementation. If the proposed regulations are adopted as final regulations, we would be required to change our compensation practices for our admissions representatives and may be required to revise compensation programs for other employees in our organization, and these changes could have a material adverse impact on our enrollments and our business.

The Proposed “Gainful Employment Rule”. The U.S. Department of Education published a NPRM on July 26, 2010 that, if promulgated as final regulations consistent with the NPRM, would cause significant changes to our business by implementing a definition of the term “gainful employment”. Under the HEA, for-profit post-secondary institutions are required to provide programs which prepare students for “gainful employment” in a recognized profession. The term “gainful employment” currently is not defined in the HEA and has not been previously defined by regulations adopted by the U.S. Department of Education. Under the NPRM, programs would be considered to lead to gainful employment based on two tests, one of which is based on total debt-to-income ratios and the other of which is based on Title IV loan repayment rates. Programs would be determined to be fully eligible, restricted or ineligible based on the results of the two tests. Additionally, if certain minimum thresholds for both tests are not satisfied for a program, institutions would be required to warn students that they may have difficulty repaying loans incurred in connection with attending the program and to disclose the results of both tests to current and prospective students. The following table summarizes the tests under the definition of gainful employment included in the NPRM:

				DEBT BURDEN
				(A)				(B)
				Above 12% of				Below 8% of
				Earnings AND 30%		Neither Column (A)		Earnings OR 20%
				of Discretionary		or Column (B)		of Discretionary
				Income		Applies		Income
PRINCIPAL REPAYMENT RATE		Above 45%		Fully Eligible; Warning Required		Fully Eligible; Warning Required		Fully Eligible
		35% — 45%		Restricted; Warning Required		Restricted; Warning Required		Fully Eligible; Warning Required
		Below 35%		Ineligible		Restricted; Warning Required		Fully Eligible; Warning Required

The Title IV loan repayment rate is generally calculated by dividing the total original outstanding principal balance (plus capitalized interest, if any) of FFEL and Direct loans that are owed by students who attended the program and that entered repayment during the prior four federal fiscal years into the total original outstanding principal balance on such loans that either were paid in full or had principal payments made during the most recent fiscal year. FFEL and direct loans of borrowers who qualify for an in-school deferment or public service deferment or which entered repayment after March 31 of the most recent fiscal year are excluded from the calculation. The U.S. Department of Education has stated that loans would not be counted as in repayment if the borrowers are meeting their legal obligations but are not actively repaying their loans such as loans in deferment or forbearance.

The debt-to-income test is generally based on the annual loan payment as a percentage of the students’ average annual earnings and as a percentage of discretionary income. The annual loan payment is calculated by determining the median loan debt of students who completed the program during the three most recent award years prior to the earnings year and using this amount to calculate an annual loan payment based on a ten year repayment schedule and the current annual interest rate on federal Direct unsubsidized loans (currently at 6.8%). Loan debt includes Title IV Program loans, other than Parent PLUS loans, and any private educational loans or debt obligations arising from institutional financing plans. Loan debt does not include any debt obligations arising from student attendance at prior or subsequent institutions unless the other and current institutions are related entities. Average annual earnings is calculated using actual earnings data obtained by the U.S. Department of Education from the Social Security Administration or other federal agency for each student who completed the program during the three most recently completed award years prior to the “earnings year”, which is the calendar year immediately preceding the calculation. Discretionary income is determined based on the students’ average annual earnings less 150% of the poverty line for a single individual as calculated by the U.S. Department of Health and Human Services.

Programs that have a FFEL/Direct loan repayment rate of less than 35% and an assumed debt burden of greater than 12% of earnings and 30% of discretionary income would be declared ineligible for participation in the Title IV programs. For the federal award year beginning July 1, 2012, the total number of ineligible programs would be limited to all Title IV eligible programs comprising 5% of the students in each of the categories of certificate programs, Associates degrees, Baccalaureate degrees, and graduate and professional degrees based on the lowest performing programs in each category. Programs that are declared ineligible may not disburse Title IV funds to students who enter the program after the date of notice from the U.S. Department of Education. Students who enrolled in the program prior to the date of the notice may continue receiving Title IV funds for the remainder of the award year and the immediately following award year. Other programs which would be ineligible but for the 5% cap are placed on restricted status. Institutions with one or more programs that become ineligible may be subject to provisional certification by the U.S. Department of Education.

Programs that would be required to warn students of potentially excessive levels of debt associated with the program must include a prominent warning in their promotional, registration and other materials associated with the program and all admissions meetings with prospective students and disclose to current and prospective students the program’s most recent repayment and debt-to-income rates.

Programs that are classified as restricted would be limited to enrolling a number of students receiving Title IV aid equal to the average number of students enrolled in the program during the prior three award years. Restricted programs must also provide the same warnings to all students in the program and annually provide affirmations from unaffiliated employers that the program aligns with positions at the employers’ businesses and that there are projected job vacancies or expected demand for occupations at those businesses. The number and locations of the businesses for which affirmation is required must be commensurate with the anticipated size of the program. Institutions with one or more programs classified as restricted may be subject to provisional certification by the U.S. Department of Education.

The proposed regulations would require institutions to apply to the U.S. Department of Education for approval before offering an additional program subject to the requirements of the regulations. Institutions would be required to submit similar employer affirmations and projected student enrollments for the next five years for each location of the institution that will offer the program. In connection with its approval, the U.S. Department of Education may restrict the approval for an initial period based on the projected growth estimates and the demonstrated ability of the institution to offer programs that comply with the gainful employment restrictions. The U.S. Department of Education estimates that approximately 55% of currently eligible programs will be classified as restricted under the proposed regulation. Final comments on the gainful employment NPRM are due by September 9, 2010. The U.S. Department of Education is expected to publish final regulations in the Federal Register by November 1, 2010, in which case the new regulations would take effect on July 1, 2011. The proposed regulations require a significant amount of data to determine whether a program is fully eligible, restricted or ineligible, some of which, such as student indebtedness, principal repayment rates and annual student earnings, is not currently available to us. Accordingly, we have been unable to project which of our programs would be ineligible, restricted or fully eligible under the proposed regulation due to the unavailability of data that is relevant to such determinations. In order to assist institutions in estimating the potential impact of the proposed gainful employment rule, the U.S. Department of Education released data on student-loan principal repayment rates at institutions of

higher education on August 13, 2010. The U.S. Department of Education estimated the repayment rate — by institution at the organizational level that executes a program participation agreement with the U.S. Department of Education — as of September 30, 2009. Based on the data released by the U.S. Department of Education, the overall principal repayment rate for our institutions as of September 30, 2009 was approximately 38% as compared to the average principal repayment for all proprietary institutions of 36%. The principal repayment rates for each of our education systems on a consolidated basis were as follows: The Art Institutes — 39%; Argosy University — 38%; Brown Mackie Colleges — 22%; South University — 39%; and Western State University College of Law — 48%. The principal repayment rates as of September 30, 2009 for our 30 institutions recognized by the U.S. Department of Education ranged from 56% to 19%. The U.S. Department of Education has stated that principal repayment rate data is not available on an individual program basis and has not released any information about income earned by program graduates. Due to the unavailability of data that is relevant to such determinations, no assurances can be given related to the number of our programs which would be restricted or ineligible under the regulation as currently proposed. The failure of a material number of our programs to satisfy the minimum program eligibility standards under the final eligibility regulations promulgated by the U.S. Department of Education would have a material adverse effect on our enrollments, revenues and results of operations. In addition, limitations on the number of students eligible to receive Title IV funds in a program and on the introduction or growth of new programs could have a material adverse effect on our enrollments, revenues and results of operations. Further, we could be subject to lawsuits from students if a program is declared ineligible for participation in the Title IV programs or restricted on the number of students eligible to participate based on prior students attending the program. No assurances can be given that the excessive debt warnings we may be required to provide to students would not have a material adverse impact on our ability to recruit prospective students to or retain existing students at our schools.

State Authorization and Accreditation Agencies

Each of our U.S. campuses, including our campuses that provide online programs, is authorized to offer education programs and grant degrees or diplomas by the state in which such school is physically located. The level of regulatory oversight varies substantially from state to state. In some U.S. states, the schools are subject to licensure by the state education agency and also by a separate higher education agency. Some states have sought to assert jurisdiction over online educational institutions that offer educational services to residents in the state or that advertise or recruit in the state, notwithstanding the lack of a physical location in the state. State laws may establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility and other operational matters. State laws and regulations may limit our ability to obtain authorization to operate in certain states or to award degrees or diplomas or offer new degree programs. Certain states prescribe standards of financial responsibility that are different from those prescribed by the U.S. Department of Education. If we are found not to be in compliance with an applicable state regulation and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or enroll students in that state and may have to cease providing services and advertising in that state, which could have a material adverse effect on our student enrollment and revenues.

Each of our U.S. schools is accredited by a national or regional accreditation agency recognized by the U.S. Department of Education, and some educational programs are also programmatically accredited. The level of regulatory oversight and standards can vary based on the agency. Certain accreditation agencies prescribe standards that are different from those prescribed by the U.S. Department of Education.

If a school does not meet its accreditation or state requirements, its accreditation and/or state licensing could be limited, modified, suspended or terminated. Failure to maintain licensure or institutional accreditation makes a school ineligible to participate in Title IV programs. As discussed above under “Legislative and Regulatory Action,” the U.S. Department of Education has proposed regulations that would require institutions to be authorized by a state agency meeting certain requirements in order to be eligible to participate in the Title IV programs. Certain of our schools are located in states which do not have an existing state agency or entity or are not required to have an explicit approval from the state agency or entity. If the proposed regulations are adopted, certain of our institutions may be required to obtain additional approvals in the states in which they are physically located and may be unable to do so if the State does not establish an agency or entity meeting the proposed requirements.

Certain of the state authorizing agencies and accrediting agencies with jurisdiction over our schools also have requirements that may, in certain instances, limit our ability to open a new school, acquire an existing school, establish an additional location of an existing school or add new educational programs.

Canadian Regulation and Financial Aid

The Art Institute of Vancouver, which represented approximately 1.1% of our net revenues in fiscal 2010, is subject to regulation in the Province of British Columbia and in the provinces in which it recruits students. Depending on their province of residence, our Canadian students may receive loans under the federally funded Canada Student Loan Program and/or provincial funding from their province of residence. Canadian schools must meet eligibility standards to administer these programs and must comply with all relevant statutes, rules, regulations and requirements. We believe that The Art Institute of Vancouver currently holds all necessary registrations, approvals and permits and meets all eligibility requirements to administer these governmental financial aid programs. If The Art Institute of Vancouver cannot meet these and other eligibility standards or fails to comply with applicable requirements, it could have a material adverse effect on our business, results of operations, cash flows or financial condition.

The British Columbia government, through its Ministry of Advanced Education and Labour Market Development, regulates private career colleges through an arms length accreditation and registration body called the Private Career Training Institutions Agency of British Columbia (“PCTIA”) and provides financial assistance to eligible students through the StudentAid BC (“SABC”). The student aid program includes a federal component under the Canada Student Loan Program and a provincial portion administered through the provincial SABC program. In order to maintain the right to administer student assistance, The Art Institute of Vancouver must abide by the rules, regulations and administrative manuals and Memorandum of Agreements with the Canada Student Loan Program and the SABC programs.

Institutions cannot automatically acquire student aid designation through the acquisition of other student aid eligible institutions. In the event of a change of ownership, including a change in controlling interest, the Ministry of Advanced Education and Labour Market Development as well as SABC require evidence that the institution has continued capacity and a formal undertaking to comply with registration and student aid eligibility requirements. Given that the Province of British Columbia and PCTIA periodically revise their respective regulations and other requirements and change their respective interpretations of existing laws and regulations, we cannot assure you that the provincial government and PCTIA will agree with our interpretation of each requirement.

Canadian schools are required to audit their administration of student aid programs annually or as otherwise directed by SABC. We believe that we have complied with these requirements.

Employees

At June 30, 2010, we employed approximately 13,400 full time employees, of whom approximately 3,000 were faculty members, and approximately 2,100 part-time employees, of whom approximately 1,800 were faculty members. In addition, we also employed approximately 6,800 adjunct faculty members at June 30, 2010. Adjunct faculty members are employed on a term-to-term basis, while part-time faculty members work a regular part-time schedule.

Competition

The post-secondary education market is highly fragmented and competitive. Our schools compete for students with traditional public and private two-year and four-year colleges and universities and other for-profit providers, including those that offer distance learning programs. Many public and private colleges and universities, as well as other for-profit providers, offer programs similar to those we offer. Public institutions receive substantial government subsidies, and both public and private institutions have access to government and foundation grants, tax-deductible contributions and other financial resources generally not available to for-profit providers. Accordingly, public and private institutions may have facilities and equipment superior to those in the for-profit sector and often can offer lower effective tuition prices. Some of our competitors in both the public and private sectors also have substantially greater financial and other resources than we do.

Seasonality in Results of Operations

Our quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments at our schools. The seasonality of our business has decreased over the last several years due to an increased percentage of students enrolling in online programs, which generally experience fewer seasonal fluctuations than campus-based programs. Our first quarter is typically our lowest revenue recognition quarter due to student vacations.

Availability of Reports

We make available financial information, news releases and other information on our Web site at www.edmc.edu. Information contained on our Web site is not part of this Form 10-K or our other filings with the Securities and Exchange Commission. There is a direct link from the Web site to our Securities and Exchange Commission filings, where our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge as soon as reasonably practicable after we file such reports and amendments with, or furnish them to, the Securities and Exchange Commission. Investors may also contact Investor Relations at 210 Sixth Avenue, 33 ^rd Floor, Pittsburgh, Pennsylvania 15222 or call (412) 562-0900 to obtain a hard copy of these reports without charge.

ITEM 1A. RISK FACTORS

The following risks comprise all the material risks of which we are aware; however, these risks and uncertainties may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also adversely affect our business or financial performance. If any of the events or developments described below actually occurred, it could have a material adverse effect on our business, financial condition or results of operations.

RISKS RELATED TO OUR HIGHLY REGULATED INDUSTRY

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

A majority of our net revenues are indirectly derived from federal student financial aid programs pursuant to Title IV of the HEA. Our participation in Title IV programs is subject to certification and oversight by the U.S. Department of Education and is further conditioned upon approvals granted by other agencies. Each of our schools also must obtain and maintain approval to enroll students, offer instruction and grant credentials from the state authorizing agency in the state in which the school is located. Such approval is also a precondition to the ability of our students to participate in Title IV programs. Participation in Title IV programs also requires each school to be accredited by an accrediting agency recognized by the U.S. Department of Education as a reliable authority on institutional quality and integrity. Accreditation is, in turn, conditioned upon the maintenance of applicable state authorization. Our schools also must comply with the requirements of any loan guarantee agencies that guarantee certain federal student loans made to our schools’ students, the requirements of such state financial aid programs as may be available to our students and the requirements of specialized accrediting agencies which oversee educational quality in particular program areas. 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, substantially change existing programs or change our corporate or ownership structure. The agencies that regulate our operations periodically revise their requirements and modify their interpretations of existing requirements. See “Business — Accreditation”, “Business — Student Financial Assistance”, “Business — Federal Oversight of Title IV Programs”, “Business — State Authorization and Accreditation Agencies” and “Business — Canadian Regulation and Financial Aid”.

If any of our schools were to violate or fail to meet any of these legal and regulatory requirements, we could suffer monetary liabilities or assessments, limitations on our operating activities, loss of accreditation, limitations on our ability to add new schools or offer new programs, termination of or limitations on the school’s ability to grant degrees and certificates, or limitations on or suspension or termination of the school’s eligibility to participate in federal student financial aid programs. A significant portion of our students rely on federal student financial aid funds to finance their education. We cannot predict with certainty how all of these requirements will be applied or interpreted by a regulatory body or whether each of our schools will be able to comply with all of the applicable requirements in the future.

If we fail to obtain periodic recertifications for our schools to participate in Title IV programs, or if our certifications are withdrawn by the U.S. Department of Education prior to the next scheduled recertification, students at the affected schools would no longer be able to receive Title IV program funds.

Our schools are required to seek recertifications from the U.S. Department of Education periodically in order to participate in Title IV programs. The current provisional certifications of our schools expire as follows: five schools expire during fiscal 2011; 23 schools expire during fiscal 2012; and two schools expire during the first quarter of fiscal 2013. The U.S Department of Education typically performs a program review of all Title IV eligible institutions every six years. Two such reviews of our institutions were performed in fiscal 2010 and an additional review occurred in July 2010. We have not received a final report from the U.S. Departments of Education for two of these three reviews. We were recently notified by the U.S. Department of Education that it plans to perform two additional program reviews in September 2010. The U.S. Department of Education will also review our schools’ continued certifications in the event that we undergo a change of ownership and control pursuant to U.S. Department of Education regulations. In addition, the U.S. Department of Education may take emergency action to suspend any of our schools’ certification without advance notice if it receives reliable information that a school is violating Title IV requirements and determines that immediate action is necessary to prevent misuse of Title IV funds. If the U.S. Department of Education were to decide not to renew or to withdraw our certification to participate in Title IV programs at any time, our students no longer would be able to receive Title IV program funds, which would have a material adverse effect on our enrollments, revenues and results of operations.

The U.S. Department of Education has proposed a number of new regulations that, if adopted in their current form, would result in significant changes to the way we operate our business and increases to the administrative cost of complying with the regulations.

The U.S. Department of Education published NPRMs in the Federal Register on June 18, 2010 and July 26, 2010. Pursuant to the NPRMs, the U.S. Department of Education proposes to amend the regulations for institutional eligibility under the HEA, its recognition of accrediting agencies and a number of federal student financial assistance programs, including the FFEL program, the Direct Loan program and the Pell program. The public comment period for the NPRM published June 18, 2010 expired on August 2, 2010 and the public comment period for the NPRM published July 26, 2010 will expire on September 9, 2010. The U.S. Department of Education is expected to publish new final regulations by November 1, 2010, in which case the new regulations would take effect on July 1, 2011. The NPRMs address 14 areas and, if promulgated as final regulations consistent with the NPRMs, would make significant changes to certain of the current regulatory requirements, including the following:

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As more fully described in “Business — Federal Oversight of Title IV Programs”, eliminating the 12 “safe harbors” for types of activities and payment arrangements of certain persons and entities involved in student recruiting and other activities that an institution may carry out without violating the HEA’s prohibition on the payment of incentive compensation to these persons and entities. One of the safe harbors permits the payment of fixed compensation, such as a fixed annual salary or hourly wage, so long as the fixed compensation is not adjusted up or down more than twice during any 12-month period, and any adjustment to the fixed compensation is not based solely on the number of students recruited, admitted, enrolled or awarded financial aid. The proposed regulation would prohibit an institution from making salary adjustments or providing anything of value to any person or entity engaged in any student recruitment or admission activity or in making decisions regarding the awarding of Title IV program funds if the salary adjustment or thing of value is based directly or indirectly upon success in securing enrollments or the award of financial aid.

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As more fully described in “Business — Federal Oversight of Title IV Programs”, defining “gainful employment” that would result in the ineligibility of programs where (i) students who attended the program have annual loan repayment rates on FFEL and Direct loans of less than 35%, and (ii) students who completed the program have an assumed debt-to-income ratio that is greater than 30% of their discretionary income and greater than 12% of their assumed average annual earnings. The proposed regulation would also impose growth restrictions and warning requirements and employer affirmation restrictions for programs that do not meet certain minimum debt-to-income ratios and FFEL/Direct loan repayment rates.

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Revising the related definitions and provisions to expand the activities that constitute a substantial misrepresentation by an institution of the nature of its educational programs, its financial charges or the employability of its graduates. Under the proposed regulations, any false, erroneous, or misleading statement, or statement that has a capacity to mislead, that a representative of an institution or person or entity with whom the institution has an agreement makes directly or indirectly to any member of the public, an accrediting agency or a state licensing agency could constitute a misrepresentation by the institution. The proposed regulations also expand the type of statements and the manner in which statements can be made. The proposed regulations also expand the U.S. Department of Education’s ability to enforce their regulation by revocation or limitation of an institution’s eligibility to participate in the Title IV programs.

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As more fully described below, requiring states to legally authorize institutions through a state governmental agency or entity, subject institutions to adverse action by the state, and establish a process to review and act on complaints concerning institutions and enforce applicable state laws.

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Limiting the percentage of a home institution’s program that could be provided by a host institution if the institutions have a common, for-profit parent. The preamble language to the proposed regulation states that, if the host institution delivers programs in a distinct format, such as distance education, the home institution’s accreditor must approve the mode of delivery. Some of our students take online courses at one of our three schools that offer fully online programs under an agreement between the two schools approved by the home institution’s accrediting agency even though the home institution does not have the capability or approval from its accrediting agency to offer online programs. We are unsure whether the new proposed regulation would limit students attending a home institution from taking online classes at a host institution we own.

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Defining a “credit hour” and establishing the procedures that accrediting agencies must have in place to determine whether an institution’s assignment of a credit hour is acceptable.

The changes proposed in the NPRMs, or other legislative action and regulatory actions, could increase our administrative costs and require us to adjust our practices in order for our schools to comply fully with Title IV program requirements. For example, the proposed change to regulations prohibiting the payment of incentive compensation to admissions representatives would require us to substantially revise our current compensation practices for our admissions representatives, which could have an adverse affect on our ability to recruit new students and result in our significantly increasing the number of employees who recruit students. If the final regulation is not revised, we may also be required to substantially revise the compensation programs for our executive officers and senior administrative staff at our schools, which currently include a bonus component based on the achievement of certain financial metrics and performance goals. The U.S. Department also has stated that it will not review individual schools’ compensation plans prior to their implementation. In addition, the broad scope of a number of the regulations such as the proposed definition of a substantial misrepresentation will increase our exposure to civil litigation by making it easier for individuals to file qui tam actions under the False Claims Act alleging a violation of the Title IV program regulations.

The definition of “gainful employment” proposed by the U.S. Department of Education could result in our inability to offer a number of programs currently offered to students and substantially decrease the attractiveness of our programs to prospective students, which could reduce the number of students attending our schools and revenue, earnings and cash flows.

The NPRM published by the U.S. Department of Education on July 26, 2010, if promulgated as final regulations consistent with the NPRM, would cause significant changes to our business by implementing a definition of the term “gainful employment”. Under the HEA, for-profit post-secondary institutions are required to prepare students for “gainful employment” in a recognized profession. The term “gainful employment” currently is not defined in the HEA and has not been previously defined by regulations adopted by the U.S. Department of Education. Under the NPRM, programs would be considered to lead to gainful employment based on two tests, one of which is based on total debt-to-income ratios and the other of which is based on Title IV loan repayment rates. Programs would be determined to be fully eligible, restricted or ineligible based on the results of the two tests. Additionally, programs would be required to warn students that they may have difficulty repaying loans incurred in connection with attending a program if certain minimum thresholds for both tests are not satisfied. The proposed regulations require a significant amount of data to determine whether a program is fully eligible, restricted or ineligible, some of which, such as student indebtedness, principal repayment rates and annual student earnings, is not currently available to us. Accordingly, we have been unable to project which of our programs would be ineligible, restricted or fully eligible under the proposed regulation due to the unavailability of data that is relevant to such determinations. Due to the unavailability of such data, no assurances can be given related to the number of our programs which would be restricted or ineligible under the regulation as currently proposed. The failure of a material number of our programs to satisfy the minimum eligibility standards promulgated by the U.S. Department of Education would have a material adverse effect on our enrollments, revenues and results of operations. In addition, limitations on the number of students eligible to receive Title IV funds in a program and on the introduction or growth of new programs could have a material adverse effect on our enrollments, revenues and results of operations. Further, we could be subject to lawsuits from students if a program is declared ineligible for participation in the Title IV programs or restricted on the number of students eligible to participate based on prior students attending the program. No assurances can be given that the excessive debt warnings we may be required to provide to students would not have a material adverse impact on our ability to retain or recruit prospective students to our schools.

Congress may change eligibility standards or reduce funding for federal student financial aid programs, or other governmental or regulatory bodies may change similar laws or regulations relating to other student financial aid programs, which could reduce the growth of our student population and revenue.

Political and budgetary concerns can significantly affect Title IV programs and other laws and regulations governing federal and state student financial aid programs. Title IV programs are made available pursuant to the provisions of the HEA, and the HEA must be reauthorized by Congress approximately every six years. Independent of reauthorization, Congress must annually appropriate funds for Title IV programs. In August 2008, the most recent reauthorization of the HEA was enacted, continuing the Title IV HEA programs through at least September 30, 2014. Future reauthorizations or appropriations may result in numerous legislative changes, including those that could adversely affect our ability to participate in the Title IV programs and the availability of Title IV and non-Title IV funding sources for our students. Congress also may impose certain requirements upon the state or accrediting agencies with respect to their approval of our schools. Any action by Congress or the U.S. Department of Education that significantly reduces funding for the federal student financial aid programs or the ability of our schools or students to participate in these programs would have a material adverse effect on our student population and revenue. Legislative action also may increase our administrative costs and require us to modify our practices in order for our schools to comply fully with applicable requirements.

If we do not meet specific financial responsibility ratios and other compliance tests established by the U.S. Department of Education, our schools may lose eligibility to participate in federal student financial aid programs, which may result in a reduction in our student enrollment and an adverse effect on our results of operations.

To participate in federal student financial aid programs, an institution, among other things, must either satisfy certain quantitative standards of financial responsibility on an annual basis or post a letter of credit in favor of the U.S. Department of Education and possibly accept other conditions or limitations on its participation in the federal student financial aid programs. As of June 30, 2010, we did not meet the required quantitative measures of financial responsibility on a consolidated basis.

We are required by the U.S. Department of Education to post a letter of credit and are subject to provisional certification and additional financial and cash monitoring of our disbursements of Title IV funds due to our failure on a consolidated basis to satisfy the financial responsibility standards after the completion of the Transaction resulting from the amount of goodwill we recorded and indebtedness we incurred in connection with the Transaction. The amount of this letter of credit is currently set at 10% of the Title IV program funds expected to be received by students at our schools during fiscal 2011. As a result, we posted a $259.8 million letter of credit with the U.S. Department of Education in May 2010. Prior to May 2010, the size of the letter of credit was set at 10% of the Title IV program funds received by students at our schools during the preceding fiscal year. Outstanding letters of credit reduce the availability under our revolving credit facility.

We expect to continue to not satisfy the U.S. Department of Education’s quantitative measure of financial responsibility for the foreseeable future. As a result, we expect each of our schools to be required to continue on provisional certification for additional three-year periods. The current provisional certifications of our schools expire as follows: five schools expire during fiscal 2011; 23 schools expire during fiscal 2012; and two schools expire during the first quarter of fiscal 2013. We expect that the U.S. Department of Education’s evaluation of our schools’ financial responsibility on the basis of our consolidated financial statements will continue through future annual reviews and may result in continuation of the requirement that we maintain a letter of credit, provisional certification and financial and cash monitoring in future years. Any conditions or limitations on our participation in the federal student financial aid programs in addition to the letter of credit, provisional certification and additional financial and cash monitoring could adversely affect our net income and student population. We expect to be required to renew the letter of credit at the 10% level for as long as our schools remain provisionally certified, although the U.S. Department of Education could increase the amount substantially. There can be no assurance that the U.S. Department of Education will not require further restrictions as a condition of the renewal of our certification. Any failure to meet specific financial responsibility ratios and other compliance tests established by the U.S. Department of Education could affect our students’ ability to access student financial assistance programs, which would adversely affect our net income and student population.

An institution may lose its eligibility to participate in some or all of the federal student financial aid programs if defaults by its students on their federal student loans exceed specified rates. Certain of our schools have default rates in excess of specified rates in the Federal Perkins Loan Program, which is not a material federal student aid program for us or any of our institutions. Though we believe our schools do not exceed either the specified rates for student default for our material programs or the percentage of revenue limitation test, loss of eligibility to participate in the federal student financial aid programs by one or more of our schools could have a material adverse effect on our student population and revenue.

The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages. Providers of federally guaranteed student loans have also experienced recent increases in default rates. Any increase in interest rates could contribute to higher default rates with respect to repayment of our students’ education loans. Such higher default rates may adversely impact our eligibility to participate in Title IV programs, which could result in a significant reduction in our student population and our profitability.

In the event of a bankruptcy filing by any of our schools, the schools filing for bankruptcy would not be eligible to receive Title IV program funds, notwithstanding the automatic stay provisions of federal bankruptcy law, which would make any reorganization difficult to implement. In addition, our other schools may be held to be jointly responsible for financial aid defaults experienced at the bankrupt schools.

If any of our schools either fails to demonstrate “administrative capability” to the U.S. Department of Education or violates other requirements of Title IV programs, the U.S. Department of Education may impose sanctions or terminate that school’s participation in Title IV programs.

Regulations adopted by the U.S. Department of Education specify criteria an institution must satisfy to establish that it has the requisite “administrative capability” to participate in Title IV programs. These criteria require, among other things, that the institution:

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comply with all applicable federal student financial aid regulations;

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have capable and sufficient personnel to administer the federal student financial aid programs;

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have acceptable methods of defining and measuring the satisfactory academic progress of its students;

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provide financial aid counseling to its students; and

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submit all reports and financial statements required by the regulations.

If an institution fails to satisfy any of these criteria, or any other of the legal and regulatory requirements of Title IV programs, the U.S. Department of Education may:

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require the repayment of federal student financial aid funds improperly disbursed;

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transfer the institution from the “advance” system of payment of federal student financial aid funds to the “reimbursement” system of payment or “cash monitoring”;

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place the institution on provisional certification status; or

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commence a proceeding to impose a fine or to limit, suspend or terminate the participation of the institution in Title IV programs.

If one or more of our schools loses or is limited in its access to, or is required to repay, federal student financial aid funds due to a failure to demonstrate administrative capability or to comply with other requirements of Title IV programs, our business could be materially adversely affected.

If our institutions do not comply with the 90/10 Rule, they will lose eligibility to participate in federal student financial aid programs.

Regulations promulgated under the HEA require all for-profit education institutions to comply with the 90/10 Rule, which imposes sanctions on participating institutions that derive more than 90% of their total revenue on a cash accounting basis from Title IV programs. An institution that derives more than 90% of its total revenue on a cash accounting basis from the Title IV programs for each of two consecutive fiscal years loses its eligibility to participate in Title IV programs and is not permitted to reapply for eligibility until the end of the following two fiscal years. Institutions which fail to satisfy the 90/10 Rule for one fiscal year are placed on provisional certification. Compliance with the 90/10 Rule is measured at the end of each of our fiscal years. For our institutions that disbursed federal financial aid during fiscal 2010, the percentage of revenues derived from Title IV programs ranged from approximately 89% to 58%, with a weighted average of approximately 77% as compared to a weighted average of approximately 70% in fiscal 2009. In order to ensure proper reporting of our 90/10 rates, we have engaged an independent accounting firm to perform a detailed review of the 90/10 rate of one of our institutions representing approximately 1.6% of our net revenues in fiscal 2010 which had a 90/10 rate of 89% in fiscal 2010. We expect to receive the results of the detailed review in the Fall of 2010. We anticipate that our 90/10 rates will continue to increase in fiscal 2011 due to recent increases in grants from the Pell program and other Title IV loan limits, coupled with decreases in the availability of state grants and private loans and the inability of households to pay cash due to the current economic climate. While our consolidated 90/10 rate for fiscal 2011 is projected to remain under the 90% threshold, we project that some of our institutions will exceed the 90% threshold if we do not continue to successfully implement certain changes to these institutions during the fiscal year which would decrease their 90/10 rate, such as increases in international and military students and certain internal restructuring designed to achieve additional operational efficiencies. Additionally, the revised rules included in the new HEA reauthorization include relief through June 30, 2011 from a $2,000 increase in the annual Stafford loan availability for undergraduate students which became effective July 1, 2008. We anticipate that our 90/10 rate will increase substantially in fiscal 2012 in the event that relief from this additional $2,000 is not extended beyond June 30, 2011, which would adversely affect our ability to comply with the 90/10 Rule. Continued decreases in the availability of state grants would also adversely impact our ability to comply with the 90/10 Rule because state grants generally are considered cash payments for purposes of the 90/10 Rule. We continue to monitor the compliance with the 90/10 Rule by each of our institutions and assess the impact of increased financial aid received by our students under the current rule. If any of our institutions violates the 90/10 Rule, its ineligibility to participate in Title IV programs for at least two years would have a material adverse effect on our enrollments, revenues and results of operations.

Our failure to comply with various state regulations or to maintain any national, regional or programmatic accreditation could result in actions taken by those states or accrediting agencies that would have a material adverse effect on our student enrollment and results of operations.

Each of our U.S. campuses, including our campuses that provide online programs, is authorized to offer education programs and grant degrees or diplomas by the state in which such school is physically located. The level of regulatory oversight varies substantially from state to state. In some U.S. states, the schools are subject to licensure by the state education agency and also by a separate higher education agency. Some states have sought to assert jurisdiction over online educational institutions that offer educational services to residents in the state or that advertise or recruit in the state, notwithstanding the lack of a physical location in the state. State laws may establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility and other operational matters. State laws and regulations may limit our ability to obtain authorization to operate in certain states or to award degrees or diplomas or offer new degree programs. Certain states prescribe standards of financial responsibility that are different from those prescribed by the U.S. Department of Education. In addition, each of our U.S. schools is accredited by a national or regional accreditation agency recognized by the U.S. Department of Education, and some educational programs are also programmatically accredited. The level of regulatory oversight and standards can vary based on the agency. Certain accreditation agencies prescribe standards that are different from those prescribed by the U.S. Department of Education. If we are found not to be in compliance with an applicable state regulation and a state seeks to restrict one or more of our business activities within its boundaries, we may not be able to recruit or enroll students in that state and may have to cease providing services and advertising in that state, which could have a material adverse effect on our student enrollment and revenues.

If one of our schools does not meet its accreditation or applicable state requirements, its accreditation and/or state licensing could be limited, modified, suspended or terminated. Failure to maintain licensure in the state where it is physically located or institutional accreditation would make such school ineligible to participate in Title IV programs, which could have a material adverse effect on our student enrollment and revenues. Further, requirements for programs offered by our schools that are accredited by national accrediting agencies with respect to retention rates, graduation rates and employment placement rates may be more difficult to satisfy due to the current economic recession in the U.S. If programmatic accreditation is withdrawn or fails to be renewed for any of the individual programs at any of our schools, enrollment in such program could decline, which could have a material adverse impact on student enrollment and revenues at that school.

The U.S. Department of Education recently proposed regulations that would require states, in order to permit post-secondary institutions located within the state to participate in the Title IV student financing programs, to (i) specifically authorize each institution to offer programs beyond secondary education (i.e., is not merely an authorization to do business in the state), (ii) make the authorization subject to adverse action by the state, and (iii) have in place a process to review and act on complaints about the institution and to enforce applicable state laws against the institution. If the proposed regulation is adopted by the U.S. Department of Education, a number of states will need to make significant revisions to their current regulatory scheme for post-secondary institutions. For example, Argosy University has a campus located in Hawaii, which does not have a state agency which authorizes post-secondary institutions. In addition, a number of states where we have schools, such as California, Texas and Alabama, do not license post-secondary institutions which are regionally accredited. We are unsure of the potential impact of this proposed regulation on our three schools which offer fully online programs because these schools generally are not currently required to obtain licensure in the states in which their students reside outside of the main campus for the school. Further, the U.S. Department of Education plans to issue final regulations by November 1, 2010, which would make the regulations effective as of July 1, 2011 and provide very little time for states negatively impacted by the new regulation to adopt legislation which conforms with the new requirements unless the proposed regulations are substantially revised prior to adoption or the effective date of the regulations is extended. The inability of our students to participate in Title IV financing programs at one or more of our schools due to the failure of the state in which it is located to comply with any new regulations on authorization and oversight of post-secondary institutions would have a material adverse effect on our student population and revenue. Additionally, the requirement that our three schools which currently offer fully online programs to obtain authorization from each state in which students enrolled in the programs are located would have a have a material adverse effect on our student population and revenue if the schools are not provided sufficient time in which to obtain the state authorizations.

Loss of or reductions in state financial aid programs for our students could negatively impact our revenues from students.

In fiscal 2010, approximately 2% of our net revenues were indirectly derived from state financial aid programs. State grant programs are generally subject to annual appropriation by the state legislature, which may lead to the state’s eliminating or significantly decreasing the amount of state aid to students at our schools. Recently several states in which we have schools have substantially decreased or eliminated the amount of grants available to students who attend for-profit post secondary institutions. The loss of access to these state grants by our students could have a material adverse effect on our business due to enrollment losses at our schools.

If regulators do not approve transactions involving a change of control or change in our corporate structure, we may lose our ability to participate in federal student financial aid programs, which would result in declines in our student enrollment, and thereby adversely affect our results of operations.

If we or one of our schools experiences a change of ownership or control under the standards of applicable state agencies, accrediting agencies or the U.S. Department of Education, we or the schools governed by such agencies must seek the approval of the relevant agencies. Transactions or events that could constitute a change of control include significant acquisitions or dispositions of shares of our stock, internal restructurings, acquisition of schools from other owners, significant changes in the composition of a school’s board of directors or certain other transactions or events, several of which are beyond our control. The failure of any of our schools to reestablish its state authorization, accreditation or U.S. Department of Education certification following a transaction involving a change of ownership or control would result in a suspension of operating authority or suspension or loss of federal student financial aid funding, which could have a material adverse effect on our student population and revenue. Further, such a change of ownership or control could result in the imposition of growth restrictions on our schools, including limitations on our ability to open new campuses or initiate new educational programs. Restrictions on growth such as these could have a material adverse impact on our student population and revenue and future growth plans. The potential adverse effects of a change of control also could influence future decisions by us and our shareholders regarding the sale, purchase, transfer, issuance or redemption of our stock, which could discourage bids for shares of our common stock and could have an adverse effect on the market price of our common stock.

Government and regulatory and accrediting agencies may conduct compliance reviews, bring claims or initiate litigation against us, which may adversely impact our licensing or accreditation status, and thereby adversely affect our results of operations.

From time to time, we may be subject to program reviews, audits, investigations, claims of non-compliance or lawsuits by governmental or accrediting agencies or third parties, which may allege statutory violations, regulatory infractions or common law causes of action. If the results of any such proceedings are unfavorable to us, we may lose or have limitations imposed on our accreditation, state licensing, state grant or Title IV program participation, be required to pay monetary damages or be subject to fines, penalties, injunctions or other censure that could materially and adversely affect our business. We also may be limited in our ability to open new schools or add new program offerings and may be adversely impacted by the negative publicity surrounding an investigation or lawsuit. Even if we adequately address the issues raised by an agency review or investigation or successfully defend a third-party lawsuit, we may suffer interruptions in cash flows due to, among other things, transfer from the advance funding to the “reimbursement” or “heightened cash monitoring” method of Title IV program funding, and we may have to devote significant money and management resources to address these issues, which could harm our business. Additionally, we may experience adverse collateral consequences, including declines in the number of students enrolling at our schools and the willingness of third parties to deal with us or our schools, as a result of any negative publicity associated with such reviews, claims or litigation.

The Chicago campus of Argosy University was included in an undercover investigation performed by the GAO in connection with hearings currently being held by the U.S. Senate HELP committee. The report presented by the GAO to the HELP committee stated that admissions representatives at all 15 of the for-profit institutions visited by the GAO in connection with its undercover investigation made “deceptive or otherwise questionable statements” to the GAO investigators. The statements made by our admissions representative cited by the GAO relate to the overall cost of the program of study and incomplete information about the qualifications of faculty members and student graduation rates. We have requested copies of the interactions between the GAO investigators and our campus personnel and have yet to receive a copy of the videotape.  We will review any evidence provided by the GAO and will take appropriate actions based on any evidence we obtain. Additionally, the President of Argosy University received a letter from HLC requesting a response to the allegations contained in the GAO report. In addition to seeking a response to the specific circumstances identified in the GAO report, HLC requested that Argosy University demonstrate that it has reasonable, sufficient, and effective systems in place to assure appropriate control of employees engaged in the recruiting, marketing or admissions process.  Argosy University is in the process of responding to HLC’s requests.

The hearings held by the HELP committee and the requested GAO review are not formally related to the rulemaking process currently undertaken by the U.S. Department of Education. However, the hearings and the requested GAO review could affect the final rules promulgated by the U.S. Department of Education or could lead to further investigations of proprietary schools and the proposal of additional regulations.

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

In recent years, there have been a number of regulatory investigations and civil litigation matters targeting post-secondary education institutions. For example, the U.S. Senate HELP committee held two hearings on the for-profit education industry during the Summer of 2010 and plans to hold more in the Fall. We received a substantial request for documents from the HELP committee on August 5, 2010 in connection with the hearings and are currently responding to the request. The request seeks information and documents relating to our use of Federal resources, including how we recruit and enroll students, set program price or tuition, determine financial aid including private or institutional loans, track attendance, handle withdrawal of students and return of Title IV funds and manage compliance with the 90/10 Rule. The request also seeks an understanding of the number of students who complete or graduate from programs offered by our schools, how many of those students find new work in their educational area, the debt levels of students enrolling and completing programs and how we track and manage the number of students who risk default within the cohort default rate window. In addition, the HELP committee requested that the Government Accountability Office perform an independent study of the for-profit education industry. The study is not anticipated to be available until 2011. The HELP committee hearings, along with other recent investigations and lawsuits, have included allegation of, among other things, deceptive trade practices, false claims against the United States and non-compliance with state and U.S. Department of Education regulations. These allegations have attracted significant adverse media coverage. Allegations against the overall student lending and post-secondary education sectors may impact general public perceptions of educational institutions, including us, in a negative manner. Adverse media coverage regarding other educational institutions or regarding us directly could damage our reputation, reduce student demand for our programs, adversely impact our revenues and operating profit or result in increased regulatory scrutiny.

We do not have significant experience in processing student loans through the Direct Loan program and we could experience increases to our administrative costs and delays to the receipt of federal loan proceeds.

Loans to students at our U.S. schools under the FFEL/Direct loan program represented approximately 72.7% of our net revenues in fiscal 2010. Under recently adopted legislation, all new federal student loans after July 1, 2010 are required to be made through the Direct Loan program. As of June 30, 2009 only two of our schools participated in the Direct Loan program. While each of our U.S. based schools participated in the Direct Loan program as of June 30, 2010, processing all of our students’ federal loans through the Direct Loan program is a substantial change to our systems and operating procedures, and could cause increases to our administrative costs and delays to our receipt of federal student loan proceeds.

RISKS RELATED TO OUR BUSINESS

If our students were unable to obtain private loans from third party lenders, our business could be adversely affected given our reliance on such lenders as a source of net revenues.

The education finance industry has been experiencing and may continue to experience problems that have resulted in fewer overall financing options for some of our students. Factors that could impact the general availability of loans to our students include:

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changes in overall economic conditions or overall uncertainty or disruption in capital markets, in either case causing lenders to cease making student loans, limit the volume or types of loans made or impose more stringent eligibility or underwriting standards;

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the financial condition and continued financial viability of student loan providers;

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changes in applicable laws or regulations, such as provisions of the most recently-enacted HEA reauthorization that impose new disclosure and certification requirements with respect to private educational loans, that could have the effect of reducing the availability of education financing, including as a result of any lenders choosing to provide fewer loans or to stop providing loans altogether in light of increased regulation, or which could increase the costs of student loans; and

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determinations by lenders to reduce the number of loans, or to cease making loans altogether, to students attending or planning to attend certain types of schools, particularly for-profit institutions.

During fiscal 2010, revenues derived indirectly from private loans to students at our schools, excluding loans under our Education Finance Loan program, represented approximately 4.5% of our net revenues, as compared to approximately 13.0% and 22.3% of our net revenues in fiscal 2009 and 2008, respectively. These loans are provided pursuant to private loan programs and are made available to eligible students at our schools to fund a portion of the students’ costs of education not covered by federal and state financial aid grants due to increases in tuition and the cost of living. Private loans are made to our students by institutions and are non-recourse to us and our schools. Approximately 43% of the private loans in fiscal 2010 were offered by SLM Corporation (“Sallie Mae”) and its affiliates and serviced by its affiliated loan servicer.

During the last two fiscal years, adverse market conditions for consumer student loans have resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. In order to provide student loans to certain of our students who do not satisfy standard underwriting criteria, we pay credit enhancement fees to certain lenders (including Sallie Mae) based on the principal balance of each loan disbursed by the lender. An agreement we entered into with Sallie Mae to provide loans to certain students who received a private loan from Sallie Mae prior to April 17, 2008 and are continued their education but who did not satisfy Sallie Mae’s current standard underwriting criteria expired in June 2010.

The consumer credit markets in the United States have recently suffered from increases in default rates and foreclosures on mortgages, which has resulted in fewer providers of student loans. Providers of federally guaranteed student loans and alternative or private student loans have also experienced recent increases in default rates. Adverse market conditions for consumer loans have resulted in providers of private loans reducing the attractiveness and/or decreasing the availability of private loans to post-secondary students, including students with low credit scores who would not otherwise be eligible for credit-based private loans. Prospective students may find that these increased financing costs make borrowing prohibitively expensive and abandon or delay enrollment in post-secondary education programs. Certain private lenders have also required that we pay them new or increased fees in order to provide private loans to prospective students.

The inability of our students to finance their education could cause our student population to decrease, which could have a material adverse effect on our financial condition, results of operations and cash flows.

We do not anticipate awarding aid to new students under the Education Finance Loan program during fiscal 2011, which could have a material adverse effect on our financial condition, results of operations and cash flows.

In August 2008, we introduced the Education Finance Loan program, which enables students who have exhausted all available government-sponsored or other aid and have been denied a private loan to borrow a portion of their tuition and other educational expenses at our schools not covered by other financial aid sources if they or a co-borrower meet certain eligibility and underwriting criteria. During fiscal 2010, approximately 2.6% of our net revenues were derived from loans under the Education Finance Loan program as compared to 1.0% of our net revenues in fiscal 2009. We do not anticipate awarding aid under the Education Finance Loan program in fiscal 2011 to students who had not received aid under the program as of June 30, 2010. We estimate that total aid awarded under the program will be approximately $15 million in fiscal 2011.

We bear the risks of collection with respect to these loans from students who do not meet eligibility and underwriting standards of other commercial lenders. As a result, our allowance for doubtful accounts and bad debt expense have increased. Factors that may impact our ability to collect these loans include general economic conditions, compliance with laws applicable to the origination, servicing and collection of loans, the quality of our loan servicers’ performance and the priority that borrowers under these loans, particularly students who did not complete or were dissatisfied with their programs of study, attach to repaying these loans as compared to other obligations. In addition, because of restrictions imposed under our existing debt arrangements or otherwise, this program, or any enlargement or extension of this program, could adversely affect our ability to make investments and incur indebtedness for the financing of other aspects of our business, including acquisitions.

Federal, state and local laws and public policy and general principles of equity relating to the protection of consumers apply to the origination, servicing and collection of the loans that we purchase under this program. Any violation of the various federal, state and local laws, including, in some instances, violations of these laws by parties not under our control, may result in losses on the loans that we purchase or may limit our ability to collect all or part of the principal or interest on the loans that we purchase. This may be the case even if we are not directly responsible for the violations by such parties.

Federal or state financial regulators also might delay or suspend the Education Finance Loan program for a variety of reasons, including as a result of concerns that the program exposes our bank partners to unacceptable risks. Finally, depending on the terms of the loans, state consumer credit regulators may assert that our activities in connection with the Education Finance Loan program require us to obtain one or more licenses, registrations or other forms of regulatory approvals, any of which may not be able to be obtained in a timely manner, if at all.

Our business may be adversely affected by a general economic slowdown or recession in the U.S. or abroad.

The United States and other industrialized countries currently are experiencing reduced economic activity, increased unemployment, substantial uncertainty about their financial services markets and, in some cases, economic recession. In addition, homeowners in the United States have experienced a significant reduction in wealth due to the decline in residential real estate values across much of the country. These events may reduce the demand for our programs among students, which could materially and adversely affect our business, financial condition, results of operations and cash flows. These adverse economic developments also may result in a reduction in the number of jobs available to our graduates and lower salaries being offered in connection with available employment, which, in turn, may result in declines in our placement and persistence rates. In addition, these events could adversely affect the ability or willingness of our former students to repay student loans, which could increase our student loan cohort default rate and require increased time, attention and resources to manage these defaults. Further, the inability of students to pay their tuition and fees in cash has, along with other factors, resulted in a significant increase to our 90/10 rate.

The continued disruptions in the credit and equity markets worldwide may impede or prevent our access to the capital markets for additional funding to expand or operate our business and may affect the availability or cost of borrowing under our existing credit facilities.

The credit and equity markets of both mature and developing economies have experienced extraordinary volatility, asset erosion and uncertainty during the last two years leading to governmental intervention in the banking sector in the United States and abroad on an unprecedented scale. Until these market disruptions diminish, we may not be able to access the capital markets to obtain funding needed to refinance our existing indebtedness or expand our business. In addition, changes in the capital or other legal requirements applicable to commercial lenders may affect the availability or increase the cost of borrowing under our senior secured credit facilities. If we are unable to obtain needed capital on terms acceptable to us, we may have to limit our growth initiatives or take other actions that materially adversely affect our business, financial condition, results of operations and cash flows.

We may have difficulty opening additional new schools and growing our online academic programs, and we may be unable to achieve the anticipated return on our investment.

We anticipate continuing to open new schools in the future. Establishing new schools poses unique challenges and requires us to make investments in management, capital expenditures, marketing expenses and other resources. When opening a new school, we are required to obtain appropriate state or provincial and accrediting agency approvals. In addition, to be eligible for federal student financial aid programs, a school has to be certified by the U.S. Department of Education. Further, our debt agreements include limitations on the amount of capital expenditures we may make on an annual basis. Our failure to effectively manage the operations of newly established schools or service areas, or any diversion of management’s attention from our core school operating activities, could harm our business.

We anticipate significant future growth from online courses we offer to students. As of June 30, 2010, we offer fully online programs at The Art Institute of Pittsburgh, Online Division, Argosy University and South University. We plan to continue to introduce new online programs at these schools in the future. The success of any new online programs and classes depends in part on our ability to expand the content of our programs, develop new programs in a cost-effective manner and meet the needs of our students in a timely manner. The expansion of our existing online programs, the creation of new online classes and the development of new fully online programs may not be accepted by students or the online education market for many reasons, including as a result of the expected increased competition in the online education market or because of any problems with the performance or reliability of our online program infrastructure. In addition, a general decline in Internet use for any reason, including due to security or privacy concerns, the cost of Internet service or changes in government regulation of Internet use may result in less demand for online educational services, in which case we may not be able to grow our online programs as planned.

We may not be able to implement our growth strategy optimally if we are not able to improve the content of our existing academic programs or to develop new programs on a timely basis and in a cost-effective manner.

We continually seek to improve the content of our existing academic programs and develop new programs in order to meet changing market needs. Revisions to our existing academic programs and the development of new programs may not be accepted by existing or prospective students or employers in all instances. If we cannot respond effectively to market changes, our business may be adversely affected. Even if we are able to develop acceptable new programs, we may not be able to introduce these new programs as quickly as students require or as quickly as our competitors are able to introduce competing programs. Our efforts to introduce a new academic program may be conditioned or delayed by requirements to obtain federal, state and accrediting agency approvals. The development of new programs and classes, both conventional and online, is subject to requirements and limitations imposed by the U.S. Department of Education, state licensing agencies and the relevant accrediting bodies. The imposition of restrictions on the initiation of new educational programs by any of our regulatory agencies may delay such expansion plans. If we do not respond adequately to changes in market requirements, our ability to attract and retain students could be impaired and our financial results could suffer.

Establishing new academic programs or modifying existing academic programs also may require us to make investments in specialized personnel and capital expenditures, increase marketing efforts and reallocate resources away from other uses. We may have limited experience with the subject matter of new programs and may need to modify our systems and strategy. If we are unable to increase the number of students, offer new programs in a cost-effective manner or otherwise manage effectively the operations of newly established academic programs, our results of operations and financial condition could be adversely affected.

Our marketing and advertising programs may not be effective in attracting prospective students, current students or potential employers of our graduates.

In order to maintain and increase our revenues and margins, we must continue to attract new students in a cost-effective manner. Over the last several fiscal years, we have increased the amounts spent on marketing and advertising, and we anticipate that this trend will continue. If we are unable to successfully advertise and market our schools and programs, our ability to attract and enroll new students could be adversely impacted and, consequently, our financial performance could suffer. We use marketing tools such as the Internet, radio, television and print media advertising to promote our schools and programs. Our representatives also make presentations at high schools. If we are unable to utilize these advertising methods in a cost-effective manner or if our other costs limit the amount of funds we can contribute to advertising, our profitability and revenue may suffer. Additionally, we rely on the general reputation of our schools and referrals from current students, alumni and employers as a source of new students. Among the factors that could prevent us from successfully marketing and advertising our schools and programs are the failure of our marketing tools and strategy to appeal to prospective students or current student and/or employer dissatisfaction with our program offerings or results and diminished access to high school campuses.

A decline in the overall growth of enrollment in post-secondary institutions could cause us to experience lower enrollment at our schools, which would negatively impact our future growth.

According to the U.S. Department of Education, enrollment in degree-granting, post-secondary institutions is projected to grow 7.9% over the ten-year period ending in the fall of 2018 to approximately 20.6 million students. This growth compares with a 31.5% increase reported in the prior ten-year period ended in 2008, when enrollment increased from 14.5 million students in 1998 to 19.1 million students in 2008. While enrollment growth in the ten-year period ended 2008 was accompanied by a 20.7% increase in high school graduates from 2.8 million students in 1998 to 3.3 million students in 2008, the U.S. Department of Education is not projecting any significant growth in the number of high school graduates through 2018.

Our substantial leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry and expose us to interest rate risk to the extent of our variable rate debt.

The following chart shows our level of consolidated indebtedness at June 30, 2010 (in millions):

Senior secured term loan facility		$	1,115.0
8 3/4% senior notes due 2014			375.0
10 1/4% senior subordinated notes due 2016			47.7
Other			1.0
Total		$	1,538.7

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

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making it more difficult for us to make payments on our indebtedness;

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increasing our vulnerability to general economic and industry conditions;

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

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increasing the likelihood of our not satisfying, on a consolidated basis, the U.S. Department of Education’s annual responsibility requirements and subjecting us to letter of credit and provisional certification requirements for the foreseeable future;

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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior secured credit facilities, bear interest at variable rates;

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restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

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limiting our ability to obtain additional financing for working capital, capital expenditures, program development, debt service requirements, acquisitions and general corporate or other purposes; and

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limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who are less highly leveraged.

In addition, we and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our senior secured credit facilities and the indentures governing our 8 3/4% senior notes due 2014 (the “Senior Notes”) and our 10 1/4% senior subordinated notes due 2016 (the “Senior Subordinated Notes” and, together with the Senior Notes, the “Notes”). If new indebtedness is added to our current debt levels, the related risks that we now face could intensify.

We may not be able to generate sufficient cash to service all of our debt obligations and may be forced to take other actions in an effort to satisfy our obligations under such indebtedness, which may not be successful.

Our ability to make scheduled payments on our indebtedness, or to refinance our obligations under our debt agreements on acceptable terms, if at all, will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to the financial and business risk factors described in this Form 10-K, many of which are beyond our control. We cannot assure you that we will be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay the opening of new schools, acquisitions or capital expenditures, sell assets, seek to obtain additional equity capital or restructure our indebtedness. We also cannot assure you that we will be able to refinance any of our indebtedness or obtain additional financing on acceptable terms, if at all, particularly because of our high levels of debt and the debt incurrence restrictions imposed by the agreements governing our debt.

Our debt agreements contain restrictions that limit our flexibility in operating our business.

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

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incur additional indebtedness or issue certain preferred shares;

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

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make certain investments, including capital expenditures;

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sell certain assets;

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create liens;

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

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enter into certain transactions with affiliates.

In addition, under our senior secured credit agreement, we are required to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests. A breach of any of these covenants could result in a default under the senior secured credit agreement. Upon the occurrence of an event of default under the senior secured credit agreement, the lenders could elect to declare all amounts outstanding under the senior secured credit agreement immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the senior secured credit facilities could proceed against the collateral granted to them to secure that indebtedness. Certain of our subsidiaries have pledged a significant portion of our assets as collateral under the senior secured credit agreement. If the lenders accelerate the repayment of borrowings, we cannot assure you that we will have sufficient assets to repay our indebtedness under our senior secured credit facilities, as well as our unsecured indebtedness.

Failure to keep pace with changing market needs and technology could harm our ability to attract students.

The success of our schools depends to a large extent on the willingness of prospective employers to employ our students upon graduation. Increasingly, employers demand that their new employees possess appropriate technological skills and also appropriate “soft” skills, such as communication, critical thinking and teamwork skills. These skills can evolve rapidly in a changing economic and technological environment. Accordingly, it is important that our educational programs evolve in response to those economic and technological changes. The expansion of existing academic programs and the development of new programs may not be accepted by current or prospective students or the employers of our graduates. Even if our schools are able to develop acceptable new programs, our schools may not be able to begin offering those new programs as quickly as required by prospective employers or as quickly as our competitors offer similar programs. If we are unable to adequately respond to changes in market requirements due to regulatory or financial constraints, unusually rapid technological changes or other factors, our ability to attract and retain students could be impaired, the rates at which our graduates obtain jobs involving their fields of study could suffer and our results of operations and cash flows could be adversely affected.

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

We believe that funds from operations, cash, investments and borrowings under our revolving credit facility will be adequate to fund our current operating plans for the foreseeable future. However, we may need additional debt or equity financing in order to finance our continued growth. The amount and timing of such additional financing will vary principally depending on the timing and size of acquisitions and new school openings, the willingness of sellers to provide financing for future acquisitions and the amount of cash flows from our operations. To the extent that we require additional financing in the future and are unable to obtain such additional financing, we may not be able to fully implement our growth strategy.

Failure to effectively manage our growth could harm our business.

Our business recently has experienced rapid growth. Growth and expansion of our operations may place a significant strain on our resources and increase demands on our management information and reporting systems, financial management controls and personnel. We may not be able to maintain or accelerate our current growth rate, effectively manage our expanding operations or achieve planned growth on a timely or profitable basis. If we are unable to manage our growth effectively, we may experience operating inefficiencies and our net income may be materially adversely affected.

Capacity constraints or system disruptions to our online computer networks could have a material adverse effect on our ability to attract and retain students.

The performance and reliability of the program infrastructure of our schools’ online operations is critical to the reputation of these campuses and our ability to attract and retain students. Any computer system error or failure, or a sudden and significant increase in traffic on our computer networks that host our schools’ online operations, may result in the unavailability of our schools’ online operations’ computer networks. In addition, any significant failure of our computer networks could disrupt our on campus operations. Individual, sustained or repeated occurrences could significantly damage the reputation of our schools’ online operations and result in a loss of potential or existing students. Additionally, our schools’ online computer systems and operations are vulnerable to interruption or malfunction due to events beyond our control, including natural disasters and network and telecommunications failures. Any interruption to our schools’ online computer systems or operations could have a material adverse effect on the ability of our schools’ online operations to attract and retain students.

The personal information that we collect may be vulnerable to breach, theft or loss that could adversely affect our reputation and operations.

Possession and use of personal information in our operations subjects us to risks and costs that could harm our business. Our schools collect, use and retain large amounts of personal information regarding our students and their families, including social security numbers, tax return information, personal and family financial data and credit card numbers. We also collect and maintain personal information of our employees in the ordinary course of our business. Our computer networks and the networks of certain of our vendors that hold and manage confidential information on our behalf may be vulnerable to unauthorized access, computer hackers, computer viruses and other security threats. Confidential information also may become available to third parties inadvertently when we integrate or convert computer networks into our network following an acquisition of a school or in connection with upgrades from time to time.

Due to the sensitive nature of the information contained on our networks, such as students’ grades, our networks may be targeted by hackers. A user who circumvents security measures could misappropriate proprietary information or cause interruptions or malfunctions in our operations. Although we use security and business controls to limit access and use of personal information, a third party may be able to circumvent those security and business controls, which could result in a breach of student or employee privacy. In addition, errors in the storage, use or transmission of personal information could result in a breach of student or employee privacy. Possession and use of personal information in our operations also subjects us to legislative and regulatory burdens that could require notification of data breaches and restrict our use of personal information. As a result, we may be required to expend significant resources to protect against the threat of these security breaches or to alleviate problems caused by these breaches. A major breach, theft or loss of personal information regarding our students and their families or our employees that is held by us or our vendors could have a material adverse effect on our reputation and results of operations and result in further regulation and oversight by federal and state authorities and increased costs of compliance.

We may not be able to retain our key personnel or hire and retain additional personnel needed for us to sustain and grow our business as planned.

Our success depends, in large part, upon our ability to attract and retain highly qualified faculty, school presidents and administrators and corporate management. We may have difficulty locating and hiring qualified personnel, and retaining such personnel once hired. In addition, key personnel may leave and subsequently compete against us. The loss of the services of any of our key personnel, many of whom are not party to employment agreements with us, or our failure to attract and retain other qualified and experienced personnel on acceptable terms could impair our ability to successfully sustain and grow our business, which could have a material adverse effect on our results of operations.

If we are not able to integrate acquired schools, we may experience operational inefficiencies.

From time to time, we engage in acquisitions of schools. Integrating acquired operations into our institutions involves significant risks and uncertainties, including:

•

inability to maintain uniform standards, controls, policies and procedures;

•

distraction of management’s attention from normal business operations during the integration process;

•

expenses associated with the integration efforts; and

•

unidentified issues not discovered in our due diligence process, including legal contingencies.

Our inability to operate one or more of our schools or locations due to a natural disaster, terrorist act or widespread epidemic or to restore a damaged school or location to its prior operational level could materially hurt our operating results.

A number of our schools are located in Florida and elsewhere in the southeastern United States in areas prone to hurricane damage, which may be substantial. We also have a number of schools located in California in areas vulnerable to earthquakes. One or more of these schools may be unable to operate for an extended period of time in the event of a hurricane, earthquake or other natural disaster which does substantial damage to the area in which a school is located. In addition, we may not be in a position to devote sufficient resources to a damaged school in order for it to re-open in a timely fashion or at the same level of operation as existed prior to the damage. Further, a regional or national outbreak of influenza or other illness easily spread by human contact could cause us to close one or more of our schools for an extended period of time. The failure of one or more of our schools to operate for a substantial period of time could have a material adverse effect on our results of operations.

We have a significant concentration of admissions representatives for our fully online schools in two geographically separate locations. A natural disaster or terrorist act which affected one of these locations could result in our inability to contact prospective students for our fully online programs for an extended period of time, which would result in a significantly lower number of new students enrolling in our programs.

We operate in a highly competitive industry, and competitors with greater resources could harm our business.

The post-secondary education market is highly fragmented and competitive. Our schools compete for students with traditional public and private two-year and four-year colleges and universities and other for-profit providers, including those that offer online learning programs. Many public and private colleges and universities, as well as other for-profit providers, offer programs similar to those we offer. We expect to experience additional competition in the future as more colleges, universities and for-profit providers offer an increasing number of online programs. Public institutions receive substantial government subsidies, and public and private institutions have access to government and foundation grants, tax-deductible contributions and other financial resources generally not available to for-profit providers. Accordingly, public and private institutions may have instructional and support resources superior to those in the for-profit sector, and public institutions can offer substantially lower tuition prices. Some of our competitors in both the public and private sectors also have substantially greater financial and other resources than we do.

We could experience an event of default under our senior secured credit agreement if the Sponsors cease to own an aggregate of at least 35% of the voting interests of our outstanding capital stock, and such an event of default could adversely effect our liquidity and financial position.

Under the current terms of our senior secured credit agreement, an event of default would occur if the Sponsors cease to own, collectively, at least 35% of the voting interests of our outstanding capital stock on a fully diluted basis. This event of default could be triggered during the term of the senior secured credit agreement either by future sales or transfers of our capital stock by any of the Sponsors or by additional issuances of voting capital stock by us. As of June 30, 2010, the Sponsors owned, in the aggregate, approximately 69.1% of the voting interests of our outstanding capital stock on a fully diluted basis.

Because we cannot control when future transactions by any of the Sponsors will occur, we cannot assure you that one or more Sponsors will not engage in transactions that trigger an event of default under the current terms of our senior secured credit agreement, or that we will be able to amend this provision of our senior secured credit agreement prior to any such sale or transfer. If an event of default occurs as a result of a future sale or transfer by any of the Sponsors, the lenders could elect to declare all amounts outstanding under the senior secured credit agreement to be immediately due and payable and terminate all commitments to extend further credit. It is possible that we would not be in a position at that time to refinance the amounts due under the senior secured credit agreement on economical terms, or at all, or repay the amounts due to the lenders, and the lenders then could proceed against the collateral securing our indebtedness.

If we expand in the future into new markets outside the United States, we would be subject to risks inherent in non-domestic operations.

If we acquire or establish schools in new markets outside the United States, we will face risks that are inherent in non-domestic operations, including the complexity of operations across borders, currency exchange rate fluctuations, monetary policy risks, such as inflation, hyperinflation and deflation, and potential political and economic instability in the countries into which we expand.

Private equity funds affiliated with the Sponsors own the majority of our voting stock, which, if they act together, allows them to control substantially all matters requiring shareholder approval.

Private equity funds affiliated with Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners beneficially owned approximately 28.6%, 33.6% and 6.9%, respectively, of our outstanding common stock at June 30, 2010. In addition, pursuant to a Shareholders Agreement entered into among the Sponsors and certain of our shareholders, five of our ten directors are representatives of the private equity funds affiliated with the Sponsors. Certain private equity funds affiliated with Providence Equity Partners and certain private equity funds affiliated with Goldman Sachs Capital Partners each have the right to appoint two directors if such Sponsor owns 10% or more of our common stock and each of the Sponsors have the right to appoint one director if such Sponsor owns 2% or more of our common stock. As a result, these private equity funds, should they vote their respective shares in concert with each other, have significant influence over our decision to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of shareholders, regardless of whether or not other shareholders believe that such transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business combination that might otherwise be beneficial to our shareholders.

Additionally, the Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. One or more of the Sponsors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. As long as private equity funds affiliated with the Sponsors collectively continue to own, directly or indirectly, a significant amount of the outstanding shares of our common stock, the Sponsors will collectively continue to be able to strongly influence or effectively control our decisions.

We qualify for and avail ourselves of exemptions from certain corporate governance requirements for companies whose stock is quoted on The NASDAQ Stock Market LLC (“Nasdaq”) that provide protection to shareholders of other companies.

The parties to the Shareholders Agreement collectively will own more than 50% of the total voting power of our common stock, and we therefore use certain “controlled company” exemptions under Nasdaq’s corporate governance listing standards that free us from the obligation to comply with certain Nasdaq corporate governance requirements, including the requirements:

•

that a majority of our Board of Directors consists of independent directors;

•

that the compensation of executive officers be determined, or recommended to our Board of Directors for determination, either by (a) a majority of the independent directors or (b) a compensation committee comprised solely of independent directors; and

•

that director nominees be selected, or recommended for our Board of Directors’ selection, either by (a) a majority of the independent directors or (b) a nominations committee comprised solely of independent directors.

As a result of our use of these exemptions, owners of our common stock do not have the same protection afforded to shareholders of companies that are subject to all of Nasdaq’s corporate governance requirements. In the event that we cease to be eligible to utilize “controlled company” exemptions under Nasdaq’s corporate governance listing standards, we will have a transitionary period during which we must achieve compliance with the requirements described above.

Provisions in our charter documents and the Pennsylvania Business Corporation Law could make it more difficult for a third party to acquire us and could discourage a takeover and adversely affect existing shareholders.

Provisions in our charter documents could discourage potential acquisition proposals or make it more difficult for a third party to acquire control of the Company, even if doing so might be beneficial to our shareholders. Our articles of incorporation and bylaws provide for various procedural and other requirements that could make it more difficult for shareholders to effect certain corporate actions. For example, our articles of incorporation authorize our Board of Directors to issue up to 20.0 million shares of preferred stock and to determine the powers, preferences, privileges, rights, including voting rights, qualifications, limitations and restrictions on those shares, without any further vote or action by our shareholders. The rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Additional provisions that could make it more difficult for shareholders to effect certain corporate actions include the following:

•

our articles of incorporation prohibit cumulative voting in the election of directors;

•

once the private equity funds affiliated with the Sponsors and certain of our other institutional investors collectively cease to beneficially own 50% or more of our outstanding common stock, our articles of incorporation and bylaws will not (i) permit shareholder action without a meeting by consent, except for unanimous written consent, (ii) permit shareholders to call or to require the Board of Directors to call a special meeting or (iii) permit shareholder removal of directors without assigning any cause; and

•

our bylaws provide that shareholders seeking to nominate candidates for election as directors or to bring business before an annual meeting of shareholders must comply with advance notice procedures.

Our shareholders may remove directors only for cause; provided, that as long as our shareholders have the right to act by partial written consent, directors may be removed from office by partial written consent without assigning any cause. These and other provisions of the Pennsylvania Business Corporation Law (the “PBCL”) and our articles of incorporation and bylaws may discourage acquisition proposals, make it more difficult or expensive for a third party to acquire a majority of our outstanding common stock or delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect our stock price.

We currently do not intend to pay dividends on our common stock and, consequently, investors’ only opportunity to achieve a return on their investment is if the price of our common stock appreciates.

We currently do not expect to pay dividends on shares of our common stock. The terms of our senior secured credit facilities and indentures limit our ability to pay cash dividends in certain circumstances. Furthermore, if we are in default under our credit facilities or indentures, our ability to pay cash dividends will be limited in certain circumstances in the absence of a waiver of that default or an amendment to the facilities or indentures. In addition, because we are a holding company, our ability to pay cash dividends on shares of our common stock may be limited by restrictions on our ability to obtain sufficient funds through dividends from our subsidiaries, including the restrictions under our senior secured credit facilities and indentures. Subject to these restrictions, the payment of cash dividends in the future, if any, will be at the discretion of our Board of Directors and will depend upon such factors as earnings levels, capital requirements, our overall financial condition and any other factors deemed relevant by our Board of Directors. Consequently, the only opportunity for investors to achieve a return on their investment in the Company is if the market price of our common stock appreciates.

We rely on dividends, distributions and other payments, advances and transfers of funds from our operating subsidiaries to meet our debt service and other obligations.

We conduct all of our operations through certain of our subsidiaries, and we currently have no significant assets other than cash of approximately $48.3 million and the capital stock of our respective subsidiaries. As a result, we will rely on dividends and other payments or distributions from our operating subsidiaries to meet any existing or future debt service and other obligations. The ability of our operating subsidiaries to pay dividends or to make distributions or other payments to their parent companies will depend on their respective operating results and may be restricted by, among other things, the laws of their respective jurisdictions of organization, regulatory requirements, agreements entered into by those operating subsidiaries and the covenants of any existing or future outstanding indebtedness that we or our subsidiaries may occur. For example, our senior secured credit agreement and the indentures governing the Notes contain certain restrictions on our subsidiaries’ ability to pay dividends and to make distributions.

We experience seasonal fluctuations in our results of operations which may result in similar fluctuations in the trading price of our common stock.

Historically, our quarterly revenues and income have fluctuated primarily as a result of the pattern of student enrollments at our schools. The number of students enrolled at our schools typically is greatest in the second quarter of our fiscal year, when the largest number of recent high school and college graduates typically begin post-secondary education programs. Student vacations generally cause our student enrollments to be at their lowest during our first fiscal quarter. Because a significant portion of our expenses do not vary proportionately with the fluctuations in our revenue, our results in a particular fiscal quarter may not indicate accurately the results we will achieve in a subsequent quarter or for the full fiscal year. These fluctuations in our operating results may result in corresponding volatility in the market price for our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

Our corporate headquarters are located in Pittsburgh, Pennsylvania. At June 30, 2010, our schools were located in major metropolitan areas in 31 states and one Canadian province. 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 and 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 College in Lenexa, Kansas. At June 30, 2010, we owned approximately 0.6 million square feet of real property and leased approximately 6.2 million square feet of office and educational facilities.

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. 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.

ITEM 3. LEGAL PROCEEDINGS

In August 2009, a complaint was filed in the District Court for Dallas County, Texas in the case of Capalbo et al. v. Argosy University, Education Management LLC, Education Management Corporation and Marilyn Powell-Kissinger by 15 former students in the Clinical Psychology program offered by the Dallas campus of Argosy University. In September 2009, the defendants removed the case to the United States District Court for the Northern District of Texas, Dallas division. The case was remanded back to state court in November 2009 by agreement after the plaintiffs amended their pleadings to specify their allegations and agreed to dismiss Ms. Powell-Kissinger as a defendant. The plaintiffs filed an amended complaint in state court in January 2010 under the name of Buirkle et al. v. Argosy Education Group, Inc., Education Management LLC and Education Management Corporation and included three new plaintiffs. The complaint alleges that, prior to the plaintiffs’ enrollment and/or while the plaintiffs were enrolled in the program, the defendants violated the Texas Deceptive Trade Practices and Consumer Protection Act and made material misrepresentations regarding the importance of accreditation of the program by the Commission on Accreditation, American Psychological Association, the status of the application of the Dallas campus for such accreditation, the availability of loan repayment options for the plaintiffs, and the quantity and quality of the plaintiffs’ career options. Plaintiffs seek unspecified monetary compensatory and punitive damages. In March 2010, claims filed by three of the plaintiffs who signed arbitration agreements with Argosy University were compelled to binding arbitration. The remaining lawsuits in the case were stayed pending the resolution of the three arbitrations. We believe the claims in this lawsuit and the arbitrations to be without merit and we intend to vigorously defend ourselves.

In March 2010, the same counsel representing the plaintiffs in the Buirkle case filed a complaint in the District Court for Dallas County, Texas in the case of Adibian et al. v. Argosy University, Education Management LLC and Education Management Corporation. In Adibian, three former students who were enrolled in the Clinical Psychology doctoral program at the Argosy University Dallas campus make similar allegations to those set forth in the Buirkle case and seek unspecified monetary compensatory and punitive damages. A fourth former student in the program had signed a binding arbitration agreement and therefore filed for arbitration rather than joining in the new lawsuit. In August 2010, the three former students withdrew their lawsuit.

On May 6, 2010, a qui tam action captioned Buchanan v. South University Online and Education Management Corporation filed under the False Claims Act in July 2007 was unsealed due to the U.S. Department of Justice’s decision to not intervene in the action at this time. The case, which is pending in the United States District Court for the Western District of Pennsylvania, relates to whether the defendants’ compensation plans for admission representatives violated the HEA and U.S. Department of Education regulations prohibiting an institution participating in Title IV Programs from providing any commission, bonus or other incentive payment based directly or indirectly on success in securing enrollments to any person or entity engaged in any student recruitment or admissions activity. A number of similar lawsuits have been filed in recent years against educational institutions that receive Title IV funds. The complaint, which was filed by a former admissions representative for the online programs offered by South University, outlines a theory of damages based upon Title IV funding disbursements to the Company over a number of years and asserts the plaintiff is entitled to recover treble the amount of actual damages allegedly sustained by the federal government as a result of the alleged activity, plus civil monetary penalties. We believe the claims to be without merit and intend to defend this action vigorously.

On August 11, 2010, a securities class action complaint captioned Gaer v. Education Management Corp., et. al was filed against the Company, certain of our executive officers and directors, and certain underwriters of our initial public offering. The complaint alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act of 1934 due to allegedly false and misleading statements in connection with our initial public offering and our subsequent press releases and filings with the Securities and Exchange Commission. We believe that the lawsuit is without merit and intend to vigorously defend ourselves.

In June 2007, The New England Institute of Art (“NEIA”) received a civil investigative demand letter from the Massachusetts State Attorney General requesting information in connection with the Attorney General’s review of alleged submissions of false claims by NEIA to the Commonwealth of Massachusetts and alleged unfair and deceptive student lending and marketing practices engaged in by the school. In February 2008, the Attorney General informed NEIA that it does not plan to further pursue its investigation of the false claims and deceptive marketing practices. NEIA intends to fully cooperate with the Attorney General in connection with its investigation of NEIA’s student lending practices to the extent further cooperation is required.

In addition to the matters described above, we are a defendant in certain legal proceedings arising out of the conduct of our business. In the opinion of management, based upon an investigation of these claims and discussion with legal counsel, the ultimate outcome of such legal proceedings, individually and in the aggregate, is not anticipated to have a material adverse effect on our consolidated financial position, results of operations or liquidity.

ITEM 4. (REMOVED AND RESERVED)

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

On October 1, 2009, we consummated an initial public offering of 23.0 million shares of our common stock for net proceeds of approximately $387.3 million. In connection with the initial public offering, our Board of Directors declared a 4.4737 for one split of our common stock, which was paid in the form of a stock dividend on September 30, 2009. In connection with this stock split, we amended and restated our articles of incorporation to, among other things, increase the our number of authorized shares of common stock. Unless otherwise noted, all information presented in this Form 10-K has been adjusted to reflect our amended and restated articles of incorporation and stock split.

Our common stock is traded on the Nasdaq Global Select Market under the symbol “EDMC.” At August 31, 2010, there were 142,874,389 shares of our common stock outstanding, which were held by approximately 110 holders of record. The computation of the approximate number of shareholders is based upon a broker search. The prices set forth below reflect the high and low sales prices for our common stock, as reported in the consolidated transaction reporting system of the Nasdaq Global Select Market:

		Year Ended June 30,
		2010
		High				Low
Fiscal Quarter Ended
December 31		$	26.98			$	20.06
March 31		$	24.11			$	17.10
June 30		$	26.79			$	15.05

The following performance graph compares the yearly percentage change in the cumulative total shareholder return on the common stock of EDMC to the cumulative shareholder return for the same period of a peer group and the Standard & Poor’s 500 Stock Index. The peer group is comprised of EDMC, Apollo Group, Inc., Capella Education Co., Career Education Corporation, DeVry Inc., ITT Educational Services, Inc. and Strayer Education, Inc. We believe this peer group, including us, represents a significant portion of the market value of publicly traded companies whose primary business is postsecondary education.

The preceding stock price performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

On June 11, 2010, EDMC announced a stock repurchase program under which we may purchase up to $50.0 million of our common stock through June 30, 2011. On June 15, 2010, we purchased 123,000 shares of our common stock under this program at a price of $17.95 per share, which we currently hold in treasury.

We have not paid dividends over the past two fiscal years, and we currently do not expect to pay dividends on shares of our common stock. The agreements governing our indebtedness limit our ability to pay dividends.

See Part III, Item 12. “Security ownership of Certain Beneficial Owners and Management and Related Stockholders Matters” for information relating to EDMC’s equity compensation plans.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial and other data as of the dates and for the periods indicated. The term “Predecessor” refers to EDMC prior to the consummation of the Transaction, and the term “Successor” refers to EDMC following the Transaction. The selected consolidated balance sheet data of Successor as of June 30, 2009 and 2010 and the selected consolidated statement of operations data and the selected consolidated statement of cash flows data for the Successor fiscal years ended June 30, 2008, 2009 and 2010 have been derived from our audited consolidated financial statements and related notes appearing elsewhere in this Form 10-K. The selected historical consolidated statement of operations and statement of cash flows data for the Predecessor period from July 1, 2005 through May 31, 2006 and Successor periods from June 1, 2006 through June 30, 2006 and for the fiscal year ended June 30, 2007 and the consolidated balance sheet data of Successor as of June 30, 2006, 2007 and 2008 presented in this table have been derived from audited consolidated financial statements not included in this Form 10-K.

The selected consolidated financial and other data as of and for any period are not necessarily indicative of the results that may be obtained for any future date or for any future period.

The selected historical consolidated financial data set forth should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes that appear elsewhere in this Form 10-K.

		Predecessor					Successor
		Period from					Period from
		July 1, 2005					June 1, 2006
		through					through
		May 31,					June 30,				Year Ended June 30,
		2006					2006				2007				2008				2009				2010
		(dollars in millions except per share amounts)
Statement of Operations Data:
Net revenues		$	1,095.8				$	74.4			$	1,363.7			$	1,684.2			$	2,011.5			$	2,508.5
Costs and expenses:
Educational services			590.9					59.0				729.9				901.3				1,067.7				1,267.1
General and administrative			273.3					25.6				310.3				414.1				507.7				667.1
Management fees paid to affiliates			—					0.4				5.0				5.0				5.0				32.1
Depreciation and amortization			62.9					7.4				90.6				100.3				112.3				123.4
Total costs and expenses			927.1					92.4				1,135.8				1,420.7				1,692.7				2,089.7
Income (loss) before interest, loss on early retirement of debt and income taxes			168.7					(18.0	)			227.9				263.5				318.8				418.8
Interest expense (income), net			(5.3	)				14.1				168.3				156.3				153.3				121.5
Loss on early retirement of debt			—					—				—				—				—				47.2
Income (loss) before income taxes			174.0					(32.1	)			59.6				107.2				165.5				250.1
Provision for (benefit from) income taxes			73.6					(12.4	)			27.2				41.2				61.1				81.6
Net income (loss)		$	100.4				$	(19.7	)		$	32.4			$	66.0			$	104.4			$	168.5
Basic earnings (loss) per common share			*				$	(0.17	)		$	0.27			$	0.55			$	0.87			$	1.23
Diluted earnings (loss) per common share			*				$	(0.17	)		$	0.27			$	0.55			$	0.87			$	1.22
Basic weighted average shares outstanding			*					116,316				118,292				119,769				119,770				136,917
Diluted weighted average shares outstanding			*					116,316				118,292				119,769				119,770				137,667
Statement of Cash Flows Data:
Net cash flows provided by (used in):
Operating activities		$	301.7				$	(22.5	)		$	179.9			$	152.7			$	293.4			$	307.1
Investing activities			(56.4	)				(3,434.0	)			(110.8	)			(157.3	)			(173.1	)			(190.2	)
Financing activities			(43.2	)				3,445.5				(41.3	)			(8.5	)			(33.7	)			(106.4	)
Other Data:
EBITDA(1)		$	231.6				$	(10.6	)		$	318.5			$	363.8			$	431.1			$	542.2
Capital expenditures for long lived assets		$	57.9				$	7.7			$	96.1			$	150.9			$	150.7			$	175.8
Enrollment at beginning of fall quarter			72,500									80,300				96,000				110,800				136,000
Campus locations (at period end)			71					71				78				88				92				101