UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

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

Commission File Number: 001-34466

 

EDUCATION MANAGEMENT CORPORATION

(Exact name of registrant as specified in its charter)

Pennsylvania		25-1119571
(State or other jurisdiction of		(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

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 if 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 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

As of May 6, 2011, there were 132,665,901 shares of the registrant’s common stock outstanding.

 

 

Table of Contents

INDEX

		PAGE
PART I — FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS			2
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			27
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			45
ITEM 4 CONTROLS AND PROCEDURES			46
PART II — OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS			47
ITEM 1A RISK FACTORS			47
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			48
ITEM 3 DEFAULTS UPON SENIOR SECURITIES			48
ITEM 4 REMOVED AND RESERVED			48
ITEM 5 OTHER INFORMATION			48
ITEM 6 EXHIBITS			49
SIGNATURES			50
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

		March 31, 2011				June 30, 2010				March 31, 2010
		(Unaudited)								(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	613,155			$	373,546			$	472,637
Restricted cash			52,907				12,842				26,482
Total cash, cash equivalents and restricted cash			666,062				386,388				499,119
Student receivables, net of allowances of $180,667, $124,242 and $118,246 (Note 4)			110,158				167,857				94,776
Notes, advances and other receivables			15,143				20,680				17,457
Inventories			11,785				11,655				13,242
Deferred income taxes			65,761				65,410				46,320
Other current assets			42,391				40,971				44,442
Total current assets			911,300				692,961				715,356
Property and equipment, net (Note 5)			695,761				678,846				634,587
Other long-term assets (Note 7)			89,915				93,441				82,168
Intangible assets, net (Note 6)			463,545				467,188				468,224
Goodwill (Note 6)			2,579,131				2,579,131				2,579,131
Total assets		$	4,739,652			$	4,511,567			$	4,479,466
Liabilities and shareholders’ equity
Current liabilities:
Current portion of long-term debt (Note 9)		$	12,076			$	12,103			$	12,172
Accounts payable			43,420				71,211				48,150
Accrued liabilities (Note 8)			191,594				178,085				187,812
Accrued income taxes			24,400				17,851				31,704
Unearned tuition			104,610				155,746				89,540
Advance payments			293,368				72,154				158,788
Interest rate swap (Note 10)			9,561				—				—
Total current liabilities			679,029				507,150				528,166
Long-term debt, less current portion (Note 9)			1,517,480				1,526,635				1,529,661
Deferred income taxes			177,390				180,934				178,388
Deferred rent			190,548				165,808				154,240
Other long-term liabilities			16,947				54,345				66,624
Shareholders’ equity:
Common stock, at par			1,431				1,429				1,428
Additional paid-in capital			1,758,402				1,749,456				1,745,512
Treasury stock			(140,610	)			(2,207	)			—
Retained earnings			544,982				350,273				302,373
Accumulated other comprehensive loss			(5,947	)			(22,256	)			(26,926	)
Total shareholders’ equity			2,158,258				2,076,695				2,022,387
Total liabilities and shareholders’ equity		$	4,739,652			$	4,511,567			$	4,479,466

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

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)

		For the Three Months								For the Nine Months
		Ended March 31,								Ended March 31,
		2011				2010				2011				2010
Net revenues		$	754,340			$	667,896			$	2,192,238			$	1,857,764
Costs and expenses:
Educational services			381,703				323,146				1,113,384				934,125
General and administrative			190,568				174,446				564,317				491,608
Management fees paid to affiliates			—				—				—				32,055
Depreciation and amortization			37,148				30,674				107,548				88,902
Total costs and expenses			609,419				528,266				1,785,249				1,546,690
Income before loss on extinguishment of debt, interest and income taxes			144,921				139,630				406,989				311,074
Interest expense, net			31,464				27,933				87,516				94,652
Loss on extinguishment of debt			—				2,445				8,363				47,207
Income before income taxes			113,457				109,252				311,110				169,215
Provision for income taxes			40,474				24,682				116,401				48,609
Net income		$	72,983			$	84,570			$	194,709			$	120,606
Earnings per share: (Note 2)
Basic		$	0.54			$	0.59			$	1.40			$	0.89
Diluted		$	0.53			$	0.59			$	1.39			$	0.89
Weighted average number of shares outstanding: (Note 2)
Basic			135,655				142,831				139,258				134,939
Diluted			136,759				143,936				140,003				135,675

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

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

		For the Nine Months
		Ended March 31,
		2011				2010
Cash flows from operating activities:
Net income		$	194,709			$	120,606
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization of property and equipment			101,515				82,231
Amortization of intangible assets			6,033				6,671
Bad debt expense			105,807				78,574
Fair value adjustment to EFL loans (Note 7)			21,366				—
Amortization of debt issuance costs			5,177				6,127
Loss on extinguishment of debt			8,363				47,207
Share-based compensation			8,293				19,428
Non cash adjustments related to deferred rent			(2,842	)			1,898
Changes in assets and liabilities:
Restricted cash			(40,065	)			(16,110	)
Receivables			(37,915	)			(43,280	)
Reimbursements for tenant improvements			18,354				8,229
Inventory			(113	)			(3,868	)
Other assets			(21,853	)			(14,565	)
Purchase of EFL loans			(23,888	)			(51,501	)
Accounts payable			(13,737	)			696
Accrued liabilities			16,017				35,675
Unearned tuition			(51,136	)			(29,202	)
Advance payments			219,729				91,341
Total adjustments			319,105				219,551
Net cash flows provided by operating activities			513,814				340,157
Cash flows from investing activities:
Expenditures for long-lived assets			(106,324	)			(119,825	)
Reimbursements for tenant improvements			(18,354	)			(8,229	)
Net cash flows used in investing activities			(124,678	)			(128,054	)
Cash flows from financing activities:
Payments under revolving credit facility			—				(100,000	)
Retirement of senior subordinated notes			—				(378,952	)
Issuance of common stock			655				387,998
Common stock repurchased for treasury			(135,660	)			—
Principal payments on long-term debt			(9,182	)			(9,489	)
Debt issuance costs			(5,411	)			(2,400	)
Net cash flows used in financing activities			(149,598	)			(102,843	)
Effect of exchange rate changes on cash and cash equivalents			71				59
Net change in cash and cash equivalents			239,609				109,319
Cash and cash equivalents, beginning of period			373,546				363,318
Cash and cash equivalents, end of period		$	613,155			$	472,637
Cash paid during the period for:
Interest (including swap settlement)		$	77,189			$	81,734
Income taxes			126,535				53,868

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

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands)

																		Accumulated
		Common				Additional												Other
		Stock at				Paid-in				Treasury				Retained				Comprehensive
		Par Value (c)				Capital				Stock (c)				Earnings				Loss				Total
Balance at June 30, 2009		$	1,198			$	1,338,316			$	—			$	181,767			$	(35,628	)(b)		$	1,485,653
Issuance of common stock			231				389,210								—				—				389,441
Share-based compensation			—				21,670								—				—				21,670
Excess tax benefit from share-based compensation			—				260								—				—				260
Common stock repurchased for treasury			—				—				(2,207	)			—				—				(2,207	)
Comprehensive income: (a)
Net income			—				—				—				168,506				—				168,506
Foreign currency translation			—				—				—				—				458				458
Reclassification into earnings on interest rate swaps, net of tax of $14,005			—				—				—				—				23,795				23,795
Periodic revaluation of interest rate swaps, net of tax of $6,430			—				—				—				—				(10,881	)			(10,881	)
Net change in interest rate swaps			—				—				—				—				12,914				12,914
Comprehensive income			—				—				—				—				—				181,878
Balance at June 30, 2010		$	1,429			$	1,749,456			$	(2,207	)		$	350,273			$	(22,256	)(b)		$	2,076,695
Issuance of common stock			2				653				—				—				—				655
Share-based compensation			—				8,293				—				—				—				8,293
Common stock repurchased for treasury			—				—				(138,403	)			—				—				(138,403	)
Comprehensive income:
Net income			—				—				—				194,709				—				194,709
Foreign currency translation			—				—				—				—				972				972
Reclassification into earnings on interest rate swaps, net of tax of $10,451			—				—				—				—				17,796				17,796
Periodic revaluation of interest rate swaps, net of tax of $1,416			—				—				—				—				(2,459	)			(2,459	)
Net change in interest rate swaps			—				—				—				—				15,337				15,337
Comprehensive income			—				—				—				—				—				211,018
Balance at March 31, 2011		$	1,431			$	1,758,402			$	(140,610	)		$	544,982			$	(5,947	)(b)		$	2,158,258

(a)		During the nine months ended March 31, 2010, other comprehensive income consisted of a $17.8 million reclassification into earnings, net of tax, a $(10.1) million reduction on interest rate swaps due to a periodic revaluation, net of tax and a $1.0 million foreign currency translation gain.
(b)		The balance in accumulated other comprehensive loss at March 31, 2011, June 30, 2010 and March 31, 2010 is comprised of $6.0 million, $21.4 million and $26.5 million of cumulative unrealized losses on interest rate swaps, net of tax, respectively and $0.1 million, $(0.9) million and $(0.4) million of a cumulative foreign currency translation gain/(loss), respectively.
(c)		There were 600,000,000 authorized shares of par value $0.01 common stock at March 31, 2011, June 30, 2010 and March 31, 2010. Common stock of 142,848,312 shares was issued and outstanding at March 31, 2010. Common stock and treasury stock balances and activity were as follows for the periods indicated.

		Treasury				Outstanding
Balance at June 30, 2009			—				119,770,277
Repurchased for treasury			123,000				(123,000	)
Public offering			—				23,000,000
Issued for stock-based compensation plans			—				205,141
Balance at June 30, 2010			123,000				142,852,418
Repurchased for treasury			9,161,672				(9,161,672	)
Issued for stock-based compensation plans			—				116,097
Balance at March 31, 2011			9,284,672				133,806,843

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

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

Basis of presentation

The accompanying unaudited consolidated financial statements of Education Management Corporation and its subsidiaries (the “Company”) have been prepared by the Company’s management in accordance with generally accepted accounting principles for interim financial information and applicable rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for annual financial statements. The unaudited consolidated financial statements included herein contain all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to present fairly the Company’s financial position as of March 31, 2011 and 2010, and its consolidated statements of operations for the three and nine months ended March 31, 2011 and 2010 and of cash flows for the nine months ended March 31, 2011 and 2010. The consolidated statements of operations for the three and nine months ended March 31, 2011 and 2010 are not necessarily indicative of the results to be expected for future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended June 30, 2010 as filed with the Securities and Exchange Commission (“SEC”). The accompanying consolidated balance sheet at June 30, 2010 has been derived from the consolidated audited balance sheet included in the Form 10-K.

Nature of operations

The Company is among the largest providers of post-secondary education in North America, with approximately 158,300 enrolled students as of October 2010. The Company offers education through four different education systems (The Art Institutes, Argosy University, Brown Mackie Colleges and South University) and through online platforms at three of the four education systems. The Company offers academic programs to its students through campus-based and online instruction, or through a combination of both. The Company is committed to offering quality academic programs and continuously strives to improve the learning experience for its students. The curriculum is designed with a distinct emphasis on applied career-oriented content and is primarily taught by faculty members that possess practical and relevant professional experience in their respective fields.

Going Private Transaction

On June 1, 2006, the Company was acquired by a consortium of private equity investment funds led by Providence Equity Partners, Goldman Sachs Capital Partners and Leeds Equity Partners (collectively, the “Sponsors”). The acquisition was accomplished through the merger of EM Acquisition Corporation into the Company, with the Company surviving the merger (the “Transaction”). The Sponsors, together with certain other investors, became the owners of the Company.

The acquisition of the Company was financed by equity invested in EM Acquisition Corporation by the Sponsors and other investors, cash on hand, borrowings under a new senior secured credit facility by Education Management LLC (“EM LLC”) and the issuance by EM LLC and Education Management Finance Corp. (a wholly-owned subsidiary of EM LLC) of 8.75% senior notes due 2014 (the “Senior Notes”) and 10.25% senior subordinated notes due 2016 (the “Senior Subordinated Notes” and, together with the Senior Notes, the “Notes”).

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Initial Public Offering

In October 2009, the Company completed an initial public offering of 23.0 million shares of common stock, $0.01 par value, at a per share price of $18.00 (the “initial public offering”). Net proceeds to the Company, after transaction costs, totaled approximately $387.3 million, of which $355.5 million was used to purchase $316.0 million of the Senior Subordinated Notes in a tender offer and $29.6 million was used to pay a termination fee under a management agreement entered into with the Sponsors in connection with the Transaction. In addition, the availability for borrowing under EM LLC’s revolving credit facility increased from $388.5 million to $442.5 million effective upon the closing of the initial public offering. No Sponsor-owned shares were sold in connection with the initial public offering.

Seasonality

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

Reclassifications

Certain reclassifications of March 31, 2010 data have been made to conform to the March 31, 2011 presentation.

2. EARNINGS PER SHARE

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

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

		For the Three Months								For the Nine Months
		Ended March 31,								Ended March 31,
		2011				2010				2011				2010
Net income		$	72,983			$	84,570			$	194,709			$	120,606
Weighted average number of shares outstanding:
Basic			135,655				142,831				139,258				134,939
Effect of stock-based awards			1,104				1,105				745				736
Diluted			136,759				143,936				140,003				135,675
Earnings per share:
Basic		$	0.54			$	0.59			$	1.40			$	0.89
Diluted		$	0.53			$	0.59			$	1.39			$	0.89

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Because certain performance and market conditions have not been met with respect to the Company’s performance-based options, as further described in Note 3, the Company has determined these options to be contingently issuable at March 31, 2011 and 2010. As a result, all 3.3 million of outstanding performance options have been excluded from the computation of diluted EPS in the three and nine month periods ended March 31, 2011 and 2010. Additionally, time-based options to purchase 4.0 million and 1.6 million shares of common stock were outstanding for the three month periods ended March 31, 2011 and 2010, respectively, but were not included in the computation of diluted EPS because the effect of applying the treasury stock method would have been antidilutive. As a result, time-based options that have a dilutive effect were the only options included in the diluted EPS calculation for the three and nine month periods ended March 31, 2011 and 2010.

3. SHARE-BASED COMPENSATION AND STOCK REPURCHASE PROGRAM

Share-Based Compensation

In August 2006, the Company’s Board of Directors approved the 2006 Stock Option Plan (the “2006 Plan”) for executive management and key personnel. Under the 2006 Plan, certain of the Company’s employees were granted a combination of time-based and performance-based options to purchase the Company’s common stock. In April 2009, the Company’s Board of Directors adopted the Omnibus Long-Term Incentive Plan (the “Omnibus Plan”), which became effective upon the completion of the initial public offering. Under the Omnibus Plan, the Company may issue stock options, stock appreciation rights, restricted stock, restricted stock units and other forms of long-term incentive compensation.

Upon completion of the initial public offering in October 2009, the Company recognized $15.2 million of previously deferred stock-based compensation costs due to the removal of certain conditions that existed related to the inability of option holders to obtain fair market value for stock options granted under the 2006 Plan. The Company also granted stock options and restricted stock under the Omnibus Plan in connection with the initial public offering. The Company recognized $2.9 million and $8.3 million of share-based compensation expense related to outstanding time-based stock options, restricted stock and other awards during the three and nine month periods ended March 31, 2011, respectively. The Company recognized $2.2 million and $19.4 million of share-based compensation expense during the three and nine month periods ended March 31, 2010, respectively.

The Company continues to defer compensation expense on performance-based options granted under the 2006 Plan, which have elements of both performance and market conditions, because the performance conditions are not probable of being met at March 31, 2011.

During the nine month period ended March 31, 2011, the Company granted 2.5 million time-based stock options, which vest over a four year period, at a weighted average exercise price of $14.65 per share. Using key assumptions of 44% for stock price volatility and 6.25 years for expected option term, these options had an estimated fair value of $6.65 per option using the Black-Scholes method of estimating fair value.

Approximately 0.1 million of stock options were exercised during the nine month period ended March 31, 2011. Net of estimated forfeitures, the Company had $23.4 million of unrecognized compensation cost relating to time-based stock options and $8.6 million of unrecognized compensation cost related to performance-based stock options at March 31, 2011.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

On April 29, 2011, the Company’s Board of Directors approved a plan to modify the vesting conditions of the existing performance-based stock options. After giving effect to the modification, the options will vest upon the greater of the percentage of the Company’s common stock sold by certain investment funds affiliated with Providence Equity Partners and Goldman Sachs Capital Partners (together, the “Principal Stockholders”) or on certain return on investment hurdles achieved by the Principal Stockholders. The exercise price and contractual life of the performance-based stock options did not change. Since the modified vesting conditions are not probable of being met, the Company will not have compensation expense until those conditions become probable of being met. The Company is in the process of determining the new unrecognized compensation cost on the modified performance-based stock options.

Long Term Incentive Compensation Plan

In fiscal 2007, the Company adopted the Long-Term Incentive Compensation Plan (the “LTIC Plan”). The LTIC Plan consists of a bonus pool that is valued based on returns to the Principal Stockholders in connection with a change in control of the Company. Out of a total of 1,000,000 units authorized, approximately 656,000 units were outstanding under the LTIC Plan at March 31, 2011. Each unit represents the right to receive a payment based on the value of the bonus pool. As the contingent future events that would result in value to the unit-holders are less than probable, no compensation expense has been recognized by the Company during any of the periods following the Transaction. The plan is being accounted for as an equity-based plan as the units may be settled in stock or cash at the Company’s discretion, and it is the Company’s intent to settle any future payment out of the LTIC Plan in stock. The total amount of unrecognized compensation cost over the vesting periods of all units, net of estimated forfeitures, is approximately $2.5 million at March 31, 2011.

Stock Repurchase Program

On March 11, 2011, the Company’s Board of Directors approved an increase to the size of the Company’s stock repurchase program from $150.0 million to $250.0 million. The date through which the repurchases may occur remained December 31, 2011. Under the terms of the program, the Company may make repurchases in the open market, in privately negotiated transactions, through accelerated repurchase programs or in structured share repurchase programs. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. The Company has repurchased 9.3 million shares of its common stock for $140.6 million under the program from its inception in June 2010 through March 31, 2011, of which $2.7 million settled after March 31, 2011. At March 31, 2011, approximately $109.4 million remained available under the program to be used for future stock repurchases.

4. STUDENT RECEIVABLES

The Company records student receivables at cost less an estimated allowance for doubtful accounts. The Company determines its allowance for doubtful accounts by categorizing gross receivables based upon the enrollment status of the student. The reserve is established based on the likelihood of collection considering the Company’s historical experience, which is updated on a frequent basis. The reserve methodology results in a higher reserve rate for out-of-school students compared to in-school students. Student accounts are monitored through an aging process whereby past due accounts are pursued. When certain criteria are met, which is generally when receivables age past the due date by more than four months, and internal collection measures have been taken without success, the accounts of former students are placed with an outside collection agency. Student accounts that are in collection are reserved for at a high rate and are written off after repeated collection attempts have been unsuccessful.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

5. PROPERTY AND EQUIPMENT

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

Asset Class		March 31, 2011				June 30, 2010				March 31, 2010
Land		$	17,649			$	17,655			$	17,861
Buildings and improvements			75,315				74,764				73,917
Leasehold improvements and capitalized lease costs			505,157				446,992				404,383
Furniture and equipment			141,916				128,411				117,117
Technology and other equipment			260,373				226,587				205,144
Software			65,130				56,350				53,083
Library books			37,941				35,051				33,551
Construction in progress			24,779				29,850				44,553
Total			1,128,260				1,015,660				949,609
Less accumulated depreciation			(432,499	)			(336,814	)			(315,022	)
Property and equipment, net		$	695,761			$	678,846			$	634,587

Depreciation and amortization of property and equipment was $35.1 million and $28.6 million, respectively, for the three months ended March 31, 2011 and 2010. Depreciation and amortization of property and equipment was $101.5 million and $82.2 million, respectively, for the nine month periods ended March 31, 2011 and 2010.

6. GOODWILL AND INTANGIBLE ASSETS

Goodwill

As a result of the Transaction, the Company recorded approximately $2.6 billion of goodwill. Goodwill is recognized as an asset in the financial statements and is initially measured as the excess of the purchase price of the acquired company over the amounts assigned to net assets acquired. In connection with the Transaction, property, equipment, intangible assets other than goodwill and other assets and liabilities were recorded at fair value. The remaining value was assigned to goodwill and represents the intrinsic value of the Company beyond its net tangible and identifiable intangible assets. This is evidenced by the excess of the amount paid to acquire the Company over the values of these respective net assets.

The Company formally evaluates the carrying amount of goodwill for impairment on April 1 of each fiscal year. During interim periods, the Company reviews forecasts, its market capitalization, business plans, regulatory and legal matters and other activities necessary to identify events that may trigger more frequent impairment tests. During the nine month period ended March 31, 2011, the Company identified no such triggering events, and as a result, no impairments were recorded.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Intangible Assets

Intangible assets consisted of the following amounts (in thousands):

		March 31, 2011								June 30, 2010								March 31, 2010
		Gross								Gross								Gross
		Carrying				Accumulated				Carrying				Accumulated				Carrying				Accumulated
		Amount				Amortization				Amount				Amortization				Amount				Amortization
Tradename-Art Institute		$	330,000			$	—			$	330,000			$	—			$	330,000			$	—
Licensing, accreditation and Title IV program participation			112,179				—				112,179				—				112,179				—
Curriculum and programs			34,327				(22,303	)			31,948				(18,412	)			30,935				(17,191	)
Student contracts, applications and relationships			39,511				(34,881	)			39,511				(34,048	)			39,511				(33,687	)
Favorable leases and other			19,448				(14,736	)			19,403				(13,393	)			19,425				(12,948	)
Total intangible assets		$	535,465			$	(71,920	)		$	533,041			$	(65,853	)		$	532,050			$	(63,826	)

Tradenames are often considered to have useful lives similar to that of the overall business, which generally means such assets are assigned an indefinite life for accounting purposes.

State licenses and accreditations of the Company’s schools as well as their eligibility for Title IV program participation are periodically renewed in cycles ranging from every year to up to every ten years depending upon government and accreditation regulations. Since the Company considers these renewal processes to be a routine aspect of the overall business, these assets were assigned indefinite lives.

Amortization of intangible assets for the three months ended March 31, 2011 and 2010 was $2.0 million and $2.1 million, respectively. Amortization of intangible assets for the nine month period ended March 31, 2011 and 2010 was $6.0 million and $6.7 million, respectively.

Total estimated amortization on the Company’s existing intangible assets at March 31, 2011 for each of the years ending June 30, 2011 through 2015 and thereafter is as follows (in thousands):

		Amortization
Fiscal years		Expense
2011 (remainder)		$	2,001
2012			8,082
2013			5,735
2014			3,967
2015			1,581
Thereafter			—

7. OTHER LONG-TERM ASSETS

Other long-term assets consisted of the following amounts (in thousands):

		March 31,				June 30,				March 31,
		2011				2010				2010
EFL loans		$	44,403			$	49,529			$	35,502
Deferred financing fees			17,407				25,536				27,538
Other			28,105				18,376				19,128
Total other long-term assets		$	89,915			$	93,441			$	82,168

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In August 2008, the Company introduced the Education Finance Loan program with a private lender, which enabled students who had exhausted all available government-sponsored or other aid and had been denied a private loan to borrow funds to finance a portion of their tuition and other educational expenses. Under the Education Finance Loan program, the Company purchased loans that were originated by a private lender (“EFL Loans”). The Company has only awarded aid under the Education Finance Loan program in fiscal 2011 to students who had received aid under the program before June 30, 2010.

Prior to the quarter ended December 31, 2010, EFL Loans were classified as held for investment, and the Company recognized bad debt expense related to these loans for estimated losses on the pro-rata portion of the academic term that had been completed. Bad debt expense was determined using a projected default rate based on information received from a private loan provider that included historical default rate data for former students that attended the Company’s institutions. This data was further analyzed to apply projected default rates by credit score and was supplemented to include consideration of current economic factors. The allowance for loan losses was recorded in other long-term assets or other long-term liabilities, depending on whether the loan had been purchased from the originating bank.

In December 2010, EFL Loans were redesignated from held for investment to held for sale, and the Company recorded the loans at the lower of cost or fair market value. On April 14, 2011, the Company sold its wholly-owned subsidiary which holds the EFL Loans to an unrelated third party for proceeds of $44.4 million. In connection with the sale, the Company pre-funded approximately $1.6 million for the purchase of EFL Loans through June 30, 2011. This transaction was considered in determining the required fair market value adjustment of $13.2 million on March 31, 2011. Including this fair value adjustment, the Company recorded a total fair value adjustment of $13.9 million and $21.4 million, respectively, in educational services expense during the three and nine months ended March 31, 2011. As a result of the above-mentioned sale, the Company has no future obligations to fund additional purchases of loans from the private lender under the Education Finance Loan program.

8. ACCRUED LIABILITIES

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

		March 31,				June 30,				March 31,
		2011				2010				2010
Payroll and related taxes		$	67,526			$	67,803			$	67,775
Capital expenditures			7,275				10,020				11,187
Advertising			34,767				32,474				30,009
Interest			21,727				12,732				21,790
Benefits			11,748				12,014				9,569
Other			48,551				43,042				47,482
Total accrued liabilities		$	191,594			$	178,085			$	187,812

9. SHORT-TERM AND LONG-TERM DEBT

Senior Secured Credit Facilities Amendment:

On December 7, 2010, EM LLC entered into an agreement to amend and extend its senior secured credit facilities, which include a $442.5 million revolving credit facility and a $1.1 billion term loan. Under the agreement, lenders providing $328.3 million, or 74%, of the current capacity under the revolving credit facility extended their commitments from June 1, 2012 to June 1, 2015, at a new interest rate of LIBOR + 4.00%. In addition, holders of an aggregate $758.7 million, or 68%, of the term loan agreed to extend the maturity date from June 1, 2013 to June 1, 2016 and increase the interest rate on these borrowings from LIBOR + 1.75% to LIBOR + 4.00%. Lenders who did not extend will continue to be paid interest based on the margin spreads in place prior to the amendment.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The lenders also approved other amendments to the senior secured credit facilities, including a springing maturity of March 1, 2014 for the term loan in the event that EM LLC does not refinance, extend or pay in full the Senior Notes due 2014 on or prior to March 1, 2014. The amendments also included an increase to the covenant basket amount for capital expenditures and certain restricted payments, a tightening of the leverage ratio requirements through the remainder of fiscal 2011, an increase in the amount of the revolving credit line available for letters of credit to $425.0 million and the ability to use cash to collateralize letters of credit.

The amendment of the term loan was accounted for as an extinguishment of the original term loan, which resulted in a loss on extinguishment of debt of $8.4 million. This loss included $5.1 million of previously deferred financing fees that were being amortized through the original maturity date and $3.3 million in cash paid to lenders in connection with the amendment.

Short-Term Debt:

EM LLC had no borrowings under its $442.5 million revolving credit facility at March 31, 2011, June 30, 2010 or March 31, 2010. EM LLC is obligated to pay a per annum commitment fee on undrawn amounts under the revolving credit facility, which is currently 0.375% and varies based on certain leverage ratios. The revolving credit facility is secured by certain of EM LLC’s assets and is subject to the Company’s satisfaction of certain covenants and financial ratios described in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Covenant Compliance”.

EM LLC had outstanding letters of credit of $280.8 million at March 31, 2011. The majority of these letters of credit are with the U.S. Department of Education, which requires the Company to maintain a letter of credit due to the Company’s failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. The amount of the letter of credit was $259.8 million at March 31, 2011. The outstanding letters of credit reduced the amount available for borrowings under the revolving credit facility to $161.7 million at March 31, 2011.

On April 11, 2011, the Company increased its letter of credit with the U.S. Department of Education to $361.5 million, which is 15% of total Title IV aid received by students attending the Company’s institutions during fiscal 2010. Immediately following this increase, the Company had $75.0 million of additional borrowings available under the revolving credit facility.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Long-Term Debt:

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

		March 31,				June 30,				March 31,
		2011				2010				2010
Senior secured term loan facility, due 2013		$	351,445			$	1,114,977			$	1,117,940
Senior secured term loan facility, due 2016			754,645				—				—
Senior notes due 2014 at 8.75%			375,000				375,000				375,000
Senior subordinated notes due 2016 at 10.25%			47,680				47,680				47,680
Other			786				1,081				1,213
Total long-term debt			1,529,556				1,538,738				1,541,833
Less current portion			12,076				12,103				12,172
Total long term debt, less current portion		$	1,517,480			$	1,526,635			$	1,529,661

The interest rate on the senior secured term loan facility due in 2013, which equals three-month LIBOR plus a margin spread of 1.75%, was 2.1% at March 31, 2011, 2.3% at June 30, 2010 and 2.1% at March 31, 2010. The interest rate on the senior secured term loan facility due in 2016, which equals three-month LIBOR plus a margin spread of 4.0%, was 4.3% at March 31, 2011.

During the nine months ended March 31, 2010, the Company purchased Senior Subordinated Notes with a total face value of approximately $337.3 million through two tender offer transactions. As the Senior Subordinated Notes were purchased at a premium, the Company recorded losses of $2.4 million and $47.2 million in the three and nine months ended March 31, 2010, respectively. These losses included the acceleration of amortization on previously deferred debt fees of $0.3 million and $5.6 million in the three and nine month periods ended March 31, 2010, respectively.

On April 29, 2011, the Company notified the Trustee of its intention to call the remaining $47.7 million of the Senior Subordinated Notes on June 1, 2011 for a price of 105.125%. The premium of $2.4 million and remaining amortization on related deferred financing fees of $0.6 million will be recorded as a loss on extinguishment of debt in the fourth quarter of fiscal 2011.

10. DERIVATIVE INSTRUMENTS

EM LLC utilizes interest rate swap agreements, which are contractual agreements to exchange payments based on underlying interest rates, to manage the floating rate portion of its term loan facility. At March 31, EM LLC has two five-year interest rate swaps outstanding through July 1, 2011, each for a notional amount of $375.0 million. The interest rate swaps effectively convert a portion of the variable interest rate on the senior secured term loan to a fixed rate. EM LLC receives payments based on the three-month LIBOR and makes payments based on a fixed rate of 5.4%.

The fair value of the interest rate swaps was $9.6 million at March 31, 2011, which was recorded as part of current liabilities on the consolidated balance sheet since the agreements mature within one year. The fair value of the interest rate swaps was $33.9 million and $42.3 million at June 30, 2010 and March 31, 2010, respectively, which was recorded in other long-term liabilities on the consolidated balance sheets.

During the three and nine months ended March 31 of both 2011 and 2010, the Company reclassified approximately $6.1 million and $17.8 million, net of tax, respectively, from accumulated other comprehensive loss to the consolidated statement of operations, all of which was paid due to regularly recurring quarterly settlements of the interest rate swaps. The Company recorded an unrealized after-tax loss of $0.4 million and $3.4 million for the three months ended March 31, 2011 and 2010, respectively, and $2.5 million and $10.1 million for the nine months ended March 31, 2011 and 2010, respectively, in other comprehensive loss related to the change in market value of the swap agreements. Additionally, at March 31, 2011, there was a cumulative unrealized loss of $6.0 million, net of tax, related to these interest rate swaps included in accumulated other comprehensive loss on the Company’s consolidated balance sheet that will be reclassified to the consolidated statement of operations over the remaining three months of the term of the interest rate swaps based on current interest rates and underlying debt obligations at March 31, 2011. This loss would be immediately recognized in the consolidated statement of operations if these instruments fail to meet certain cash flow hedge requirements.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company used Level 2 inputs to value its interest rate swaps. These inputs are defined as other than quoted prices in active markets that are either directly or indirectly observable, including obtaining quotes from counterparties, which are based on three-month LIBOR forward curves, and assessing non-performance risk based upon published market data.

On April 7, 2011, the Company entered into three interest rate swap agreements for an aggregate notional amount of $950.0 million. All swap agreements are effective July 1, 2011. The first swap agreement is for a notional amount of $325.0 million and effectively fixes future interest payments at a rate of 2.935% until the scheduled maturity of the underlying borrowings on June 1, 2013. The other two swap agreements are for notional amounts of $312.5 million each and effectively fix future interest payments at a rate of 6.26% through June 1, 2015. One of the swap agreements for $312.5 million was entered into with an affiliate of one of the Sponsors.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table presents the carrying amounts and fair values of financial instruments (in thousands):

		March 31, 2011								June 30, 2010								March 31, 2010
		Carrying								Carrying								Carrying
		Value				Fair Value				Value				Fair Value				Value				Fair Value
Variable rate debt		$	1,106,090			$	1,082,146			$	1,114,977			$	1,036,929			$	1,117,940			$	1,089,992
Fixed rate debt			423,466				431,936				423,761				426,979				423,893				437,082
Total debt		$	1,529,556			$	1,514,082			$	1,538,738			$	1,463,908			$	1,541,833			$	1,527,074

The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate carrying values due to the short-term nature of these instruments. The derivative financial instruments are carried at fair value, which is based on the framework discussed in Note 10. The fair values of the Company’s debt instruments are determined based on each instrument’s trading value at the dates presented.

As described in Note 7, EFL Loans under the Education Finance Loan program were redesignated from held for investment to held for sale in December 2010. At March 31, 2011, the loans were recorded at market value using Level 2 inputs, as the loans were sold to an unrelated third party in April 2011.

As described in Note 10, the fair value of the interest rate swap was recorded as part of current liabilities on the consolidated balance sheet at March 31, 2011 since the agreements mature within one year. In past periods, the fair value of the interest rate swap was recorded as part of other long-term liabilities on the consolidated balance sheets.

12. INCOME TAXES

The Company accounts for income taxes by the asset and liability method. Under this method, deferred tax assets and liabilities result from (i) temporary differences in the recognition of income and expense for financial and federal income tax reporting requirements, and (ii) differences between the recorded value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. The Company regularly evaluates deferred income tax assets for recoverability and records a valuation allowance if it is more-likely-than-not that some portion of the deferred income tax asset will not be realized.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company’s effective tax rate was 35.7% and 37.4% for the three and nine months ended March 31, 2011 and 22.6% and 28.7% for the three and nine months ended March 31, 2010. The effective rates differed from the combined federal and state statutory rates primarily due to valuation allowances, expenses that are non-deductible for tax purposes, and accounting for uncertain tax positions.

As a result of the expiration of certain statutes of limitation with respect to the 2007 and 2006 tax years, the Company’s liability for uncertain tax positions, excluding interest and the indirect benefits associated with state income taxes, decreased by $4.3 million and $16.3 million during the three and nine month periods ended March 31, 2011 and 2010, respectively. The Company’s effective tax rate was impacted by $3.5 million and $17.9 million during the three and nine month periods ending March 31, 2011 and 2010, respectively, related to these statute of limitation expirations.

As of March 31, 2011, the Company’s accrual for uncertain tax positions was $5.3 million, excluding interest and the indirect benefits associated with state income taxes. It is reasonably possible that the total amount of unrecognized tax benefits, excluding interest and the indirect benefits associated with state income taxes, will decrease by $0.8 million within the next twelve months due to the expiration of certain statutes of limitation with respect to the 2008 tax year. If recognized, the resultant tax benefit will be a discrete item in the third quarter of fiscal year 2012.

The statutes of limitation for the Company’s U.S. income tax return are closed for years through fiscal 2007. The statutes of limitation for the Company’s state and local income tax returns for prior periods vary by jurisdiction. However, the statutes of limitation with respect to the major jurisdictions in which the Company files state and local income tax returns are generally closed for years through fiscal 2006.

13. CONTINGENCIES

Securities Class Action

On August 11, 2010, a securities class action complaint captioned Gaer v. Education Management Corp., et. al was filed against the Company, certain of its executive officers and directors, and certain underwriters of the Company’s 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 the Company’s initial public offering and the Company’s subsequent press releases and filings with the Securities and Exchange Commission. On November 10, 2010, the Court granted the Oklahoma Police Pension and Retirement System’s motion to serve as lead plaintiff in the lawsuit. On January 10, 2011, the lead plaintiff and the Southeastern Pennsylvania Transportation Authority filed an Amended Class Action Complaint with the Court alleging similar violations of Section 11, 12(a)(2) and 15 of the Securities Act of 1933 and Section 10(b) and 20(a) of the Exchange Act of 1934 and adding one additional individual defendant and other underwriters from the Company’s initial public offering. The Company believes that the lawsuit is without merit and intends to vigorously defend itself.

Incentive Compensation Matters

On May 3, 2011, a qui tam action captioned United States of America, and the States of California, Florida, Illinois, Indiana, Massachusetts, Minnesota, Montana, New Jersey, New Mexico, New York and Tennessee, and the District of Columbia, each ex rel., Lynntoya Washington and Michael T. Mahoney v. Education Management Corporation, et. al (“Washington”) filed under the federal False Claims Act in April 2007 was unsealed due to the U.S. Department of Justice’s decision to intervene in the case under the federal False Claims Act. Several of the states listed on the case caption have joined the case based on qui tam actions filed under their respective state False Claims Acts. The case, which is pending in the Western District of Pennsylvania, relates to whether the defendants’ compensation plans for admission representatives violated the Higher Education Act, as amended (“HEA”), and U.S. Department of Education regulations prohibiting an institution participating in Title IV Programs from providing any commission, bonus or other incentive payment based

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

directly or indirectly on success in securing enrollments to any person or entity engaged in any student recruitment or admissions activity. The Company previously disclosed the receipt of a request from the Department of Justice, Civil Division, for documents and other information regarding its policies and practices with respect to recruiter compensation and performance evaluation in connection with a qui tam action pending in United States District Court for the Western District of Pennsylvania but that was under seal at the time. The complaint was filed by a former admissions representative at The Art Institute of Pittsburgh Online Division and a former director of training at Online Higher Education and asserts the relators are entitled to recover treble the amount of actual damages allegedly sustained by the federal government as a result of the alleged activity, plus civil monetary penalties. The Company believes the claims to be without merit and intends to vigorously defend itself.

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 that time. The case, which is also pending in the United States District Court for the Western District of Pennsylvania, makes similar allegations to the Washington case that the defendants’ compensation plans for admission representatives violated the HEA and U.S. Department of Education regulations. The complaint was filed by a former admissions representative for the online programs offered by South University and requests damages similar to Washington. The Company believes the claims to be without merit and intends to defend this action vigorously

OIG Subpoena

On March 22, 2011, the Company received a subpoena from the Office of Inspector General of the U.S. Department of Education requesting documents related to satisfactory academic progress standards and state licensing of online programs offered by South University and The Art Institute of Pittsburgh for the time period beginning January 1, 2006 through the date of the subpoena. The Company intends to cooperate with the subpoena and investigation. However, the Company cannot predict the eventual scope, duration or outcome of the investigation at this time.

Buirkle APA Program Accreditation Lawsuit

In August 2009, a petition was filed in the District Court for Dallas County, Texas in the case of Capalbo et al. v. Argosy Education Group, Inc. 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 petition 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 petition 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.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
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(Continued)

In May 2010, those three plaintiffs and a fourth former student in the Clinical Psychology program offered by the Dallas campus of Argosy University filed a demand for arbitration. The first of four separate arbitrations is currently scheduled to be heard in February 2012. Also in May 2010, three additional former students in the Clinical Psychology program offered by the Dallas campus of Argosy University filed a new action in the District Court for Dallas County, Texas in the case of Adibian et al. v. Argosy Education Group, Inc., Education Management LLC, and Education Management Corporation alleging the same claims made in the previous lawsuits. Defendants filed a motion to stay the new action pending the resolution of the arbitration proceedings. Prior to the hearing on the motion, plaintiffs filed a notice of non-suit without prejudice. The court signed the order of non-suit in August 2010, and the case was closed. The Company believes the claims in the lawsuits and the arbitrations to be without merit and intends to vigorously defend itself.

State Attorney General Investigations

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

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

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.

Other

In addition to the matters described above, the Company is a defendant in certain legal proceedings arising out of the conduct of its 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 expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

14. RELATED PARTY TRANSACTIONS

In connection with the debt amendment described in Note 9, the Company paid an arranger fee of $1.1 million to an affiliate of one of the Sponsors in the second quarter of fiscal 2011.

In connection with the Transaction and under the terms of an agreement between the Company and the Sponsors, the Company agreed to pay annual advisory fees of $5.0 million to the Sponsors. This agreement included customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates. Upon the completion of the initial public offering, the Company terminated the agreement with the Sponsors and paid a non-recurring fee of $29.6 million. The termination fee is included in management fees paid to affiliates in the accompanying consolidated statements of operations for the nine months ended March 31, 2010.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In June 2006 and April 2011, the Company entered into interest rate swap agreements in the amount of $375.0 million and $312.5 million, respectively, with an affiliate of one of the Sponsors. The terms of these agreements are discussed in Note 10.

15. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION

On June 1, 2006, in connection with the Transaction, EM LLC and Education Management Finance Corp. issued the Notes. The Notes are fully and unconditionally guaranteed by all of EM LLC’s existing direct and indirect domestic restricted subsidiaries, other than any subsidiary that directly owns or operates a school, or has been formed for such purposes, and subsidiaries that have no material assets (collectively, the “Guarantors”). All other subsidiaries of EM LLC, either direct or indirect, do not guarantee the Notes (“Non-Guarantors”).

In November 2009, Education Management Corporation (“EDMC”) guaranteed the indebtedness of EM LLC and Education Management Finance Corp. under the Notes.

The following tables present the condensed consolidated financial position of EM LLC, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and EDMC as of March 31, 2011, June 30, 2010 and March 31, 2010. The statements of operations for the three and nine month periods ended March 31, 2011 and 2010 and of condensed cash flows for the nine month periods ended March 31, 2011 and 2010 are presented for EM LLC, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and EDMC.

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2011 (In thousands)

						Guarantor				Non-Guarantor								EM LLC												EDMC
		EM LLC				Subsidiaries				Subsidiaries				Eliminations				Consolidated				EDMC				Eliminations				Consolidated
Assets
Current:
Cash and cash equivalents		$	543,502			$	10,636			$	9,919			$	—			$	564,057			$	49,098			$	—			$	613,155
Restricted cash			21,571				—				31,336				—				52,907				—				—				52,907
Student and other receivables, net			(77	)			101				125,273				—				125,297				4				—				125,301
Inventories			(254	)			117				11,922				—				11,785				—				—				11,785
Other current assets			31,085				418				76,649				—				108,152				—				—				108,152
Total current assets			595,827				11,272				255,099				—				862,198				49,102				—				911,300
Property and equipment, net			70,212				7,172				618,377				—				695,761				—				—				695,761
Intangible assets, net			2,445				53				461,047				—				463,545				—				—				463,545
Goodwill			7,328				—				2,571,803				—				2,579,131				—				—				2,579,131
Intercompany balances			692,994				(106,974	)			(857,282	)			—				(271,262	)			271,262				—				—
Other long-term assets			33,247				44,196				12,473				—				89,916				(1	)			—				89,915
Investment in subsidiaries			2,138,249				—				—				(2,138,249	)			—				1,837,633				(1,837,633	)			—
Total assets		$	3,540,302			$	(44,281	)		$	3,061,517			$	(2,138,249	)		$	4,419,289			$	2,157,996			$	(1,837,633	)		$	4,739,652
Liabilities and shareholders’ equity (deficit)
Current:
Current portion of long-term debt		$	11,850			$	—			$	226			$	—			$	12,076			$	—			$	—			$	12,076
Other current liabilities			149,582				3,881				513,492				—				666,955				(2	)			—				666,953
Total current liabilities			161,432				3,881				513,718				—				679,031				(2	)			—				679,029
Long-term debt, less current portion			1,516,920				—				560				—				1,517,480				—				—				1,517,480
Other long-term liabilities			32,726				1,325				173,444				—				207,495				—				—				207,495
Deferred income taxes			(8,409	)			(23,987	)			210,046				—				177,650				(260	)			—				177,390
Total liabilities			1,702,669				(18,781	)			897,768				—				2,581,656				(262	)			—				2,581,394
Total shareholders’ equity (deficit)			1,837,633				(25,500	)			2,163,749				(2,138,249	)			1,837,633				2,158,258				(1,837,633	)			2,158,258
Total liabilities and shareholders’ equity (deficit)		$	3,540,302			$	(44,281	)		$	3,061,517			$	(2,138,249	)		$	4,419,289			$	2,157,996			$	(1,837,633	)		$	4,739,652

EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2010 (In thousands)

						Guarantor				Non-Guarantor								EM LLC												EDMC
		EM LLC				Subsidiaries				Subsidiaries				Eliminations				Consolidated				EDMC				Eliminations				Consolidated
Assets
Current:
Cash and cash equivalents		$	11,522			$	314			$	313,403			$	—			$	325,239			$	48,307			$	—			$	373,546
Restricted cash			387				—				12,455				—				12,842				—				—				12,842
Student and other receivables, net			99				90				188,342				—				188,531				6				—				188,537
Inventories			—				182				11,473				—				11,655				—				—				11,655
Other current assets			26,741				576				79,064				—				106,381				—				—				106,381
Total current assets			38,749				1,162				604,737				—				644,648				48,313				—				692,961
Property and equipment, net			64,814				6,956				607,076				—				678,846				—				—				678,846
Intangible assets, net			2,737				65				464,386				—				467,188				—				—				467,188
Goodwill			7,328				—				2,571,803				—				2,579,131				—				—				2,579,131
Intercompany balances			1,285,257				(76,041	)			(1,611,040	)			—				(401,824	)			401,824				—				—
Other long-term assets			38,474				49,529				5,440				—				93,443				(2	)			—				93,441
Investment in subsidiaries			1,883,576				—				—				(1,883,576	)			—				1,626,483				(1,626,483	)			—
Total assets		$	3,320,935			$	(18,329	)		$	2,642,402			$	(1,883,576	)		$	4,061,432			$	2,076,618			$	(1,626,483	)		$	4,511,567
Liabilities and shareholders’ equity (deficit)
Current:
Current portion of long-term debt		$	11,850			$	—			$	253			$	—			$	12,103			$	—			$	—			$	12,103
Other current liabilities			114,396				4,827				375,641				—				494,864				183				—				495,047
Total current liabilities			126,246				4,827				375,894				—				506,967				183				—				507,150
Long-term debt, less current portion			1,525,807				—				828				—				1,526,635				—				—				1,526,635
Other long-term liabilities			58,397				3,172				158,584				—				220,153				—				—				220,153
Deferred income taxes			(15,998	)			(13,393	)			210,585				—				181,194				(260	)			—				180,934
Total liabilities			1,694,452				(5,394	)			745,891				—				2,434,949				(77	)			—				2,434,872
Total shareholders’ equity (deficit)			1,626,483				(12,935	)			1,896,511				(1,883,576	)			1,626,483				2,076,695				(1,626,483	)			2,076,695
Total liabilities and shareholders’ equity (deficit)		$	3,320,935			$	(18,329	)		$	2,642,402			$	(1,883,576	)		$	4,061,432			$	2,076,618			$	(1,626,483	)		$	4,511,567