10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: December 31, 2002 Commission File Number: 000-21363

EDUCATION MANAGEMENT CORPORATION

(Exact name of registrant as specified in its charter)

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

210 Sixth Avenue, Pittsburgh, PA	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     X         No         

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes              No     X    

The number of shares of the registrant’s Common Stock outstanding as of December 31, 2002 was 35,403,716.

INDEX

			PAGE
PART I –	FINANCIAL INFORMATION
	ITEM 1 –	FINANCIAL STATEMENTS	3-9
	ITEM 2 –	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10-14
	ITEM 3 –	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14
	ITEM 4 –	CONTROLS AND PROCEDURES	14
PART II –	OTHER INFORMATION
	ITEM 4 –	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	15
	ITEM 6 –	EXHIBITS AND REPORTS ON FORM 8-K	15
SIGNATURES			16
CERTIFICATIONS BY CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER			17-18
EXHIBIT INDEX			19

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PART I

ITEM 1 – FINANCIAL STATEMENTS

EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	December 31,			June 30,			December 31,
	2001			2002			2002
	(unaudited)						(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	44,936		$	84,477		$	5,486
Restricted cash		516			1,756			2,561
Total cash		45,452			86,233			8,047
Receivables, net		33,318			30,378			35,509
Inventories		4,033			3,932			4,638
Deferred and prepaid income taxes		5,715			12,847			10,102
Other current assets		9,813			6,652			9,386
Total current assets		98,331			140,042			67,682
Property and equipment, net		186,967			191,698			223,174
Deferred income taxes and other long-term assets		10,822			10,977			10,390
Intangible assets, net of amortization		143,165			149,938			173,185
Total assets	$	439,285		$	492,655		$	474,431
Liabilities and shareholders’ investment
Current liabilities:
Current portion of long-term debt	$	508		$	25,076		$	140
Accounts payable		6,146			17,550			11,440
Accrued liabilities		29,381			26,458			35,315
Advance payments and deferred tuition		81,720			70,588			40,923
Total current liabilities		117,755			139,672			87,818
Long-term debt, less current portion		3,541			3,500			3,638
Deferred income taxes and other long-term liabilities		5,742			2,906			3,350
Shareholders’ investment:
Common stock		348			352			355
Additional paid-in capital		237,376			250,271			255,157
Treasury stock, at cost		(1,495	)		(1,495	)		(1,495	)
Retained earnings		76,044			97,091			125,740
Accumulated other comprehensive income (loss)		(26	)		358			(132	)
Total shareholders’ investment		312,247			346,577			379,625
Total liabilities and shareholders’ investment	$	439,285		$	492,655		$	474,431

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

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EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except per share amounts)

	For the three months ended December 31,				For the six months ended December 31,
	2001		2002		2001		2002
Net revenues	$	129,490	$	175,136	$	221,364	$	303,279
Costs and expenses:
Educational services		74,326		100,753		141,458		194,883
General and administrative		22,679		31,322		43,403		59,482
Amortization of intangible assets		530		1,095		839		2,060
		97,535		133,170		185,700		256,425
Income before interest and taxes		31,955		41,966		35,664		46,854
Interest expense, net		548		332		1,027		642
Income before income taxes		31,407		41,634		34,637		46,212
Provision for income taxes		12,123		15,823		13,370		17,563
Net income	$	19,284	$	25,811	$	21,267	$	28,649
Earnings per share:
Basic	$	.61	$	.73	$	.68	$	.81
Diluted	$	.58	$	.70	$	.65	$	.78
Weighted average number of shares outstanding (000’s):
Basic		31,829		35,339		31,088		35,265
Diluted		33,363		36,685		32,626		36,650

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

4

EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

	Six months ended December 31,
	2001			2002
Cash flows from operating activities:
Net income	$	21,267		$	28,649
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		14,049			18,551
Changes in current assets and liabilities:
Restricted cash		(298	)		(805	)
Receivables		(8,604	)		(4,194	)
Inventories		(463	)		(668	)
Other current assets		860			(64	)
Accounts payable		(2,249	)		3,035
Accrued liabilities		9,956			8,319
Advance payments and deferred tuition		32,007			(31,405	)
Total adjustments		45,258			(7,231	)
Net cash flows from operating activities		66,525			21,418
Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired		(105,830	)		(24,044	)
Expenditures for property and equipment		(28,892	)		(55,648	)
Other items, net		(3,372	)		(417	)
Net cash flows from investing activities		(138,094	)		(80,109	)
Cash flows from financing activities:
Revolving credit facility activity, net		(53,525	)		(25,000	)
Principal payments on debt		(8,073	)		(51	)
Proceeds from issuance of Common Stock		131,057			4,889
Net cash flows from financing activities		69,459			(20,162	)
Effective exchange rate changes on cash		(26	)		(138	)
Net change in cash and cash equivalents		(2,136	)		(78,991	)
Cash and cash equivalents, beginning of period		47,072			84,477
Cash and cash equivalents, end of period	$	44,936		$	5,486
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	740		$	374
Income taxes		552			49
Cash paid for acquistions:
Fair value of:
Assets acquired	$	154,309		$	29,302
Liabilities assumed		(36,280	)		(3,385	)
Cash paid		118,029			25,917
Less: cash acquired		(9,920	)		(1,873	)
Stock options exchanged in connection with acquisition of subsidiary		2,279			—
Net cash paid for acquisitions	$	105,830		$	24,044

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

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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. NATURE OF OPERATIONS:

Education Management Corporation (“EDMC” or the “Company”) is among the largest providers of private postsecondary education in North America, based on student enrollment and revenue. EDMC’s Art Institutes offer master’s, bachelor’s, associate’s and non-degree programs in the areas of design, media arts, fashion, and culinary arts. EDMC’s Argosy Education Group, Inc. (“Argosy”) provides graduate and undergraduate degree programs in various fields including psychology, education, business, law and the health sciences. The Company has provided career-oriented education for 40 years.

2. BASIS OF PRESENTATION:

The accompanying condensed consolidated financial statements should be read in conjunction with the notes to consolidated financial statements included in the Annual Report on Form 10-K for the year ended June 30, 2002 (the “Fiscal 2002 Annual Report”). The accompanying condensed consolidated balance sheet as of June 30, 2002 has been derived from the audited balance sheet included in the Company’s Fiscal 2002 Annual Report. The accompanying interim financial statements are unaudited; however, management believes that all adjustments necessary for a fair presentation have been made and all such adjustments are considered normal and recurring. The results for the three-month and six-month periods ended December 31, 2002 are not necessarily indicative of the results to be expected for the full fiscal year. Unless otherwise noted, references to 2002 and 2003 refer to the periods ended December 31, 2001 and 2002, respectively.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Certain prior period balances have been reclassified to conform to the current period presentation.

3. CAPITAL STOCK:

Reflected below is a summary of the Company’s capital stock:

	Par Value		Authorized	December 31, 2001	June 30, 2002	December 31, 2002
Issued:
Preferred Stock	$	.01	10,000,000	—	—	—
Common Stock	$	.01	60,000,000	34,845,153	35,182,203	35,493,898
Held in treasury:
Common Stock		N/A	N/A	90,182	90,182	90,182

4. BUSINESS ACQUISITIONS:

On October 3, 2002, the Company acquired the stock of the Center for Digital Imaging and Sound (“CDIS”) in Burnaby, British Columbia, Canada.

On October 15, 2002, the Company purchased assets and assumed certain liabilities of the California Design College located in Los Angeles, California. This acquisition received regulatory approval in December 2002.

On November 8, 2002, the Company acquired the stock of Infocast Digital Arts Inc., which operates IDA Institute of Digital Arts (“IDA”) in Richmond, British Columbia, Canada.

These transactions are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations.” These entities were purchased for $25.9 million in the aggregate. CDIS and IDA will provide EDMC with a strong base for the addition of Art Institute programs in Vancouver. The purchase of California Design College will allow EDMC to expand on its current base of students in the Los Angeles area.

6

On December 21, 2001, the Company purchased Argosy, a leading provider of postgraduate professional education. The Company has consolidated Argosy’s results of operations as of the acquisition date. The following table reports pro forma information as if the acquisition of Argosy had been completed at July 1, 2001 (unaudited, in thousands, except per share amounts):

	Three months ended December 31,				Six months ended December 31,
	2001		2002		2001		2002
Net revenues
As reported	$	129,490	$	175,136	$	221,364	$	303,279
Pro forma		145,294		175,136		251,822		303,279
Net Income
As reported	$	19,284	$	25,811	$	21,267	$	28,649
Pro forma		18,795		25,811		19,382		28,649
Diluted earnings per share
As reported	$	.58	$	.70	$	.65	$	.78
Pro forma		.56		.70		.59		.78

5. EARNINGS PER SHARE:

Basic EPS is computed using the weighted average number of shares outstanding during the period, while diluted EPS is calculated to reflect the potential dilution related to stock options, using the treasury stock method.

Reconciliation of diluted shares (in thousands):

	Three months ended December 31,		Six months ended December 31,
	2001	2002	2001	2002
Basic shares	31,829	35,339	31,088	35,265
Dilution for stock options	1,534	1,346	1,538	1,385
Diluted shares	33,363	36,685	32,626	36,650

For the quarters ended December 31, 2001 and 2002, options to purchase 140,181 and 120,629 shares were excluded from the diluted earnings per share calculation because of their antidilutive effect (due to the exercise price of such options exceeding the average market price for the period), respectively.

6. COMPREHENSIVE INCOME:

Comprehensive income consisted of the following (in thousands):

	Three months ended December 31,						Six months ended December 31,
	2001			2002			2001			2002
Net income	$	19,284		$	25,811		$	21,267		$	28,649
Other comprehensive loss:
Foreign currency translation		(26	)		(201	)		(26	)		(490	)
Comprehensive income	$	19,258		$	25,610		$	21,241		$	28,159

Accumulated other comprehensive loss represents only the foreign currency translation adjustment of approximately ($26,000) and ($132,000) as of December 31, 2001 and 2002, respectively.

7. SEGMENT REPORTING:

        The Company’s principal business is providing post-secondary education. The services of EDMC’s operations are discussed in more detail under Note 1, “Nature of Operations.” In accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), EDMC manages its business according to two segments: The Art Institutes and Argosy. Effective for fiscal 2003, ITI Information Technology Institute Incorporated (“ITI”) is now reported within the Art Institutes division. The prior period results have been reclassified accordingly. The Company acquired ITI and Argosy on November 23, 2001 and December 21, 2001, respectively.

        These segments are based upon the method by which management makes operating decisions and assesses performance. Corporate information is included where it is needed to reconcile segment data to the consolidated financial statements.

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Summary information by reportable segment is as follows (in thousands):

	Three months ended December 31,					Six months ended December 31,
	2001			2002		2001			2002
Net revenue
Art Institutes	$	128,988		$	152,293	$	220,862		$	262,899
Argosy		502			22,843		502			40,380
	$	129,490		$	175,136	$	221,364		$	303,279
Income before interest and taxes
Art Institutes	$	32,106		$	37,716	$	35,815		$	44,248
Argosy		(151	)		4,250		(151	)		2,606
	$	31,955		$	41,966	$	35,664		$	46,854

	As of December 31,
	2001		2002
Total assets
Art Institutes	$	281,268	$	303,749
Argosy		105,146		119,324
		386,414		423,073
Corporate		52,871		51,358
Consolidated	$	439,285	$	474,431

8. INTANGIBLE ASSETS:

In the first quarter of fiscal 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), under which goodwill is no longer amortized. As required by SFAS 142, an independent appraisal company evaluated the intangible assets for impairment and no impairment existed. In addition, the Company evaluates the intangible assets for impairment annually (or more frequently, if needed), with any resulting impairment reflected as an operating expense.

Amortization of intangible assets for the three and six months ended December 31, 2002 was approximately $1.1 million and $2.1 million, respectively. Estimated amortization expense for amortized intangible assets for the next five fiscal years ending June 30 is as follows:

Fiscal years	Expense (in thousands)
2003 (remainder)	$	2,384
2004		4,503
2005		3,192
2006		1,818
2007		885

Intangible assets consisted of the following (in thousands):

	As of June 30, 2002					As of December 31, 2002					Weighted Average Amortization Period (years)
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Curriculum	$	7,567	$	(1,645	)	$	8,559	$	(2,282	)	6
Accreditation		3,486		(433	)		3,533		(579	)	12
Bachelors’ programs		1,100		(125	)		1,100		(162	)	15
Student contracts and applications		6,929		(1,322	)		7,806		(2,384	)	3
Software		256		(55	)		371		(105	)	3
Title IV		750		(30	)		785		(55	)	14
Tradename		500		—			500		—		Indefinite
Other		2,768		(1,117	)		2,768		(1,220	)	13
Total	$	23,356	$	(4,727	)	$	25,422	$	(6,787	)	6

The changes in the carrying amount of goodwill, by reporting segment, for the six months ended December 31, 2002 are as follows (in thousands):

	Art Institutes			Argosy			Total
Balance as of June 30, 2002	$	64,123		$	67,186		$	131,309
Goodwill related to acquisitions during the current fiscal year		24,769			—			24,769
Purchase price adjustments		(210	)		(1,111	)		(1,321	)
Goodwill variance due to foreign currency translation		(207	)		—			(207	)
Balance as of December 31, 2002	$	88,475		$	66,075		$	154,550

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9. GUARANTEES:

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Indebtedness of Others.” This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The Company guarantees a significant portion of real estate lease obligations for its subsidiaries. The approximate minimum future commitments under non-cancelable, long-term operating leases as of December 31, 2002 are reflected below:

Fiscal years	(in thousands)
2003 (remainder)	28,254
2004	51,736
2005	48,711
2006	47,805
2007	46,762
Thereafter	242,453
	465,721

10. STOCK-BASED COMPENSATION:

As of December 31, 2002, the Company has two stock option plans, which are described more fully in Note 15 of the Company’s Fiscal 2002 Annual Report. The Company accounts for these plans using the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying Common Stock on the date of grant. The following table illustrates the effect on net income and earnings per share as if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

	Three months ended December 31,				Six months ended December 31,
	2001		2002		2001		2002
Net income (in 000’s)
As reported	$	19,284	$	25,811	$	21,267	$	28,649
Pro forma		17,846		23,963		18,432		25,132
Basic earnings per share
As reported	$	.61	$	.73	$	.68	$	.81
Pro forma		.56		.68		.59		.71
Diluted earnings per share
As reported	$	.58	$	.70	$	.65	$	.78
Pro forma		.54		.66		.57		.70

11. NEW ACCOUNTING STANDARDS:

In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure (“SFAS 148”) was issued. This Statement amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. The Company has evaluated the impact of this statement and does not intend to change its accounting for stock-based compensation, but has early-adopted the required disclosure provisions, see Note 10, “Stock-Based Compensation.”

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

This Quarterly Report on Form 10-Q contains statements that may be forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Those statements can be identified by the use of forward-looking terminology such as “believes,” “estimates,” “anticipates,” “continues,” “contemplates,” “expects,” “may,” “will,” “could,” “should” or “would” or the negatives thereof. Those statements are based on the intent, belief or expectation of the Company as of the date of this Quarterly Report. Any such forward-looking statements are not guarantees of future performance and may involve risks and uncertainties that are outside the control of the Company. Actual results may vary materially from the forward-looking statements contained herein as a result of changes in United States and Canada or international economic conditions, governmental regulations and other factors. The Company expressly disclaims any obligation or understanding to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The following discussion of the Company’s financial condition and results of operations should be read in conjunction with the interim unaudited condensed consolidated financial statements of the Company and the notes thereto, included herein. Unless otherwise noted, references to 2002 and 2003 are to the periods ended December 31, 2001 and 2002, respectively.

Critical Accounting Policies

In preparing the Company’s financial statements in conformity with accounting principles generally accepted in the United States, judgements and estimates are made about the amounts reflected in the financial statements. As part of the financial reporting process, the Company’s management collaborates to determine the necessary information on which to base judgements and develop estimates used to prepare the financial statements. Historical experience and available information are used to make these judgements and estimates. However, different amounts could be reported using different assumptions and in light of different facts and circumstances. Therefore, actual amounts could differ from the estimates reflected in the financial statements.

The Company believes that the following critical accounting policies affect the more significant judgements and estimates used in the preparation of the financial statements:

Revenue Recognition and Receivables

The Company’s net revenues consist of tuition and fees, student housing charges and bookstore and restaurant sales. Net revenues are reduced for student refunds and scholarships. Bookstore and restaurant revenue is recognized when the sale occurs. Advance payments represent that portion of payments received but not earned and are reflected as a current liability in the accompanying consolidated balance sheets. These payments are typically related to future academic periods and are for the most part refundable.

The Company bills tuition and housing revenues at the beginning of an academic term and recognizes the revenue on a pro rata basis over the term of instruction or occupancy. For most Art Institute programs, the academic and fiscal quarters are the same; therefore, unearned revenue is not significant at the end of a fiscal quarter. However, certain recently-acquired schools have programs with class starting and ending dates that differ from the Company’s fiscal quarters. Therefore, at the end of the fiscal quarter, the Company has revenue from these programs that has not yet been earned in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements.” Unearned tuition revenue of approximately $200,000 and $400,000, related to programs not on the Art Institutes’ quarterly academic calendar, is included with advance payments and deferred tuition in the accompanying condensed consolidated balance sheets as of December 31, 2001 and 2002, respectively.

Argosy’s academic programs follow a semester schedule and several programs were in session as of December 31, 2002. Accordingly, unearned revenue of approximately $2.7 million and $2.8 million related to Argosy is included with advance payments and deferred tuition in the accompanying condensed consolidated balance sheets as of December 31, 2001 and 2002, respectively.

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

The trade receivable balances are comprised of individually insignificant amounts due primarily from students throughout the United States and Canada. The Company determines its allowance for doubtful accounts by categorizing gross receivables based upon the enrollment status of the student (primarily in-school, out-of-school, and balances in collection) and establishes a reserve based on the likelihood of collections (in-school receivables having the lowest percentage reserved).

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Long-Lived Assets

The Company evaluates the recoverability of property, plant and equipment and intangible assets other than goodwill whenever events or changes in circumstances indicate the carrying amount of any such assets may not be fully recoverable. Changes in circumstances include economic conditions or operating performance. The Company’s evaluation is based upon assumptions about the estimated future undiscounted cash flows. If the projected future cash flows are less than the carrying value, the Company would recognize an impairment loss. The Company continually applies its best judgement when performing these evaluations to determine the timing of the testing, the undiscounted cash flows used to assess recoverability and the fair value of the asset.

The Company evaluates the recoverability of the goodwill attributable to each reporting unit as required under SFAS No. 142, “Goodwill and Other Intangible Assets,” by comparing the fair value of each reporting unit with its carrying value. The Company continually applies its best judgement when performing these evaluations to determine the financial projections used to assess the fair value of each reporting unit.

Results of Operations

Three months ended December 31, 2002 compared to the three months ended December 31, 2001

Net revenues increased by 35.3% to $175.1 million in 2003 from $129.5 million in the second quarter of 2002 primarily due to increases in student enrollment and tuition rates.

Art Institute net revenues increased by 18.1% to $152.3 million in 2003 from $129.0 million in the second quarter of 2002. Total student enrollment at the Art Institutes increased 13.4% over the prior year to 36,483 from 32,180. Additionally, in the second quarter of 2002, the Art Institute’s results include revenue for ITI Information Technology Institute Incorporated (“ITI”), which the Company purchased in November 2001. Results for 2002 include revenue for ITI, which the Company purchased in November 2001, and whose enrollment is not reflected in the 2002 amounts. The enrollment increase is accompanied by a tuition increase of approximately 7% over the prior year. Enrollment at locations operated by the Art Institutes for 24 months or more increased 9.7% to 33,848 compared to 30,847 in the prior year.

Argosy’s net revenues were approximately $22.8 million for the three-month period ended December 31, 2002. Argosy’s enrollment for this period was 7,301. The Company completed its acquisition of Argosy on December 21, 2001 and accordingly included only eleven days of results for Argosy in the comparable prior quarter.

Educational services expense increased by $26.5 million, or 35.6%, to $100.8 million in 2003 from $74.3 million in 2002, due primarily to the incremental costs incurred to support higher student enrollment. These costs include employee compensation, rent and other facility operating costs, and depreciation and amortization. Overall, educational services expense as a percentage of revenue increased 20 basis points from 57.4% in fiscal 2002 to 57.6% in 2003. Art Institutes’ educational services expenses increased 17.9% to $87.0 million in 2003, as compared to $73.8 million in 2002. As a percentage of revenue, Art Institutes’ expenses improved 10 basis points to 57.1% in 2003 from 57.2% for the second quarter of 2002. The improvement at the Art Institutes is attributable to reductions in costs at established locations, partially offset by increases at those Art Institutes recently acquired or opened including higher facility costs at several locations occupying new or additional space in the second quarter. Argosy’s educational services expenses were $13.8 million for 2003, representing approximately 60.3% of net revenues.

General and administrative expense was $31.3 million in 2003, up 38.1% from $22.7 million in 2002. The increase over the comparable quarter in the prior year primarily reflects increases in costs related to newly-acquired entities as well as increases in marketing and admissions expenses. As a percentage of net revenues, general and administrative expense increased 40 basis points to 17.9% as compared to 17.5% in the second quarter of fiscal 2002. Art Institutes’ general and administrative expenses increased 18.9% to $26.9 million in 2003, as compared to $22.6 million in 2002. As a percentage of revenue, Art Institutes’ expenses increased 20 basis points to 17.7% in 2003 from 17.5% for the second quarter of 2002. Argosy’s general and administrative expenses were $4.4 million for 2003, representing approximately 19.4% of net revenues.

Amortization of intangibles increased by $565,000 to $1.1 million in 2003, as compared to $530,000 in the second quarter of fiscal 2002. This increase results from amortization of intangibles associated with including a full quarter of amortization for the acquisitions of ITI and Argosy, both of which occurred in the second quarter of fiscal 2002; the 2003 acquisitions of the California Design College, Center for Digital Imaging and Sound, and the Institute of Digital Arts; and the ongoing curriculum development at The Art Institute Online, resulted in more amortizable intangible assets.

EBIT increased by $10.0 million to $42.0 million in 2003 from $32.0 million in 2002. The EBIT margin decreased to 24.0% for the quarter as compared to 24.7% for the prior year.

Art Institute’s EBIT increased $5.6 million to $37.7 million for the three months ended December 31, 2002 as compared to $32.1 million in the prior year. The Art Institute’s EBIT margin decreased slightly to 24.8% for the quarter as compared to 24.9% for the

11

prior year. This was a result of costs incurred at newer locations and increased amortization of intangibles, partially offset through increases in revenue and margin improvements at the Art Institutes in educational services expense. In addition, certain centralized costs are now allocated to the Argosy division.

Argosy’s EBIT was $4.3 million or 18.6% of net revenues, including the allocated centralized costs from EDMC, representing 2.4% of their net revenues for the three months ended December 31, 2002. The Company included only eleven days of results for Argosy for the comparable quarter in the prior year.

Net interest expense was $332,000 in 2003, as compared to $548,000 in 2002. The Company’s outstanding borrowings were reduced significantly at the end of the second quarter of 2002 from cash received in the Company’s public stock offering (the “Offering”). Net interest expense includes, among other items, the amortization of fees paid in connection with securing the Company’s credit agreement (the “Credit Agreement”) and interest expense on mortgage indebtedness at one of the Company’s schools, partially offset by interest income.

The Company’s effective tax rate was 38.0% for the second quarter of fiscal 2003, as compared to 38.6% in the comparable quarter of the prior year. The improvement in the rate as compared to the prior year is primarily due to the reduced impact of non-deductible expenses as a percentage of income before income taxes. The effective rates differed primarily due to the combined federal and state statutory rates due to expenses that are non-deductible for tax purposes.

Net income increased by $6.5 million to $25.8 million in 2003 from $19.3 million in 2002. The increase is attributable to improved results from operations at the Art Institutes, lower interest expense, and a reduced effective tax rate, partially offset by an increase in amortization of intangibles.

Six months ended December 31, 2002 compared to the six months ended December 31, 2001

Net revenues increased by 37.0% to $303.3 million for the first six months of fiscal 2003 as compared to $221.4 million in 2002. Enrollment growth and higher tuition rates resulted in greater net revenues for 2003.

Art Institute net revenues increased by 19.0% to $262.9 million in 2003 from $220.9 million in 2002. Average enrollment at the Art Institute schools increased 13.9% from 28,365 in 2002 to 32,295 in 2003, accompanied by an average tuition increase of approximately 7%. Results for 2002 include revenue for ITI, which the Company purchased in November 2001, and whose enrollment is not reflected in the 2002 amounts.

Educational services expense increased by $53.4 million, or 37.8%, to $194.9 million in 2003 from $141.5 million in 2002, due primarily to the incremental costs incurred to support higher student enrollment. These costs include increased salaries, rent, and operating expenses as well as increased depreciation and amortization associated with recent capital expenditures. Educational services expense as a percentage of revenue increased approximately 40 basis points from 63.9% in fiscal 2002 to 64.3% in 2003. The increase in the expense reflects costs associated with recent acquisitions and start-up locations that have been operating for less than two years. Art Institutes’ educational services expenses increased 18.3% to $166.8 million in 2003, as compared to $140.9 million in 2002. As a percentage of revenue, Art Institutes’ expenses improved 40 basis points to 63.4% in 2003 from 63.8% for 2002. The improvement at the Art Institutes is attributable to reductions in costs at established locations, partially offset by increases at those Art Institutes recently acquired or opened including higher facility costs at several locations occupying new or additional space in the second quarter. Argosy’s educational service expenses were $28.1 million for 2003, representing approximately 69.6% of net revenues.

General and administrative expense was $59.5 million in 2003, up 37.0% from $43.4 million in 2002. The increase over the comparable period in the prior year reflects increased advertising and recruiting costs as well as increased employee compensation. In addition, the acquisitions made in the past year have contributed to the rise in general and administrative costs. As a percentage of net revenues, general and administrative expense remained constant at 19.6% for 2003. Art Institutes’ general and administrative expenses increased 16.7% to $50.6 million in 2003, as compared to $43.3 million in 2002. As a percentage of revenue, Art Institutes’ expenses decreased 40 basis points to 19.2% in 2003 from 19.6% for 2002. Argosy’s general and administrative expenses were $8.9 million for 2003, representing approximately 22.1% of net revenues.

Amortization on intangibles increased by approximately $1.2 million to $2.1 million in 2003. This change reflects the incremental amortization associated with intangibles acquired in conjunction with recent acquisitions, along with amortization of ongoing curriculum development at The Art Institute Online.

EBIT increased by $11.2 million to $46.9 million in 2003 from $35.7 million in 2002. The EBIT margin decreased to 15.4% for 2003 as compared to 16.1% for the prior year.

Art Institute EBIT increased $8.4 million to $44.2 million for the six months ended December 31, 2002 as compared to $35.8

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million in the prior year. The Art Institute EBIT margin increased 60 basis points to 16.8% for the year-to-date period as compared to 16.2% for the prior year. This was a result of increases in revenue and margin improvements at the Art Institutes in educational services and general and administrative expense. In addition, certain centralized costs are now allocated to the Argosy division. This served to improve the Art Institute’s EBIT margin, as compared to the prior year.

Argosy’s EBIT was $2.6 million or 6.5% of net revenues, including the allocated centralized costs from EDMC. The Company included only eleven days of results for Argosy for the comparable quarter in the prior year.

Net interest expense was $642,000 in 2003, as compared to $1.0 million in 2002. This decrease is attributable to a decrease in average borrowings for the six months ended December 31, 2002. Net interest expense includes, among other items, the amortization of fees paid in connection with securing the Credit Agreement and interest expense on mortgage indebtedness at one of the Company’s schools, partially offset by interest income.

The Company’s effective tax rate declined to 38.0% in 2003 from 38.6% in 2002, primarily due to the reduced impact of nondeductible expenses as a percent of income before income taxes. The effective rates differed from the combined federal and state statutory rates due to expenses that are nondeductible for tax purposes.

Net income increased by $7.4 million to $28.6 million in 2003 from $21.3 million in 2002. The increase is attributable to improved results from operations at the Company’s schools, lower interest costs, and a reduction in the effective tax rate.

Seasonality and Other Factors Affecting Quarterly Results

The Company’s quarterly revenues and income fluctuate primarily as a result of the pattern of student enrollments. The Company experiences a seasonal increase in new enrollments in the fall (fiscal year second quarter), which is traditionally when the largest number of new students begin postsecondary education. Some students choose not to attend classes during summer months, although the Company’s schools encourage year-round attendance. As a result, total student enrollments at the Company’s schools are highest in the fall quarter and lowest in the summer months (fiscal year first quarter). The Company’s costs and expenses, however, do not fluctuate as significantly as revenues on a quarterly basis. Historically, the Company’s profitability has been lowest in its fiscal first quarter due to lower revenues combined with expenses incurred in preparation for the peak enrollments in the fall quarter. The Company anticipates that this seasonal pattern in revenues and earnings will continue in the future.

Liquidity and Funds of Capital Resources

As of December 31, 2002, the Company’s unrestricted cash balance was $5.5 million, a decrease of $79.0 million from $84.5 million at June 30, 2002 and a decrease of $39.5 million as compared to December 31, 2001. The reduction in cash as compared to June 30, 2002 and December 31, 2001 was primarily a result of the Company’s repayment of borrowings outstanding at year-end, use of cash for acquisitions, and the timing of The Art Institute’s winter academic quarter, which started six days later in January this year. Student loan proceeds normally received by electronic transfer in the last week of December were received in early January, because federal regulations provide for the payment of these funds only within 10 days of the start of classes. Total loan proceeds received by The Art Institutes within 10 days of the start of the winter quarter increased to $67 million this year from $53 million last year, and all of these funds were received in January. In the previous fiscal year, approximately $51 million of these funds were received in December.

The Company generated positive cash flow from operating activities of $21.4 million for the six months ended December 31, 2002, a decrease of $45.1 million as compared to the comparable period for fiscal 2002. The decrease is due primarily to the timing of receipt of financial aid for The Art Institute’s winter term in January whereas monies related to the comparable prior year class were received in December. This decrease was partially offset by increases in net income and non-cash charges.

The Company had a working capital deficit of $20.1 million as of December 31, 2002, as compared to $370,000 of working capital as of June 30, 2002 and a $19.4 million deficit as of December 31, 2001. Net receivables increased $5.1 million from June 30, 2002 and $2.2 million from December 31, 2001 primarily as a result of the receivables related to the acquisitions that occurred over the past twelve months, higher student enrollment and the corresponding revenue increases.

The Company’s Credit Agreement allows borrowings up to $150 million on a revolving basis. The Credit Agreement, which expires September 20, 2004, contains customary covenants that, among other matters, require the Company to meet specified financial ratios, restrict the repurchase of Common Stock and limit the incurrence of additional indebtedness. As of December 31, 2002, the Company had no borrowings under this facility and was in compliance with all covenants under the Credit Agreement.

Borrowings under the Credit Agreement are available to the Company to finance acquisitions and fund seasonal working capital needs resulting from the seasonal pattern of cash receipts throughout the year. The level of accounts receivable reaches a peak immediately after the billing of tuition and fees at the beginning of each academic quarter. Collection of these receivables is heaviest at the start of each academic quarter. Additionally, Title IV proceeds for continuing students can be received up to ten days prior to the start of an academic quarter. For most of the Company’s Art Institute schools, the academic and financial quarters coincide.

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The Company believes that cash flow from operations, supplemented from time to time by borrowings under the Credit Agreement, will provide adequate funds for ongoing operations, planned expansion to new locations, planned capital expenditures and debt service during the term of the Credit Agreement.

The following table describes the Company’s commitments under various contracts and agreements as of December 31, 2002 (in thousands):

	Total amounts committed		Payments due by fiscal year
			2003 (remainder)		2004-2005		2006-2007		2008-Thereafter
Standby letters of credit (1)	$	2,736	$	—	$	—	$	—	$	—
Mortgage obligation		3,539		77		124		3,338		—
Capital lease obligations		239		63		88		88		—
Operating leases		465,721		28,254		100,447		94,567		242,453
Total commitments	$	472,235	$	28,394	$	100,659	$	97,993	$	242,453

(1) The Company does not anticipate these letters of credit will be drawn on.

The Company anticipates its total capital spending for fiscal 2003 will increase as compared to the prior year to approximately $79 million. The 2003 expenditures relate principally to the investment in schools acquired or started during the previous several years and those added in 2003, continued expansion and improvements to current facilities, new culinary arts programs, additional or replacement school and housing facilities, classroom and administrative technology and construction of a new facility for Argosy University – Twin Cities.

The majority of the Company’s facilities are leased. Future commitments on existing leases will be paid from cash provided from operating activities.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risks in the ordinary course of business that include foreign currency exchange rates. The Company does not utilize interest rate swaps, forward or option contracts on foreign currencies or commodities, or other types of derivative financial instruments. The Company is subject to fluctuations in the value of the Canadian dollar relative to the U.S. dollar. The Company does not believe it is subject to material risks from reasonably possible near-term change in exchange rates.

ITEM 4 – CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the Securities and Exchange Commission (the “SEC”) and to process, summarize and disclose this information within the time periods specified in the SEC’s rules. The Company’s management, including the chief executive officer and chief financial officer, evaluated disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”). Based on that evaluation, the Company concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective in alerting them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the SEC.

Since the Evaluation Date, there have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls.

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PART II

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 14, 2002, the annual meeting of the shareholders of the Company was held for the election of certain directors and the retention of the Company’s independent auditors.

	Shares
(i) Election of directors (Class II):
Robert B. Knutson:
Votes for	25,339,444
Authority withheld	7,117,091
John R. McKernan, Jr.:
Votes for	31,353,626
Authority withheld	1,102,909
James S. Pasman, Jr.:
Votes for	30,873,685
Authority withheld	1,582,850

The names of the other directors whose terms of office continued after the meeting are Robert H. Atwell, James J. Burke, Jr., William M. Campbell, III, Robert P. Gioella, Albert Greenstone, and Miryam L. Knutson.

(ii) Approval of the retention of Ernst & Young LLP as the Company’s independent auditors:
Votes for	31,717,540
Votes against	687,701
Abstentions	51,294

ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

(10.1)	Education Management Corporation Deferred Compensation Plan, amended and restated as of January 1, 2003.
(15.1)	Independent Accountant’s Review Report
(99.1)	Certifications Pursuant to 18 U.S.C. Section 1350
(99.2)	Statement regarding Western State University College of Law (incorporated by reference to Exhibit 99 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).

(b) Reports on Form 8-K:

No reports on Form 8-K were filed for the three months ended December 31, 2002.

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SIGNATURES

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

EDUCATION MANAGEMENT CORPORATION

(Registrant)

Date: February 7, 2003

/s/    Robert B. Knutson

Robert B. Knutson

Chairman and Chief Executive Officer

/s/    Robert T. McDowell

Robert T. McDowell

Executive Vice President and Chief Financial Officer

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CERTIFICATIONS

I, Robert B. Knutson, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Education Management Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.    The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 7, 2003 /s/    Robert B. Knutson Robert B. Knutson Chairman and Chief Executive Officer

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I, Robert T. McDowell, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of Education Management Corporation;

2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.    The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.    The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 7, 2003 /s/    Robert T. McDowell Robert T. McDowell Executive Vice President and Chief Financial Officer

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EXHIBIT INDEX

(10.1)	Education  Management Corporation Deferred Compensation Plan, amended and restated as of January 1, 2003.
(15.1)	Independent Accountant’s Review Report
(99.1)	Certifications Pursuant to 18 U.S.C. Section 1350
(99.2)	Statement  regarding Western State University College of Law (incorporated by reference to Exhibit 99 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).

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EX-10.1

Exhibit 10.1

THE

EDUCATION MANAGEMENT CORPORATION

DEFERRED COMPENSATION PLAN

AMENDED FOR IMPLEMENTATION FEBRUARY 1, 2003

TABLE OF CONTENTS

Welcome to the Plan!	1
Participation	1
Salary Deferrals	2
Company Credits	4
Investment Credits	5
Deferral of Gain from the Exercise of Stock Options	6
Lack of Funding	8
Payment of Benefits	9
Hardship Withdrawals	11
Administration, Claims and Appeals	11
Miscellaneous	12

WELCOME TO THE PLAN!

Introduction.    This is the plan document for the Education Management Corporation Deferred Compensation Plan. This is an unfunded, non-qualified deferred compensation arrangement. The purpose is to allow additional retirement savings for a select group of management or highly compensated employees in view of the restrictions on the contributions that can be made, or benefits that can be accrued, for these employees under tax-qualified retirement plans of the employer.

Ordinary names.    In this document, we will call things by their ordinary names. Education Management Corporation will be called “the company.” This plan will simply be called “the plan.” When we say “you,” we mean employees who are eligible to participate in the plan and choose to do so. When we say “the Code,” we mean the Internal Revenue Code of 1986, as amended.

Effective date.    This document amends and restates the plan effective January 1, 2003. This amendment and restatement does not attempt to describe the rules that were in effect under the plan before that date and therefore does not apply to any participant whose employment with the employer terminated before that date (any such participant’s rights being governed by the terms of the plan as in effect when his termination of employment occurred).

PARTICIPATION

Committee discretion.    The Retirement Committee has complete discretion to select employees for participation in this plan.

Current criteria.    At present, the Retirement Committee has exercised its discretion to make eligible:

• outside directors of the company, with respect to their director’s fees and gain on the exercise of stock options,

• school presidents, and

• executive employees of the company and designated subsidiaries who earn $150,000 or more per year.

Legal limitation.    Despite the discretion of the Retirement Committee and the current criteria just described, no employee will be selected for participation or continued as a participant in this plan if, due to the employee’s participation, the plan would fail to qualify as primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees, within the meaning of sections 201, 301 and 401 of the Employee Retirement Income Security Act of 1974, as amended.

Participation agreement.    Participation is not automatic if and when you satisfy the current criteria. Instead, employees who satisfy the current criteria will be notified of their eligibility and offered the

1

opportunity to participate. If you wish to participate, you must complete and file with the administrator of the plan a written participation agreement.

If you choose to make salary deferrals, the participation agreement will reflect your choice. But in any event, the participation agreement will (i) confirm your participation, (ii) indicate your initial choice with regard to investment credits on any company credits that may be made, (iii) indicate your choice as to the form of payment and (iv) designate your beneficiary.

Annual determination.    Eligibility to participate is determined annually. The fact that you were eligible to participate (and did participate) in one year does not automatically entitle you to participate in any future year.

Your participation agreement, however, is “evergreen.” It remains in effect and governs your choices under the plan during those years when you do participate in the plan, unless and until you change it.

Changing your participation agreement.    Except for changes with regard to investment credits (which we will explain in just a moment), you change your participation agreement by completing and filing a new one with the administrator of the plan.

A change in the amount of salary deferrals will take effect at the beginning of the next calendar year, as long as it is filed with the administrator no later than December 31 of the preceding calendar year. A change in the time or form of payment will take effect as described later in the plan in the section called “Payment.” A change of beneficiary will take effect immediately upon filing with the administrator.

With regard to investment credits, you change your choices in the same manner as under the Retirement Plan–by calling Fidelity at (800) 835-5092 during normal business hours–and the changes take effect as soon as Fidelity processes them.

SALARY DEFERRALS

Introduction.    You may choose to defer a certain percentage of your salary and/or bonus into the plan. If you do, that amount will not be paid to you currently in cash but will be credited to a bookkeeping account in your name under the plan. (With regard to outside directors, references in this section to “salary” will be understood as referring to director’s fees.)

Amount.    There are two possible elements of your choice to defer.

Ordinary deferral of salary.    First, you may defer a fixed, whole percentage of your salary and/or bonus. The amount of deferral must be at least 1% of your compensation or $1,000, whichever is less. The amount may not be more than 100% of your compensation. Alternatively, you may defer a fixed dollar amount, as long as the amount is within those limits.

Supplemental deferral based on amounts returned under Retirement Plan.    Second, entirely separate from the percentage described in the preceding paragraph (and assuming you have not already chosen to defer 100% of your compensation, of course), you may defer an additional amount of salary equal to all or a portion of any elective contributions (plus interest) that are returned to you from the Education Management Corporation Retirement Plan (we’ll just call it the “Retirement Plan”) by reason

2

of the non-discrimination requirements of law.

That is to say, in a given calendar year, elective contributions made under the Retirement Plan in the preceding year may be returned to you (with interest) because of the non-discrimination requirements of law. If you have elected supplemental deferral under this paragraph, while the elective contributions (and interest) will still be returned to you in cash from the Retirement Plan, an offsetting additional deferral will be taken from your current salary under this plan. The net economic effect will be that the amount remains deferred, but under this plan instead of under the Retirement Plan. You may elect to defer any whole percentage of any such return of elective contributions, from zero to 100%.

Written election.    In order to defer compensation into the plan, you must complete and file with the administrator of the plan a written election. The written election will specify the percentage and whether it applies to salary or bonus or both. The election will also specify whether you wish to defer an additional amount equal to all or any portion of any elective contributions (and interest) that may be returned to you in the particular calendar year.

Timing.    In order to defer for a particular calendar year, you must complete and file the written election with the administrator of the plan no later than December 31 of the preceding calendar year.

With respect to the additional deferral equal to all or a portion of the elective contributions that may be returned under the Retirement Plan, the timing may require more explanation. An election made by December 31 of Year 1 applies to compensation earned in Year 2. In the case of supplemental deferrals equal to contributions that are returned under the Retirement Plan, the supplemental deferral occurs in Year 2 based on elective contributions that are returned in Year 2 and the deferral is made from compensation earned and otherwise payable in Year 2.

This is so even though the contributions returned from the Retirement Plan in Year 2 were made to the Retirement Plan in Year 1. An election of supplemental deferral under this plan must therefore be made before it is known whether elective contributions will be returned from the Retirement Plan at all. The election will therefore be contingent–applicable only if and when elective contributions are in fact returned under the Retirement Plan.

COMPANY CREDITS

Introduction.    Whether or not you choose to defer salary and/or bonus, you may receive company credits under the plan in the following circumstances.

Matching contributions.    If you made elective contributions under the Retirement Plan that generated the maximum matching contribution under the Retirement Plan (or your matching contributions did not reach the maximum because your elective contributions reached the dollar limit before the end of the year), you may be entitled to a company credit under this section.

If so, you are entitled to a credit under this section if the amount of matching contributions that you received under the Retirement Plan was limited:

• by section 401(a)(17) of the Code (which limits compensation taken into account under the Retirement Plan to a stated amount, which is $170,000 in 2000, for example) or

3

• by section 402(g) of the Code (which limits elective contributions under the Retirement Plan to a stated amount, which is $10,500 in 2000, for example).

If so, the company will credit you under this plan with an amount equal to the additional matching contribution that you would have received under the Retirement Plan if you had not been so limited.

EXAMPLE 1–Not eligible for company matching credit.    It is 2000. Your compensation is $200,000 (although only $170,000 can be taken into account under the Retirement Plan). You make elective contributions under the Retirement Plan of 4% of compensation. You receive no credit under this section of this plan, because you did not make elective contributions under the Retirement Plan that generated the maximum matching contribution under the Retirement Plan, nor did your matching contributions reach the maximum because your elective contributions reached the dollar limit.

EXAMPLE 2–Eligible and limited by 401(a)(17).    It is 2000. Your compensation is $200,000 (although only $170,000 can be taken into account under the Retirement Plan). You make elective contributions under the Retirement Plan of 6% of compensation, which generate the maximum matching contribution of 4.5% (that is, 4.5% of $170,000, which is $7,650). If the compensation that is taken into account under the Retirement Plan were not limited to $170,000, your matching contribution would have been $9,000 (that is, 4.5% of $200,000). Therefore, under this section of this plan, you receive a company credit equal to the difference–$9,000 minus $7,650, or $1,350.

EXAMPLE 3–Eligible and limited by 402(g).    It is 2000. Your compensation is $170,000. You make elective contributions under the Retirement Plan of 10% of compensation, a percentage calculated to generate the maximum matching contribution. But your elective contributions reach the limit of $10,500 well before the end of the year (whenever your cumulative compensation during the year reaches $105,000), at which point they stop. When your elective contributions stop, so do the matching contributions, which up to that point have accumulated to $4,725. Effective January 1, 1999, under the Retirement Plan a “catch-up” matching contribution is made at the end of the year to bring your matching contributions up to the maximum of $7,650; that adjustment relieves you of the effect of your elective contributions stopping before the end of the year. But before 1999 (and if that “catch-up” provision is ever eliminated), you would get a credit under this section equal to the “catch-up” amount (that is, the maximum of $7,650 minus your actual matching contributions of $4,725, or 2,925).

Discretionary contributions and forfeitures.    Your share of company discretionary contributions and forfeitures under the Retirement Plan may be limited by either or both of two legal limits–the limit on compensation that may be taken into account (in 2000, $170,000) and the limit under section 415 of the Code on total allocations of contributions and forfeitures. If so, the company will credit you under this plan with the discretionary contributions and/or forfeitures that you would have received under the Retirement Plan (if the Retirement Plan had not been subject to those two legal limits) but did not receive under the Retirement Plan. (These are credits of cash, not stock, even if they relate to forfeitures from employer stock accounts under the Retirement Plan.)

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INVESTMENT CREDITS

Introduction.    The amount that you are entitled to receive under the plan is a function of the salary deferrals that you make, the company credits that you receive under the plan, and investment credits. This section will explain the system of investment credits.

Hypothetical investments.    Investment credits are calculated as if the amounts standing to your credit under the plan were invested in one or more of a variety of mutual or collective funds (listed below). While we call them investment “credits,” you realize of course that they may be either positive or negative, depending on the performance of the funds that are used as measuring devices.

In addition, we want to emphasize that, for legal reasons, the amounts standing to your credit under the plan are nothing more than bookkeeping entries that measure the extent of the company’s contractual obligation to pay you under the terms of the plan. That includes the investment credits. You do not have any right to, or interest in, any assets that the company may set aside for this purpose or investment gains on them.

Your choice.    You do, however, have a choice as to the mutual or collective funds that will be used as the measuring stick for the investment credits that will be added to your account. When you first become eligible to participate, you will be asked to choose from among the funds offered under the Retirement Plan. Those choices are shown on Appendix B to the Retirement Plan, which is incorporated here by reference as it may be in effect from time to time. As an exception, the Managed Income Portfolio (Fidelity) is not available under this plan, nor is any employer stock fund that might become available under the Retirement Plan.

If for any reason there is no current choice on file for you, the plan hereby requires that the measuring stick be the Fidelity Intermediate Bond Fund, and neither the plan administrator nor any other fiduciary of the plan shall have any authority or discretion to direct otherwise. The same applies to any portion of your choice that becomes out of date, such as if you have chosen a particular fund and that fund is no longer offered (unless a substitute fund is automatically provided).

The choice that you make for the amounts currently standing to your credit under the plan need not be the same as the choice you make for future credits. But choices among the funds are not permitted in increments smaller than 10% of the amount to which they apply.

As noted above, you may change your choice with regard to investment credits at any time by calling Fidelity during normal business hours at (800) 835-5092.

Statements.    The administrator of the plan will provide annual statements showing the amounts standing to your credit under the plan. The statements will separately account for salary deferrals, different types of company credits, and investment credits. But you may inquire about your balance or get a statement at any time by calling Fidelity at (800) 835-5092. Or you can visit the Fidelity website at www.401k.com.

DEFERRAL OF GAIN FROM THE

EXERCISE OF STOCK OPTIONS

Introduction.    If you hold a stock option under the company’s 1996 Stock Incentive Plan, then entirely apart from the system of salary deferrals, company credits and investment credits which has

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been described up to this point, you may choose to defer under this plan the gain that you would otherwise realize upon the exercise of that stock option. If you do, the stock that you would otherwise have received upon exercise of the stock option will not be paid to you currently but will be credited to a bookkeeping account in your name under the plan for payment to you (or your beneficiary) at a future date.

Written election.    In order to defer gain from the exercise of a stock option into the plan, you must complete and file with the administrator of the plan a written election. The written election will specify either (a) the particular options from which the gain will be deferred under this plan, regardless of when the option is exercised, or (b) the particular exercises from which the gain will be deferred under this plan, identified by a date or range of dates, or (c) a combination of both.

For example, you may elect to defer under this plan the gain from (a) the exercise of all non-qualified stock options granted under the 1996 Stock Incentive Plan, but none of the incentive stock options, or (b) all exercises of stock options during a stated calendar year, or (c) all exercises of non-qualified stock options granted under the 1996 Stock Incentive Plan that occur during a particular calendar year.

Please note:    As explained in more detail below, the purpose of this section of the plan is to postpone federal income taxation on the element of gain from exercising a stock option–taxation that would otherwise occur when you exercise the option. Since federal income taxation of the gain at exercise applies to non-qualified stock options but not to incentive stock options, you may reasonably conclude that this section should only be used with respect to non-qualified stock options.

Timing.    You may make the election to defer under this section of the plan at any time. But the election will apply only to exercises that satisfy both of the following conditions:

• the exercise occurs in a calendar year following the calendar year in which the election was filed with the administrator of this plan, and

• the exercise occurs at least six months after the election was filed with the administrator of this plan.

For example, if an election is filed with the plan administrator on February 15, 2002, it cannot apply to any exercises that occur before January 1, 2003. If an election is filed with the administrator on October 15, 2002, it cannot apply to any exercises that occur before April 15, 2003.

Once filed with the plan administrator, an election under this section of the plan is irrevocable.

Exercising the option.    If you have elected to defer under this section of the plan, do not initiate an exercise of your stock option through Mellon Investor Services (or the then-current transfer agent). Instead, please contact Human Resources to initiate the process, in order to assure that the option stock is not issued to you, as we will explain here.

Upon exercise, you will not receive the shares of stock that represent the element of gain from exercising the stock option. When we say “the element of gain from exercising the stock option,” we mean the excess of the value of the stock that you would receive by exercising the stock option over the amount that you had to pay to exercise the stock option (either in cash or in stock). This is the amount on which you would ordinarily be taxed if you did not use this section of this plan.

EXAMPLE:    You have the option to buy 100 shares of company stock at an option price of $20. The stock has a current market value of $25. You exercise your option by paying $2,000 and, in return, would ordinarily receive 100 shares of stock valued at $2,500. In

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this example, $2,000 worth of that stock represents a return of your purchase price; $500 worth of stock represents the element of gain from exercising the stock option. In this example, the gain from exercising the option consists of 20 shares of stock ($500 worth of stock at $25 per share equals 20 shares).

EXAMPLE:    The facts are the same as the previous example, except that you exercise by using a cashless method such as “exercise and sell to cover,” meaning that you are treated as if you exercised the option by buying 100 shares at $20, costing $2,000, and then sold 80 shares at $25 to cover the cost of exercising the option (selling 80 shares at $25 raises $2,000). That would likewise leave you with 20 shares as the element of gain from exercising the option.

Upon exercise, instead of receiving the shares of stock that represent the element of gain from exercising the option, you will receive a credit under this plan, expressed as the number of shares of stock that represent the element of gain. In the examples above, you would receive a credit under this plan equal to 20 shares of stock. We will call these “stock credits” in the remainder of this plan. As with all other amounts deferred under this plan, stock credits represent nothing more than the company’s unfunded, unsecured promise to pay the shares to you at a future date, in accordance with the terms of this plan. You do not own the stock unless and until it is paid to you pursuant to the terms of this plan.

Dividends.    You do not earn investment credits on shares of stock that are credited to your account under this section of the plan. Instead, if dividends are payable on the stock for which the stock credit under this plan is a substitute, then your account under this plan will receive additional credits, expressed in shares of company stock, equal to the value of the dividends. Alternatively, if you so choose by written election made and filed with the plan administrator before a dividend is declared, you may receive a current cash payment from the company equal to the dividend in the same manner as if you actually owned the stock that stands to your credit under this plan.

LACK OF FUNDING

Introduction.    We say “credits” in this document deliberately, because this plan involves nothing more than a contractual promise by the company to pay deferred compensation when (and in the amounts) determined under the terms of the plan. Legally, the plan is unfunded and unsecured, as this section will explain.

Unfunded, unsecured promise to pay.    This plan is unfunded and has no assets. The promise of benefits under the plan is no more than a contractual obligation of the company to be satisfied from its general assets. Participation in the plan gives you nothing more than the company’s contractual promise to pay deferred compensation when due in accordance with the terms of this plan.

Salary deferral.    Just to make the point clear once again, if you choose to defer salary under the plan, the amount that you choose to defer is not an “employee contribution” and is not an asset of yours or of the plan. It reflects nothing more than a re-structuring of your compensation arrangement, whereby current compensation is somewhat less and deferred compensation is somewhat more.

Reserves.    The company is not required to segregate, maintain or invest any portion of its assets by reason of its contractual commitment to pay deferred compensation under this plan. If the company nevertheless chooses to establish and invest a reserve (as a matter of prudent management of its

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contractual liability), such reserve remains an asset of the company in which no participating employee has any right, title or interest. Employees entitled to deferred compensation under this plan have the status of general unsecured creditors of the company.

Rabbi trust.    Though not required to do so, the company may establish (and has in fact established) a so-called rabbi trust (so named because it was invented by a synagogue and first approved by the IRS for a rabbi). Here is how the rabbi trust works:

• The rabbi trust is held by a financial institution as trustee under a detailed, written trust agreement.

• The company contributes cash to the rabbi trust at whatever times and in whatever amounts it chooses. Please note that this applies only to salary deferrals, company credits, and investment credits. If you use this plan to defer the element of gain from the exercise of a stock option, and therefore receive stock credits under this plan, no stock is transferred to, or held in, the rabbi trust.

• The assets of the trust are considered to be assets of the company. For example, the investment earnings of the trust are taxable income to the company under the “grantor trust” rules. As noted in the previous section of this plan, no participant or beneficiary of the plan has any right, title or interest in the assets of the rabbi trust.

• But under the terms of the rabbi trust, the assets may be used only for the purpose of paying benefits under this plan, barring bankruptcy of the company (or similar events), in which event the assets of the rabbi trust are available not just to participants and beneficiaries of this plan but to all other creditors of the company as well.

• To the extent that payments are made to participants and beneficiaries by the trustee from the rabbi trust, those payments are considered payments by the company under the plan and satisfy the company’s obligation under the plan.

The trustee of the rabbi trust is Fidelity Management Trust Company, which is why the plan refers you to Fidelity for information about your account and to change your choices about investment credits.

PAYMENT OF BENEFITS

Introduction.    This section of the plan explains when you are entitled to payment under the plan, how much, and in what form.

Deferrals to a stated date, even before termination of employment.    On your participation form, you may designate salary deferrals (not company credits, which are subject to vesting) to be credited to accounts which are payable on dates that you specify. When the stated date arrives, you are entitled to the total amount standing to your credit in that account (including investment credits), regardless of whether your employment with the company has terminated. You may use this feature to defer for a child’s education, for example.

Termination of employment.    Apart from accounts that are payable on a stated date (as explained in

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the previous section), payment is triggered by any one of the following events, whichever happens first. When we say “the total amount standing to your credit under the plan,” remember that we are only talking about accounts that are not designated to be paid on stated dates (as explained the in previous section).

• Normal retirement.    If your employment with the company terminates on or after your 65th birthday, you are entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits and stock credits (if any).

• Early retirement.    If your employment with the company terminates on or after your 55th birthday and you have completed at least 5 years of service with the company (with the meaning of the Retirement Plan), you are entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits, and stock credits (if any).

• Disability.    If you become totally and permanently disabled while still employed by the company, you are entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits, and stock credits (if any).

For this purpose, total and permanent disability means that you are unable to engage in any substantial gainful activity by reason of any physical or mental impairment which is expected to result in death or be of a long, continued and indefinite duration, as certified by a written opinion of a physician selected by the administrator of the plan.

• Death.    If you die while still employed by the company, your beneficiary is entitled to receive payment equal to the total amount standing to your credit under the plan, including salary deferral credits, company credits, investment credits, and stock credits (if any).

• Other termination of employment.    If your employment with the company terminates under any circumstances other than those previously listed in this section, you are entitled to receive all of your salary deferral credits and investment credits on them, as well as all of your stock credits (if any). You are also entitled to receive all of the company credits and investment credits on them if you have completed at least 3 years of service (within the meaning of the Retirement Plan). If you have not completed at least 3 years of service (within the meaning of the Retirement Plan), you are not entitled to receive any of the company credits and investment credits on them, with one exception.

As an exception, if you had completed at least 3 years of service (within the meaning of the Retirement Plan) by April 1, 2000, then you are entitled to 20% of the company credits and investment credits on them (if you have completed only 3 years of service at the time of your termination) or 40% of the company credits and investment credits on them (if you have completed only 4 years of service at the time of your termination).

When payment is made.    By default, payment is made (or begun, if payment is to be made in installments) as soon as administratively feasible after the triggering event. If you die before payment is made in full, the balance of your entitlement will be paid to your beneficiary as soon as administratively feasible.

But you may alter the default time of payment if you act sufficiently in advance of the triggering event. Sufficiently in advance of the triggering event means (a) during the calendar year before the calendar year in which the triggering event occurs and (b) at least six months before the triggering event occurs. If you file a written form with the plan administration sufficiently in advance of the triggering event, you may postpone the triggering event either for a fixed period or until a fixed date (stated on your form).

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EXAMPLE 1:    It is August 2002. You are thinking of taking early retirement (age 55 plus 5 years of service) on April 1, 2003. Early retirement will trigger payment under this plan. But you file a written form with the plan administrator no later than September 30, 2002 stating that you wish payment to be deferred until 3 years after your early retirement. You take early retirement on April 1, 2003. Because the form was filed during the preceding calendar year and at least six months before your early retirement, payment is successfully postponed until 3 years after your early retirement.

EXAMPLE 2:    Same facts as Example 1, except that you die on January 15, 2003. Your death triggers payment under this plan. Because your form was not filed at least six months before the triggering event, however, it is not given effect. Your beneficiary is paid as soon as administratively possible after your death.

Form of payment.    Payment of salary deferral credits, company credits and investment credits on both is made in cash. Payment of stock units is made in stock. In either case, by default, payment is made in a single payment.

But you may alter the default form of payment if you act sufficiently in advance of the triggering event. Sufficiently in advance of the triggering event means (a) during the calendar year before the calendar year in which the triggering event occurs and (b) at least six months before the triggering event occurs. If you file a written form with the plan administration sufficiently in advance of the triggering event, you may choose to have payments made in annual installments over a period that you choose, as long as it is at least 2 years and not more than 10 years.

If you choose installment payments, the unpaid balance of your entitlement will remain in the plan and will remain subject to investment credits. The amount of each annual payment will be the balance then standing to your credit under the plan multiplied by a fraction which is 1 divided by the number of remaining payments.

Please note:    Before January 1, 2003, the plan required you to choose the form of payment on your original participation agreement, and you could not change the form of payment except as applied to amounts deferred in the future. That restriction no longer applies. The choices that you made on your original participation agreement will remain in effect on and after January 1, 2003 if you take no further action. But if you would like to change your choices, you may do so at any time (in accordance with the rules just described) with respect to both past and future accruals.

Your beneficiary.    Your beneficiary is the individual or entity designated on the last participation agreement that was completed and filed with the administrator of the plan before your death. Please note that separation or divorce does not automatically change your designation of beneficiary. It is your responsibility to keep your designation current based on your current circumstances.

If no designated beneficiary survives you, your estate will be considered your beneficiary. This might occur if you fail to name a beneficiary or if all of your designated beneficiaries die before you do.

If your beneficiary is a minor or legally incompetent, the administrator may, in its discretion, make payment to a legal or natural guardian, other relative, court-appointed representative, or any other adult with whom the minor or incompetent resides. Any payment made in good faith by the administrator will fully discharge the obligation of the plan with regard to that payment, and the administrator will have no duty or responsibility to see to the proper application of any such payment.

Forfeitures.    If your employment terminates as described above under the heading “Other termination of employment” and you are not entitled to 100% of your company credits (and investment credits on them), the balance will be retained on the books of the plan until you have a “Break in Service”

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within the meaning of the Retirement Plan but will then be permanently forfeited.

That is to say, if you return to employment before incurring a “Break in Service,” the forfeiture amount will remain in your account and you may be able to earn additional entitlement to that amount with additional years of service. But if you return after incurring a “Break in Service,” the forfeiture amount will have been removed from your account and you will never be able to earn any additional entitlement to that amount.

HARDSHIP WITHDRAWALS

Introduction.    Besides deferrals to a stated date, there is one more circumstance in which you may be able to withdraw from the plan while still employed.

Administrator’s discretion.    The administrator of the plan has discretion to grant an in-service withdrawal in the circumstance where you establish hardship. But hardship withdrawal is limited to your salary deferral credits and stock credits (if any). That means no company credits and no investment credits on either salary deferral credits or company credits.

Hardship.    For this purpose, hardship means severe financial hardship to you resulting from:

• a sudden and unexpected illness or accident of you or a dependent (within the meaning of section 152(a) of the Code),

• loss of your property due to casualty, or

• other similar extraordinary and unforeseeable circumstances arising as a result of events beyond your control.

The need to send a child to college and the desire to purchase a home do not qualify for a hardship withdrawal.

Amount available.    The amount available is not more than is reasonably necessary to satisfy the need after exhaustion of other sources such as:

• reimbursement or compensation by insurance or otherwise,

• liquidation of other assets (except to the extent that such liquidation would itself create a hardship), and

• cessation of salary deferrals under this plan.

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ADMINISTRATION, CLAIMS

AND APPEALS

Introduction.    The administrator of the plan is the Retirement Committee appointed by the board of directors of the company. The administrator has all rights, duties and powers necessary or appropriate for the administration of the plan.

Claims.    To claim your money (or stock) under the plan, file a written claim with the administrator (c/o Education Management Corporation, 300 Sixth Avenue, Pittsburgh, PA 15222). The plan administrator will respond in writing within 90 days and, if the claim is denied, point out the specific reasons and plan provisions on which the denial is based, describe any additional information needed to complete the claim, and describe the appeal procedure.

Appeal.    If your claim is denied and you disagree and want to pursue the matter, you must file an appeal in accordance with the following procedure. You cannot take any other steps unless and until you have exhausted the appeal procedure. For example, if your claim is denied and you do not use the appeal procedure, the denial of your claim is conclusive and cannot be challenged, even in court.

To file an appeal, write to the administrator stating the reasons why you disagree with the denial of your claim. You must do this within 60 days after the claim was denied. In the appeal process, you have the right to review pertinent documents. You have the right to be represented by anyone else, including a lawyer if you wish. And you have the right to present evidence and arguments in support of your position.

The administrator will ordinarily issue a written decision within 60 days. The administrator may extend the time to 120 days as long as it notifies you of the extension within the original 60 days. The administrator may, in its sole discretion, hold a hearing. The decision will explain the reasoning of the administrator and refer to the specific provisions of this plan on which the decision is based.

Discretionary authority.    The administrator shall have and shall exercise complete discretionary authority to construe, interpret and apply all of the terms of the plan, including all matters relating to eligibility for benefits, amount, time or form of benefits, and any disputed or allegedly doubtful terms. In exercising such discretion, the administrator shall give controlling weight to the intent of the company in establishing the plan. All decisions of the administrator in the exercise of its appellate authority under the plan (or in the exercise of its claims authority, absent an appeal) shall be final and binding on the plan, the company and all participants and beneficiaries.

MISCELLANEOUS

No guarantee of tax consequences.    While the company is pleased to be able to offer this plan for those employees who are eligible for it and wish to take advantage of it, the plan does not qualify for any program under which the Internal Revenue Service would issue an advance ruling or other determination on the federal tax consequences of the plan. This is particularly true of the feature under which the element of gain on the exercise of a stock option may be deferred under this plan–a relatively recent innovation on which the IRS has not yet spoken (when this edition of the plan was adopted). The company does not guarantee the tax consequences of the plan; consult your own tax advisor.

Integration.    This plan document represents the totality of the company’s commitment to provide deferred compensation under this plan. There are no other writings, nor are there any oral representations or understandings, that reflect, add to, subtract from, or alter the terms of this document.

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Amendment and termination.    Although the plan was not established with the intention that it be temporary or expire on a certain date, the company reserves the right, in its sole discretion, to amend or terminate the plan at any time, for any reason (or no reason), without notice, retroactively or prospectively.

As the only exception to the foregoing authority to amend or terminate, the company may not amend or terminate the plan in such a way as to reduce the balance that stands to the credit of any participant as of the date of adoption of any such amendment or termination, including salary deferral credits, company credits, and investment credits earned up to that time.

Expenses.    The expenses of the plan will be borne by the company.

Non-alienation.    As required by the Internal Revenue Service, your right to benefits under this plan is not subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, attachment, garnishment or any other type of alienation, whether initiated by you or by creditors of you or your beneficiary. Any attempt at alienation will simply be void.

Limitation of liability. No director, officer, or other employee of the company shall be personally liable for any action taken or omitted in connection with this plan and its administration unless attributable to his own fraud or willful misconduct.

The company hereby agrees to provide insurance to, or otherwise indemnify, every director, officer, and other employee of the company who serves the plan in an administrative or fiduciary capacity against any and all claims, loss, damages, expense, and liability arising from any act or failure to act in that capacity unless there is a final court decision that the person was guilty of gross negligence or willful misconduct.

Applicable law.    This plan will be construed according to the law of the Commonwealth of Pennsylvania to the extent not pre-empted by ERISA.

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EX-15.1

EXHIBIT 15.1

Independent Accountants’ Review Report

The Board of Directors

Education Management Corporation

We have reviewed the accompanying condensed consolidated balance sheet of Education Management Corporation and subsidiaries as of December 31, 2002, and the related condensed consolidated statements income and cash flows for the three-month and six-month periods then ended. These financial statements are the responsibility of the Company’s management. The condensed consolidated balance sheet of Education Management Corporation and subsidiaries as of December 31, 2001, and the related condensed consolidated statements of income and cash flows for the three-month and six-month periods then ended were reviewed by other accountants whose report dated January 25, 2002 stated that they were not aware of any material modifications that should be made to those statements for them to be in conformity with accounting principles generally accepted in the United States.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements at December 31, 2002, and for the three-month and six-month period then ended for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Education Management Corporation and subsidiaries as of June 30, 2002, and the related consolidated statements of income, shareholders’ investment, and cash flows for the year then ended not presented herein and in our report dated August 1, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Pittsburgh, Pennsylvania

    January 27, 2003

EX-99.1

Exhibit 99.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Education Management Corporation (the “Company”) for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert B. Knutson, Chairman and Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1). The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 7, 2003

/S/   ROBERT B. KNUTSON

Robert B. Knutson

Chairman and Chief Executive Officer                             

In connection with the Quarterly Report on Form 10-Q of Education Management Corporation (the “Company”) for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert T. McDowell, Executive Vice President and Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1). The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 7, 2003

/S/   ROBERT T. MCDOWELL

Robert T. McDowell

Executive Vice President and Chief Financial Officer