Form 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Arb5PGZ9imlsWzXXe2YGCNfcIfn5Z4Iebx38Nnz10mfZkCMqsSK2/mmHD/et1+7q 2R8hKeNM8HvjAGkgWl9JGQ== 0001193125-04-025159.txt : 20040217 0001193125-04-025159.hdr.sgml : 20040216 20040217164523 ACCESSION NUMBER: 0001193125-04-025159 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDUCATION MANAGEMENT CORPORATION CENTRAL INDEX KEY: 0000880059 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 251119571 FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21363 FILM NUMBER: 04609502 BUSINESS ADDRESS: STREET 1: 300 SIXTH AVENUE CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 4125620900 MAIL ADDRESS: STREET 1: 300 SIXTH AVE CITY: PITTSBURGH STATE: PA ZIP: 15222 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

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, 2003

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 x No ¨

The number of shares of the registrant’s Common Stock outstanding as of December 31, 2003 was 72,933,524.

INDEX


					PAGE
PART I	–	FINANCIAL INFORMATION

		ITEM 1	–	FINANCIAL STATEMENTS	3-11
		ITEM 2	–	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12-18
		ITEM 3	–	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18
		ITEM 4	–	CONTROLS AND PROCEDURES	18

PART II	–	OTHER INFORMATION

		ITEM 4	–	SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS	19
		ITEM 6	–	EXHIBITS AND REPORTS ON FORM 8-K	20

SIGNATURES					21

EXHIBIT INDEX					22

PART I

ITEM 1 – FINANCIAL STATEMENTS

EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	December 31, 2002			June 30, 2003			December 31, 2003
	(unaudited)						(unaudited)
Assets

Current assets:
Cash and cash equivalents	$	5,486		$	79,896		$	7,297
Restricted cash		2,561			595			7,574

Total cash and cash equivalents		8,047			80,491			14,871

Receivables, net		35,509			39,709			45,887
Inventories		4,638			4,371			5,982
Deferred and prepaid income taxes		10,102			17,162			18,247
Other current assets		9,386			9,296			11,362

Total current assets		67,682			151,029			96,349

Property and equipment, net		223,174			230,749			266,519
Deferred income taxes and other long-term assets		10,390			11,202			10,692
Intangible assets, net of amortization		18,635			16,892			21,954
Goodwill		154,550			156,701			310,961

Total assets	$	474,431		$	566,573		$	706,475

Liabilities and shareholders’ investment

Current liabilities:
Current portion of long-term debt	$	140		$	35,074		$	85,998
Notes payable		—			—			11,000
Accounts payable		11,440			16,301			25,151
Accrued liabilities		35,315			28,461			52,466
Advance payments		36,795			36,943			42,617
Unearned tuition		4,128			13,429			8,337

Total current liabilities		87,818			130,208			225,569

Long-term debt, less current portion		3,638			3,426			3,415
Deferred income taxes and other long-term liabilities		3,350			5,160			4,618

Shareholders’ investment:
Common stock		710			722			732
Additional paid-in capital		254,802			272,702			280,091
Treasury stock, at cost		(1,495	)		(1,495	)		(1,495	)
Retained earnings		125,740			153,368			190,026
Accumulated other comprehensive income/(loss)		(132	)		2,482			3,519

Total shareholders’ investment		379,625			427,779			472,873

Total liabilities and shareholders’ investment	$	474,431		$	566,573		$	706,475

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

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,
	2002		2003		2002		2003
Net revenues	$	175,136	$	232,980	$	303,279	$	401,956

Costs and expenses:
Educational services		100,753		135,702		194,883		259,301
General and administrative		31,322		40,994		59,482		76,856
Amortization of intangible assets		1,095		1,816		2,060		3,262

		133,170		178,512		256,425		339,419

Income before interest and taxes		41,966		54,468		46,854		62,537
Interest expense, net		332		820		642		1,510

Income before income taxes		41,634		53,648		46,212		61,027
Provision for income taxes		15,823		21,491		17,563		24,369

Net income	$	25,811	$	32,157	$	28,649	$	36,658

Earnings per share:
Basic	$	.37	$	.44	$	.41	$	.51

Diluted	$	.35	$	.43	$	.39	$	.49

Weighted average number of shares outstanding (000’s):
Basic		70,678		72,638		70,530		72,404

Diluted		73,370		75,039		73,300		74,618

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

EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)


	Six months ended December 31,
	2002			2003
Cash flows from operating activities:
Net income	$	28,649		$	36,658

Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		18,551			25,725
Changes in current assets and liabilities:
Restricted cash		(805	)		(6,979	)
Receivables		(4,194	)		(1,077	)
Inventories		(668	)		(1,109	)
Other current assets		(64	)		(696	)
Accounts payable		3,035			13,793
Accrued liabilities		8,319			21,264
Advance payments		(26,414	)		4,919
Unearned tuition		(4,991	)		(13,949	)

Total adjustments		(7,231	)		41,891

Net cash flows from operating activities		21,418			78,549

Cash flows from investing activities:
Acquisition of subsidiaries, net of cash acquired		(24,044	)		(159,908	)
Expenditures for property and equipment		(55,648	)		(49,128	)
Other items, net		(417	)		903

Net cash flows from investing activities		(80,109	)		(208,133	)

Cash flows from financing activities:
Revolving credit facility activity, net		(25,000	)		50,760
Principal payments on debt		(51	)		(123	)
Proceeds from issuance of Common Stock		4,889			7,399

Net cash flows from financing activities		(20,162	)		58,036

Effective exchange rate changes on cash		(138	)		(1,051	)

Net change in cash and cash equivalents		(78,991	)		(72,599	)

Cash and cash equivalents, beginning of period		84,477			79,896

Cash and cash equivalents, end of period	$	5,486		$	7,297

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	374		$	933
Income taxes	$	49		$	339

Cash paid for acquisitions:
Fair value of:
Assets acquired	$	29,302		$	191,025
Liabilities assumed		(3,385	)		(13,199	)
Less: Cash acquired		(1,873	)		(6,918	)
Acquisition financing – notes payable		—			(11,000	)

Net cash paid for acquisitions	$	24,044		$	159,908

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

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 education institutions offer a broad range of academic programs concentrated in the media arts, design, fashion, culinary arts, behavioral sciences, health sciences, education, information technology, legal studies and business fields, culminating in the award of associate’s through doctoral degrees. EDMC has provided career-oriented education for over 40 years.

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.

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, 2003 (the “Fiscal 2003 Annual Report”). The accompanying condensed consolidated balance sheet as of June 30, 2003 has been derived from the audited balance sheet included in the Company’s Fiscal 2003 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 six-month period ended December 31, 2003 are not necessarily indicative of the results to be expected for the full fiscal year. Unless otherwise noted, references to 2003 and 2004 refer to the periods ended December 31, 2002 and 2003, 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.

On April 1, 2003, the Company revised the estimated useful lives of several classes of fixed assets to more accurately reflect the current estimates of actual usage. See Note 6 of the Company’s Fiscal 2003 Annual Report for additional information regarding the change in accounting estimate for certain fixed asset’s useful lives. The impact of this change in accounting estimate was an incremental depreciation charge of approximately $550,000 for the six months ended December 31, 2003.

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

Effective October 1, 2003, the Company is now managed as one segment by shifting from a divisional approach to capitalize on the synergies apparent in serving the multiple locations from a centralized corporate structure. Accordingly, the Company’s results are no longer presented in a segment format.

Common Stock, Additional Paid-In Capital, Basic and Diluted Shares Outstanding, and Basic and Diluted Earnings Per Share have all been adjusted to reflect the two-for-one stock split on December 22, 2003 (see Note 5).

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

STOCK-BASED COMPENSATION:

The Company has three stock incentive plans, which are described more fully in Note 15 of the Company’s Fiscal 2003 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. With the exception of a restricted stock grant made in the first quarter of 2004, there is no stock-based employee compensation cost 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 Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to stock-based employee compensation.


	Three months ended December 31,						Six months ended December 31,
	2002			2003			2002			2003
Net income (in thousands):
As reported	$	25,811		$	32,157		$	28,649		$	36,658
Stock-based employee compensation expense included in reported net income, net of tax		—			162			—			214
Stock-based employee compensation expense determined under fair value method, net of tax		(1,848	)		(2,974	)		(3,517	)		(5,429	)

Pro forma	$	23,963		$	29,345		$	25,132		$	31,443

Basic earnings per share:
As reported	$	.37		$	.44		$	.41		$	.51
Pro forma		.34			.40			.36			.44

Diluted earnings per share:
As reported	$	.35		$	.43		$	.39		$	.49
Pro forma		.33			.39			.34			.42

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, adjusted for the stock split, see Note 5):


	Three months ended December 31,		Six months ended December 31,
	2002	2003	2002	2003
Basic shares	70,678	72,638	70,530	72,404
Dilution for stock options	2,692	2,401	2,770	2,214

Diluted shares	73,370	75,039	73,300	74,618

For the quarters ended December 31, 2002 and 2003, options to purchase 241,258 and 90,000 shares, respectively, 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).

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

CAPITAL STOCK:

The Company’s Board of Directors declared a stock split effected in the form of a stock dividend, payable at the rate of one share of Common Stock for each issued and outstanding share of Common Stock to the holders of record of Common Stock as of the close of business on December 1, 2003. The shares issued for the stock split were distributed on December 22, 2003. Reflected below is a summary of the Company’s capital stock. The numbers shown for December 31, 2002 and June 30, 2003 have been adjusted to reflect the stock split.


	Par Value		Authorized	December 31, 2002	June 30, 2003	December 31, 2003
Issued:
Preferred Stock	$	.01	10,000,000	—	—	—
Common Stock	$	.01	120,000,000	70,987,796	72,161,382	73,113,888
Held in treasury:
Common Stock		N/A	N/A	180,364	180,364	180,364

BUSINESS ACQUISITIONS:

On July 14, 2003, the Company acquired 100 percent of the outstanding stock of South University, Inc. (“South”). South has four campuses in the southeastern United States and offers undergraduate and graduate degree programs in business, legal studies, information technology and health sciences fields. The Company paid approximately $51.0 million for South, which includes $4.0 million held in escrow. Funds from this account will be transferred to the previous owner if certain conditions are met. These conditions primarily relate to the development and performance of certain health profession education programs.

On September 2, 2003, the Company acquired 100 percent of the outstanding stock of American Education Centers, Inc. and related companies (“AEC”), headquartered in a suburb of Cincinnati, Ohio. AEC operates 18 education institutions in eight states, mainly in the Midwest, offering programs in health sciences, business, information technology, legal studies and design technologies. The Company paid approximately $103.5 million in cash; an additional $11.0 million in notes, payable on September 2, 2004; and assumed $3.5 million in debt. The Company is in the process of finalizing the third-party valuation of certain tangible and intangible assets associated with AEC; therefore, the allocation of the purchase price is subject to adjustment which are not believed to be material.

South and AEC were acquired to create a broad range of market-sensitive academic programs and a comprehensive distribution system. The results of operations for South and AEC have been consolidated as of the respective closing dates. Approximately $143.0 million and $7.3 million were assigned to goodwill and intangible assets, respectively.

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

The following table reports pro forma information as if the acquisitions of South and AEC had been completed at July 1, 2002 (unaudited, in thousands, except per share amounts). Pro forma results for the six-month period ended December 31, 2003 include $15.9 million in expenses for AEC pertaining to stock compensation payouts and costs incurred related to the acquisition by EDMC. These stock plans at AEC are no longer in place and the Company does not expect to incur charges of this nature in future periods.


	Three months ended December 31,				Six months ended December 31,
	2002		2003		2002		2003
Net revenues
As reported	$	175,136	$	232,980	$	303,279	$	401,956
Pro forma		192,802		232,980		337,477		412,285

Net income
As reported	$	25,811	$	32,157	$	28,649	$	36,658
Pro forma		27,346		32,157		30,965		27,496

Diluted earnings per share
As reported	$	.35	$	.43	$	.39	$	.49
Pro forma		.37		.43		.42		.37

On October 1, 2003, the Company acquired Dubrulle International Culinary & Hotel Institute of Canada (“Dubrulle”), located in Vancouver, British Columbia. On October 8, 2003, the Company acquired Bradley Academy for the Visual Arts (“Bradley”), located in York, Pennsylvania. The aggregate purchase price for these two entities was approximately $10.6 million. Dubrulle will allow EDMC to expand on its current base of students in the Vancouver area, while the purchase of Bradley will complement EDMC’s existing presence in Pennsylvania. Bradley will allow EDMC to reach students interested in a suburban setting and also reach the more populous centers of Baltimore, MD and Harrisburg, PA.

These transactions are accounted for in accordance with Statement SFAS 141, “Business Combinations (“SFAS 141”) and are included in the Company’s consolidated results of operations from their respective acquisition dates.”

COMPREHENSIVE INCOME:

Comprehensive income consisted of the following (in thousands):


	Three months ended December 31,					Six months ended December 31,
	2002			2003		2002			2003
Net income	$	25,811		$	32,157	$	28,649		$	36,658
Other comprehensive income/(loss):
Foreign currency translation		(201	)		947		(490	)		1,037

Comprehensive income	$	25,610		$	33,104	$	28,159		$	37,695

Accumulated other comprehensive income represents only the foreign currency translation adjustment of approximately ($132,000) and $3.5 million as of December 31, 2002 and 2003, respectively.

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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. The Company reviews intangible assets with an identifiable useful life for impairment, when indicators of impairment exist, as defined by SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”).” Annually, or more frequently if necessary, the Company evaluates goodwill for impairment, with any resulting impairment reflected as an operating expense.

Amortization of intangible assets for the three and six months ended December 31, 2003 was approximately $1.8 million and $3.3 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)
2004 (remainder)	$	3,457
2005		5,741
2006		2,761
2007		1,282
2008		1,107

Intangible assets consisted of the following (in thousands):


	As of June 30, 2003					As of December 31, 2003					Weighted Average Amortization Period (years)
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization			Weighted Average Amortization Period (years)
Curriculum	$	9,126	$	(3,080	)	$	11,889	$	(3,932	)	7
Accreditation		3,534		(732	)		4,019		(891	)	11
Bachelor’s degree programs		1,100		(198	)		1,100		(234	)	15
Student contracts and applications		7,854		(3,589	)		12,508		(5,570	)	3
Software		395		(166	)		434		(233	)	4
Title IV		785		(82	)		1,130		(124	)	12
Tradename		500		—			500		—		Indefinite
Other		2,768		(1,323	)		2,806		(1,448	)	10

Total	$	26,062	$	(9,170	)	$	34,386	$	(12,432	)	5

The changes in the carrying amount of goodwill for the three months ended December 31, 2003 are as follows (in thousands):


	Total
Balance as of June 30, 2003	$	156,701
Goodwill related to acquisitions during the current period		153,463
Goodwill variance due to foreign currency translation		797

Balance as of December 31, 2003	$	310,961

EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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 issued. The Company guarantees a significant portion of real estate lease obligations for its subsidiaries, including a mortgage on the building that the Western State University College of Law occupies, which had an outstanding balance of $3.4 million as of December 31, 2003. The Company would be required to perform under these guarantees if the subsidiary could not satisfy the obligations. The Company has no guarantees for any unconsolidated entities. The minimum future commitments under non-cancelable, long-term operating leases as of December 31, 2003 are reflected below:


Fiscal years	(in thousands)
2004 (remainder)	$	36,243
2005		65,728
2006		60,105
2007		56,131
2008		52,521
Thereafter		235,001

Total	$	505,729

10.

NEW ACCOUNTING STANDARDS:

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), which nullifies Emerging Issues Task Force Issue No. 90-15, “Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions.” This interpretation addresses consolidation by business enterprises of variable interest entities with certain characteristics. FIN 46 is effective immediately for all variable interest entities created after January 31, 2003. In December 2003, the FASB agreed to defer the effective date of FIN 46 for all public companies with variable interests in special purpose entities that were created before February 1, 2003 to no later than the end of periods ending after December 15, 2003. The deferral will require that public companies adopt the revised provisions of FIN 46 interests in financial statements for periods after March 15, 2004. The Company is in the process of evaluating the affect of the adoption of FIN 46, but believes it will not have a material impact on the Company’s consolidated financial position and results of operations.

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 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 2003 and 2004 are to the periods ended December 31, 2002 and 2003, 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 condensed consolidated 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 condensed consolidated 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 condensed consolidated financial statements.

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

Revenue Recognition and Receivables

The Company’s net revenues consist of tuition and fees, student housing charges and bookstore and restaurant sales. The Company derived 90.2% and 90.3% of its net revenues from tuition and fees paid by or on behalf of its students for the three and six months ended December 31, 2002. The Company derived 90.2% and 90.4% for the three and six months ended 2003. 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 condensed 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, Argosy, South, AEC and other 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.”

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 for most locations primarily by categorizing gross receivables based upon the enrollment status of the student and establishing a reserve based on the likelihood of collection. Student accounts are monitored through an aging process whereby past due accounts are pursued. When certain criteria are met and internal collection measures have been taken, the account is placed with an outside collection agency. Student accounts in collection are evaluated on a case-by-case basis before being written off.

Loss Contingencies

The Company accrues for loss contingencies when it is determined that an unfavorable outcome is probable and estimable.

Use of Estimates

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 in accordance with SFAS No. 144. Changes in circumstances include economic conditions or operating performance. If such a circumstance existed, the Company would perform additional analysis which is based upon assumptions about the estimated future undiscounted cash flows associated with the asset. If the projected undiscounted future cash flows are less than the carrying value, the Company would determine the fair value of the asset based upon a discounted cash flow model. If the discounted cash flows are less than the carrying value of the asset, an impairment loss is recognized. 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 and indefinite-lived intangible assets attributable to the reporting unit as required under SFAS No. 142, by comparing the fair value of the reporting unit with its carrying value. The evaluation is performed at least annually and when potential impairment indicators exist as required by SFAS No. 142. The Company continually applies its best judgement when performing these evaluations to determine the financial projections used to assess the fair value of the reporting unit.

Income Taxes

The Company calculates income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes”, which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company has generated foreign and state operating loss carryforwards. Management has determined that it is currently more likely than not that the benefits will be realized and has established a valuation allowance against only a portion of these assets. The utilization of the net deferred tax asset recorded for net operating loss carryforwards is dependent on the execution of certain tax planning strategies and the generation of future taxable income. The Company has continuously implemented these tax planning strategies and plans to continue implementing these strategies in the future. The Company continues to evaluate the need for a valuation allowance on an ongoing basis.

Results of Operations

Three months ended December 31, 2003 compared to the three months ended December 31, 2002

Net revenues increased by 33.0% to $233.0 million in 2004 from $175.1 million in the second quarter of 2003 primarily due to increases in student enrollment and tuition rates, as well as new acquisitions. Student enrollment for the second quarter for those schools owned for one year or more increased 13.9% to 49,860 as compared to 43,784 in the prior year. The enrollment increase was accompanied by a tuition increase of approximately 6% over the prior year. Revenue from fiscal 2004 acquisitions totaled $23.9 million.

Educational services expense increased by $34.9 million, or 34.7%, to $135.7 million in 2004 from $100.7 million in 2003, due primarily to the incremental costs incurred to support higher student enrollment. These costs include employee compensation, rent and other facility operating costs, cost of sales, bad debt, and depreciation and amortization. Overall, educational services expense as a percentage of revenue increased approximately 70 basis points from 57.5% in fiscal 2003 to 58.2% in 2004. This increase is attributable primarily to increases in bad debt expense, benefits expense, and management incentive costs for school employees in the second quarter as compared to the prior year. The Company does not expect these expenses to be higher as a percentage of revenue for the fiscal year, as compared to last year.

General and administrative expense was $41.0 million in 2004, up 30.9% from $31.3 million in 2003. 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, and salaries and benefits expenses. As a percentage of net revenues, general and administrative expense decreased approximately 30 basis points to 17.6% as compared to 17.9% in the second quarter of fiscal 2003. The improvement in these expenses as a percentage of revenue primarily reflects operating leverage on marketing and admissions expenses, partially offset by increases in benefits and management incentive compensation expense for general and administrative employees in the second quarter as compared to the prior year. The Company does not expect the benefits and incentive expenses to be higher as a percent of revenue for the fiscal year, as compared to last year.

Amortization of intangibles increased by $721,000 to $1.8 million in 2004, as compared to $1.1 million in the second quarter of fiscal 2003. This increase results from amortization associated with the 2004 acquisitions of South, AEC, Bradley and Dubrulle, along with ongoing curriculum development at The Art Institute Online.

Income before interest and taxes (“operating income”) increased by $12.5 million to $54.5 million in 2004 from $42.0 million in 2003. The corresponding margin decreased approximately 60 basis points to 23.4% for the quarter as compared to 24.0% for the prior year, due to benefits cost, management incentive compensation expense, higher bad debt expense and amortization of intangible assets as a percent of revenue in the second quarter, partially offset by leverage on marketing and admissions expenses.

Net interest expense was $820,000 in the second quarter of 2004, as compared to $332,000 in 2003. The increase of $488,000 or 147.0% as compared to the prior quarter is primarily a result of borrowings incurred to fund the acquisition of AEC. In addition to interest on the borrowings under the Company’s revolving credit agreement (the “Credit Agreement”), net interest expense includes 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 was 40.1% for the second quarter of fiscal 2004, as compared to 38.0% recorded in the comparable quarter of the prior year. The effective tax rate for fiscal 2003 was 38.5%. The increase in the rate as compared to the prior year reflects the distribution of taxable income to states with higher

tax rates as well as valuation allowances applied to tax assets related to foreign net operating losses (Canada). The effective rates differed from the combined federal and state statutory rates due primarily to expenses that are non-deductible for tax purposes. The Company expects the effective tax rate to be 40.0% for fiscal 2004.

As of December 31, 2003, the Company had net state operating loss carryforwards of approximately $43.5 million and foreign net operating loss carryforwards of approximately $14.3 million. A valuation allowance of approximately $4.0 million has been established for the deferred tax asset related to the foreign net operating loss carryforwards. This allowance was increased by approximately $400,000 during the period ended December 31, 2003.

Net income increased by $6.3 million to $32.2 million in 2004 from $25.8 million in 2003. The increase is attributable to improved results from operations, partially offset by increased amortization of intangibles expense, and a higher tax provision in 2004.

The Company expects that the acquisitions made in 2004 will create additional growth in consolidated revenue and operating income for 2004. In subsequent years, the Company expects these entities to have revenue growth consistent with the Company’s historical trends and to offer the potential for the Company to have improvement in operating margins somewhat greater than the historical average over the past several years.

Six months ended December 31, 2003 compared to the six months ended December 31, 2002

Net revenues increased by 32.5% to $402.0 million in 2004 from $303.3 million in the first half of 2003. Increases in student enrollment and tuition rates, as well as new acquisitions, drove the higher net revenues. Average student enrollment for the first half increased 29.0% to 49,403 as compared to 38,292 in the prior year. The enrollment increase was accompanied by a tuition increase of approximately 6% over the prior year. Revenue from new acquisitions totaled $32.8 million.

Educational services expense increased by $64.4 million, or 33.1%, to $259.3 million in 2004 from $194.9 million in 2003, due primarily to the incremental costs incurred to support higher student enrollment. These costs include employee compensation, rent and other facility operating costs, cost of sales, and depreciation and amortization. Overall, educational services expense as a percentage of revenue increased approximately 30 basis points from 64.3% in fiscal 2003 to 64.5% in 2004.

General and administrative expense was $76.9 million in 2004, up 29.2% from $59.5 million in 2003. The increase over the comparable period in the prior year primarily reflects increases in costs related to newly-acquired entities as well as increases in marketing and admissions expenses, and salaries and benefits expenses. As a percentage of net revenues, general and administrative expense decreased approximately 50 basis points to 19.1% as compared to 19.6% for the six months ended December 31, 2002. The improvement in these expenses as a percentage of revenue primarily reflects operating leverage on marketing and admissions expenses, partially offset by increases in benefits and management incentive compensation expense for general and administrative employees.

Amortization of intangibles increased by $1.2 million to $3.3 million in 2004, as compared to $2.1 million in the first half of fiscal 2003. This increase results from amortization associated with the 2004 acquisitions of South, AEC, Bradley and Dubrulle, along with ongoing curriculum development at The Art Institute Online.

Income before interest and taxes (“operating income”) increased by $15.7 million to $62.5 million in 2004 from $46.9 million in 2003. The corresponding margin increased approximately 10 basis points to 15.6% for the six month period as compared to 15.4% for the prior year.

Net interest expense was $1.5 million in 2004, as compared to $642,000 in 2003. The increase of $868,000 or 135.2% as compared to the prior period is primarily a result of borrowings incurred to fund the acquisition of AEC. In addition to interest on the borrowings under the Credit Agreement, net interest expense includes 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 was 39.9% for 2004, as compared to 38.0% recorded in the comparable six months of the prior year. The effective tax rate for fiscal 2003 was 38.5%. The increase in the rate as compared to the prior year reflects the distribution of taxable income to states with higher tax rates as well as valuation allowances applied to tax assets related to foreign net operating losses (Canada). The effective rates differed from the combined federal and state statutory rates due primarily to expenses that are non-deductible for tax purposes. The Company expects the effective tax rate for fiscal 2004 to be 40.0%.

Net income increased by $8.0 million to $36.7 million in 2004 from $28.6 million in 2003. The increase is attributable to improved results from operations, partially offset by increased amortization of intangibles expense, and a higher tax provision in 2004.

Seasonality and Other Factors Affecting Quarterly Results

Liquidity and Funds of Capital Resources

As of December 31, 2003, the Company’s unrestricted cash balance was $7.3 million, a decrease of $72.6 million from $79.9 million at June 30, 2003 and an increase of $1.8 million as compared to December 31, 2002. The decrease from June 30 is primarily a result of cash paid for acquisitions in the second quarter of 2004 of $159.9 million, net of $6.9 million cash acquired. The cash paid for acquisitions was partially funded through revolver borrowings. This decrease was partially offset by cash flow from operations during the six months ended December 31, 2003.

The Company generated positive cash flow from operating activities of $78.5 million for the six months ended December 31, 2003, an increase of $57.1 million as compared to the comparable period for fiscal 2003. A substantial portion of this increase in cash flow from operations is due to the timing of receipt of financial aid for the Art Institutes summer term, which started nine days later in the current year; therefore, financial aid was received for both the summer and fall terms during the second quarter of 2004. Improved operating results and an increase in non-cash charges also contributed to the increase.

The Company had a working capital deficit of $129.2 million as of December 31, 2003, as compared to working capital of $20.9 million as of June 30, 2003 and a deficit of $20.1 million at December 31, 2002. This decrease in working capital was primarily a result of the decrease in cash and cash equivalents, due to cash paid for acquisitions, partially funded through revolver borrowings, accompanied by higher deferred tuition. Net receivables increased $6.2 million from June 30, 2003 and increased $10.4 million from December 31, 2002. The increase in net receivables relates primarily to recent acquisitions, higher student enrollment at existing schools

and the corresponding revenue increases. The days sales outstanding in accounts receivable decreased approximately 0.5 days to 18.1 days as of December 31, 2003 as compared to last year.

The Company and its lenders amended and restated the Credit Agreement, effective August 18, 2003, to increase allowable borrowings from $150 million to $250 million. The Credit Agreement, which now expires August 18, 2008, 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, 2003, the Company had approximately $149 million available 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, federal financial aid 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.

The Company anticipates its total capital spending for fiscal 2004 will be approximately $89.0 million, as compared to $76.9 million in the prior year. The 2004 expenditures relate to the investment in schools acquired or started during the previous several years and schools to be added in 2004, continued expansion and improvements to current facilities, additional or replacement school and housing facilities, and classroom and administrative technology.

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, 2003 (in thousands):


	Total amounts committed		Payments due by fiscal year
	Total amounts committed		2004 (remainder)		2005-2006		2007-2008		2009 - Thereafter
Line of credit borrowings (1)	$	85,760		—		—		—		—
Standby letters of credit (2)		4,570		—		—		—		—
Mortgage obligation		3,461		81		3,380		—		—
Note payable		11,000		—		11,000		—		—
Operating leases		505,729		36,243		125,833		108,652		235,001

Total commitments	$	610,520	$	36,324	$	140,213	$	108,652	$	235,001

(1)

These borrowings were repaid subsequent to December 31, 2003. Under the terms of the Company’s Credit Agreement, all outstanding borrowings become due at expiration of the facility in fiscal 2009.

(2)

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

The Company leases the majority of its facilities. The Company anticipates that future commitments on existing leases will be paid from cash provided from operating activities.

The Company is a defendant in certain legal proceedings arising out of the conduct of its businesses. In the opinion of management, based upon its investigation of these claims and discussion with legal counsel, the ultimate outcome of such legal proceedings, individually and in the aggregate, will not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.

On November 11, 2003, the Accreditation Committee of the Section on Legal Education and Admission to the Bar of the American Bar Association (“ABA”) orally notified Western State University College of Law (“WSU”) that it would not recommend to the ABA’s Council of the Section on Legal Education and Admission

to the Bar (the “Council”) that WSU receive full approval and would not recommend that WSU’s provisional approval be extended. (WSU is currently provisionally approved by the ABA, but its period of provisional approval is scheduled to expire in 2004 unless the ABA elects to extend the period.) By letter of December 11, 2003, the Council notified WSU that the Council had adopted a motion to withdraw provisional approval and that the matter would be submitted to the ABA House of Delegates at its meeting in February 2004 for ratification. On January 16, 2004, WSU and two WSU students filed a lawsuit against the ABA in the United States District Court for the Central District of California seeking a preliminary injunction preventing the ABA from reviewing the Council’s decision to withdraw provisional approval at the February meeting of the House of Delegates. On February 6, 2004, the court issued an order preliminarily enjoining the ABA from implementing any final decision to withdraw WSU’s provisional approval. On February 8, 2004, the Council withdrew its request that the House of Delegates ratify its action to remove the provisional approval of WSU. By letter dated February 11, 2004, the Council notified WSU that the Council proposes to hold a meeting on March 28, 2004 to reconsider its decision to withdraw WSU’s provisional approval. The Company believes that WSU meets the ABA’s standards for approval, but if the ABA should decide not to grant WSU full approval, or not to extend the time during which WSU is provisionally approved, this action could have a material adverse effect on WSU. However, WSU would continue to be eligible to participate in federal financial aid programs, as it is separately accredited by the Commission on Colleges of the Western Association of Schools and Colleges.

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

(a) 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 December 31, 2003. Based on that evaluation, the Company concluded that 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.

(b) There have not been any significant changes in the Company’s internal controls or in other factors that could significantly affect such controls during the quarterly period ended December 31, 2003.

PART II

ITEM 4 – SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

On November 20, 2003, the annual meeting of the shareholders of the Company was held for the election of certain directors, the amendment of the Company’s articles of incorporation, the adoption of an incentive plan and the retention of the Company’s independent auditors.


		Shares
(i) Election of directors (Class I):

Robert H. Atwell: Votes for Authority withheld		32,221,881 532,711

William M. Campbell, III: Votes for Authority withheld		31,521,908 1,232,684

Friedrich Teroerde: Votes for Authority withheld		32,144,198 610,394

(ii) Approval of amendment and restatement of the Company’s articles of incorporation to increase number of shares of authorized common stock:

Votes for Votes against Abstentions		30,743,467 1,970,981 40,142

(iii) Adoption of the Company’s 2003 Incentive Plan:

Votes for Votes against Abstentions		25,369,941 5,225,847 53,574

(iv) Approval of the retention of Ernst & Young LLP as the Company’s independent auditors:

Votes for Votes against Abstentions		31,815,243 836,319 103,030

ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits:

(3.1)

Restated By-Laws

(15.1)

Independent Accountant’s Review Report

(15.2)

Auditor’s Acknowledgement

(31.1)

Rule 13a-14(a)/15d-14(a) Certifications

(32.1)

Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

(b)

Reports on Form 8-K:

During the last fiscal quarter of the period covered by this Form 10-Q, the Company filed a current report on From 8-K dated October 28, 2003 relating to its financial results for the quarter ended September 30, 2003; a current report on Form 8-K/A dated November 10, 2003 amending a previously filed Form 8-K originally filed September 2, 2003 announcing that it had completed its previously-announced acquisition of American Education Centers; and a current report on Form 8-K dated November 20, 2003 announcing that the Board of Directors declared a stock split effected in the form of a stock dividend.

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 17, 2004

		/s/ JOHN R. MCKERNAN, JR.
		John R. McKernan, Jr.
		Vice Chairman and Chief Executive Officer

		/s/ ROBERT T. MCDOWELL
		Robert T. McDowell
		Executive Vice President and Chief Financial Officer

EXHIBIT INDEX



(3.1	)	Restated By-Laws

(15.1	)	Independent Accountant’s Review Report

(15.2	)	Auditor’s Acknowledgement

(31.1	)	Rule 13a-14(a)/15d-14(a) Certifications

(32.1	)	Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

EX-3.1 3 dex31.htm RESTATED BY-LAWS Restated By-laws

Exhibit 3.1

RESTATED BYLAWS

EDUCATION MANAGEMENT CORPORATION

Adopted: November 20, 2003

TABLE OF CONTENTS


		PAGE
ARTICLE I MEETING OF SHAREHOLDERS

Section 1.1	Annual Meeting	4
Section 1.2	Special Meetings	4
Section 1.3	Place of Meetings	4
Section 1.4	Notice of Meetings	4
Section 1.5	Quorum; Adjournments	4
Section 1.6	Advance Notice of Shareholder Proposals	5
Section 1.7	Advance Notice of Shareholder Nominations	5
Section 1.8	Voting	6
Section 1.9	Informal Action	6
Section 1.10	Presence at Meetings	6

ARTICLE II DIRECTORS

Section 2.1	Number, Qualifications, Election and Term of Office	6
Section 2.2	Vacancies	7
Section 2.3	Removal of Directors	7
Section 2.4	Annual Meeting; Other Regular Meetings	7
Section 2.5	Special Meetings	8
Section 2.6	Quorum	8
Section 2.7	Powers of Directors	8
Section 2.8	Informal Action	8
Section 2.9	Telephone Participation in Meetings	8
Section 2.10	Compensation of Directors	8
Section 2.11	Director Emeritus	8

ARTICLE III COMMITTEES OF DIRECTORS

Section 3.1	Appointment and Powers	9
Section 3.2	Appointment by Committees of Substitute Members	9
Section 3.3	Procedure	9
Section 3.4	Telephone Participation in Meetings	9
Section 3.5	Informal Action	10

ARTICLE IV OFFICERS

Section 4.1	Enumeration	10
Section 4.2	Chairman	10
Section 4.3	Chief Executive Officer	10
Section 4.4	President	10
Section 4.5	Vice President	10
Section 4.6	Secretary	10
Section 4.7	Treasurer	11
Section 4.8	Other Officers	11
Section 4.9	Compensation	11
Section 4.10	Additional Duties of Officers	11

ARTICLE V STOCK

Section 5.1	Issuance of Stock	11
Section 5.2	Certificate of Stock	11
Section 5.3	Transfer of Stock	12


		PAGE
Section 5.4	Lost, Stolen, Destroyed or Mutilated Certificates	12
Section 5.5	Regulations	12
Section 5.6	Holders of Record	12
Section 5.7	Record Date	12
Section 5.8	Restriction on Transfer Rights	13

ARTICLE VI LIABILITY OF DIRECTORS

Section 6.1	Directors’ Personal Liability	13
Section 6.2	Preservation of Rights	13

ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 7.1	Mandatory Indemnification of Directors and Officers	13
Section 7.2	Mandatory Advancement of Expenses to Directors and Officers	14
Section 7.3	Permissive Indemnification and Advancement of Expenses	14
Section 7.4	Enforcement	15
Section 7.5	General	15
Section 7.6	Definition of Corporation	15
Section 7.7	Definition of Authorized Representative	15
Section 7.8	Savings Clause	16
Section 7.9	Insurance	16
Section 7.10	Funding to Meet Indemnification Obligations	16

ARTICLE VIII GENERAL PROVISIONS

Section 8.1	Corporate Seal	16
Section 8.2	Fiscal Year	16
Section 8.3	Authorization	16
Section 8.4	Inapplicability of Subchapter 25E	16
Section 8.5	Inapplicability of Subchapter 25F	17
Section 8.6	Inapplicability of Subchapter 25G	17
Section 8.7	Inapplicability of Subchapter 25H	17

ARTICLE IX AMENDMENTS		17

RESTATED BYLAWS

EDUCATION MANAGEMENT CORPORATION

ARTICLE I

MEETING OF SHAREHOLDERS

Section 1.1 Annual Meeting.

An annual meeting of the shareholders for the election of directors and the transaction of such other business as may properly come before the same shall be held on the second Thursday of November of each year, at 10:00 a.m., prevailing time, or at such other date and time as shall be designated by the Board of Directors. If the day fixed for the meeting falls on a Saturday or Sunday, or is a legal holiday, the meeting shall be held at the same hour on the next succeeding full business day or as soon thereafter as practicable.

Section 1.2 Special Meetings.

Special meetings may be called only by the Chairman, the Chief Executive Officer, the President, or a majority of the directors in office. The only business to be transacted at a special meeting of shareholders shall be the business stated in the notice provided pursuant to Section 1.4 of these Bylaws.

Section 1.3 Place of Meetings.

Meetings of the shareholders shall be held at the registered office of the Corporation, or at such other place within or without the Commonwealth of Pennsylvania as shall be fixed by the Board of Directors or the person or persons calling the meeting.

Section 1.4 Notice of Meetings.

A written notice stating the place, day and hour of any meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be given by, or at the direction of, the Secretary, to each shareholder of record entitled to vote at such meeting, at such address as appears upon the records of the Corporation, at least twenty (20) days before the day named for the meeting if written notice is given by bulk mail or five (5) days before the day named for the meeting if written notice is given by first class or express mail, postage prepaid, or by telegram, telex or TWX (with answerback received), unless a greater period of time is required by law in a particular case.

Section 1.5 Quorum; Adjournments.

The presence, in person or by proxy, of the majority of the outstanding shares entitled to vote shall constitute a quorum. The shareholders present at a duly authorized meeting can continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, those present may, except as otherwise provided by statute, adjourn the meeting to such time and place as they may determine, but in the case of any meeting called for the election of directors, those who attend the second of such adjourned meetings, although less than a quorum, shall nevertheless constitute a quorum for the purpose of electing the directors. When a meeting is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting other than the announcement at the meeting at which such adjournment is taken. If after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting.

Section 1.6 Advance Notice of Shareholder Proposals.

At any annual meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any shareholder of the Corporation who complies with the notice procedure set forth in this Section 1.6. For business to be properly brought before any annual meeting of the shareholders by a shareholder, the shareholder must be entitled by Pennsylvania law to present such business and such shareholder must have given timely notice of such shareholder’s intent to make such presentation. To be timely, a shareholder’s notice must have been received by the Secretary of the Corporation not less than 60 nor more than 90 days in advance of the first anniversary of the previous year’s annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must have been received no later than the close of business on the 5th day following the day on which public announcement of the date of such meeting is first made. Each such notice shall set forth: (i) a brief description of each item of business desired to be brought before the meeting and the reasons for conducting such business at the meeting; (ii) the name and address, as they appear on the Corporation’s books, of the shareholder proposing such business; (iii) a representation by the shareholder proposing such business that such shareholder will be a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting; (iv) the class and number of shares of the Corporation that are beneficially owned by the shareholder; and (v) as to each item of business the shareholder proposes to bring before the meeting, any material interest of the shareholder in such business. In addition, the shareholder making such proposal shall promptly provide any other information reasonably requested by the Corporation.

Only such business shall be conducted at any annual meeting of shareholders as shall have been brought before such meeting in accordance with the requirements set forth in these Bylaws. Notwithstanding the foregoing provisions of this Section 1.6, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in these Bylaws. Nothing in these Bylaws shall be deemed to affect any rights of any shareholder to request inclusion of a proposal in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Except as otherwise required by law, the chairman of any annual meeting of shareholders shall have the power and duty (x) to determine whether any business proposed to be brought before the meeting was brought in accordance with the requirements set forth in these Bylaws and (y) if any proposed business was not brought in compliance with these Bylaws to declare that such defective proposal shall be disregarded. For purposes of Sections 1.6 and 1.7 of these Bylaws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, the Associated Press or any comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

Section 1.7 Advance Notice of Shareholder Nominations.

Nominations for the election of directors may be made by the Board of Directors or by any shareholder entitled to vote generally in the election of directors; provided, however, that a shareholder may nominate a person for election as a director at a meeting only if timely notice of such shareholder’s intent to make such nomination has been given to the Secretary of the Corporation. To be timely, a shareholder’s notice must have been received by the Secretary of the Corporation (a) in the case of an annual meeting, not less than 60 nor more than 90 days in advance of the first anniversary of the previous year’s annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than 30 days from such anniversary date, notice by the shareholder to be timely must have been received no later than the close of business on the fifth day following the date on which public announcement of the date of such meeting is first made; and (b) in the case of a special meeting at which directors are to be elected, not later than the close of business on the fifth day following such public announcement. Each such notice shall set forth: (i) the name and address, as they appear on the Corporation’s books, of the shareholder who intends to make the nomination and the name(s) and address list of the person or persons to be nominated; (ii) a representation that the holder will be a holder of record of

shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (iii) the class and number of shares of the Corporation that are beneficially owned by the shareholder; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (vi) the consent of each nominee to serve as a director of the Corporation, if so elected. In addition, the shareholder making such nomination shall promptly provide any other information reasonably requested by the Corporation. Notwithstanding anything in these Bylaws to the contrary, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 1.7. Notwithstanding the foregoing provisions of these Bylaws, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in these Bylaws.

Except as otherwise required by law, the chairman of any meeting of shareholders shall have the power and duty (x) to determine whether a nomination was made in accordance with the requirements set forth in these Bylaws and (y) if any proposed nomination was not made in compliance with these Bylaws, to declare that such defective nomination shall be disregarded.

Section 1.8 Voting.

Except as otherwise provided by law or the Articles of Incorporation, every shareholder of record shall have the right at every shareholders’ meeting to one (1) vote for every share standing in his or her name on the books of the Corporation. A majority of the votes cast shall decide every question or matter submitted to the shareholders unless otherwise provided by law or the Articles of Incorporation. The vote upon any matter submitted to the shareholders may be taken viva voce; provided, however, that the vote upon any question shall be by ballot if demand for the same is made by any shareholder or is directed by the chairman of the meeting.

Section 1.9 Informal Action.

Whenever the vote of the shareholders at a meeting thereof is required or permitted to be taken in connection with any corporate action by any provision of law or of the Articles of Incorporation, the meeting, notice and vote of shareholders may be dispensed with, if a consent in writing, setting forth the action so taken, shall be signed by the holders of all the outstanding shares, prior or subsequent to such corporate action, and filed with the Secretary of the Corporation.

Section 1.10 Presence at Meetings.

A shareholder may participate in a meeting of the shareholders only if the shareholder or the shareholder’s duly authorized proxy is physically present in person at the meeting. A shareholder or a proxy may not participate in a meeting of the shareholders by means of conference telephone or similar communications equipment.

ARTICLE II

DIRECTORS

Section 2.1 Number, Qualifications, Election and Term of Office.

The number of directors to manage and control the affairs of the Corporation shall be as determined by the Board of Directors from time to time, but shall not be less than three (3). Directors need not be shareholders of

the Corporation or residents of the Commonwealth of Pennsylvania. Directors shall be elected by the shareholders at the annual meeting or any special meeting called for such purpose. Each director shall be elected to serve until the next annual meeting of the shareholders and until his or her successor is duly elected and qualified.

The directors of the Corporation shall be divided into three classes: Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the whole number of the Board of Directors. The initial Class I, II and III directors shall be those elected and designated to serve as such directors at the meeting of shareholders held to approve the Articles of Amendment dated as of October 24, 1996 (the “Shareholders Meeting”), such Class I directors shall hold office for a term to expire at the first annual meeting of the shareholders after the Shareholders Meeting; such Class II directors shall hold office for a term to expire at the second annual meeting of the shareholders after the Shareholders Meeting; and such Class III directors shall hold office for a term to expire at the third annual meeting of the shareholders after the Shareholders Meeting, and in the case of each class, until their respective successors are duly elected and qualified. At each annual election the directors elected to succeed those whose terms expire shall be identified as being of the same class as the directors they succeed and shall be elected to hold office for a term to expire at the third annual meeting of the shareholders after their election, and until their respective successors are duly elected and qualified. If the number of directors is changed, any increase or decrease in directors shall be apportioned among the classes so as to maintain all classes as equal in number as possible, and any additional director elected to any class shall hold office for a term which shall coincide with the terms of the other directors in such class and until his or her successor is duly elected and qualified.

Subject to the rights of holders of any series of Preferred Stock then outstanding, in the case of any increase in the number of directors of the Corporation the additional director or directors shall be elected by the Board of Directors. No decrease in the number of directors of the Corporation shall shorten the term of any incumbent director.

Section 2.2 Vacancies.

Vacancies in the Board of Directors caused by death, resignation, increase in the number of directors or otherwise shall be filled by a majority vote of the remaining member or members of the Board; and each director so elected shall hold office until the next selection of the class for which such director has been chosen and until his or her successor is duly elected and qualified.

Section 2.3 Removal of Directors.

The entire Board of Directors, or any class of the Board, or any individual director may be removed from office by vote of the shareholders entitled to vote thereon only for cause. In case the Board or a class of the Board or any one or more directors are so removed, new directors may be elected at the same meeting. The repeal of a provision of the Articles of Incorporation or these Bylaws prohibiting, or the addition of a provision to the Articles of Incorporation or these Bylaws permitting, the removal by the shareholders of the Board, a class of the Board or a director without assigning any cause shall not apply to any incumbent director during the balance of the term for which he was elected.

Section 2.4 Annual Meeting; Other Regular Meetings.

An annual meeting of the Board of Directors shall be held each year as soon as practicable after the annual meeting of shareholders, at the place where such meeting of shareholders was held or at such other place as the Board of Directors may determine, for the purposes of organization, election or appointment of officers and the transaction of such other business as shall come before the annual meeting. No notice of the annual meeting need be given. Other regular meetings of the Board of Directors shall be held at such times and places as the Board of Directors may from time to time by resolution appoint; and no notice shall be required to be given of any such regular meeting. No minimum number of regular meetings and no more than one annual meeting of the Board of Directors need be called in any year.

Section 2.5 Special Meetings.

Special meetings of the Board of Directors may be called by the Chairman, the Chief Executive Officer, the President or a majority of the directors in office, to be held at such time (as will permit the giving of notice as provided in this Section) and at such place in the Commonwealth of Pennsylvania or elsewhere as may be designated by the person or persons calling the meeting. Notice of the place, day and hour of such special meeting shall be given to each director by the Secretary (i) by written notice deposited in the United States mail not later than during the third full business day immediately preceding the day for such meeting, or (ii) by telephone, telex, facsimile transmission or other oral, written or electronic means received not later than 24 hours before the meeting. The notice need not refer to the business to be transacted at the meeting except action under Article VII of the Bylaws. No minimum number of special meetings of the Board of Directors need be called in any year.

Section 2.6 Quorum.

A majority of the directors in office shall constitute a quorum for the transaction of business, and actions may be taken by a majority of the members present at any meeting at which a quorum is present.

Section 2.7 Powers of Directors.

Except as otherwise provided by statute or the Articles of Incorporation, all powers vested by law in the Corporation shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, the Board of Directors.

Section 2.8 Informal Action.

Any action which may be taken at a meeting of the directors may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by all of the directors in office and filed with the Secretary of the Corporation.

Section 2.9 Telephone Participation in Meetings.

Any one or more directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.

Section 2.10 Compensation of Directors.

Each director of the Corporation who is not a salaried officer or employee of the Corporation or of a subsidiary of the Corporation, shall receive such compensation (whether in cash or otherwise) and reimbursement of expenses for serving as a director and for attendance at meetings of the Board of Directors or any committee appointed by the Board of Directors as the Board of Directors may from time to time determine.

Section 2.11 Director Emeritus.

The Board of Directors may, at its discretion, designate any former director as a Director Emeritus. The designation, number and term of each Director Emeritus shall be within the sole discretion of the Board of Directors, and the Board of Directors may remove, with or without cause, a Director Emeritus of the Corporation at any time. A Director Emeritus shall provide consulting or advisory services to the Board of Directors as requested from time to time by the Board of Directors and may be invited to attend meetings of the Board of Directors at the request of the Chairman, but shall not vote, or serve on any committee of the Board of Directors, or be counted in determining a quorum, or have any of the duties or obligations imposed on a director or officer

of the Corporation under the Pennsylvania Business Corporation Law of 1988, as amended, the Articles of Incorporation or these Bylaws or, except as provided in the last sentence of this Section 2.11, otherwise be considered to be a director or officer of the Corporation. Each Director Emeritus shall be compensated for his or her services and reimbursed expenses incurred in such person’s capacity as Director Emeritus as determined by the Board of Directors from time to time. A Director Emeritus shall be entitled to benefits and protections in accordance with Article VI (Liability of Directors) and Article VII (Indemnification of Directors and Officers) of these Bylaws as if such person were deemed to be, as the case may be, a director or former director of the Corporation.

ARTICLE III

COMMITTEES OF DIRECTORS

Section 3.1 Appointment and Powers.

The Board of Directors may, by resolution adopted by a majority of the directors in office, establish one or more committees, each of which shall consist of one or more of the directors of the Corporation. To the extent provided in the resolution establishing any committee, such committee shall have and may exercise all of the powers and authority of the Board of Directors; provided, however, that no such committee shall have any power or authority as to the following:

(i) the submission to the shareholders of the Corporation of any action requiring approval of the shareholders under the Pennsylvania Business Corporation Law of 1988, as amended;

(ii) the creation or filling of vacancies in the Board of Directors;

(iii) the adoption, amendment or repeal of the By-laws;

(iv) the amendment or repeal of any resolution of the Board that by its terms is amendable or repealable only by the Board; or

(v) action on matters committed by the By-laws or resolution of the Board of Directors to another committee of the Board.

Section 3.2 Appointment by Committees of Substitute Members.

In the absence or disqualification of any member of any such committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may by unanimous action appoint another director to act at the meeting in the place of any such absent or disqualify member.

Section 3.3 Procedure.

The Board of Directors may establish reasonable rules and regulations for the conduct of the proceedings of any such committee and may appoint a chairman of the committee who shall be a member thereof and a secretary of the committee who need not be a member thereof. To the extent that the Board of Directors shall not exercise such powers, they may be exercised by the Committee.

Section 3.4 Telephone Participation in Meetings.

Any one or more committee members may participate in a meeting of a committee of the Board of Directors by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.

Section 3.5 Informal Action.

Any action which may be taken at a meeting of any such committee may be taken without a meeting, if a consent or consents in writing setting forth the action so taken shall be signed by all the members of any such committee and filed with the Secretary of the Corporation.

ARTICLE IV

OFFICERS

Section 4.1 Enumeration.

The officers of the Corporation shall be elected by the Board of Directors and shall consist of a Chairman, a Chief Executive Officer, a President, one or more Vice-Presidents, a Secretary, a Chief Financial Officer, a Treasurer and, in the discretion of the Board of Directors, such other officers as shall from time to time be chosen and appointed by the Board of Directors. Any two (2) or more offices may be held by one (1) person. Every officer of the Corporation shall hold his or her position at the will of the Board of Directors.

Section 4.2 Chairman.

The Chairman shall preside at meetings of the Board of Directors and meetings of the shareholders, and he shall perform such other duties and exercise such other powers as the Board of Directors may from time to time prescribe.

Section 4.3 Chief Executive Officer.

The Chief Executive Officer shall have general charge and control over the affairs of the Corporation, subject to the Board of Directors. The Chief Executive Officer shall sign certificates for shares of capital stock of the Corporation and may, together with the Secretary, execute on behalf of the Corporation any contract which has been authorized by the Board of Directors. In the absence of the Chairman, the Chief Executive Officer shall preside at meetings of the shareholders. In the absence of the President or if the Board of Directors has not appointed a person holding the title of “President,” the Chief Executive Officer shall also perform the duties and exercise the powers of president within the meaning of the Business Corporation Law of 1988.

Section 4.4 President.

In the absence of the Chief Executive Officer or if the Board of Directors has not appointed a person holding the title of “Chief Executive Officer,” the President shall perform the duties and exercise the powers of chief executive officer, and shall report to the Board of Directors. The President shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

Section 4.5 Vice President.

The Vice President, or, if there shall be more than one, the Vice Presidents, in the order determined by the Board of Directors, shall, in the absence or disability of the President, perform the duties and exercise the powers of the President and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

Section 4.6 Secretary.

The Secretary shall keep a record of the minutes of the proceedings of meetings of shareholders and directors and shall give notice as required by statute or these Bylaws of all such meetings. The Secretary shall

have custody of the seal of the Corporation and of all the books, records and papers of the Corporation, except such as shall be in the charge of the Treasurer or of some other person authorized to have custody and be in possession thereof by resolution of the Board of Directors. The Secretary shall sign certificates for shares of the capital stock of the Corporation. The Secretary may, together with the Chief Executive Officer, execute on behalf of the Corporation any contract which has been authorized by the Board of Directors.

Section 4.7 Treasurer.

The Treasurer shall keep accounts of all moneys of the Corporation received and disbursed, and shall deposit all moneys and valuables of this Corporation in its name and to its credit in such banks and depositories as the Board of Directors shall designate. In the absence of the Treasurer or if the Board of Directors has not appointed a person holding the title of “Treasurer,” the chief financial officer of the Corporation shall perform the duties and exercise the powers of treasurer within the meaning of the Business Corporation Law of 1988. The Treasurer shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

Section 4.8 Other Officers.

The duties and powers of other officers who may from time to time be chosen by the Board of Directors shall be as specified by the Board of Directors at the time of the appointment of such other officers.

Section 4.9 Compensation.

The salaries and other compensation (whether cash or otherwise) of all officers listed in Sections 4.2 through 4.8 of this Article shall be fixed by, or pursuant to authority delegated by, the Board of Directors.

Section 4.10 Additional Duties of Officers.

The Board of Directors may from time to time by resolution increase or decrease the duties and powers of the Chairman, the Chief Executive Officer, the President, one or more Vice-Presidents, the Secretary, the Chief Financial Officer, the Treasurer, or any other officer.

ARTICLE V

STOCK

Section 5.1 Issuance of Stock.

Shares of capital stock of any class now or hereafter authorized, securities convertible into such shares or options or other rights to purchase such shares or securities may be issued or granted only in accordance with the authority granted by the Board of Directors.

Section 5.2 Certificate of Stock.

Certificates for shares of the capital stock of the Corporation shall be in the form adopted by the Board of Directors, shall be signed by the Chief Executive Officer or the President and the Secretary or an Assistant Secretary, and shall be sealed with the seal of the Corporation. Where any such certificate is signed by a registrar other than the Corporation or its employee, the signatures thereon of any officer of the Corporation and, where authorized by the Board of Directors, any transfer agent, may be facsimiles. All such certificates shall be numbered consecutively; and the name of the person owning the shares and the date of issue shall be stated on each certificate and entered on the books of the Corporation. In case any officer, transfer agent or registrar who has executed, by facsimile or otherwise, any share certificate shall have ceased to be such officer, transfer agent

or registrar by reason of death, resignation or otherwise, before the certificate is issued, it may be issued by the Corporation with the same effect as if the officer, transfer agent or registrar had not ceased to be such at the date of its issue.

Section 5.3 Transfer of Stock.

Shares of capital stock of the Corporation shall be transferred only on the books of the Corporation by the holder thereof in person or by his or her duly authorized attorney. All stock certificates transferred by endorsement thereon shall be surrendered for cancellation and new certificates issued to the transferee.

Section 5.4 Lost, Stolen, Destroyed or Mutilated Certificates.

New certificates of stock may be issued to replace certificates of stock lost, stolen, destroyed or mutilated, upon such terms and conditions, including proof of loss or destruction, and, if appropriate, the giving of a satisfactory bond of indemnity, as the Board of Directors or as one or more of the officers of the Corporation, as delegated to by the Board of Directors, may determine from time to time.

Section 5.5 Regulations.

The Board of Directors shall have power and authority to make all such rules and regulations not inconsistent with these Bylaws as it may deem expedient concerning the issue, transfer and registration of certificates of stock of the Corporation. The Board of Directors may appoint one or more transfer agents or assistant transfer agents and one or more registrars of transfers, and may require all stock certificates to bear the signature of a transfer agent or assistant transfer agent and a registrar of transfers. The Board of Directors may at any time terminate the appointment of any transfer agent or any assistant transfer agent or any registrar of transfers.

Section 5.6 Holders of Record.

The Corporation shall be entitled to treat the holder of record of any stock of the Corporation as the holder and owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or right, title or interest in, such stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law.

Section 5.7 Record Date.

The Board of Directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the Company after any record date fixed as provided herein. The Board of Directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided herein for purposes of a meeting, the determination shall apply to any adjournment thereof unless the Board fixes a new record date for the adjourned meeting. If a record date is not fixed by the Board of Directors: (i) the record date for determining shareholders entitled to notice of or to vote at a meeting of the shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day immediately preceding the day on which the meeting is held; and (ii) the record date for determining shareholders entitled to express consent or dissent to corporate action in writing without a meeting, when prior action by the Board of Directors is not necessary, shall be the close of business on the day on which the first written consent or dissent is filed with the Secretary of the Corporation.

Section 5.8 Restriction on Transfer Rights.

Rights issued pursuant to the Rights Agreement, dated October 1, 1996, between the Corporation and the Rights Agent, as the same may be amended from time to time (the “Rights Agreement”) may be transferred by an Acquiring Person or an Associate or Affiliate of any such Person (as such terms are defined in the Rights Agreement) only in accordance with the terms of, and subject to the restrictions contained in, the Rights Agreement.

ARTICLE VI

LIABILITY OF DIRECTORS

Section 6.1 Directors’ Personal Liability.

A director of the Corporation shall not be personally liable for monetary damages for any action taken, or any failure to take any action; provided, however, that this provision shall not eliminate or limit the liability of a director to the extent that such elimination or limitation of liability is expressly prohibited by the Business Corporation Law of 1988 or any successor statute as in effect at the time of the alleged action or failure to take action by such director.

Section 6.2 Preservation of Rights.

Any repeal or modification of this Article shall not adversely affect any right or protection existing at the time of such repeal or modification to which any director or former director may be entitled under this Article. The rights conferred by this Article shall continue as to any person who has ceased to be a director of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such person.

ARTICLE VII

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 7.1 Mandatory Indemnification of Directors and Officers.

(A) The Corporation shall promptly indemnify, to the fullest extent now or hereafter permitted by law and by Section 7.1(B) hereof, each director or officer (including each former director or officer) (an “indemnitee”) of the Corporation who was or is made a party to or a witness in or is threatened to be made a party to or a witness in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether external or internal to the Corporation (a “proceeding”), by reason of the fact that the indemnitee is or was an authorized representative of the Corporation, against all expenses (including attorneys’ fees, disbursements and other charges), judgments, fines (including excise taxes and penalties) and amounts paid in settlement actually and reasonably incurred by the indemnitee in connection with such proceeding.

(B) Indemnification pursuant to this Section 7.1 shall include but shall not be limited to cases in which indemnification is permitted pursuant to the provisions of Chapter 17, Subchapter D, of the Business Corporation Law of 1988. Indemnification pursuant to this Section 7.1 shall be made in every case described in Section 7.1(A) hereof except:

(i) in connection with a proceeding (or any claim, issue or matter therein or any part thereof) initiated by the indemnitee, unless such initiation was authorized by the Board of Directors of the Corporation; or

(ii) with respect to any act that is established, by a final, unappealable adjudication adverse to the indemnitee, as having been material to the cause of action so adjudicated and as having constituted either willful misconduct or recklessness; or

(iii) with respect to any benefit or advantage gained by the indemnitee to which the indemnitee was not legally entitled; or

(iv) in connection with a proceeding by or for the benefit of the Corporation to recover any profit pursuant to the provisions of section 16(b) of the Securities Exchange Act of 1934 and regulations thereunder or similar provisions of any applicable state law; or

(v) to the extent that the indemnitee actually receives payment under any policy of insurance or is otherwise reimbursed.

(C) Notwithstanding the foregoing provisions of this Section 7.1, to the extent that an indemnitee is successful on the merits or otherwise in defense of any proceeding or any part thereof or in defense of any claim, issue or matter therein, including but not limited to obtaining a dismissal without prejudice or a settlement without admission of liability, the indemnitee shall be promptly indemnified by the Corporation against expenses (including attorneys’ fees, disbursements and other charges) actually and reasonably incurred by the indemnitee in connection therewith.

(D) The right of indemnification pursuant to this Section 7.1 is conferred in order to attract and retain the services of highly qualified directors and officers and to encourage them to make corporate decisions without fear of strike suits and legal harassment. Indemnification pursuant to this Section 7.1 is therefore declared to be consistent with the fiduciary duty of the Corporation’s Board of Directors. Except as specifically provided in this Section 7.1, such indemnification shall be made by the Corporation without any requirement that any determination be made or any action be taken by the Board of Directors, shareholders, or legal counsel. A failure of the Board of Directors, shareholders, or legal counsel to make a determination or take action favorable to the claim of an indemnitee for indemnification pursuant to this Section 7.1, or the making of a determination or taking of action adverse to such a claim, shall not preclude indemnification under this Article or create any presumption that the indemnitee is not entitled to such indemnification.

Section 7.2 Mandatory Advancement of Expenses to Directors and Officers.

The Corporation shall promptly pay all expenses (including attorneys’ fees, disbursements and other charges) actually and reasonably incurred by an indemnitee in defending or appearing in any proceeding described in Section 7.1(A) hereof in advance of the final disposition of such proceeding upon receipt of (i) an undertaking by or on behalf of the indemnitee to repay all amounts advanced if it is ultimately specifically determined by a final, unappealable adjudication that the indemnitee is not entitled to be indemnified by the Corporation and (ii) an irrevocable assignment to the Corporation of all payments to which the indemnitee may be or become entitled, under any policy of insurance or otherwise, in reimbursement of any such expenses paid by the Corporation pursuant to this Section 7.2. Notwithstanding the foregoing, no advance payment shall be made by the Corporation pursuant to this Section 7.2 if the Board of Directors reasonably and promptly determines by a majority vote of the directors who are not parties to the proceeding that, based upon the facts known to the Board at the time the determination is made, the matter is of the kind described in Section 7.1(B)(i) or (iv) hereof or the indemnitee’s actions were of the kind described in Section 7.1(B)(ii) or (iii) hereof.

Section 7.3 Permissive Indemnification and Advancement of Expenses.

The Corporation may, as determined by the Board of Directors from time to time:

(A) indemnify, to the fullest extent permitted by Section 7.1 hereof, any other person who was or is made a party to or required to appear in, or is threatened to be made a party to or required to appear in, or was or is otherwise involved in, any threatened, pending or completed proceeding by reason of the fact that such person is or was an authorized representative of the Corporation, both as to action in such person’s official capacity and as to action in another capacity while holding such office or position, against all expenses (including attorneys’ fees, disbursements and other charges), judgments, fines (including excise taxes and penalties), and amounts paid in settlement actually and reasonably incurred by such person in connection with such action or proceeding, with the same effect as though such person were an “indemnitee” as defined in Section 7.1 hereof; and

(B) pay expenses incurred by any such other person by reason of his or her participation in any such proceeding in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation and to repay all amounts advanced for which he or she is reimbursed under any policy of insurance or otherwise, with the same effect as though such person were an “indemnitee” as defined in Section 7.1 hereof.

Section 7.4 Enforcement.

If the Corporation refuses or fails to make any payment to an indemnitee required by this Article, the indemnitee shall be promptly indemnified by the Corporation against expenses (including attorneys’ fees, disbursements and other charges) actually and reasonably incurred by the indemnitee in connection with the successful establishment of his or her right to indemnification or advancement of expenses, in whole or in part, in an action in a court of competent jurisdiction.

Section 7.5 General.

Each director or officer of the Corporation shall be deemed to act in such capacity in reliance upon such rights of indemnification and advancement of expenses as are provided in this Article. The rights of indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which any person seeking indemnification or advancement of expenses may be entitled under any agreement, vote of shareholders or disinterested directors, statute or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office or position, and shall continue as to a person who has ceased to be an authorized representative of the Corporation and shall inure to the benefit of the heirs and personal representatives of such person. Indemnification and advancement of expenses under this Article shall be provided whether or not the indemnified liability arises or arose from any threatened, pending or completed action by or in the right of the Corporation. Any repeal or modification of this Article shall not adversely affect any right or protection existing at the time of such repeal or modification to which any person may be entitled under this Article.

Section 7.6 Definition of Corporation.

For the purposes of this Article, references to “the Corporation” shall include all constituent corporations absorbed in a consolidation, merger or division, as well as the surviving or new corporations surviving or resulting therefrom, so that (i) any person who is or was an authorized representative of a constituent, surviving or new corporation shall stand in the same position under the provisions of this Article with respect to the surviving or new corporation as such person would if he or she had served the surviving or new corporation in the same capacity and (ii) any person who is or was an authorized representative of the Corporation shall stand in the same position under the provisions of this Article with respect to the surviving or new corporation as such person would with respect to the Corporation if its separate existence had continued.

Section 7.7 Definition of Authorized Representative.

For the purposes of this Article, the term “authorized representative” shall mean a director, officer, employee or agent of the Corporation or of any subsidiary of the Corporation, or a trustee, custodian, administrator, committeeman or fiduciary of any employee benefit plan established and maintained by the Corporation or by any direct or indirect subsidiary of the Corporation, or a person serving another corporation, partnership, joint venture, trust or other enterprise in any of the foregoing capacities at the request of the Corporation.

Section 7.8 Savings Clause.

If a court of competent jurisdiction determines that any provision of this Article requires the Corporation to take an action that would violate applicable law, such provision shall be limited or modified in its application to such action to the minimum extent necessary to avoid such violation of law, and, as so limited or modified, such provision and the balance of this Article shall be enforceable in accordance with their terms to the fullest extent permitted by applicable law, including but not limited to the Business Corporation Law of 1988.

Section 7.9 Insurance.

The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was an authorized representative of the Corporation, against any liability asserted against or incurred by such person in any such capacity, or arising out of the status of such person as such, whether or not the Corporation would have the power to indemnify such person against such liability under the provisions of this Article.

Section 7.10 Funding to Meet Indemnification Obligations.

The Board of Directors, without approval of the shareholders, shall have the power to borrow money on behalf of the Corporation, including the power to pledge the assets of the Corporation, from time to time to discharge the Corporation’s obligations with respect to indemnification, the advancement and reimbursement of expenses, and the purchase and maintenance of insurance referred to in this Article. The Corporation may, in lieu of or in addition to the purchase and maintenance of insurance referred to in Section 7.9 hereof, establish and maintain a fund of any nature or otherwise secure or insure in any manner its indemnification obligations, whether arising under or pursuant to this Article or otherwise.

ARTICLE VIII

GENERAL PROVISIONS

Section 8.1 Corporate Seal.

The Corporate seal of the Corporation shall be a circular seal with the name of the Corporation and state of incorporation around the border or a seal in such form as the Board of Directors shall from time to time determine.

Section 8.2 Fiscal Year.

The fiscal year of the Corporation shall be as designated by the Board of Directors.

Section 8.3 Authorization.

All checks, notes, vouchers, warrants, drafts, acceptances and other orders for the payment of moneys of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

Section 8.4 Inapplicability of Subchapter 25E.

Subchapter E of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended (former Section 910 of the Pennsylvania Business Corporation Law of 1933, as amended), shall not be applicable to the Corporation.

Section 8.5 Inapplicability of Subchapter 25F.

Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended (former Section 911 of the Pennsylvania Business Corporation Law of 1933, as amended), shall not be applicable to the Corporation.

Section 8.6 Inapplicability of Subchapter 25G.

Subchapter G of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended, shall not be applicable to the Corporation.

Section 8.7 Inapplicability of Subchapter 25H.

Subchapter H of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended, shall not be applicable to the Corporation.

ARTICLE IX

AMENDMENTS

The authority to adopt, amend or repeal the Bylaws of the Corporation is expressly conferred upon the Board of Directors, which may take such action by the affirmative vote of a majority of the whole Board of Directors at any annual, regular or special meeting duly convened after notice of that purpose, subject always to the power of the shareholders to adopt, amend or repeal the Bylaws of the Corporation by the affirmative vote of the holders of two-thirds of the outstanding shares of common stock of the Corporation. Any change in the Bylaws shall take effect when adopted unless otherwise provided in the resolution effecting the change.

EX-15.1 4 dex151.htm INDEPENDENT ACCOUNTANT'S REVIEW REPORT Independent Accountant's Review Report

EXHIBIT 15.1

The Board of Directors

Education Management Corporation and Subsidiaries

We have reviewed the accompanying condensed consolidated balance sheet of Education Management Corporation and Subsidiaries as of December 31, 2003, and the related condensed consolidated statements of income for the three-month and six-month periods ended December 31, 2003 and 2002, and the condensed consolidated statements of cash flows for the six-month periods ended December 31, 2003 and 2002. These financial statements are the responsibility of the Company’s management.

We conducted our reviews 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 reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above 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, 2003, 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, 2003, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph for the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 30, 2003, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Pittsburgh, Pennsylvania

February 12, 2004

EX-15.2 5 dex152.htm AUDITOR'S ACKNOLEDGEMENT Auditor's Acknoledgement

EXHIBIT 15.2

February 12, 2004

The Board of Directors

Education Management Corporation and Subsidiaries

We are aware of the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-20057, 333-20073, 333-31398, 333-76096, 333-76654, 333-85518, 333-106270, 333-106271, 333-110706) pertaining to Education Management Corporation and Subsidiaries’ Deferred Compensation Plan, Stock Incentive Plans, and Retirement Plan of our reports dated November 6, 2003 and February 12, 2004 relating to the unaudited condensed consolidated interim financial statements of Education Management Corporation that are included in its Forms 10-Q for the quarters ended September 30, 2003 and December 31, 2003.

/s/ Ernst & Young LLP

EX-31.1 6 dex311.htm RULE 13A-14(A)/15D-14(A) CERTIFICATIONS Rule 13a-14(a)/15d-14(a) Certifications

EXHIBIT 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATIONS

I, John R. McKernan, Jr., certify that:

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

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 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-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

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

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize, and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 17, 2004


By:		/s/ John R. McKernan, Jr.
John R. McKernan, Jr.
Chief Executive Officer

I, Robert T. McDowell, certify that:

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

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 17, 2004


By:		/s/ Robert T. McDowell
Robert T. McDowell
Chief Financial Officer

EX-32.1 7 dex321.htm CEO AND CFO CERTIFICATIONS CEO and CFO Certifications

EXHIBIT 32.1

CERTIFICATIONS BY THE CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Education Management Corporation (the “Company”) on Form 10-Q for the fiscal quarter ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John R. McKernan, Jr., Chief Executive Officer of the Company, hereby certify in such capacity, 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; and;

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods reflected therein.

Date: February 17, 2004

/s/ John R. McKernan, Jr.

John R. McKernan, Jr.

Chief Executive Officer

In connection with the Quarterly Report of Education Management Corporation (the “Company”) on Form 10-Q for the fiscal quarter ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert T. McDowell, Chief Financial Officer of the Company, hereby certify in such capacity, 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; and;

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods reflected therein.

Date: February 17, 2004

/s/ Robert T. McDowell

Robert T. McDowell

Chief Financial Officer

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