##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended: December 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period From  to
 Commission File Number: 001-34466
 
 EDUCATION MANAGEMENT CORPORATION
 (Exact name of registrant as specified in its charter)
 
 Pennsylvania
(State or other jurisdiction of 
incorporation or organization)
    
    25-1119571
(I.R.S. Employer
Identification No.)210 Sixth Avenue, Pittsburgh, PA, 33rdFloor(Address of principal executive offices)
    
    15222
(Zip Code)
 Registrants telephone number, including area code: (412) 562-0900
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes
o No
þ




---



##### 



Table of Contents
 INDEX
 PAGEPART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
    
    
    2ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    25ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    37ITEM 4. CONTROLS AND PROCEDURES
    
    
    38PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    39ITEM 1A.  RISK FACTORS
    
    
    39ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    39ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
    
    
    39ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
    
    
    39ITEM 5.  OTHER INFORMATION
    
    
    39ITEM 6. EXHIBITS INDEX
    
    
    39SIGNATURES
    
    
    40Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 December 31,
    
    
    June 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2008(Unaudited)
    
    
    
    
    
    
    (Unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    310,037
    
    
    $
    363,318
    
    
    $
    312,522Restricted cash
    
    
    16,006
    
    
    
    10,372
    
    
    
    12,192Total cash, cash equivalents and restricted cash
    
    
    326,043
    
    
    
    373,690
    
    
    
    324,714Receivables, net of allowances of $108,576, $83,691
and $70,416
    
    
    80,863
    
    
    
    122,272
    
    
    
    57,693Notes, advances and other
    
    
    11,024
    
    
    
    13,678
    
    
    
    17,108Inventories
    
    
    12,572
    
    
    
    9,355
    
    
    
    9,680Deferred income taxes
    
    
    45,164
    
    
    
    45,164
    
    
    
    25,739Other current assets
    
    
    48,130
    
    
    
    30,163
    
    
    
    30,474Total current assets
    
    
    523,796
    
    
    
    594,322
    
    
    
    465,408Property and equipment, net
    
    
    618,953
    
    
    
    580,965
    
    
    
    525,070Other long-term assets
    
    
    66,857
    
    
    
    58,945
    
    
    
    56,822Intangible assets, net
    
    
    469,546
    
    
    
    471,882
    
    
    
    477,029Goodwill
    
    
    2,579,131
    
    
    
    2,579,131
    
    
    
    2,578,898Total assets
    
    $
    4,258,283
    
    
    $
    4,285,245
    
    
    $
    4,103,227Liabilities and shareholders equityCurrent liabilities:Current portion of long-term debt
    
    $
    12,281
    
    
    $
    12,622
    
    
    $
    12,758Revolving credit facility
    
    
    
    
    
    
    100,000
    
    
    
    180,000Accounts payable
    
    
    47,053
    
    
    
    53,516
    
    
    
    41,086Accrued liabilities
    
    
    147,176
    
    
    
    163,485
    
    
    
    91,875Accrued income taxes
    
    
    16,836
    
    
    
    5,015
    
    
    
    14,027Unearned tuition
    
    
    48,913
    
    
    
    118,741
    
    
    
    25,710Advance payments
    
    
    81,325
    
    
    
    67,020
    
    
    
    74,640Total current liabilities
    
    
    353,584
    
    
    
    520,399
    
    
    
    440,096Long-term debt, less current portion
    
    
    1,554,049
    
    
    
    1,876,021
    
    
    
    1,882,198Deferred income taxes
    
    
    177,396
    
    
    
    187,583
    
    
    
    164,939Deferred rent
    
    
    146,187
    
    
    
    123,656
    
    
    
    100,638Other long-term liabilities
    
    
    94,289
    
    
    
    91,933
    
    
    
    106,196Shareholders equity:Common Stock, par value $0.01 per share; 600,000,000 shares
authorized; 142,823,731, 119,770,277 and 119,769,082 issued
and outstanding at December 31, 2009, June 30, 2009 and
December 31, 2008, respectively
    
    
    1,428
    
    
    
    1,198
    
    
    
    1,198Additional paid-in capital
    
    
    1,743,386
    
    
    
    1,338,316
    
    
    
    1,338,302Retained earnings
    
    
    217,803
    
    
    
    181,767
    
    
    
    116,361Accumulated other comprehensive loss
    
    
    (29,839
    )
    
    
    (35,628
    )
    
    
    (46,701
    )Total shareholders equity
    
    
    1,932,778
    
    
    
    1,485,653
    
    
    
    1,409,160Total liabilities and shareholders equity
    
    $
    4,258,283
    
    
    $
    4,285,245
    
    
    $
    4,103,227
   2




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands except per share amounts)
 For the Three Months
    
    
    For the Six MonthsEnded December 31,
    
    
    Ended December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    $
    655,469
    
    
    $
    522,218
    
    
    $
    1,189,868
    
    
    $
    956,446Costs and expenses:Educational services
    
    
    315,266
    
    
    
    265,618
    
    
    
    610,979
    
    
    
    519,130General and administrative
    
    
    170,305
    
    
    
    120,614
    
    
    
    317,162
    
    
    
    240,723Management fees paid to affiliates
    
    
    30,805
    
    
    
    1,250
    
    
    
    32,055
    
    
    
    2,500Depreciation and amortization
    
    
    29,401
    
    
    
    27,575
    
    
    
    58,228
    
    
    
    54,179Total costs and expenses
    
    
    545,777
    
    
    
    415,057
    
    
    
    1,018,424
    
    
    
    816,532Income before interest, loss on early
retirement of debt and income taxes
    
    
    109,692
    
    
    
    107,161
    
    
    
    171,444
    
    
    
    139,914Interest expense, net
    
    
    30,390
    
    
    
    40,455
    
    
    
    66,719
    
    
    
    78,614Loss on early retirement of debt
    
    
    44,762
    
    
    
    
    
    
    
    44,762
    
    
    
    Income before income taxes
    
    
    34,540
    
    
    
    66,706
    
    
    
    59,963
    
    
    
    61,300Provision for income taxes
    
    
    14,266
    
    
    
    24,404
    
    
    
    23,927
    
    
    
    22,301Net income
    
    $
    20,274
    
    
    $
    42,302
    
    
    $
    36,036
    
    
    $
    38,999Earnings per share:Basic
    
    $
    0.14
    
    
    $
    0.35
    
    
    $
    0.27
    
    
    $
    0.33Diluted
    
    $
    0.14
    
    
    $
    0.35
    
    
    $
    0.27
    
    
    $
    0.33Weighted average number of shares outstanding:Basic
    
    
    142,387
    
    
    
    119,769
    
    
    
    131,079
    
    
    
    119,769Diluted
    
    
    143,143
    
    
    
    119,769
    
    
    
    131,457
    
    
    
    119,769
   3




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 For the Six MonthsEnded December 31,2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    36,036
    
    
    $
    38,999Adjustments to reconcile net income to
net cash flows provided by operating activities:Depreciation and amortization of property and equipment
    
    
    53,659
    
    
    
    45,358Bad debt expense
    
    
    50,565
    
    
    
    35,092Amortization of intangible assets
    
    
    4,569
    
    
    
    8,821Amortization of debt issuance costs
    
    
    4,113
    
    
    
    3,845Loss on early retirement of debt
    
    
    44,762
    
    
    
    Share-based compensation
    
    
    17,476
    
    
    
    Non-cash adjustments related to deferred rent
    
    
    1,436
    
    
    
    (1,004
    )Purchase of private loans
    
    
    (22,643
    )
    
    
    (41
    )Reimbursements for tenant improvements
    
    
    7,421
    
    
    
    11,543Changes in assets and liabilities:Restricted cash
    
    
    (5,634
    )
    
    
    1,630Receivables
    
    
    (1,288
    )
    
    
    (2,348
    )Inventories
    
    
    (3,193
    )
    
    
    (1,256
    )Other assets
    
    
    (17,236
    )
    
    
    (12,829
    )Accounts payable
    
    
    (1,373
    )
    
    
    (6,778
    )Accrued liabilities
    
    
    (12,415
    )
    
    
    (21,815
    )Unearned tuition
    
    
    (69,828
    )
    
    
    (43,444
    )Advance payments
    
    
    13,997
    
    
    
    14,622Total adjustments
    
    
    64,388
    
    
    
    31,396Net cash flows provided by operating activities
    
    
    100,424
    
    
    
    70,395Cash flows from investing activities:Expenditures for long-lived assets
    
    
    (69,826
    )
    
    
    (78,346
    )Reimbursements for tenant improvements
    
    
    (7,421
    )
    
    
    (11,543
    )Net cash flows used in investing activities
    
    
    (77,247
    )
    
    
    (89,889
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    
    
    
    
    180,000Payments under revolving credit facility
    
    
    (100,000
    )
    
    
    (120,000
    )Retirement of senior subordinated notes
    
    
    (355,465
    )
    
    
    Net proceeds from issuance of common stock, including
stock option exercises
    
    
    387,824
    
    
    
    Principal payments on long-term debt
    
    
    (6,343
    )
    
    
    (6,489
    )Debt issuance costs
    
    
    (2,400
    )
    
    
    Net cash flows (used in) provided by financing activities
    
    
    (76,384
    )
    
    
    53,511Effect of exchange rate changes on cash and cash equivalents
    
    
    (74
    )
    
    
    1,097Net change in cash and cash equivalents
    
    
    (53,281
    )
    
    
    35,114Cash and cash equivalents, beginning of period
    
    
    363,318
    
    
    
    277,408Cash and cash equivalents, end of period
    
    $
    310,037
    
    
    $
    312,522Cash paid during the period for:Interest (including swap settlement)
    
    $
    64,168
    
    
    $
    79,158Income taxes
    
    
    23,011
    
    
    
    21,422
   4




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands)
 Common Stock at Par Value
    
    
    Additional Paid-in Capital
    
    
    Retained Earnings
    
    
    Accumulated Other Comprehensive Loss
    
    
    TotalBalance, June 30, 2008
    
    $
    1,198
    
    
    $
    1,338,302
    
    
    $
    77,362
    
    
    $
    (24,685
    )
    
    $
    1,392,177Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    104,405
    
    
    
    
    
    
    
    104,405Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,147
    )
    
    
    (1,147
    )Unrealized loss on interest
rate swaps, net of tax
benefit of $5,709
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,796
    )
    
    
    (9,796
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,462
    (a)Other
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    14Balance,
June 30, 2009
    
    
    1,198
    
    
    
    1,338,316
    
    
    
    181,767
    
    
    
    (35,628
    )(b)
    
    
    1,485,653(Unaudited)Issuance of common stock including
option exercises
    
    
    230
    
    
    
    387,594
    
    
    
    
    
    
    
    
    
    
    
    387,824Share-based compensation
    
    
    
    
    
    
    17,476
    
    
    
    
    
    
    
    
    
    
    
    17,476Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    36,036
    
    
    
    
    
    
    
    36,036Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    771
    
    
    
    771Unrealized gain on interest
rate swaps, net of tax
expense of $2,891
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,018
    
    
    
    5,018Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,825Balance, December 31, 2009
    
    $
    1,428
    
    
    $
    1,743,386
    
    
    $
    217,803
    
    
    $
    (29,839
    )(b)
    
    $
    1,932,778
 (a)
    
    During the six months ended December 31, 2008, other comprehensive loss
consisted of a $22.0 million unrealized loss on interest rate swaps, net of tax
expense, and less than a $0.1 million foreign currency translation loss.(b)
    
    The balance in accumulated other comprehensive loss at December 31, 2009,
June 30, 2009 and December 31, 2008 is comprised of $29.2 million, $34.2
million and $46.3 million of unrealized losses on interest rate swaps, net
of tax expense, respectively and $0.6 million, $1.4 million and $0.4 million of
cumulative foreign currency translation losses, respectively.   5




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. BASIS OF PRESENTATION
 Nature of operations
  Basis of presentation
      6




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 Ownership
   Initial public offering
   Seasonality
  Reclassifications
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 TM
  7




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 3. EARNINGS PER SHARE
   For the Three Months
    
    
    For the Six MonthsEnded December 31,
    
    
    Ended December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    20,274
    
    
    $
    42,302
    
    
    $
    36,036
    
    
    $
    38,999Weighted average number of shares outstandingBasic
    
    
    142,387
    
    
    
    119,769
    
    
    
    131,079
    
    
    
    119,769Effect of stock-based awards
    
    
    756
    
    
    
    
    
    
    
    378
    
    
    
    Diluted
    
    
    143,143
    
    
    
    119,769
    
    
    
    131,457
    
    
    
    119,769Earnings per share:Basic
    
    $
    0.14
    
    
    $
    0.35
    
    
    $
    0.27
    
    
    $
    0.33Diluted
    
    $
    0.14
    
    
    $
    0.35
    
    
    $
    0.27
    
    
    $
    0.33
  4. SHARE-BASED PAYMENT
    8




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 2006 Stock Option Plan
    Long Term Incentive Compensation Plan
  Omnibus Long-Term Incentive Plan
     9




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 5. PROPERTY AND EQUIPMENT
 (in thousands):
 December 31,
    
    
    June 30,
    
    
    December 31,Asset Class
    
    2009
    
    
    2009
    
    
    2008Land
    
    $
    17,657
    
    
    $
    17,805
    
    
    $
    17,805Buildings and improvements
    
    
    73,683
    
    
    
    74,171
    
    
    
    73,798Leasehold improvements and capitalized lease costs
    
    
    372,578
    
    
    
    329,449
    
    
    
    306,500Furniture and equipment
    
    
    110,470
    
    
    
    97,783
    
    
    
    93,062Technology and other equipment
    
    
    193,148
    
    
    
    170,818
    
    
    
    153,256Software
    
    
    49,622
    
    
    
    45,651
    
    
    
    38,314Library books
    
    
    32,484
    
    
    
    29,778
    
    
    
    27,060Construction in progress
    
    
    57,178
    
    
    
    43,470
    
    
    
    14,863Total
    
    
    906,820
    
    
    
    808,925
    
    
    
    724,658Less accumulated depreciation
    
    
    (287,867
    )
    
    
    (227,960
    )
    
    
    (199,588
    )Property and equipment, net
    
    $
    618,953
    
    
    $
    580,965
    
    
    $
    525,070
  6. GOODWILL AND INTANGIBLE ASSETS
 Goodwill
    10




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 Intangible Assets
 in thousands)
 December 31, 2009
    
    
    June 30, 2009
    
    
    December 31, 2008Gross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationTradename-Art Institute
    
    $
    330,000
    
    
    $
    
    
    
    $
    330,000
    
    
    $
    
    
    
    $
    330,000
    
    
    $
    Tradename-Argosy University
    
    
    3,000
    
    
    
    (1,194
    )
    
    
    3,000
    
    
    
    (1,028
    )
    
    
    3,000
    
    
    
    (861
    )Licensing, accreditation and Title
IV program participation
    
    
    112,179
    
    
    
    
    
    
    
    112,179
    
    
    
    
    
    
    
    112,179
    
    
    
    Curriculum and programs
    
    
    30,172
    
    
    
    (16,007
    )
    
    
    27,974
    
    
    
    (13,520
    )
    
    
    25,246
    
    
    
    (11,333
    )Student contracts,
applications and
relationships
    
    
    39,511
    
    
    
    (33,284
    )
    
    
    39,511
    
    
    
    (32,479
    )
    
    
    39,511
    
    
    
    (28,292
    )Favorable leases and other
    
    
    16,409
    
    
    
    (11,240
    )
    
    
    16,351
    
    
    
    (10,106
    )
    
    
    16,297
    
    
    
    (8,718
    )Total intangible assets
    
    $
    531,271
    
    
    $
    (61,725
    )
    
    $
    529,015
    
    
    $
    (57,133
    )
    
    $
    526,233
    
    
    $
    (49,204
    )
     AmortizationFiscal years
    
    Expense2010 (remainder)
    
    $
    4,0262011
    
    
    7,8492012
    
    
    6,7832013
    
    
    4,4362014
    
    
    2,668Thereafter
    
    
    1,605
  11




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 7. ACCRUED LIABILITIES
 (in thousands)
 December 31,
    
    
    June 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2008Payroll and related taxes
    
    $
    35,449
    
    
    $
    77,894
    
    
    $
    25,974Capital expenditures
    
    
    22,904
    
    
    
    8,032
    
    
    
    4,324Advertising
    
    
    33,230
    
    
    
    25,192
    
    
    
    17,785Interest
    
    
    13,007
    
    
    
    13,878
    
    
    
    8,999Benefits
    
    
    9,842
    
    
    
    8,597
    
    
    
    8,277Other
    
    
    32,744
    
    
    
    29,892
    
    
    
    26,516Total accrued liabilities
    
    $
    147,176
    
    
    $
    163,485
    
    
    $
    91,875
 8. SHORT-TERM AND LONG-TERM DEBT
  Short-Term Debt:
    12




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 Long-Term Debt:
 in thousands)
 December 31,
    
    
    June 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2008Senior secured term loan facility, due 2013
    
    $
    1,120,902
    
    
    $
    1,126,827
    
    
    $
    1,132,752Senior notes due 2014 at 8.75%
    
    
    375,000
    
    
    
    375,000
    
    
    
    375,000Senior subordinated notes due 2016 at 10.25%
    
    
    69,032
    
    
    
    385,000
    
    
    
    385,000Capital leases
    
    
    313
    
    
    
    622
    
    
    
    903Mortgage debt of consolidated entity
    
    
    1,083
    
    
    
    1,194
    
    
    
    1,301Total long-term debt
    
    
    1,566,330
    
    
    
    1,888,643
    
    
    
    1,894,956Less current portion
    
    
    12,281
    
    
    
    12,622
    
    
    
    12,758Total long term debt, less current portion
    
    $
    1,554,049
    
    
    $
    1,876,021
    
    
    $
    1,882,198
   9. DERIVATIVE INSTRUMENTS
      13




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
 in
thousands)
 December 31, 2009
    
    
    June 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    Value
    
    
    ValueInterest rate
swap liabilities
    
    $
    46,511
    
    
    $
    46,511
    
    
    $
    54,421
    
    
    $
    54,421
    
    
    $
    73,724
    
    
    $
    73,724Variable rate debt
    
    
    1,120,902
    
    
    
    1,048,043
    
    
    
    1,126,827
    
    
    
    1,031,047
    
    
    
    1,132,752
    
    
    
    702,306Fixed rate debt
    
    
    445,428
    
    
    
    458,749
    
    
    
    761,816
    
    
    
    738,916
    
    
    
    762,204
    
    
    
    583,754
  11. INCOME TAXES
    12. CONTINGENCIES
    14




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
     13. RELATED PARTY TRANSACTIONS
     15




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
  14. GUARANTOR SUBSIDIARIES FINANCIAL INFORMATION
    16




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent:Cash and cash equivalents
    
    $
    245,086
    
    
    $
    2,301
    
    
    $
    16,544
    
    
    $
    
    
    
    $
    263,931
    
    
    $
    46,106
    
    
    $
    
    
    
    $
    310,037Restricted cash
    
    
    531
    
    
    
    
    
    
    
    15,475
    
    
    
    
    
    
    
    16,006
    
    
    
    
    
    
    
    
    
    
    
    16,006Notes, advances and trade
receivables, net
    
    
    63
    
    
    
    53
    
    
    
    91,767
    
    
    
    
    
    
    
    91,883
    
    
    
    4
    
    
    
    
    
    
    
    91,887Inventories
    
    
    
    
    
    
    90
    
    
    
    12,482
    
    
    
    
    
    
    
    12,572
    
    
    
    
    
    
    
    
    
    
    
    12,572Other current assets
    
    
    29,377
    
    
    
    624
    
    
    
    63,293
    
    
    
    
    
    
    
    93,294
    
    
    
    
    
    
    
    
    
    
    
    93,294Total current assets
    
    
    275,057
    
    
    
    3,068
    
    
    
    199,561
    
    
    
    
    
    
    
    477,686
    
    
    
    46,110
    
    
    
    
    
    
    
    523,796Property and equipment, net
    
    
    52,434
    
    
    
    6,481
    
    
    
    560,038
    
    
    
    
    
    
    
    618,953
    
    
    
    
    
    
    
    
    
    
    
    618,953Intangible assets, net
    
    
    2,952
    
    
    
    68
    
    
    
    466,526
    
    
    
    
    
    
    
    469,546
    
    
    
    
    
    
    
    
    
    
    
    469,546Goodwill
    
    
    7,328
    
    
    
    
    
    
    
    2,571,803
    
    
    
    
    
    
    
    2,579,131
    
    
    
    
    
    
    
    
    
    
    
    2,579,131Intercompany balances
    
    
    1,144,441
    
    
    
    (36,215
    )
    
    
    (1,508,694
    )
    
    
    
    
    
    
    (400,468
    )
    
    
    400,468
    
    
    
    
    
    
    
    Other long-term assets
    
    
    43,046
    
    
    
    18,147
    
    
    
    5,664
    
    
    
    
    
    
    
    66,857
    
    
    
    
    
    
    
    
    
    
    
    66,857Investment in subsidiaries
    
    
    1,712,211
    
    
    
    
    
    
    
    
    
    
    
    (1,712,211
    )
    
    
    
    
    
    
    1,486,386
    
    
    
    (1,486,386
    )
    
    
    Total assets
    
    $
    3,237,469
    
    
    $
    (8,451
    )
    
    $
    2,294,898
    
    
    $
    (1,712,211
    )
    
    $
    3,811,705
    
    
    $
    1,932,964
    
    
    $
    (1,486,386
    )
    
    $
    4,258,283Liabilities and shareholders equity
(deficit)Current:Current portion of long-term debt
    
    $
    11,851
    
    
    $
    
    
    
    $
    430
    
    
    $
    
    
    
    $
    12,281
    
    
    $
    
    
    
    $
    
    
    
    $
    12,281Accounts payable, accrued and
other current liabilities
    
    
    118,130
    
    
    
    2,620
    
    
    
    220,367
    
    
    
    
    
    
    
    341,117
    
    
    
    186
    
    
    
    
    
    
    
    341,303Total current liabilities
    
    
    129,981
    
    
    
    2,620
    
    
    
    220,797
    
    
    
    
    
    
    
    353,398
    
    
    
    186
    
    
    
    
    
    
    
    353,584Long-term debt, less current portion
    
    
    1,553,084
    
    
    
    
    
    
    
    965
    
    
    
    
    
    
    
    1,554,049
    
    
    
    
    
    
    
    
    
    
    
    1,554,049Other long-term liabilities
    
    
    87,512
    
    
    
    11,785
    
    
    
    141,179
    
    
    
    
    
    
    
    240,476
    
    
    
    
    
    
    
    
    
    
    
    240,476Deferred income taxes
    
    
    (19,494
    )
    
    
    (9,521
    )
    
    
    206,411
    
    
    
    
    
    
    
    177,396
    
    
    
    
    
    
    
    
    
    
    
    177,396Total liabilities
    
    
    1,751,083
    
    
    
    4,884
    
    
    
    569,352
    
    
    
    
    
    
    
    2,325,319
    
    
    
    186
    
    
    
    
    
    
    
    2,325,505Total shareholders
equity (deficit)
    
    
    1,486,386
    
    
    
    (13,335
    )
    
    
    1,725,546
    
    
    
    (1,712,211
    )
    
    
    1,486,386
    
    
    
    1,932,778
    
    
    
    (1,486,386
    )
    
    
    1,932,778Total liabilities and
shareholders equity
(deficit)
    
    $
    3,237,469
    
    
    $
    (8,451
    )
    
    $
    2,294,898
    
    
    $
    (1,712,211
    )
    
    $
    3,811,705
    
    
    $
    1,932,964
    
    
    $
    (1,486,386
    )
    
    $
    4,258,283
  17




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent:Cash and cash equivalents
    
    $
    15,789
    
    
    $
    481
    
    
    $
    305,287
    
    
    $
    
    
    
    $
    321,557
    
    
    $
    41,761
    
    
    $
    
    
    
    $
    363,318Restricted cash
    
    
    789
    
    
    
    
    
    
    
    9,583
    
    
    
    
    
    
    
    10,372
    
    
    
    
    
    
    
    
    
    
    
    10,372Notes, advances and trade
receivables, net
    
    
    172
    
    
    
    35
    
    
    
    135,738
    
    
    
    
    
    
    
    135,945
    
    
    
    5
    
    
    
    
    
    
    
    135,950Inventories
    
    
    
    
    
    
    
    
    
    
    9,355
    
    
    
    
    
    
    
    9,355
    
    
    
    
    
    
    
    
    
    
    
    9,355Other current assets
    
    
    19,056
    
    
    
    1,213
    
    
    
    55,058
    
    
    
    
    
    
    
    75,327
    
    
    
    
    
    
    
    
    
    
    
    75,327Total current assets
    
    
    35,806
    
    
    
    1,729
    
    
    
    515,021
    
    
    
    
    
    
    
    552,556
    
    
    
    41,766
    
    
    
    
    
    
    
    594,322Property and equipment, net
    
    
    52,190
    
    
    
    6,137
    
    
    
    522,638
    
    
    
    
    
    
    
    580,965
    
    
    
    
    
    
    
    
    
    
    
    580,965Intangible assets, net
    
    
    3,119
    
    
    
    61
    
    
    
    468,702
    
    
    
    
    
    
    
    471,882
    
    
    
    
    
    
    
    
    
    
    
    471,882Goodwill
    
    
    7,328
    
    
    
    
    
    
    
    2,571,803
    
    
    
    
    
    
    
    2,579,131
    
    
    
    
    
    
    
    
    
    
    
    2,579,131Intercompany balances
    
    
    1,880,889
    
    
    
    (20,819
    )
    
    
    (1,859,626
    )
    
    
    
    
    
    
    444
    
    
    
    (444
    )
    
    
    
    
    
    
    Other long-term assets
    
    
    48,447
    
    
    
    9,764
    
    
    
    734
    
    
    
    
    
    
    
    58,945
    
    
    
    
    
    
    
    
    
    
    
    58,945Investment in subsidiaries
    
    
    1,590,364
    
    
    
    
    
    
    
    
    
    
    
    (1,590,364
    )
    
    
    
    
    
    
    1,444,515
    
    
    
    (1,444,515
    )
    
    
    Total assets
    
    $
    3,618,143
    
    
    $
    (3,128
    )
    
    $
    2,219,272
    
    
    $
    (1,590,364
    )
    
    $
    4,243,923
    
    
    $
    1,485,837
    
    
    $
    (1,444,515
    )
    
    $
    4,285,245Liabilities and shareholders
equity (deficit)Current:Current portion of long-term
debt
    
    $
    111,911
    
    
    $
    
    
    
    $
    711
    
    
    $
    
    
    
    $
    112,622
    
    
    $
    
    
    
    $
    
    
    
    $
    112,622Accounts payable, accrued and
other current liabilities
    
    
    111,694
    
    
    
    4,739
    
    
    
    291,159
    
    
    
    
    
    
    
    407,592
    
    
    
    185
    
    
    
    
    
    
    
    407,777Total current liabilities
    
    
    223,605
    
    
    
    4,739
    
    
    
    291,870
    
    
    
    
    
    
    
    520,214
    
    
    
    185
    
    
    
    
    
    
    
    520,399Long-term debt, less current portion
    
    
    1,874,921
    
    
    
    
    
    
    
    1,100
    
    
    
    
    
    
    
    1,876,021
    
    
    
    
    
    
    
    
    
    
    
    1,876,021Other long-term liabilities
    
    
    91,124
    
    
    
    4,649
    
    
    
    119,817
    
    
    
    
    
    
    
    215,590
    
    
    
    (1
    )
    
    
    
    
    
    
    215,589Deferred income taxes
    
    
    (16,022
    )
    
    
    72
    
    
    
    203,533
    
    
    
    
    
    
    
    187,583
    
    
    
    
    
    
    
    
    
    
    
    187,583Total liabilities
    
    
    2,173,628
    
    
    
    9,460
    
    
    
    616,320
    
    
    
    
    
    
    
    2,799,408
    
    
    
    184
    
    
    
    
    
    
    
    2,799,592Total shareholders
equity (deficit)
    
    
    1,444,515
    
    
    
    (12,588
    )
    
    
    1,602,952
    
    
    
    (1,590,364
    )
    
    
    1,444,515
    
    
    
    1,485,653
    
    
    
    (1,444,515
    )
    
    
    1,485,653Total liabilities and
shareholders equity
(deficit)
    
    $
    3,618,143
    
    
    $
    (3,128
    )
    
    $
    2,219,272
    
    
    $
    (1,590,364
    )
    
    $
    4,243,923
    
    
    $
    1,485,837
    
    
    $
    (1,444,515
    )
    
    $
    4,285,245
  18




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2008 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedAssetsCurrent:Cash and cash equivalents
    
    $
    266,970
    
    
    $
    168
    
    
    $
    3,737
    
    
    $
    
    
    
    $
    270,875
    
    
    $
    41,647
    
    
    $
    
    
    
    $
    312,522Restricted cash
    
    
    1,216
    
    
    
    
    
    
    
    10,976
    
    
    
    
    
    
    
    12,192
    
    
    
    
    
    
    
    
    
    
    
    12,192Notes, advances and trade
receivables, net
    
    
    377
    
    
    
    55
    
    
    
    74,345
    
    
    
    
    
    
    
    74,777
    
    
    
    24
    
    
    
    
    
    
    
    74,801Inventories
    
    
    
    
    
    
    
    
    
    
    9,680
    
    
    
    
    
    
    
    9,680
    
    
    
    
    
    
    
    
    
    
    
    9,680Other current assets
    
    
    13,256
    
    
    
    539
    
    
    
    42,418
    
    
    
    
    
    
    
    56,213
    
    
    
    
    
    
    
    
    
    
    
    56,213Total current assets
    
    
    281,819
    
    
    
    762
    
    
    
    141,156
    
    
    
    
    
    
    
    423,737
    
    
    
    41,671
    
    
    
    
    
    
    
    465,408Property and equipment, net
    
    
    48,205
    
    
    
    6,101
    
    
    
    470,764
    
    
    
    
    
    
    
    525,070
    
    
    
    
    
    
    
    
    
    
    
    525,070Intangible assets, net
    
    
    444
    
    
    
    63
    
    
    
    476,522
    
    
    
    
    
    
    
    477,029
    
    
    
    
    
    
    
    
    
    
    
    477,029Goodwill
    
    
    8,075
    
    
    
    
    
    
    
    2,570,823
    
    
    
    
    
    
    
    2,578,898
    
    
    
    
    
    
    
    
    
    
    
    2,578,898Intercompany balances
    
    
    1,735,137
    
    
    
    (16,581
    )
    
    
    (1,718,112
    )
    
    
    
    
    
    
    444
    
    
    
    (444
    )
    
    
    
    
    
    
    Other long-term assets
    
    
    51,491
    
    
    
    
    
    
    
    5,331
    
    
    
    
    
    
    
    56,822
    
    
    
    
    
    
    
    
    
    
    
    56,822Investment in subsidiaries
    
    
    1,480,514
    
    
    
    
    
    
    
    
    
    
    
    (1,480,514
    )
    
    
    
    
    
    
    1,368,119
    
    
    
    (1,368,119
    )
    
    
    Total assets
    
    $
    3,605,685
    
    
    $
    (9,655
    )
    
    $
    1,946,484
    
    
    $
    (1,480,514
    )
    
    $
    4,062,000
    
    
    $
    1,409,346
    
    
    $
    (1,368,119
    )
    
    $
    4,103,227Liabilities and shareholders
equity (deficit)Current:Current portion of long-term
debt
    
    $
    191,913
    
    
    $
    
    
    
    $
    845
    
    
    $
    
    
    
    $
    192,758
    
    
    $
    
    
    
    $
    
    
    
    $
    192,758Accounts payable, accrued and
other current liabilities
    
    
    75,712
    
    
    
    1,809
    
    
    
    169,631
    
    
    
    
    
    
    
    247,152
    
    
    
    186
    
    
    
    
    
    
    
    247,338Total current liabilities
    
    
    267,625
    
    
    
    1,809
    
    
    
    170,476
    
    
    
    
    
    
    
    439,910
    
    
    
    186
    
    
    
    
    
    
    
    440,096Long-term debt, less current portion
    
    
    1,880,858
    
    
    
    
    
    
    
    1,340
    
    
    
    
    
    
    
    1,882,198
    
    
    
    
    
    
    
    
    
    
    
    1,882,198Other long-term liabilities
    
    
    110,426
    
    
    
    45
    
    
    
    96,363
    
    
    
    
    
    
    
    206,834
    
    
    
    
    
    
    
    
    
    
    
    206,834Deferred income taxes
    
    
    (21,343
    )
    
    
    72
    
    
    
    186,210
    
    
    
    
    
    
    
    164,939
    
    
    
    
    
    
    
    
    
    
    
    164,939Total liabilities
    
    
    2,237,566
    
    
    
    1,926
    
    
    
    454,389
    
    
    
    
    
    
    
    2,693,881
    
    
    
    186
    
    
    
    
    
    
    
    2,694,067Total shareholders
equity (deficit)
    
    
    1,368,119
    
    
    
    (11,581
    )
    
    
    1,492,095
    
    
    
    (1,480,514
    )
    
    
    1,368,119
    
    
    
    1,409,160
    
    
    
    (1,368,119
    )
    
    
    1,409,160Total liabilities and
shareholders equity
(deficit)
    
    $
    3,605,685
    
    
    $
    (9,655
    )
    
    $
    1,946,484
    
    
    $
    (1,480,514
    )
    
    $
    4,062,000
    
    
    $
    1,409,346
    
    
    $
    (1,368,119
    )
    
    $
    4,103,227
  19




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    (3,254
    )
    
    $
    658,723
    
    
    $
    
    
    
    $
    655,469
    
    
    $
    
    
    
    $
    
    
    
    $
    655,469Costs and expenses:Educational services
    
    
    17,201
    
    
    
    (2,000
    )
    
    
    300,065
    
    
    
    
    
    
    
    315,266
    
    
    
    
    
    
    
    
    
    
    
    315,266General and administrative
    
    
    (14,895
    )
    
    
    (29
    )
    
    
    185,171
    
    
    
    
    
    
    
    170,247
    
    
    
    58
    
    
    
    
    
    
    
    170,305Management fees paid to affiliates
    
    
    30,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,805
    
    
    
    
    
    
    
    
    
    
    
    30,805Depreciation and amortization
    
    
    4,449
    
    
    
    64
    
    
    
    24,888
    
    
    
    
    
    
    
    29,401
    
    
    
    
    
    
    
    
    
    
    
    29,401Total costs and expenses
    
    
    37,560
    
    
    
    (1,965
    )
    
    
    510,124
    
    
    
    
    
    
    
    545,719
    
    
    
    58
    
    
    
    
    
    
    
    545,777Income (loss) before interest and income taxes
    
    
    (37,560
    )
    
    
    (1,289
    )
    
    
    148,599
    
    
    
    
    
    
    
    109,750
    
    
    
    (58
    )
    
    
    
    
    
    
    109,692Interest expense, net
    
    
    29,612
    
    
    
    85
    
    
    
    722
    
    
    
    
    
    
    
    30,419
    
    
    
    (29
    )
    
    
    
    
    
    
    30,390Loss on early retirement of debt
    
    
    44,762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,762
    
    
    
    
    
    
    
    
    
    
    
    44,762Equity in earnings of subsidiaries
    
    
    (86,942
    )
    
    
    
    
    
    
    
    
    
    
    86,942
    
    
    
    
    
    
    
    (20,291
    )
    
    
    20,291
    
    
    
    Income (loss) before income taxes
    
    
    (24,992
    )
    
    
    (1,374
    )
    
    
    147,877
    
    
    
    (86,942
    )
    
    
    34,569
    
    
    
    20,262
    
    
    
    (20,291
    )
    
    
    34,540Provision for (benefit from) income taxes
    
    
    (45,283
    )
    
    
    (546
    )
    
    
    60,107
    
    
    
    
    
    
    
    14,278
    
    
    
    (12
    )
    
    
    
    
    
    
    14,266Net income (loss)
    
    $
    20,291
    
    
    $
    (828
    )
    
    $
    87,770
    
    
    $
    (86,942
    )
    
    $
    20,291
    
    
    $
    20,274
    
    
    $
    (20,291
    )
    
    $
    20,274
   CONSOLIDATED STATEMENT OF OPERATIONS
For the Three Months Ended December 31, 2008 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    1,902
    
    
    $
    520,316
    
    
    $
    
    
    
    $
    522,218
    
    
    $
    
    
    
    $
    
    
    
    $
    522,218Costs and expenses:Educational services
    
    
    11,394
    
    
    
    1,499
    
    
    
    252,725
    
    
    
    
    
    
    
    265,618
    
    
    
    
    
    
    
    
    
    
    
    265,618General and administrative
    
    
    (16,314
    )
    
    
    725
    
    
    
    136,146
    
    
    
    
    
    
    
    120,557
    
    
    
    57
    
    
    
    
    
    
    
    120,614Management fees paid to affiliates
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    1,250Depreciation and amortization
    
    
    3,801
    
    
    
    91
    
    
    
    23,683
    
    
    
    
    
    
    
    27,575
    
    
    
    
    
    
    
    
    
    
    
    27,575Total costs and expenses
    
    
    131
    
    
    
    2,315
    
    
    
    412,554
    
    
    
    
    
    
    
    415,000
    
    
    
    57
    
    
    
    
    
    
    
    415,057Income (loss) before interest and income
taxes
    
    
    (131
    )
    
    
    (413
    )
    
    
    107,762
    
    
    
    
    
    
    
    107,218
    
    
    
    (57
    )
    
    
    
    
    
    
    107,161Interest expense, net
    
    
    39,802
    
    
    
    
    
    
    
    734
    
    
    
    
    
    
    
    40,536
    
    
    
    (81
    )
    
    
    
    
    
    
    40,455Equity in earnings of subsidiaries
    
    
    (68,436
    )
    
    
    
    
    
    
    
    
    
    
    68,436
    
    
    
    
    
    
    
    (42,327
    )
    
    
    42,327
    
    
    
    Income (loss) before income taxes
    
    
    28,503
    
    
    
    (413
    )
    
    
    107,028
    
    
    
    (68,436
    )
    
    
    66,682
    
    
    
    42,351
    
    
    
    (42,327
    )
    
    
    66,706Provision for (benefit from) income taxes
    
    
    (13,824
    )
    
    
    (154
    )
    
    
    38,333
    
    
    
    
    
    
    
    24,355
    
    
    
    49
    
    
    
    
    
    
    
    24,404Net income (loss)
    
    $
    42,327
    
    
    $
    (259
    )
    
    $
    68,695
    
    
    $
    (68,436
    )
    
    $
    42,327
    
    
    $
    42,302
    
    
    $
    (42,327
    )
    
    $
    42,302
  20




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    (3,459
    )
    
    $
    1,193,327
    
    
    $
    
    
    
    $
    1,189,868
    
    
    $
    
    
    
    $
    
    
    
    $
    1,189,868Costs and expenses:Educational services
    
    
    26,174
    
    
    
    (2,526
    )
    
    
    587,331
    
    
    
    
    
    
    
    610,979
    
    
    
    
    
    
    
    
    
    
    
    610,979General and administrative
    
    
    (34,706
    )
    
    
    391
    
    
    
    351,363
    
    
    
    
    
    
    
    317,048
    
    
    
    114
    
    
    
    
    
    
    
    317,162Management fees paid to affiliates
    
    
    32,055
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,055
    
    
    
    
    
    
    
    
    
    
    
    32,055Depreciation and amortization
    
    
    8,902
    
    
    
    127
    
    
    
    49,199
    
    
    
    
    
    
    
    58,228
    
    
    
    
    
    
    
    
    
    
    
    58,228Total costs and expenses
    
    
    32,425
    
    
    
    (2,008
    )
    
    
    987,893
    
    
    
    
    
    
    
    1,018,310
    
    
    
    114
    
    
    
    
    
    
    
    1,018,424Income (loss) before interest and income
taxes
    
    
    (32,425
    )
    
    
    (1,451
    )
    
    
    205,434
    
    
    
    
    
    
    
    171,558
    
    
    
    (114
    )
    
    
    
    
    
    
    171,444Interest (income) expense, net
    
    
    65,523
    
    
    
    (208
    )
    
    
    1,442
    
    
    
    
    
    
    
    66,757
    
    
    
    (38
    )
    
    
    
    
    
    
    66,719Loss on early retirement of debt
    
    
    44,762
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,762
    
    
    
    
    
    
    
    
    
    
    
    44,762Equity in earnings of subsidiaries
    
    
    (121,847
    )
    
    
    
    
    
    
    
    
    
    
    121,847
    
    
    
    
    
    
    
    (36,082
    )
    
    
    36,082
    
    
    
    Income (loss) before income taxes
    
    
    (20,863
    )
    
    
    (1,243
    )
    
    
    203,992
    
    
    
    (121,847
    )
    
    
    60,039
    
    
    
    36,006
    
    
    
    (36,082
    )
    
    
    59,963Provision for (benefit from) income taxes
    
    
    (56,945
    )
    
    
    (496
    )
    
    
    81,398
    
    
    
    
    
    
    
    23,957
    
    
    
    (30
    )
    
    
    
    
    
    
    23,927Net income (loss)
    
    $
    36,082
    
    
    $
    (747
    )
    
    $
    122,594
    
    
    $
    (121,847
    )
    
    $
    36,082
    
    
    $
    36,036
    
    
    $
    (36,082
    )
    
    $
    36,036
   CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended December 31, 2008 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    EM LLC
    
    
    
    
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated
    
    
    EDMC
    
    
    Eliminations
    
    
    ConsolidatedNet revenues
    
    $
    
    
    
    $
    5,230
    
    
    $
    951,216
    
    
    $
    
    
    
    $
    956,446
    
    
    $
    
    
    
    $
    
    
    
    $
    956,446Costs and expenses:Educational services
    
    
    22,155
    
    
    
    3,859
    
    
    
    493,116
    
    
    
    
    
    
    
    519,130
    
    
    
    
    
    
    
    
    
    
    
    519,130General and administrative
    
    
    (30,442
    )
    
    
    1,497
    
    
    
    269,554
    
    
    
    
    
    
    
    240,609
    
    
    
    114
    
    
    
    
    
    
    
    240,723Management fees paid to affiliates
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500Depreciation and amortization
    
    
    7,518
    
    
    
    91
    
    
    
    46,570
    
    
    
    
    
    
    
    54,179
    
    
    
    
    
    
    
    
    
    
    
    54,179Total costs and expenses
    
    
    1,731
    
    
    
    5,447
    
    
    
    809,240
    
    
    
    
    
    
    
    816,418
    
    
    
    114
    
    
    
    
    
    
    
    816,532Income (loss) before interest and income
taxes
    
    
    (1,731
    )
    
    
    (217
    )
    
    
    141,976
    
    
    
    
    
    
    
    140,028
    
    
    
    (114
    )
    
    
    
    
    
    
    139,914Interest expense, net
    
    
    77,389
    
    
    
    
    
    
    
    1,467
    
    
    
    
    
    
    
    78,856
    
    
    
    (242
    )
    
    
    
    
    
    
    78,614Equity in earnings of subsidiaries
    
    
    (89,259
    )
    
    
    
    
    
    
    
    
    
    
    89,259
    
    
    
    
    
    
    
    (38,920
    )
    
    
    38,920
    
    
    
    Income (loss) before income taxes
    
    
    10,139
    
    
    
    (217
    )
    
    
    140,509
    
    
    
    (89,259
    )
    
    
    61,172
    
    
    
    39,048
    
    
    
    (38,920
    )
    
    
    61,300Provision for (benefit from) income taxes
    
    
    (28,781
    )
    
    
    (79
    )
    
    
    51,112
    
    
    
    
    
    
    
    22,252
    
    
    
    49
    
    
    
    
    
    
    
    22,301Net income (loss)
    
    $
    38,920
    
    
    $
    (138
    )
    
    $
    89,397
    
    
    $
    (89,259
    )
    
    $
    38,920
    
    
    $
    38,999
    
    
    $
    (38,920
    )
    
    $
    38,999
  21




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended December 31, 2009 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    EM LLC
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated
    
    
    EDMC
    
    
    ConsolidatedNet cash flows provided by (used in) operations
    
    $
    (33,830
    )
    
    $
    (3,542
    )
    
    $
    137,635
    
    
    $
    100,263
    
    
    $
    161
    
    
    $
    100,424Cash flows from investing activitiesExpenditures for long-lived assets
    
    
    (5,915
    )
    
    
    (731
    )
    
    
    (63,180
    )
    
    
    (69,826
    )
    
    
    
    
    
    
    (69,826
    )Other investing activities
    
    
    
    
    
    
    
    
    
    
    (7,421
    )
    
    
    (7,421
    )
    
    
    
    
    
    
    (7,421
    )Net cash flows used in investing activities
    
    
    (5,915
    )
    
    
    (731
    )
    
    
    (70,601
    )
    
    
    (77,247
    )
    
    
    
    
    
    
    (77,247
    )Cash flows from financing activitiesNet repayments of debt and other
    
    
    (463,793
    )
    
    
    
    
    
    
    (416
    )
    
    
    (464,209
    )
    
    
    
    
    
    
    (464,209
    )Net proceeds from issuance of common stock, including
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387,825
    
    
    
    387,825Intercompany transactions
    
    
    732,835
    
    
    
    6,093
    
    
    
    (355,287
    )
    
    
    383,641
    
    
    
    (383,641
    )
    
    
    Net cash flows provided by (used in) financing activities
    
    
    269,042
    
    
    
    6,093
    
    
    
    (355,703
    )
    
    
    (80,568
    )
    
    
    4,184
    
    
    
    (76,384
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (74
    )
    
    
    (74
    )
    
    
    
    
    
    
    (74
    )Increase (decrease) in cash and cash equivalents
    
    
    229,297
    
    
    
    1,820
    
    
    
    (288,743
    )
    
    
    (57,626
    )
    
    
    4,345
    
    
    
    (53,281
    )Beginning cash and cash equivalents
    
    
    15,789
    
    
    
    481
    
    
    
    305,287
    
    
    
    321,557
    
    
    
    41,761
    
    
    
    363,318Ending cash and cash equivalents
    
    $
    245,086
    
    
    $
    2,301
    
    
    $
    16,544
    
    
    $
    263,931
    
    
    $
    46,106
    
    
    $
    310,037
  22




---



##### Table of Contents



EDUCATION MANAGEMENT CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended December 31, 2008 (In thousands)
 Guarantor
    
    
    Non-Guarantor
    
    
    EM LLC
    
    
    
    
    
    
    EDMCEM LLC
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Consolidated
    
    
    EDMC
    
    
    ConsolidatedNet cash flows provided by (used in) operations
    
    $
    (42,497
    )
    
    $
    (2,176
    )
    
    $
    114,802
    
    
    $
    70,129
    
    
    $
    266
    
    
    $
    70,395Cash flows from investing activitiesExpenditures for long-lived assets
    
    
    (7,193
    )
    
    
    (910
    )
    
    
    (70,243
    )
    
    
    (78,346
    )
    
    
    
    
    
    
    (78,346
    )Other investing activities
    
    
    
    
    
    
    
    
    
    
    (11,543
    )
    
    
    (11,543
    )
    
    
    
    
    
    
    (11,543
    )Net cash flows used in investing activities
    
    
    (7,193
    )
    
    
    (910
    )
    
    
    (81,786
    )
    
    
    (89,889
    )
    
    
    
    
    
    
    (89,889
    )Cash flows from financing activitiesNet repayments of debt and other
    
    
    54,065
    
    
    
    (1
    )
    
    
    (553
    )
    
    
    53,511
    
    
    
    
    
    
    
    53,511Intercompany transactions
    
    
    260,284
    
    
    
    3,120
    
    
    
    (263,404
    )
    
    
    
    
    
    
    
    
    
    
    Net cash flows provided by (used in) financing activities
    
    
    314,349
    
    
    
    3,119
    
    
    
    (263,957
    )
    
    
    53,511
    
    
    
    
    
    
    
    53,511Effect of exchange rate changes on cash and cash
equivalents
    
    
    
    
    
    
    
    
    
    
    1,097
    
    
    
    1,097
    
    
    
    
    
    
    
    1,097Increase (decrease) in cash and cash equivalents
    
    
    264,659
    
    
    
    33
    
    
    
    (229,844
    )
    
    
    34,848
    
    
    
    266
    
    
    
    35,114Beginning cash and cash equivalents
    
    
    2,311
    
    
    
    135
    
    
    
    233,581
    
    
    
    236,027
    
    
    
    41,381
    
    
    
    277,408Ending cash and cash equivalents
    
    $
    266,970
    
    
    $
    168
    
    
    $
    3,737
    
    
    $
    270,875
    
    
    $
    41,647
    
    
    $
    312,522
  23




---



##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 Results of Operations
  For the Three Months
    
    
    For the Six MonthsEnded December 31,
    
    
    Ended December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Educational services
    
    
    48.1
    %
    
    
    50.9
    %
    
    
    51.3
    %
    
    
    54.3
    %General and administrative
    
    
    26.0
    %
    
    
    23.1
    %
    
    
    26.7
    %
    
    
    25.1
    %Management fees paid to affiliates
    
    
    4.7
    %
    
    
    0.2
    %
    
    
    2.7
    %
    
    
    0.3
    %Depreciation and amortization
    
    
    4.5
    %
    
    
    5.3
    %
    
    
    4.9
    %
    
    
    5.7
    %Total costs and expenses
    
    
    83.3
    %
    
    
    79.5
    %
    
    
    85.6
    %
    
    
    85.4
    %Income before interest, loss on early retirement of debt and income taxes
    
    
    16.7
    %
    
    
    20.5
    %
    
    
    14.4
    %
    
    
    14.6
    %Interest expense, net
    
    
    4.6
    %
    
    
    7.7
    %
    
    
    5.6
    %
    
    
    8.2
    %Loss on early retirement of debt
    
    
    6.8
    %
    
    
    0.0
    %
    
    
    3.8
    %
    
    
    0.0
    %Income before income taxes
    
    
    5.3
    %
    
    
    12.8
    %
    
    
    5.0
    %
    
    
    6.4
    %Provision for income taxes
    
    
    2.2
    %
    
    
    4.7
    %
    
    
    2.0
    %
    
    
    2.3
    %Net income
    
    
    3.1
    %
    
    
    8.1
    %
    
    
    3.0
    %
    
    
    4.1
    %
 Three months ended December 31, 2009 compared to the three months ended
December 31, 2008
 All basis point changes are presented as a percentage of net revenues in each period of
comparison.
 Net revenues
    24




---



##### Table of Contents



Educational services expense
     General and administrative expense
    25




---



##### Table of Contents



Management fees paid to affiliates
  Depreciation and amortization expense
  Interest expense, net
  Loss on early retirement of debt
  Provision for income taxes
    26




---



##### Table of Contents



Six months ended December 31, 2009 compared to the six months ended December 31,
2008
 All basis point changes are presented as a percentage of net revenues in each period of
comparison.
 Net revenues
  Educational services expense
    General and administrative expense
    27




---



##### Table of Contents



Management fees paid to affiliates
  Depreciation and amortization expense
  Interest expense, net
  Loss on early retirement of debt
  Provision for income taxes
   Liquidity and Funds of Capital Resources
   28




---



##### Table of Contents



Operating cash flows
      Investing cash flows
   29




---



##### Table of Contents



Financing cash flows
        30




---



##### Table of Contents



Federal Family Education Loan Program and Private Student Loans
        31




---



##### Table of Contents



Contingencies
  New Accounting Standards Not Yet Adopted
  Non-GAAP Financial Measures
   For the Three Months
    
    
    For the Six MonthsEnded December 31,
    
    
    Ended December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income
    
    $
    20.3
    
    
    $
    42.3
    
    
    $
    36.0
    
    
    $
    39.0Interest expense, net
    
    
    30.4
    
    
    
    40.5
    
    
    
    66.7
    
    
    
    78.6Loss on early retirement of debt (1)
    
    
    44.8
    
    
    
    0.0
    
    
    
    44.8
    
    
    
    0.0Provision for income taxes
    
    
    14.2
    
    
    
    24.4
    
    
    
    24.0
    
    
    
    22.3Depreciation and amortization
    
    
    29.4
    
    
    
    27.5
    
    
    
    58.2
    
    
    
    54.2EBITDA
    
    $
    139.1
    
    
    $
    134.7
    
    
    $
    229.7
    
    
    $
    194.1
 (1)
    
    In connection with our initial public offering, we purchased Senior Subordinated
Notes with a face value of $316.0 million for approximately $355.5 million, resulting in a
loss of $39.5 million. We also accelerated $5.3 million of amortization on the portion of
deferred financing costs that related to the purchased Senior Subordinated Notes. Covenant Compliance
   32




---



##### Table of Contents



33




---



##### Table of Contents



For the TwelveMonths EndedDecember 31,2009Net income
    
    $
    101.4Interest expense, net
    
    
    141.5Loss on early retirement of debt (1)
    
    
    44.8Provision for income taxes
    
    
    62.9Depreciation and amortization
    
    
    116.3EBITDA
    
    
    466.9Reversal of impact of unfavorable leases (2)
    
    
    (1.1
    )Management fees paid to affiliates (3)
    
    
    34.6Severance and relocation
    
    
    5.8Non-cash compensation
    
    
    17.2Capital taxes
    
    
    4.6Other
    
    
    1.5Adjusted EBITDA  Covenant Compliance
    
    $
    529.5
 (1)
    
    In connection with Education Management Corporations initial public offering, we purchased Senior
Subordinated Notes with a face value of approximately $316.0 million. In order to
purchase this amount of Senior Subordinated Notes, we paid approximately $355.5
million, resulting in a loss of $39.5 million. We also accelerated $5.3 million of
amortization on the portion of deferred financing costs that related to the purchased
Senior Subordinated Notes.(2)
    
    Represents a non-cash reduction to rent expense due to the amortization on $7.3
million of unfavorable lease liabilities resulting from fair value adjustments
required in connection with the Transaction.(3)
    
    Represents fees incurred under a management agreement with the Sponsors.
Upon the completion of our initial public offering, we terminated the agreement with the
Sponsors for a fee of $29.6 million.  Covenant
    
    
    ActualSenior secured credit facility
    
    Requirements
    
    
    RatiosAdjusted EBITDA to Consolidated Interest
Expense ratio
    
    Minimum of 1.90x
    
    
    3.73
    xConsolidated Total Debt to Adjusted EBITDA ratio
    
    Maximum of 6.25x
    
    
    2.46
    x
  34




---



##### Table of Contents



Certain Risks and Uncertainties
   35




---



##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
       36




---



##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
    37




---



##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  The U.S. Department of Education is in the process of preparing proposed regulatory changes
that, if enacted, could materially and adversely impact our business.
     38




---



##### Table of Contents



If our institutions do not comply with the 90/10 Rule, they will lose eligibility to participate in
federal student financial aid programs.
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
  
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS INDEX
 Number
    
    Document31.1
    
    
    Certification of Todd S. Nelson required by Rule 13a-14(a) or Rule
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    Certification of Edward H. West required by Rule 13a-14(a) or Rule
15d-14(a) and Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    
    Certification of Todd S. Nelson required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    Certification of Edward H. West required by Rule 13a-14(b) or Rule
15d-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002.
  39




---



##### Table of Contents



SIGNATURE
  /s/  EDWARD H. WESTEdward H. WestPresident and Chief Financial Officer   40