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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

EDUCATION MANAGEMENT CORPORATION

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes     X         No         

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

Yes              No     X    

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

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INDEX

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PART I

ITEM 1 – FINANCIAL STATEMENTS

EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

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

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EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except per share amounts)

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

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EDUCATION MANAGEMENT CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Dollars in thousands)

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

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EDUCATION MANAGEMENT CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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

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

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

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

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

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

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

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

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

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

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):

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

Comprehensive income consisted of the following (in thousands):

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

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

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

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

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

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

Intangible assets consisted of the following (in thousands):

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

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

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

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

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

Critical Accounting Policies

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

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

Revenue Recognition and Receivables

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

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

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

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

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

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Long-Lived Assets

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seasonality and Other Factors Affecting Quarterly Results

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

Liquidity and Funds of Capital Resources

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

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

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

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

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

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

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

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

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