Universal Technical Institute - 10-Q quarterly report FY

 

 

(Exact name of registrant as specified in its charter)

20410 North 19^th Avenue, Suite 200
Phoenix, Arizona 85027
(Address of principal executive offices)

(623) 445-9500
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” (in Rule 12b-2 of the Exchange Act).

Large accelerated filer þ     Accelerated filer o      Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     At May 7, 2007, there were 28,209,396 shares outstanding of the registrant’s common stock.

 

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

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

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

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

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

     We are a provider of post-secondary education for students seeking careers as professional automotive, diesel, collision repair, motorcycle and marine technicians. We offer undergraduate degree, diploma and certificate programs at 10 campuses and manufacturer specific advanced training (MSAT) programs that are sponsored by the manufacturer or dealer at dedicated training centers. We work closely with leading original equipment manufacturers (OEMs) in the automotive, diesel, motorcycle and marine industries to understand their needs for qualified service professionals.

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, our condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair statement of the results for the interim periods have been included. Operating results for the three and six months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending September 30, 2007. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 13, 2006.

     The unaudited condensed consolidated financial statements include the accounts of Universal Technical Institute, Inc. (UTI) and our wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

     The preparation of financial statements in conformity with GAAP 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 reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current period presentation. These reclassifications have no impact on previously reported net income.

     In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes.” FIN 48 clarifies the manner in which uncertainties in income taxes that are recognized in accordance with SFAS No. 109, “Accounting for Income Taxes” should be accounted for by providing recognition and measurement guidance and disclosure provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006. We expect to adopt FIN 48 effective October 1, 2007 and believe our adoption will not have a material impact on our consolidated financial statements or disclosures.

     In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides.” This FSP makes conforming amendments to other FASB statements and staff implementation guides

and provides technical corrections to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The conforming amendments in this FSP shall be applied upon adoption of SFAS No. 158. For a publicly traded company, SFAS No. 158 is effective as of the end of the fiscal year ending after December 15, 2006. We believe our adoption of FSP FAS 158-1 will not have a material impact on our consolidated financial statements or disclosures.

     In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities, as well as certain nonfinancial instruments, at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, SFAS No. 159 specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. We do not currently hold any financial instruments which are subject to SFAS No. 159 and will adopt the provisions of this statement at the time we first recognize an eligible item.

     In September 2006, the U.S. Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The SEC staff believes registrants must quantify errors using both a balance sheet and income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for fiscal years ending after November 15, 2006 with early application encouraged. We have adopted the provisions of SAB 108 effective October 1, 2006 with a net charge to retained earnings of $1.3 million for the matter described below. Prior to adopting SAB 108, we used the balance sheet approach for quantifying misstatements.

     During the three months ended December 31, 2006, we evaluated the calculation of the accrual for our field sales representative bonus plan and subsequently determined there was an error in the calculation. More specifically, we determined that not all tuition revenue for graduates with multiple enrollment sequences was being included in the related calculations resulting in an understatement of compensation expense during the period from June 2002 through September 30, 2006. We determined, as of September 30, 2006, that the cumulative effect of this error totaled $2.1 million on a pretax basis and $1.3 million after tax. We have also determined that this amount accumulated over time and that the financial statements of all prior annual and interim periods were not materially misstated as a result of this error. Not all of our field sales representatives were impacted by this error; however, we plan to make retroactive payments to the impacted sales representatives during our third quarter. The following is a summary of the adjustments made to our consolidated balance sheet as of October 1, 2006 to reflect our adoption of SAB 108:

     The cumulative effect of this error on our consolidated retained earnings totaled $0.5 million, $0.9 million and $1.3 million as of September 30, 2004, 2005 and 2006, respectively.

     Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the assumed conversion of all dilutive securities. For the three months and six months ended March 31, 2007, 1,177,340 shares and 1,123,878 shares, respectively, and for the three months and six months ended March 31, 2006, 568,899 shares and 580,646 shares, respectively, which could be issued under outstanding options, were not included in the determination of our diluted shares outstanding as they were anti-dilutive.

     The table below reflects the calculation of the weighted average number of common shares outstanding used in computing basic and diluted net income per common share:

Property and equipment, net consist of the following:

     At September 30, 2006, construction in progress includes $6.8 million related to construction of our new Sacramento, California campus building and $2.7 million related to construction at our Orlando, Florida campus.

     At March 31, 2007, construction in progress includes $15.5 million related to construction of our new Sacramento, California campus building. We anticipate completing the construction during the third quarter of 2007.

Accounts payable and accrued expenses consist of the following:

     In the ordinary conduct of our business, we are periodically subject to lawsuits, investigations and claims, including, but not limited to, claims involving students or graduates and routine employment matters. Although

we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition.

     We have two stock option plans, which we refer to as the Management 2002 Stock Option Program (2002 Plan) and the 2003 Incentive Compensation Plan (2003 Plan), formerly known as the 2003 Stock Incentive Plan.

     The 2002 Plan and the 2003 Plan are described, and informational disclosures are provided, on pages F-26 through F-28 in the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on December 13, 2006.

     On February 28, 2007, the 2003 Plan was amended to, among other things: permit the grant of stock units and performance units; revise the business criteria used for awards qualifying as performance-based compensation under Section 162(m) of the Internal Revenue Code; and permit the grant of cash bonuses under the 2003 Plan that would qualify as performance-based compensation under Section 162(m). The 2003 Plan was also amended to require that all options and stock appreciation rights have an exercise price per share equal to the fair market value of the common stock on the date of grant.

     On February 28, 2007, we awarded 298,030 shares of restricted stock at a fair value of $23.63 per share and granted 43,300 options to purchase shares of our common stock, with an exercise price of $23.63 per share and an estimated weighted-average fair value of $10.91 per share.

     On January 12, 2007, we issued 15,427 shares at $21.10 per share under our Employee Stock Purchase Plan.

     Our determination of fair value of each stock option grant, estimated on the date of grant using the Black-Scholes option pricing model, is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility, the expected lives of the awards and actual and projected employee stock exercise behaviors. We determine our assumptions at the date of each grant.

     The following table illustrates the assumptions used for grants made during the three and six months ended:

     The following table summarizes stock option activity for the six months ended March 31, 2007:

     The following table summarizes restricted stock activity for the six months ended March 31, 2007:

     The following table summarizes the operating expense line and the impact on net income in the consolidated statements of income in which stock-based compensation has been recorded for the three and six months ended March 31, 2006 and 2007:

     Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision-making group, in assessing performance of the segment and in deciding how to allocate resources to an individual segment.

     Our principal business is providing post-secondary education. We also provide manufacturer-specific training, and these operations are managed separately from our campus operations. These operations do not currently meet the quantitative criteria for segments and therefore are not deemed reportable under SFAS No. 131 and are reflected in the Other category. Corporate expenses are allocated to Post-Secondary Education and the Other category.

     Our net revenues for the second quarter were $91.7 million, an increase of 3.3% from the prior year and our net income for the second quarter was $6.1 million, a decrease of 26.4% from the prior year. Our decrease in net income is due to lower capacity utilization in conjunction with higher compensation and related costs, sales and marketing costs, depreciation and occupancy costs and tuition discounts, partially offset by lower bad debt expense.

     We increased available seating capacity by approximately 15% since the beginning of our 2006 fiscal year. We opened the first building of our permanent location in Sacramento, California in June 2006 with seating capacity of 1,800 students, which includes 400 seats in our temporary facility, and expanded our capacity at our Orlando, Florida location by 790 seats.

     Recruitment efforts and student starts lag the prior year due to a variety of factors. Average undergraduate full-time student enrollment decreased 1.5% to 16,389 for the three months ended March 31, 2007, as compared to 16,642 for the three months ended March 31, 2006. Average undergraduate full-time student enrollment decreased 1.2% to 16,827 for the six months ended March 31, 2007, as compared to 17,036 for the six months ended March 31, 2006. The decline in student starts has improved from a decrease of 4.6% for the three months ended December 31, 2006 to a decrease of 1.5% for the three months ended March 31, 2007 when compared to the same periods in the prior year. A strong labor market across the country coupled with affordability concerns associated with climbing interest rates and increased gas and housing prices have made it more challenging and expensive to recruit and start students. Since the third quarter of 2006, our lead flow has improved and we believe the improvement is associated with additional spending in advertising and the development of new creative advertisements and promotional materials. However, we have not fully realized the conversion of our leads into student applicants. As a result, we are focused on evaluating our lead and conversion trends to re-deploy our spending to areas that have proven successful and eliminate spending in areas that have not been productive.

     Historically, we have been able to overcome such external forces by modifying educational programs, utilizing different pricing strategies and investing in sales and marketing. In response to both the external environment and internal operational issues, we have implemented a plan that focuses on stabilizing and improving key operating efforts. We are uncertain when we will fully realize the benefits of these efforts.

     As described in Note 3 to the interim condensed consolidated financial statements, we adopted Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year financial Statements” effective October 1, 2006. During the three months ended December 31, 2006, we evaluated the calculation of the accrual for our field sales representative bonus plan and subsequently determined there was an error in the calculation. More specifically, we determined that not all tuition revenue for graduates with multiple enrollment sequences was being included in the related calculations resulting in an understatement of compensation expense during the period from June 2002 through September 30, 2006. We determined, as of September 30, 2006, that the cumulative effect of this error totaled $2.1 million on a

pretax basis and $1.3 million after tax. We have also determined that this amount accumulated over time and that the financial statements of all prior annual and interim periods were not materially misstated as a result of this error. Not all of our field sales representatives were impacted by this error; however, we plan to make retroactive payments to the impacted sales representatives during our third quarter. The following is a summary of the adjustments made to our consolidated balance sheet as of October 1, 2006 to reflect our adoption of SAB 108:

     The cumulative effect of this error on our consolidated retained earnings totaled $0.5 million, $0.9 million and $1.3 million as of September 30, 2004, 2005 and 2005, respectively.

     The following table sets forth selected statements of operations data as a percentage of net revenues for each of the periods indicated.

     The following table sets forth our capacity utilization during each of the periods indicated and the number of seats available at the end of each of the periods indicated.

     In addition to using GAAP results in evaluating our business, management evaluates the impact to operating income with and without the impact from new campus revenues and expenses. The following table sets forth data for our new campuses in each of the periods indicated. We begin to incur a majority of new campus costs in the nine month period prior to the new campus opening. Our new campuses typically become profitable within the first 12 months of operations and are no longer considered to be a new campus after one full fiscal year of operation. We believe that including this additional information provides additional transparency and improves the ability to evaluate our financial operating results.

     Net revenues. Our net revenues for the three months ended March 31, 2007 were $91.7 million,representing an increase of $3.0 million, or 3.3%, as compared to net revenues of $88.7 million for the three months ended March 31, 2006. Net revenues, excluding revenues associated with new campuses, for the three months ended March 31, 2007 were $87.5 million, representing an increase of $3.0 million, or 3.5%, as compared to $84.5 million for the three months ended March 31, 2006. We consider a campus to be a new campus until it has had one full fiscal year of operation. Effective October 1, 2006, our Norwood, Massachusetts campus was no longer considered to be a new campus.

     The increase in net revenues, excluding revenues associated with new campuses, of $3.0 million is attributable, in part, to the Norwood, Massachusetts campus, which had revenues of $5.3 million and was no longer considered to be a new campus beginning in fiscal 2007. The resulting $2.3 million decrease in net revenues was primarily due to a 7.3% decrease in the average undergraduate full-time student enrollment, excluding average undergraduate full-time student enrollment associated with new campuses, during the three months ended March 31, 2007 and an increase in tuition discounts of approximately $0.7 million for the three months ended March 31, 2007. The decrease was partially offset by tuition increases of between 3% and 5%, depending on the program, our change in policy reducing the number of free course retakes from two to one and an increase in the number of students taking two courses at a time. The change in our policy and the increase in the number of students taking two courses concurrently resulted in additional revenue of $0.9 million and $0.5 million, respectively, during the three months ended March 31, 2007.

     Our net revenues for the six months ended March 31, 2007 were $181.2 million, representing an increase of $7.0 million, or 4.0%, as compared to net revenues of $174.2 million for the six months ended March 31, 2006. Net revenues, excluding revenues associated with new campuses, for the six months ended March 31, 2007 were $173.8 million, representing an increase of $6.7 million, or 4.0%, as compared to $167.0 million for the six months ended March 31, 2006.

     The increase in net revenues, excluding revenues associated with new campuses, of $6.7 million is attributable, in part, to the Norwood, Massachusetts campus, which had revenues of $10.5 million and was no longer considered to be a new campus beginning in fiscal 2007. The resulting $3.8 million decrease in net revenues was primarily due to a 7.2% decrease in the average undergraduate full-time student enrollment, excluding average undergraduate full-time student enrollment associated with new campuses, during the six months ended March 31, 2007 and an increase in tuition discounts of approximately $0.8 million for the six months ending March 31, 2007. The decrease was partially offset by tuition increases of between 3% and 5%, depending on the program, our change in policy reducing the number of free course retakes from two to one and an increase in the number of students taking two courses at a time. The change in our policy and the increase in the number of students taking two courses concurrently resulted in additional revenue of $1.5 million and $1.7 million, respectively, during the six months ended March 31, 2007.

     Educational services and facilities expenses. Our educational services and facilities expenses for the three months ended March 31, 2007 were $45.9 million, an increase of $2.9 million, as compared to educational services and facilities expenses of $43.0 million for the three months ended March 31, 2006. Educational services and facilities expenses, excluding costs associated with new campuses, for the three months ended March 31, 2007 were $42.7 million, representing an increase of $3.1 million, or 7.7%, as compared to $39.6 million for the three months ended March 31, 2006.

     The increase in costs, excluding expenses related to new campuses, of $3.1 million is primarily associated with increased compensation and related costs of $1.7 million, depreciation expense of $1.0 million and occupancy costs of $0.4 million. The $3.1 million increase in costs is primarily attributable to educational

services and facilities expenses of $2.9 million related to our Norwood, Massachusetts campus, which was no longer considered to be a new campus beginning in fiscal 2007. The $2.9 million in costs included $1.7 million in compensation and related costs, $0.4 million in depreciation expense and $0.2 million in occupancy costs. The remaining increases in depreciation expense and occupancy costs are primarily associated with program expansions at other campuses.

     Educational services and facilities expenses as a percentage of net revenues increased to 50.0% for the three months ended March 31, 2007, as compared to 48.5% for the three months ended March 31, 2006. Educational services and facilities expenses as a percentage of net revenues, excluding activity for new campuses, was 48.8% for the three months ended March 31, 2007, as compared to 46.9% for the three months ended March 31, 2006. In addition to increased costs associated with new campuses, educational services and facilities expenses as a percentage of net revenues, excluding new campus activity, was negatively impacted by 1.0% associated with increased compensation and related costs and 1.1% related to depreciation expense. The increase in educational services and facilities expense as a percentage of revenue is primarily attributable to decreased capacity utilization at mature campuses.

     Our educational services and facilities expenses for the six months ended March 31, 2007 were $90.0 million, an increase of $7.0 million, as compared to educational services and facilities expenses of $83.1 million for the six months ended March 31, 2006. Educational services and facilities expenses, excluding costs associated with new campuses, for the six months ended March 31, 2007 were $84.3 million, representing an increase of $7.5 million, or 9.7%, as compared to $76.8 million for the six months ended March 31, 2006.

     The increase in costs, excluding expenses related to new campuses, of $7.5 million is primarily associated with increased compensation and related costs of $3.5 million, depreciation expense of $1.9 million, occupancy costs of $1.2 million and training supplies of $0.4 million. The $7.5 million increase in costs is partially attributable to educational services and facilities expenses of $5.8 million related to our Norwood, Massachusetts campus, which was no longer considered to be a new campus beginning in fiscal 2007. The $5.8 million in costs included $3.4 million in compensation and related costs, $0.7 million in depreciation expense, $0.4 million in occupancy costs and $0.3 million in training supplies. The remaining increases in depreciation expense and occupancy costs are primarily associated with program expansions at other campuses.

     Educational services and facilities expenses as a percentage of net revenues increased to 49.7% for the six months ended March 31, 2007, as compared to 47.7% for the six months ended March 31, 2006. Educational services and facilities expenses as a percentage of net revenues, excluding activity for new campuses, was 48.5% for the six months ended March 31, 2007, as compared to 46.0% for the six months ended March 31, 2006. In addition to increased costs associated with new campuses, educational services and facilities expenses as a percentage of net revenues, excluding new campus activity, was negatively impacted by 1.0% associated with increased compensation and related costs, 1.0% related to depreciation expense and 0.4% related to increased occupancy costs. The increase in educational services and facilities expense as a percentage of revenue is primarily attributable to decreased capacity utilization at mature campuses.

     Selling, general and administrative expenses. Our selling, general and administrative expenses for the three months ended March 31, 2007 were $36.3 million, an increase of $3.2 million, or 9.5%, as compared to selling, general and administrative expenses of $33.2 million for the three months ended March 31, 2006. Selling, general and administrative expenses, excluding costs associated with new campuses, for the three months ended March 31, 2007 were $34.8 million, representing an increase of $4.3 million, or 14.1%, as compared to $30.5 million for the three months ended March 31, 2006.

     The increase in selling, general and administrative costs, excluding costs associated with new campuses, of $4.3 million is primarily associated with increased compensation and related costs of $2.8 million, of which $0.5 million was related to increased stock-based compensation, and advertising costs of $2.2 million partially

offset by a decrease in bad debt expense of $0.4 million. The $4.3 million increase in costs is partially attributable to selling, general and administrative expenses of $1.9 million, including $1.1 million in compensation and related costs and $0.4 million in advertising costs, related to our Norwood, Massachusetts campus, which was no longer considered to be a new campus beginning in fiscal 2007. The remaining increase in compensation and related costs of $1.7 million is primarily due to annual merit salary increases, increased personnel associated with sales and marketing activities and increased expenses under our self-insured medical plan.

     Selling, general and administrative expenses as a percentage of net revenues increased to 39.7% for the three months ended March 31, 2007, as compared to 37.4% for the three months ended March 31, 2006. Selling, general and administrative costs as a percentage of net revenues, excluding activity for new campuses, was 39.8% for the three months ended March 31, 2007, as compared to 36.1% for the three months ended March 31, 2006. The increase in costs as a percentage of revenue, excluding new campus expenses, was impacted by an increase in compensation and related expenses of 2.5% of which 0.6% was attributable to increased stock based compensation expense and 2.3% attributable to additional spending on advertising partially offset by 0.3% associated with contract services and 0.5% related to improved bad debt expense.

     Our selling, general and administrative expenses for the six months ended March 31, 2007 were $71.2 million, an increase of $8.8 million, or 14.1%, as compared to selling, general and administrative expenses of $62.4 million for the six months ended March 31, 2006. Selling, general and administrative expenses, excluding costs associated with new campuses, for the six months ended March 31, 2007 were $67.5 million, representing an increase of $10.2 million, or 17.8%, as compared to $57.3 million for the six months ended March 31, 2006.

     The increase in selling, general and administrative costs, excluding costs associated with new campuses, of $10.2 million is primarily associated with increased advertising costs of $5.0 million, compensation and related costs of $4.9 million, of which $1.0 million was related to increased stock-based compensation, partially offset by a decrease in bad debt expense of $0.8 million. The $10.2 million increase in costs is partially attributable to selling, general and administrative expenses of $3.6 million, including $2.3 million in compensation and related costs and $0.8 million in advertising costs, related to our Norwood, Massachusetts campus, which was no longer considered to be a new campus beginning in fiscal 2007. The remaining increase in compensation and related costs of $2.6 million is primarily due to annual merit salary increases, increased personnel associated with sales and marketing activities and increased expenses under our self-insured medical plan.

     Selling, general and administrative expenses as a percentage of net revenues increased to 39.3% for the six months ended March 31, 2007, as compared to 35.8% for the six months ended March 31, 2006. Selling, general and administrative costs as a percentage of net revenues, excluding activity for new campuses, was 38.9% for the six months ended March 31, 2007, as compared to 34.3% for the six months ended March 31, 2006. The increase in costs as a percentage of revenue, excluding new campus expenses, was impacted by an increase of 2.7% attributable to additional spending on advertising and 2.0% associated with increased compensation and related costs of which 0.5% was attributable to increased stock based compensation expense, partially offset by 0.5% related to improved bad debt expense.

     Interest income. Our interest income for the three months ended March 31, 2007 was $0.6 million, representing a decrease of $0.3 million compared to interest income of $0.9 million for the three months ended March 31, 2006. Our interest income for the six months ended March 31, 2007 was $1.3 million representing a decrease of $0.3 million compared to interest income of $1.6 million for the six months ended March 31, 2006. The decrease in interest income is primarily attributable to our investment in our campus properties and our repurchase of shares of our common stock during the year ended September 30, 2006 which resulted in reduced cash available for investment.

          Income taxes. Our provision for income taxes for the three months ended March 31, 2007 was $3.9 million, or 39.1% of pretax income, as compared to $5.1 million, or 37.8% of pretax income for the three months ended March 31, 2006. The increase in the tax provision as a percentage of pretax income is primarily attributable to the release of a tax reserve in the prior year. Our provision for income taxes for the six months ended March 31, 2007 was $8.2 million, or 38.6% of pretax income, as compared to $11.8 million, or 38.8% of pretax income for the six months ended March 31, 2006. The decrease in the tax provision as a percentage of pretax income is primarily attributable to a larger state tax credit in the current year.

          We finance our operating activities and our internal growth through cash generated from operations. Our net cash from operations was $16.7 million for the six months ended March 31, 2007, as compared to $19.3 million for the six months ended March 31, 2006.

          A majority of our revenues are derived from Title IV Programs. Federal regulations dictate the timing of disbursements of funds under Title IV Programs. Students must apply for a new loan for each academic year consisting of thirty-week periods. Loan funds are generally provided by lenders in two disbursements for each academic year. The first disbursement is usually received 30 days after the start of a student’s academic year and the second disbursement is typically received at the beginning of the sixteenth week from the start of the student’s academic year. Five of our campuses and certain types of grants and other funding are not subject to a 30 day delay in receiving the first disbursement. These factors, together with the timing of when our students begin their programs, affect our operating cash flow.

     Operating Activities

          For the six months ended March 31, 2007, our cash flows provided by operating activities were $16.7 million resulting from net income of $13.0 million with adjustments of $12.5 million for non-cash and other items which were partially offset by $8.9 million related to the change in our operating assets and liabilities.

          For the six months ended March 31, 2007, the primary adjustments to our net income for non-cash and other items were depreciation and amortization of $8.6 million, substantially all of which was depreciation, stock-based compensation of $3.4 million and bad debt expense of $1.3 million partially offset by a reduction in deferred income taxes of $0.8 million.

          For the six months ended March 31, 2006, our cash flows provided by operating activities were $19.3 million resulting from net income of $18.6 million with adjustments of $9.1 million for non-cash and other items which were partially offset by $8.4 million related to the change in our operating assets and liabilities.

          For the six months ended March 31, 2006, the primary adjustments to our net income for non-cash and other items were depreciation and amortization of $6.6 million, substantially all of which was depreciation, bad debt expense of $2.3 million and stock-based compensation of $2.3 million partially offset by a reduction in deferred income taxes of $2.2 million.

     Changes in operating assets and liabilities

          For the six months ended March 31, 2007, changes in our operating assets and liabilities resulted in cash outflows of $8.9 million. A combination of operating efficiencies, a lower number of student starts during the six months ended March 31, 2007, as compared to the six months ended March 31, 2006, and our ability to request the first disbursement of Title IV funding without a 30 day delay at five campuses resulted in a decrease in receivables of $2.3 million and a decrease in deferred revenue of $4.4 million resulting in net cash outflows of $2.2 million. The timing of our accounts payable cycle resulted in a decrease in accounts payable and accrued

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expenses of approximately $6.8 million, primarily attributable to $6.5 million in capital expenditures offset by payroll related tax accruals of $0.7 million. The nature of our employee benefit and bonus plans and the timing of payments under those plans resulted in a decrease in accounts payable and other accrued expenses of approximately $1.4 million, primarily due to a $4.2 million bonus payment related to the year ended September 30, 2006 and $0.6 million in severance payments related to our reduction in force in September 2006 partially offset by an increase of $2.6 million for the bonus plans related to the year ended September 31, 2007 and $0.7 million related to other employee benefit plans. The change in income taxes from a receivable to a payable position was primarily related to our accrual of our estimated taxes of $8.7 million and receipt of a federal tax refund of $1.6 million. These changes in our operating assets and liabilities resulted in a decrease in our working capital deficit to $23.8 million at March 31, 2007, as compared to $26.0 million at September 30, 2006.

          For the six months ended March 31, 2006, cash outflows of $8.4 million related to the change in our operating assets and liabilities and were primarily due to changes in receivables and deferred revenue, accounts payable and accrued expenses and income tax receivable. The timing of tuition funding resulted in a decrease in accounts receivable of $2.9 million and a decrease in deferred revenue of $1.6 million resulting in combined positive cash flow of $1.3 million. The timing of the payment of the performance bonus for the year ended September 30, 2005 resulted in a decrease in accounts payable and accrued expenses. The increase in income tax receivable of $4.5 million was primarily attributable to the timing of estimated tax payments and $1.0 million related to the excess tax benefit from stock-based compensation.

          Our days sales outstanding (DSO) in accounts receivable was approximately 14 days at March 31, 2007 compared to approximately 21 days at March 31, 2006. The improvement was primarily attributable to operating efficiencies, the lower number of student starts during the six months ended March 31, 2007, as compared to the six months ended March 31, 2006 and the ability to request the first disbursement of Title IV funding without a 30 day delay at five of our campuses.

     Investing Activities

          For the six months ended March 31, 2007, cash flows used in investing activities were $18.1 million and were primarily related to capital expenditures associated with new campus construction and existing campus expansions.

          For the six months ended March 31, 2006, cash flows used in investing activities were $0.1 million and were primarily related to the purchase of $16.4 million in capital expenditures primarily associated with new campus construction and existing campus expansions offset by proceeds of $16.3 million for the release of our restricted investments that provided cash collateral for our letter of credit issued in favor of ED.

     Financing Activities

          For the six months ended March 31, 2007, cash flows provided by financing activities were $0.4 million and were attributable to proceeds received from issuance of common stock under employee stock option plans.

          For the six months ended March 31, 2006, cash flows provided by financing activities were $5.1 million and were attributable to proceeds of $2.6 million received from issuance of common stock under the employee incentive compensation plan and a bank overdraft of $1.5 million resulting from the timing of payments issued through controlled disbursement accounts and $1.0 million related to the tax benefit from stock-based compensation.

     Future Liquidity Sources

          Based on past performance and current expectations, we believe that our cash flows from operations and other sources of liquidity, including borrowings available under our revolving credit facility, will satisfy our working capital needs, capital expenditures, commitments, and other liquidity requirements associated with our operations through the next 12 months.

          We have executed nonbinding term sheets related to two sale-leaseback transactions involving buildings we own at our Norwood, Massachusetts and Sacramento, California campuses. We expect to receive net proceeds of $70.0 million to $75.0 million which will be used for general corporate purposes. We anticipate completing the transactions during mid-summer 2007 and do not expect to recognize a significant gain or loss as a result of these transactions.

          We believe that the most strategic uses of our cash resources include filling existing capacity, completing the expansion of our existing campuses, expanding our program offerings, and the repurchase of our common stock. In addition, our long term strategy includes the consideration of strategic acquisitions. To the extent that potential acquisitions are large enough to require financing beyond cash from operations and available borrowings under our credit facility, we may incur additional debt or issue debt resulting in increased interest expense.

     Debt Service

          At March 31, 2007, we had no borrowings under our credit facility and we were in compliance with all covenants.

          Our net revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in total student population and costs associated with opening or expanding our campuses. Student population varies as a result of new student enrollments, graduations and student attrition. Historically, our schools have had lower student populations in our third quarter, which ends on June 30, than in the remainder of the year because fewer students are enrolled during the summer months. Our expenses, however, do not vary significantly with changes in our student population and net revenues and, as a result, such expenses do not fluctuate significantly on a quarterly basis. We expect quarterly fluctuations in operating results to continue as a result of seasonal enrollment patterns. Such patterns may change however, as a result of new school openings, new program introductions, increased enrollments of adult students, increased investment in sales and marketing or acquisitions. In addition, our net revenues for the first quarter ending December 31 are adversely affected by the fact that we have fewer earning days when our campuses are closed during the calendar year end holiday break and accordingly do not recognize revenue during that period.

          Our critical accounting policies are disclosed in our 2006 Annual Report on Form 10-K. During the six months ended March 31, 2007, there have been no significant changes in our critical accounting policies.

          For information regarding recent accounting pronouncements, see Note 3 to our unaudited condensed consolidated financial statements within Part I, Item 1 of this report.

     Historically, our principal exposure to market risk relates to interest rate changes. As of March 31, 2007, we do not have any term debt. Consequently, we believe that we have minimal financial exposure to market risk.

     Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

     There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Exchange Act Rule 13a-15(d) that occurred during the quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     On May 7, 2007, we received letters from the Offices of the Attorney General of the State of Arizona and the State of Illinois requesting information related to relationships between us and student loan lenders. We are currently in the process of replying to the letter. We do not currently believe the results of complying with the civil investigative demand letter will have a material adverse effect on our business, results of operations, cash flows or financial condition.

     In the ordinary conduct of our business, we are periodically subject to lawsuits, investigations and claims including, but not limited to, claims involving students or graduates and routine employment matters. Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, results of operations, cash flows or financial condition.

     This report contains forward-looking information about our financial results, estimates and our business prospects that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements are expressions of our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They often include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “will,” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance or results, expenses, the outcome of contingencies, such as legal proceedings, and financial results. Among the factors that could cause actual results to differ materially are the following:

     We cannot guarantee any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.

     We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. The Form 10-K that we filed with the SEC on December 13, 2006 listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them under the heading “Risk Factors” in the Form 10-K. We incorporate that section of the Form 10-K in this filing and investors should refer to it. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties. Our filings with the SEC may be accessed at the SEC’s website at www.sec.gov.

Directors whose term of office continued after the annual meeting include: Conrad A. Conrad, Kevin P. Knight, Kimberly J. McWaters, Linda J. Srere and John C. White

     (c) Our stockholders voted as follows to approve the 2003 Incentive Compensation Plan as amended, for purpose of Section 162(m) of the Internal Revenue Code:

     (d) Our stockholders voted as follows to ratify the appointment of PricewaterhouseCoopers LLP as the independent auditors for our financial statements for the year ending September 30, 2007:

     (a) Exhibits (filed herewith):

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