UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 Form
10-Q
 
 (Mark
One)
 
 x
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended June 30, 2008
 
 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 000-51371
 
 LINCOLN
EDUCATIONAL SERVICES CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 New
      Jersey
              
              57-1150621(State
      or other jurisdiction of incorporation or organization)
              
              (IRS
      Employer Identification No.)200
      Executive Drive, Suite 340
              
              07052West
      Orange, NJ
              
              (Zip
      Code)(Address
      of principal executive offices)
  (973)
736-9340
 (Registrant’s
telephone number, including area code)
 
 No
change
 (Former
name, former address and former fiscal year, if changed since last
report)
 
 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 o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
 
 Large
      accelerated filer o
              
              Accelerated
      filerýNon-accelerated
      filer o
              (Do
      not check if a smaller reporting company)
              Smaller
      reporting company 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 x
 
 As of
August 5, 2008, there were 25,427,733 shares of the registrant’s common stock
outstanding.
  
 
 
 
 LINCOLNEDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES
 
 INDEX TO
FORM 10-Q
 
 FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2008
 
 PART
      I.
              FINANCIAL INFORMATIONItem
      1.
              Financial
      Statements
              1Condensed Consolidated Balance
      Sheets at June 30, 2008 and December 31, 2007
      (unaudited)
              1Condensed Consolidated Statements
      of Operations for the three and six months ended June 30, 2008 and 2007
      (unaudited)
              3Condensed Consolidated Statement
      of Changes in Stockholders’ Equity for the six months ended June 30, 2008
      (unaudited)
              4Condensed Consolidated Statements of
      Cash Flows for the six months ended June 30, 2008 and 2007
      (unaudited)
              5Notes to Unaudited Condensed
      Consolidated Financial Statements
              7Item
      2.
              Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
              13Item
      3.
              Quantitative and Qualitative
      Disclosures About Market Risk
              21Item
      4.
              Controls and
      Procedures
              21PART II.
              OTHER INFORMATION
              21Item
      1.
              Legal
      Proceedings
              21Item
      2.
              Unregistered Sales of Equity
      Securities and Use of Proceeds
              22Item
      4.
              Submission of Matters to Vote of
      Security Holders
              22Item
      6.
              Exhibits
              23
  Index
  PARTI – FINANCIAL INFORMATION
 
 Item 1.
Financial Statements
 
 LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except share amounts)
 (Unaudited)
 
 June
      30,
              
              
              December
      31,2008
              
              
              2007ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              8,891
              
              
              $
              3,502Accounts
      receivable, less allowance of $11,816 and $11,244 at June 30, 2008 and
      December 31, 2007, respectively
              
              
              21,871
              
              
              
              23,286Inventories
              
              
              2,796
              
              
              
              2,540Deferred
      income taxes, net
              
              
              4,601
              
              
              
              4,575Due
      from federal programs
              
              
              152
              
              
              
              6,087Prepaid
      income taxes
              
              
              1,770
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              2,877
              
              
              
              3,771Total
      current assets
              
              
              42,958
              
              
              
              43,761PROPERTY,
      EQUIPMENT AND FACILITIES - At cost, net of accumulated depreciation and
      amortization of $82,570 and $82,931 at June 30, 2008 and December 31,
      2007, respectively
              
              
              108,429
              
              
              
              106,564OTHER
      ASSETS:Noncurrent
      accounts receivable, less allowance of $279 and $159 at June 30, 2008 and
      December 31, 2007, respectively
              
              
              2,826
              
              
              
              1,608Deferred
      finance charges
              
              
              730
              
              
              
              827Pension
      plan assets, net
              
              
              1,730
              
              
              
              1,696Deferred
      income taxes, net
              
              
              6,695
              
              
              
              5,500Goodwill
              
              
              82,714
              
              
              
              82,714Other
      assets, net
              
              
              3,166
              
              
              
              3,513Total
      other assets
              
              
              97,861
              
              
              
              95,858TOTAL
      ASSETS
              
              $
              249,248
              
              
              $
              246,183
 
 See notes
to unaudited condensed consolidated financial statements.
  1
 Index
  LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In
thousands, except share amounts)
 (Unaudited)
 (Continued)
 
 June
      30,
              
              
              December
      31,2008
              
              
              2007LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Current
      portion of long-term debt and lease obligations
              
              $
              168
              
              
              $
              204Unearned
      tuition
              
              
              28,976
              
              
              
              34,810Accounts
      payable
              
              
              11,643
              
              
              
              13,721Accrued
      expenses
              
              
              10,700
              
              
              
              10,079Income
      taxes payable
              
              
              -
              
              
              
              1,460Other
      short-term liabilities
              
              
              741
              
              
              
              1,439Total
      current liabilities
              
              
              52,228
              
              
              
              61,713NONCURRENT
      LIABILITIES:Long-term
      debt and lease obligations, net of current portion
              
              
              31,105
              
              
              
              15,174Other
      long-term liabilities
              
              
              6,855
              
              
              
              6,829Total
      liabilities
              
              
              90,188
              
              
              
              83,716COMMITMENTS
      AND CONTINGENCIES (Note 10)STOCKHOLDERS'
      EQUITY:Preferred
      stock, no par value - 10,000,000 shares authorized, no shares issued and
      outstanding at June 30, 2008 and December 31, 2007
              
              
              -
              
              
              
              -Common
      stock, no par value - authorized 100,000,000 shares at June 30, 2008 and
      December 31, 2007, issued and outstanding 25,427,733 shares at June 30,
      2008 and 25,888,348 shares at December 31, 2007
              
              
              120,446
              
              
              
              120,379Additional
      paid-in capital
              
              
              14,453
              
              
              
              12,378Deferred
      compensation
              
              
              (4,127
              )
              
              
              (3,228
              )Treasury
      stock at cost - 600,000 shares at June 30, 2008 and no shares at December
      31, 2007
              
              
              (6,375
              )
              
              
              -Retained
      earnings
              
              
              36,749
              
              
              
              35,024Accumulated
      other comprehensive loss
              
              
              (2,086
              )
              
              
              (2,086
              )Total
      stockholders' equity
              
              
              159,060
              
              
              
              162,467TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              249,248
              
              
              $
              246,183
 
 See notes
to unaudited condensed consolidated financial statements.
  2
 Index
  LINCOLNEDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
thousands, except per share amounts)
 (Unaudited)
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007REVENUES
              
              $
              85,056
              
              
              $
              74,744
              
              
              $
              169,103
              
              
              $
              150,914COSTS
      AND EXPENSES:Educational
      services and facilities
              
              
              35,927
              
              
              
              33,337
              
              
              
              72,555
              
              
              
              67,487Selling,
      general and administrative
              
              
              46,440
              
              
              
              39,456
              
              
              
              92,573
              
              
              
              82,641Loss
      (gain) on disposal of assets
              
              
              3
              
              
              
              (15
              )
              
              
              40
              
              
              
              (15
              )Total
      costs and expenses
              
              
              82,370
              
              
              
              72,778
              
              
              
              165,168
              
              
              
              150,113OPERATING
      INCOME
              
              
              2,686
              
              
              
              1,966
              
              
              
              3,935
              
              
              
              801OTHER:Interest
      income
              
              
              18
              
              
              
              35
              
              
              
              63
              
              
              
              83Interest
      expense
              
              
              (582
              )
              
              
              (670
              )
              
              
              (1,086
              )
              
              
              (1,154
              )INCOME
      (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
              
              
              2,122
              
              
              
              1,331
              
              
              
              2,912
              
              
              
              (270
              )PROVISION
      (BENEFIT) FOR INCOME TAXES
              
              
              881
              
              
              
              563
              
              
              
              1,187
              
              
              
              (108
              )INCOME
      (LOSS) FROM CONTINUING OPERATIONS
              
              
              1,241
              
              
              
              768
              
              
              
              1,725
              
              
              
              (162
              )LOSS
      FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
              
              
              -
              
              
              
              (2,468
              )
              
              
              -
              
              
              
              (3,156
              )NET
      INCOME (LOSS)
              
              $
              1,241
              
              
              $
              (1,700
              )
              
              $
              1,725
              
              
              $
              (3,318
              )BasicEarnings
      (loss) per share from continuing operations
              
              $
              0.05
              
              
              $
              0.03
              
              
              $
              0.07
              
              
              $
              (0.01
              )Loss
      per share from discontinued operations
              
              
              -
              
              
              
              (0.10
              )
              
              
              -
              
              
              
              (0.12
              )Net
      income (loss) per share
              
              $
              0.05
              
              
              $
              (0.07
              )
              
              $
              0.07
              
              
              $
              (0.13
              )DilutedEarnings
      (loss) per share from continuing operations
              
              $
              0.05
              
              
              $
              0.03
              
              
              $
              0.07
              
              
              $
              (0.01
              )Loss
      per share from discontinued operations
              
              
              -
              
              
              
              (0.10
              )
              
              
              -
              
              
              
              (0.12
              )Net
      income (loss) per share
              
              $
              0.05
              
              
              $
              (0.07
              )
              
              $
              0.07
              
              
              $
              (0.13
              )Weighted
      average number of common shares outstanding:Basic
              
              
              25,341
              
              
              
              25,483
              
              
              
              25,500
              
              
              
              25,471Diluted
              
              
              26,059
              
              
              
              25,483
              
              
              
              26,154
              
              
              
              25,471
 
 See notes
to unaudited condensed consolidated financial statements.
  3
 Index
  LINCOLNEDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
 (In
thousands, except shares amounts)
 (Unaudited)
 
 Additional
              
              
              
              
              
              
              
              
              
              
              
              Accumulated
      OtherCommon
      Stock
              
              
              Paid-in
              
              
              Deferred
              
              
              Treasury
              
              
              Retained
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Capital
              
              
              Compensation
              
              
              Stock
              
              
              Earnings
              
              
              Loss
              
              
              TotalBALANCE
      - December 31, 2007
              
              
              25,888,348
              
              
              $
              120,379
              
              
              $
              12,378
              
              
              $
              (3,228
              )
              
              $
              -
              
              
              $
              35,024
              
              
              $
              (2,086
              )
              
              $
              162,467Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,725
              
              
              
              -
              
              
              
              1,725Stock-based
      compensation expenseRestricted
      stock
              
              
              119,485
              
              
              
              -
              
              
              
              1,427
              
              
              
              (899
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              528Stock
      options
              
              
              -
              
              
              
              -
              
              
              
              643
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              643Treasury
      stock purchases
              
              
              (600,000
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,375
              )
              
              
              -
              
              
              
              -
              
              
              
              (6,375
              )Tax
      benefit of options exercised
              
              
              -
              
              
              
              -
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5Exercise
      of stock options
              
              
              19,900
              
              
              
              67
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              67BALANCE
      - June 30, 2008
              
              
              25,427,733
              
              
              $
              120,446
              
              
              $
              14,453
              
              
              $
              (4,127
              )
              
              $
              (6,375
              )
              
              $
              36,749
              
              
              $
              (2,086
              )
              
              $
              159,060
 
 See notes
to unaudited condensed consolidated financial statements.
  4
 Index
  LINCOLN EDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 
 Six
      Months EndedJune
      30,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
              
              $
              1,725
              
              
              $
              (3,318
              )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
              
              
              8,936
              
              
              
              7,768Amortization
      of deferred finance charges
              
              
              97
              
              
              
              95Deferred
      income taxes
              
              
              (1,221
              )
              
              
              (999
              )Loss
      (gain) on disposal of assets
              
              
              40
              
              
              
              (15
              )Impairment
      of goodwill and long-lived assets
              
              
              -
              
              
              
              3,005Provision
      for doubtful accounts
              
              
              9,569
              
              
              
              7,980Stock-based
      compensation expense
              
              
              1,171
              
              
              
              888Tax
      benefit associated with exercise of stock options
              
              
              (5
              )
              
              
              -Deferred
      rent
              
              
              271
              
              
              
              336(Increase)
      decrease in assets:Accounts
      receivable
              
              
              (9,372
              )
              
              
              (7,681
              )Inventories
              
              
              (256
              )
              
              
              386Prepaid
      expenses and other current assets
              
              
              203
              
              
              
              (662
              )Due
      from federal programs
              
              
              5,935
              
              
              
              -Other
      assets
              
              
              255
              
              
              
              (267
              )Increase
      (decrease) in liabilities:Accounts
      payable
              
              
              402
              
              
              
              1,714Other
      liabilities
              
              
              (903
              )
              
              
              (278
              )Income
      taxes
              
              
              (3,225
              )
              
              
              (10,725
              )Accrued
      expenses
              
              
              569
              
              
              
              (688
              )Unearned
      tuition
              
              
              (5,834
              )
              
              
              (7,834
              )Total
      adjustments
              
              
              6,632
              
              
              
              (6,977
              )Net
      cash provided by (used in) operating activities
              
              
              8,357
              
              
              
              (10,295
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted
      cash
              
              
              -
              
              
              
              (538
              )Capital
      expenditures
              
              
              (12,560
              )
              
              
              (11,543
              )Net
      cash used in investing activities
              
              
              (12,560
              )
              
              
              (12,081
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from borrowings
              
              
              23,000
              
              
              
              21,500Payments
      on borrowings
              
              
              (7,000
              )
              
              
              -Proceeds
      from exercise of stock options
              
              
              67
              
              
              
              111Tax
      benefit associated with exercise of stock options
              
              
              5
              
              
              
              45Principal
      payments of capital lease obligations
              
              
              (105
              )
              
              
              (44
              )Purchase
      of treasury stock
              
              
              (6,375
              )
              
              
              -Net
      cash provided by financing activities
              
              
              9,592
              
              
              
              21,612NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              5,389
              
              
              
              (764
              )CASH
      AND CASH EQUIVALENTS—Beginning of period
              
              
              3,502
              
              
              
              6,461CASH
      AND CASH EQUIVALENTS—End of period
              
              $
              8,891
              
              
              $
              5,697
 
 See notes
to unaudited condensed consolidated financial statements.
  5
 Index
  LINCOLN
EDUCATIONAL SERVICES CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In
thousands)
 (Unaudited)
 (Continued)
 
 Six
      Months EndedJune
      30,2008
              
              
              2007SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the period for:Interest
              
              $
              941
              
              
              $
              1,000Income
      taxes
              
              $
              6,023
              
              
              $
              9,287SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING ACTIVITIES:Fixed
      assets acquired in noncash transactions
              
              $
              1,440
              
              
              $
              475
 
 See notes
to unaudited condensed consolidated financial statements.
  6
 Index
  LINCOLN EDUCATIONAL SERVICES CORPORATION AND
SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 THREE
AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 (In
thousands, except share and per share amounts and unless otherwise
stated)
 (Unaudited)
 
 1.         SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 Business
Activities – Lincoln Educational Services Corporation and subsidiaries
(the "Company") is a diversified provider of career-oriented post-secondary
education. The Company offers recent high school graduates and working adults
degree and diploma programs in five principal areas of study: automotive
technology, health sciences, skilled trades, business and information technology
and hospitality services. The Company currently has 35 schools in 17 states
across the United States.
 
 Basis of
Presentation – The accompanying unaudited condensed consolidated
financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission and in accordance with
accounting principles generally accepted in the United States of America
(“GAAP”).  Certain information and footnote disclosures normally
included in annual financial statements have been omitted or condensed pursuant
to such regulations.  These statements, should be read in conjunction
with the December 31, 2007 consolidated financial statements of the Company, and
reflect all adjustments, consisting solely of normal recurring adjustments,
necessary to present fairly the consolidated financial position, results of
operations, and cash flows for such periods.  The results of
operations for the three and six months ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2008.
 
 The
unaudited condensed consolidated financial statements as of June 30, 2008 and
for the three and six months ended June 30, 2008 and 2007 and the audited
consolidated financial statements as of December 31, 2007 include the accounts
of the Company and its subsidiaries.  All significant intercompany
accounts and transactions have been eliminated.
 
 Use of Estimates
in the Preparation of Financial Statements – 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 and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the period.  On an ongoing basis, the Company evaluates the estimates and
assumptions, including those related to revenue recognition, bad debts, fixed
assets, goodwill and other intangible assets, stock-based compensation, income
taxes, benefit plans and certain accruals.  Actual results could differ
from those estimates.
 
 Stock Based
Compensation – The Company currently accounts for stock-based employee
compensation arrangements in accordance with the provisions of SFAS No. 123R,
“Share Based
Payment.”Reflected in the accompanying condensed consolidated
statements of operations were compensation expense of approximately $0.6 million
and $0.5 million for the three months ended June 30, 2008 and 2007,
respectively, and $1.2 million and $0.9 million for the six months ended June
30, 2008 and 2007, respectively.  The Company uses the Black-Scholes
valuation model and utilizes straight-line amortization of compensation expense
over the requisite service period of the grant.  The Company makes an
estimate of expected forfeitures upon grant issuance.
 
 2.         RECENT
ACCOUNTING PRONOUNCEMENTS
 
 In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS
No. 163”).  SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation.  SFAS No. 163 also clarifies how Statement 60 applies to
financial guarantee insurance contracts, including the recognition and
measurement to be used to account for premium revenue and claim
liabilities.  The Statement will be effective for the Company as of
January 1, 2009.  The implementation of this standard is not expected
to have a material impact on the Company’s consolidated financial
statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements.  SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles”.  The implementation of this standard is not expected to
have material impact on the Company’s consolidated financial
statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,” (“SFAS No. 161”) –an amendment to FASB
Statement No. 133.   The Statement is intended to improve
financial standards for derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better understand their
effects on an entity's financial position, financial performance, and cash
flows. Entities are required to provide enhanced disclosures about: (a) how and
why an entity uses derivative instruments; (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related
interpretations; and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash flows.
The Statement will be effective for the Company as of January 1, 2009. The
adoption of the provision of SFAS No. 161 is not expected to have a material
effect on the Company’s consolidated financial statements.
  7
 Index
  In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations". The
Statement establishes revised principles and requirements for how the Company
will recognize and measure assets and liabilities acquired in a business
combination. The new standard requires, among other things, transaction costs
incurred in a business combination to be expensed, establishes a new measurement
date for valuing acquirer shares issued in consideration for a business
combination, and requires the recognition of contingent consideration and
pre-acquisition gain and loss contingencies.  The Statement will be
effective for the Company’s business combinations completed on or after January
1, 2009.  The Company expects that the adoption of this Statement
could have a material impact on its financial statements in future material
acquisitions.
 In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting Research Bulletin
(“ARB”) No. 51," (“SFAS No. 160”). The Statement establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. The Statement will be effective for the
Company as of January 1, 2009.  The adoption of the provision of SFAS
No. 160 is not expected to have a material effect on the Company’s consolidated
financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”, (“SFAS No. 159”), providing companies
with an option to report selected financial assets and liabilities at fair
value.  The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently.  Historically,
GAAP has required different measurement attributes for different assets and
liabilities that can create artificial volatility in earnings. SFAS No. 159
helps to mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value, which would
likely reduce the need for companies to comply with detailed rules for hedge
accounting.  SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of the Company’s choice to use fair value on
its earnings. It also requires entities to display the fair value of those
assets and liabilities for which the entity has chosen to use fair value on the
face of the balance sheet.  SFAS No. 159 became effective for the
Company as of January 1, 2008; however, the Company did not elect to utilize the
option to report selected assets and liabilities at fair value.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”,(“SFAS No. 157”). SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in accordance with
GAAP, and expands disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or permit fair value
measurements; the FASB having previously concluded in those accounting
pronouncements that fair value is the relevant measurement attribute.
Accordingly, this Statement does not require any new fair value measurements.
The provisions of SFAS No. 157 became effective for the Company as of January 1,
2008. The adoption of the provision of SFAS No. 157 had no effect on the
Company’s consolidated financial statements.
 
 3.
DISCONTINUED OPERATIONS
 
 On July
31, 2007, the Company’s Board of Directors approved a plan to cease operations
at three of the Company’s campuses.  As a result of that decision, the
Company recognized a non-cash impairment charge related to goodwill at these
three campuses of approximately $2.1 million as of June 30,
2007.  Additionally, the Company determined that certain long-lived
assets would not be recoverable at June 30, 2007 and recorded a non-cash charge
of $0.9 million to reduce the carrying value of these assets to their estimated
fair value.
 
 As of
September 30, 2007, all operations had ceased at these campuses, and
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.
  8
 Index
  The
following amounts relate to discontinued operations at these three
campuses:
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2007
              
              
              June
      30, 2007Revenues
              
              $
              1,532
              
              
              $
              3,504Operating
      expenses
              
              
              (5,818
              )
              
              
              (8,984
              )(4,286
              )
              
              
              (5,480
              )Benefit
      for income taxes
              
              
              (1,818
              )
              
              
              (2,324
              )Loss
      from discontinued operations
              
              $
              (2,468
              )
              
              $
              (3,156
              )
 
 
 4.         WEIGHTED
AVERAGE COMMON SHARES
 
 The
weighted average number of common shares used to compute basic and diluted
income per share for the three and six months ended June 30, 2008 and 2007,
respectively, was as follows:
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Basic
      shares outstanding
              
              
              25,340,562
              
              
              
              25,483,014
              
              
              
              25,500,263
              
              
              
              25,471,093Dilutive
      effect of stock options
              
              
              718,502
              
              
              
              -
              
              
              
              653,908
              
              
              
              -Diluted
      shares outstanding
              
              
              26,059,064
              
              
              
              25,483,014
              
              
              
              26,154,171
              
              
              
              25,471,093
  For the
three months ended June 30, 2008 and 2007, options to acquire 813,208 and
377,500 shares, respectively, and for the six months ended June 30, 2008 and
2007, options to acquire 555,208 and 723,708 shares, respectively, were excluded
from the above table as the effect of their inclusion on reported earnings per
share would have been antidilutive.
 
 5.         GOODWILL AND OTHER
INTANGIBLE ASSETS
 
 The
Company accounts for its intangible assets in accordance with SFAS No. 142,“Goodwill and Other Intangible
Assets.”  The Company reviews intangible assets for impairment
when indicators of impairment exist.  Annually, or more frequently, if
necessary, the Company evaluates goodwill for impairment, with any resulting
impairment reflected as an operating expense.
  There
were no changes in the carrying amount of goodwill from the year ended December
31, 2007 to the six months ended June 30, 2008.
 
 Intangible
assets, which are included in other assets in the accompanying condensed
consolidated balance sheets, consist of the following:
 
 June
      30, 2008
              
              
              December
      31, 2007Weighted
      Average Amortization Period (years)
              
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying Amount
              
              
              Gross
      Carrying Amount
              
              
              Accumulated
      Amortization
              
              
              Net
      Carrying AmountStudent
      contracts
              
              1
              
              
              $
              2,215
              
              
              $
              2,215
              
              
              $
              -
              
              
              $
              2,215
              
              
              $
              2,212
              
              
              $
              3Trade
      name
              
              Indefinite
              
              
              
              1,270
              
              
              
              -
              
              
              
              1,270
              
              
              
              1,270
              
              
              
              -
              
              
              
              1,270Accreditation
              
              Indefinite
              
              
              
              307
              
              
              
              -
              
              
              
              307
              
              
              
              307
              
              
              
              -
              
              
              
              307Curriculum
              
              10
              
              
              
              700
              
              
              
              243
              
              
              
              457
              
              
              
              700
              
              
              
              208
              
              
              
              492Non-compete
              
              5
              
              
              
              201
              
              
              
              85
              
              
              
              116
              
              
              
              201
              
              
              
              65
              
              
              
              136Total
              
              
              
              
              
              $
              4,693
              
              
              $
              2,543
              
              
              $
              2,150
              
              
              $
              4,693
              
              
              $
              2,485
              
              
              $
              2,208
 
 Amortization
of intangible assets was approximately $27 thousand and $97 thousand for the
three months ended June 30, 2008 and 2007, respectively, and $58 thousand and
$191 thousand for the six months ended June 30, 2008 and June 2007,
respectively.
  9
 Index
  6.         LONG-TERM
DEBT
 
 The
Company has a credit agreement with a syndicate of banks which expires on
February 15, 2010.  Under the terms of the credit agreement, the
syndicate provided the Company with a $100 million credit
facility.  The credit agreement permits the issuance of up to $20
million in letters of credit, the amount of which reduces the availability of
permitted borrowings under the agreement.  At the time of entering
into the credit agreement, the Company incurred approximately $0.8 million of
deferred finance charges.  At June 30, 2008, the Company had
outstanding letters of credit aggregating $4.1 million which were primarily
comprised of letters of credit for the Department of Education and real estate
leases.
 
 The
obligations of the Company under the credit agreement are secured by a lien on
substantially all of the assets of the Company and its subsidiaries and any
assets that it or its subsidiaries may acquire in the future, including a pledge
of substantially all of the subsidiaries’ common stock.  Outstanding
borrowings bear interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as
defined, or a base rate (as defined in the credit agreement).  In
addition to paying interest on outstanding principal under the credit agreement,
the Company and its subsidiaries are required to pay a commitment fee to the
lender with respect to the unused amounts available under the credit agreement
at a rate equal to 0.25% to 0.40% per year, as defined.
 
 As of
December 31, 2007 the Company had $5.0 million outstanding under its credit
agreement.  During the six months ended June 30, 2008, the Company
borrowed an additional $23.0 million and repaid $7.0 million under its credit
agreement.  As of June 30, 2008, the Company had a total of $21.0
million outstanding under its credit agreement.  Interest rates on the
loans during the quarter ranged from 3.48% to 5.25%.
 
 The
credit agreement contains various covenants, including a number of financial
covenants.  Furthermore, the credit agreement contains customary
events of default as well as an event of default in the event of the suspension
or termination of Title IV Program funding for the Company’s and its
subsidiaries' schools aggregating 10% or more of the Company’s EBITDA (as
defined) or its consolidated total assets and such suspension or termination is
not cured within a specified period.  As of June 30, 2008, the Company
was in compliance with the financial covenants contained in the credit
agreement.
 
 7.         EQUITY
 
 The
Company has two stock incentive plans:   a Long-Term Incentive
Plan (the “LTIP”) and a Non-Employee Directors Restricted Stock Plan (the
“Non-Employee Directors Plan”).
 
 Under the
LTIP, certain employees received an award of restricted shares of common stock
totaling 200,000 shares, valued at $2.9 million, on October 30, 2007; 80,000
shares, valued at $1.0 million, on February 29, 2008; 8,000 shares, valued at
$0.1 million, on May 2, 2008; and 8,000 shares, valued at $0.1 million, on May
5, 2008.  The restricted shares vest ratably on the first through
fifth anniversary of the grant date; however, there is no vesting period on the
right to vote or the right to receive dividends on these restricted
shares.  The recognized restricted stock expense for the three and six
months ended June 30, 2008 was $0.2 million and $0.3 million, respectively. The
deferred compensation or unrecognized restricted stock expense under the LTIP as
of June 30, 2008 was $3.6 million.
 
 Pursuant
to the Non-Employee Directors Plan, each of the Company’s seven non-employee
directors receives an annual award of restricted shares of common stock on the
date of the Company’s annual meeting of shareholders.  The number of
shares granted to each non-employee director is based on the fair market value
of a share of common stock on that date.  The restricted shares vest
ratably on the first through third anniversary of the grant date; however, there
is no vesting period on the right to vote or the right to receive dividends on
these restricted shares. As of June 30, 2008, there were a total of 80,962
shares awarded and 32,607 shares vested under the Non-Employee Directors Plan.
The recognized restricted stock expense for the three months ended June 30, 2008
and 2007 was $0.1 million and $0.1 million, respectively, and for the six months
ended June 30, 2008 and 2007 was $0.2 million and $0.1 million, respectively.
The deferred compensation or unrecognized restricted stock expense under the
Non-Employee Directors Plan as of June 30, 2008 and 2007 was $0.5 million and
$0.6 million, respectively.
 
 On April
1, 2008, the Company’s Board of Directors approved the repurchase of up to
1,000,000 shares of its common stock over the period of one year.  The
purchases will be made in the open market or in privately negotiated
transactions from time to time as permitted by securities laws and other legal
requirements.  The timing, manner, price and amount of any repurchases
will be determined by the Company in its discretion and will be subject to
economic and market conditions, stock price, applicable legal requirements and
other factors.  The program may be suspended or discontinued at any
time.  During the three months ended June 30, 2008, the Company
repurchased 600,000 shares of its common stock for approximately $6.4
million at an average price of $10.63 per share.
  10
 Index
  Fair
Value of Stock Options
 
 The fair
value of the stock options used to compute stock-based compensation is the
estimated present value at the date of grant using the Black-Scholes option
pricing model.  The weighted average fair values of options granted
during 2008 were $6.69 using the following weighted average assumptions for
grants:
 
 June
      30, 2008Expected
      volatility
              
              57.23%Expected
      dividend yield
              
              0%Expected
      life (term)
              
              6
      YearsRisk-free
      interest rate
              
              2.76%
      - 3.29%Expected
      forfeiture rate
              
              20.00%
  The
following is a summary of transactions pertaining to the option
plans:
 
 Shares
              
              
              Weighted
      Average Exercise Price Per Share
              
              Weighted
      Average Remaining Contractual Term
              
              Aggregate
      Intrinsic ValueOutstanding
      as of December 31, 2007
              
              
              1,512,163
              
              
              $
              9.65Granted
              
              
              145,500
              
              
              
              11.97Cancelled
              
              
              (65,500
              )
              
              
              15.76Exercised
              
              
              (19,900
              )
              
              
              3.37
              
              
              
              $
              189Outstanding
      as of June 30, 2008
              
              
              1,572,263
              
              
              
              9.69
              
              5.65
      years
              
              
              6,066Exercisable
      as of June 30, 2008
              
              
              1,120,426
              
              
              
              7.90
              
              4.56
      years
              
              
              6,059
 
 As of
June 30, 2008, the pre-tax compensation expense for all unvested stock option
awards was $1.8 million.  This amount will be expensed over the
weighted-average period of approximately 1.1 years.
 
 The
following table presents a summary of options outstanding:
 
 June
      30, 2008Stock
      Options Outstanding
              
              
              Stock
      Options ExercisableRange
      of Exercise Prices
              
              
              Shares
              
              
              Contractual
      Weighted Average Life (years)
              
              
              Weighted
      Average Price
              
              
              Shares
              
              
              Weighted
      Exercise Price$
              1.55
              
              
              
              50,898
              
              
              
              0.98
              
              
              $
              1.55
              
              
              
              50,898
              
              
              $
              1.553.10
              
              
              
              632,657
              
              
              
              3.54
              
              
              
              3.10
              
              
              
              632,657
              
              
              
              3.104.00-13.99
              
              
              
              333,500
              
              
              
              8.85
              
              
              
              11.47
              
              
              
              76,678
              
              
              
              9.9114.00-19.99
              
              
              
              437,708
              
              
              
              6.69
              
              
              
              15.27
              
              
              
              273,993
              
              
              
              14.8120.00-25.00
              
              
              
              117,500
              
              
              
              6.11
              
              
              
              22.88
              
              
              
              86,200
              
              
              
              23.071,572,263
              
              
              
              5.65
              
              
              
              9.69
              
              
              
              1,120,426
              
              
              
              7.90
 
 8.          SLM
FINANCIAL CORPORATION LOAN AGREEMENT
 
 The
Company entered into a tiered discount loan program agreement, effective
September 1, 2007, with SLM Financial Corporation (SLM) to provide up to $16.0
million of private non-recourse loans to qualifying students.  Under
this agreement, the Company was required to pay SLM either 20% or 30% of all
loans disbursed, depending on each student borrower’s credit
score.  The Company was billed at the beginning of each month based on
loans disbursed during the prior month. For the six months ended June 30, 2008,
$0.5 million of loans were disbursed, resulting in a $0.1 million loss on sale
of receivables.  Loss on sale of receivables is included in selling,
general and administrative expenses in the accompanying statements of
operations.
 
 In
January 2008, SLM notified the Company that it was terminating its tiered
discount loan program, effective February 18, 2008.  The termination
of this agreement did not have a significant impact on the Company’s financial
condition.
  11
 Index
  9.
INCOME TAXES
 
 The
effective tax rate for the three months ended June 30, 2008 and 2007 was 41.5%
and 42.3%, respectively and for the six months ended June 30, 2008 and 2007 was
40.8% and 40.0%, respectively.
 
 10.
COMMITMENTS AND CONTINGENCIES
 
 Litigation and
Regulatory Matters– In the ordinary conduct of its business, the Company
is subject to periodic lawsuits, investigations and claims, including, but not
limited to, claims involving students or graduates and routine employment
matters. Although the Company cannot predict with certainty the ultimate
resolution of lawsuits, investigations and claims asserted against it, the
Company does not believe that any currently pending legal proceeding to which it
is a party will have a material adverse effect on the Company’s business,
financial condition, results of operations or cash flows.
 
 11.       PENSION
PLAN
 
 The
Company sponsors a noncontributory defined benefit pension plan covering
substantially all of the Company’s union employees.  Benefits are
provided based on employees’ years of service and earnings.  This plan
was frozen on December 31, 1994 for non-union employees.  While the
Company does not expect to make any contributions to the plan in 2008, after
considering the funded status of the plan, movements in the discount rate,
investment performance and related tax consequences, the Company may choose to
make contributions to the plan in any given year.  The net periodic
benefit income was $17 thousand and $47 thousand for the three months ended June
30, 2008 and 2007, respectively.  The net periodic benefit income was
$34 thousand and $22 thousand for the six months ended June 30, 2008 and 2007,
respectively.
  12
 Index
  Item2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 The
following discussion may contain forward-looking statements regarding us, our
business, prospects and our results of operations that are subject to certain
risks and uncertainties posed by many factors and events that could cause our
actual business, prospects and results of operations to differ materially from
those that may be anticipated by such forward-looking
statements.  Factors that could cause or contribute to such
differences include, but are not limited to, those described in the “Risk
Factors” section of our Annual Report on Form 10-K for the year ended December
31, 2007, as filed with the Securities and Exchange Commission (“SEC”) and in
our other filings with the SEC.  Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this report.  We undertake no obligation to revise any
forward-looking statements in order to reflect events or circumstances that may
subsequently arise.  Readers are urged to carefully review and
consider the various disclosures made by us in this report and in our other
reports filed with the Securities and Exchange Commission that advise interested
parties of the risks and factors that may affect our business.
 
 The
interim financial statements filed on this Form 10-Q and the discussions
contained herein should be read in conjunction with the annual financial
statements and notes included in our Form 10-K for the year ended December 31,
2007, as filed with the SEC, which includes audited consolidated financial
statements for our three fiscal years ended December 31, 2007.
 
 General
 
 We are a
leading and diversified for-profit provider of career-oriented post-secondary
education. We offer recent high school graduates and working adults degree and
diploma programs in five areas of study: automotive technology, health sciences,
skilled trades, business and information technology and hospitality services.
Each area of study is specifically designed to appeal to and meet the
educational objectives of our student population, while also satisfying the
criteria established by various industries, employers and state and federal
accrediting bodies. We believe that diversification limits our dependence on any
one industry for enrollment growth or placement opportunities and broadens our
opportunity to introduce new programs. As of June 30, 2008, 18,597 students were
enrolled at our 35 campuses across 17 states. Our campuses primarily attract
students from their local communities and surrounding areas, although our
destination schools attract students from across the United States, and in some
cases, from other countries.
 
 Discontinued
Operations
 
 On July
31, 2007, our Board of Directors approved a plan to cease operations at three of
our campuses.  As a result of that decision, we recognized a non-cash
impairment charge related to goodwill at these three campuses of approximately
$2.1 million as of June 30, 2007.  Additionally, we determined that
certain long-lived assets would not be recoverable at June 30, 2007 and recorded
a non-cash charge of $0.9 million to reduce the carrying value of these assets
to their estimated fair value.
 
 As of
September 30, 2007, all operations had ceased at these campuses, and
accordingly, the results of operations of these campuses have been reflected in
the accompanying statements of operations as “Discontinued Operations” for all
periods presented.
 
 The
following amounts relate to discontinued operations at these three
campuses:
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30, 2007
              
              
              June
      30, 2007Revenues
              
              $
              1,532
              
              
              $
              3,504Operating
      expenses
              
              
              (5,818
              )
              
              
              (8,984
              )(4,286
              )
              
              
              (5,480
              )Benefit
      for income taxes
              
              
              (1,818
              )
              
              
              (2,324
              )Loss
      from discontinued operations
              
              $
              (2,468
              )
              
              $
              (3,156
              )
  13
 Index
  Critical
Accounting Policies and Estimates
 
 Our
discussions of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America
(“GAAP”).  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 and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the period.  On an
ongoing basis, we evaluate our estimates and assumptions, including those
related to revenue recognition, bad debts, fixed assets, goodwill and other
intangible assets, income taxes and certain accruals.  Actual results
could differ from those estimates.  The critical accounting policies
discussed herein are not intended to be a comprehensive list of all of our
accounting policies.  In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP and does not result in
significant management judgment in the application of such principles. We
believe that the following accounting policies are most critical to us in that
they represent the primary areas where financial information is subject to the
application of management’s estimates, assumptions and judgment in the
preparation of our consolidated financial statements.
 
 Revenue
recognition.  Revenues are derived primarily from programs
taught at our schools.  Tuition revenues, textbook sales and one-time
fees, such as nonrefundable application fees and course material fees, are
recognized on a straight-line basis over the length of the applicable program,
which is the period of time from a student’s start date through his or her
graduation date, including internships or externships that take place prior to
graduation.  If a student withdraws from a program prior to a
specified date, any paid but unearned tuition is refunded.  Refunds
are calculated and paid in accordance with federal, state and accrediting agency
standards.  Other revenues, such as tool sales and contract training
revenues are recognized as goods are delivered or services are
performed.  On an individual student basis, tuition earned in excess
of cash received is recorded as accounts receivable, and cash received in excess
of tuition earned is recorded as unearned tuition.
 
 Allowance for
uncollectible accounts.  Based upon experience and judgment, we
establish an allowance for uncollectible accounts with respect to tuition
receivables.  We use an internal group of collectors, augmented by
third-party collectors as deemed appropriate, in our collection
efforts.  In establishing our allowance for uncollectible accounts, we
consider, among other things, a student’s status (in-school or out-of-school),
whether or not additional financial aid funding will be collected from Title IV
Programs or other sources, whether or not a student is currently making payments
and overall collection history.  Changes in trends in any of these
areas may impact the allowance for uncollectible accounts.  The
receivables balances of withdrawn students with delinquent obligations are
reserved based on our collection history.  Although we believe that
our reserves are adequate, if the financial condition of our students
deteriorates, resulting in an impairment of their ability to make payments,
additional allowances may be necessary, which will result in increased selling,
general and administrative expenses in the period such determination is
made.
 
 Our bad
debt expense as a percentage of revenues for the three months ended June 30,
2008 and 2007 was 6.5% and 5.6%, respectively, and for the six months ended June
30, 2008 and 2007 was 5.7% and 5.1%, respectively.  Our exposure to
changes in our bad debt expense could impact our operations. A 1% increase in
our bad debt expense as a percentage of revenues for the three months ended June
30, 2008 and 2007 would have resulted in an increase in bad debt expense of $0.9
million and $0.7 million, respectively, and for the six months ended June 30,
2008 and 2007 would have resulted in an increase in bad debt expense of $1.7
million and $1.5 million, respectively.
 
 Because a
substantial portion of our revenues is derived from Title IV programs, any
legislative or regulatory action that significantly reduces the funding
available under Title IV programs or the ability of our students or schools to
participate in Title IV programs could have a material effect on our ability to
realize our receivables.
 
 Goodwill.
We test our goodwill for impairment annually, or whenever events or changes in
circumstances indicate impairment may have occurred, by comparing its fair value
to its carrying value. Impairment may result from, among other things,
deterioration in the performance of the acquired business, adverse market
conditions, adverse changes in applicable laws or regulations, including changes
that restrict the activities of the acquired business, and a variety of other
circumstances. If we determine that impairment has occurred, we are required to
record a write-down of the carrying value and charge the impairment as an
operating expense in the period the determination is made. In evaluating the
recoverability of the carrying value of goodwill and other indefinite-lived
intangible assets, we must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the acquired assets.
Changes in strategy or market conditions could significantly impact these
judgments in the future and require an adjustment to the recorded
balances.
 
 Goodwill
represents a significant portion of our total assets. As of June 30, 2008,
goodwill represented approximately $83.0 million, or 33.2%, of our total assets.
At December 31, 2007, we tested our goodwill for impairment utilizing a market
capitalization approach and determined that there was no impairment of our
goodwill.  No events have occurred subsequently that would mandate
retesting.
  14
 Index
  Stock-based
compensation.  We currently account for stock-based employee
compensation arrangements in accordance with the provisions of Statement of
Financial Accounting Standards (“SFAS”) No. 123R, “Share Based
Payment.”  We use a fair value-based method of accounting for
options as prescribed by SFAS No. 123 “Accounting for Stock-Based
Compensation.”
 
 Bonus
costs.  We accrue the estimated cost of our bonus programs
using current financial and statistical information as compared to targeted
financial achievements and key performance objectives.  Although we
believe our estimated liability recorded for bonuses is reasonable, actual
results could differ and require adjustment of the recorded
balance.
 
 Effect
of Inflation
 
 Inflation
has not had a material effect on our operations.
 
 Recent
Accounting Pronouncements
 
 In May
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (“SFAS
No. 163”).  SFAS No. 163 requires that an insurance enterprise
recognize a claim liability prior to an event of default when there is evidence
that credit deterioration has occurred in an insured financial
obligation.  SFAS No. 163 also clarifies how Statement 60 applies to
financial guarantee insurance contracts, including the recognition and
measurement to be used to account for premium revenue and claim
liabilities.  The Statement will be effective for us as of January 1,
2009.  The implementation of this standard is not expected to have a
material impact on our consolidated financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”).  SFAS No. 162
identifies the sources of accounting principles and the framework for selecting
the principles used in the preparation of financial statements.  SFAS
No. 162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles”.  The implementation of this standard is not expected to
have a material impact on our consolidated financial statements.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities,”(“SFAS No. 161”)–an amendment to FASB
Statement No. 133.  The Statement is intended to improve financial
standards for derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. Entities
are required to provide enhanced disclosures about: (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133 and its related interpretations; and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance, and cash flows. The Statement will be
effective for us as of January 1, 2009. The adoption of the provision of SFAS
No. 161 is not expected to have a material effect on our consolidated financial
statements.
  In
December 2007, the FASB issued SFAS No. 141R, "Business Combinations”. The
Statement establishes revised principles and requirements for how we will
recognize and measure assets and liabilities acquired in a business combination.
The new standard requires, among other things, transaction costs incurred in a
business combination to be expensed, establishes a new measurement date for
valuing acquirer shares issued in consideration for a business combination, and
requires the recognition of contingent consideration and pre-acquisition gain
and loss contingencies. The Statement will be effective for our business
combinations completed on or after January 1, 2009.  We expect that
the adoption of this Statement could have a material impact on our financial
statements in future material acquisitions.
 In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements, (“SFAS No. 160”), an amendment of
Accounting Research Bulletin (“ARB”) No. 51".The Statement
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The Statement will
be effective for us as of January 1, 2009.  The adoption of the
provision of SFAS No. 160 is not expected to have a material effect on our
consolidated financial statements.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities”, (“SFAS No. 159”), providing companies
with an option to report selected financial assets and liabilities at fair
value.  The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently.  Historically
GAAP has required different measurement attributes for different assets and
liabilities that can create artificial volatility in earnings. SFAS No. 159
helps to mitigate this type of accounting-induced volatility by enabling
companies to report related assets and liabilities at fair value, which would
likely reduce the need for companies to comply with detailed rules for hedge
accounting.  SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and
liabilities.  SFAS No. 159 requires companies to provide additional
information that will help investors and other users of financial statements to
more easily understand the effect of our choice to use fair value on its
earnings. It also requires entities to display the fair value of those assets
and liabilities for which the entity has chosen to use fair value on the face of
the balance sheet.  SFAS No. 159 became effective for us as of January
1, 2008; however, we did not elect to utilize the option to report selected
assets and liabilities at fair value.
 15
 Index
 
 In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”,(“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements; the
FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. The provisions of SFAS No. 157
became effective for us as of January 1, 2008. The adoption of the provision of
SFAS No. 157 had no effect on our consolidated financial
statements.
 
 Results
of Operations
 
 Certain
reported amounts in our analysis have been rounded for presentation
purposes.
 
 The
following table sets forth selected consolidated statements of operations data
as a percentage of revenues for each of the periods indicated:
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Costs
      and expenses:Educational
      services and facilities
              
              
              42.2
              %
              
              
              44.6
              %
              
              
              42.9
              %
              
              
              44.7
              %Selling,
      general and administrative
              
              
              54.6
              %
              
              
              52.8
              %
              
              
              54.8
              %
              
              
              54.8
              %Total
      costs and expenses
              
              
              96.8
              %
              
              
              97.4
              %
              
              
              97.7
              %
              
              
              99.5
              %Operating
      income
              
              
              3.2
              %
              
              
              2.6
              %
              
              
              2.3
              %
              
              
              0.5
              %Interest
      expense, net
              
              
              (0.7
              %)
              
              
              (0.8
              %)
              
              
              (0.6
              %)
              
              
              (0.7
              %)Income
      (loss) from continuing operations before income taxes
              
              
              2.5
              %
              
              
              1.8
              %
              
              
              1.7
              %
              
              
              (0.2
              %)Provision
      (benefit) for income taxes
              
              
              1.0
              %
              
              
              0.8
              %
              
              
              0.7
              %
              
              
              (0.1
              %)Income
      (loss) from continuing operations
              
              
              1.5
              %
              
              
              1.0
              %
              
              
              1.0
              %
              
              
              (0.1
              %)
 
 Three
Months Ended June 30, 2008 Compared to Three Months Ended June 30,
2007
 
 Revenues. 
Revenues increased by $10.3 million, or 13.8%, to $85.1 million for the quarter
ended June 30, 2008 from $74.7 million for the quarter ended June 30,
2007.  The increase in revenues for the quarter was primarily attributable
to a 12.3% increase in average student population, which increased to 18,540 for
the quarter ended June 30, 2008 from 16,509 for the quarter ended June 30,
2007.  The remainder of this increase was due to tuition
increases.  For a general discussion of trends in our student
enrollment, see “Seasonality and Trends” below.
 
 Educational
services and facilities expenses.  Our educational services and
facilities expenses for the quarter ended June 30, 2008 were $35.9 million,
representing an increase of $2.6 million, or 7.8%, as compared to $33.3 million
for the quarter ended June 30, 2007. The increase in educational services
and facilities expenses was due to instructional expenses and books and tools
expenses, which increased by $1.5 million, or 8.3%, and $0.3 million, or 7.8%,
respectively, over the same quarter in 2007, reflecting a 20.9% increase in
student starts during the second quarter of 2008 as compared to the second
quarter of 2007 and as a result of the overall increase in student
population.  We began the second quarter of 2008 with approximately
1,700 more students than we had on April 1, 2007.   The remainder
of the increase in educational services and facilities expenses was due to
facilities expenses, which increased by approximately $0.8 million over the same
quarter in 2007.   This increase was due to an increase in
depreciation expense resulting from increased levels of capital expenditures
during 2007 and the first six months of 2008.  Capital expenditures
during these periods included the renovation and conversion of our former auto
school in Grand Prairie to a skilled trades school, the opening of a culinary
school at our Columbia, Maryland campus and the opening of our new campus,
Aliante, in North Las Vegas, Nevada. As a percentage of revenues, educational
services and facilities expenses for the second quarter of 2008 decreased to
42.2% from 44.6% for the second quarter of 2007.
 
 Selling, general
and administrative expenses.  Our selling, general and
administrative expenses for the quarter ended June 30, 2008 were $46.4 million,
representing an increase of $7.0 million, or 17.7%, as compared to $39.5 million
for the quarter ended June 30, 2007.  The increase in our selling, general
and administrative expenses during the period was primarily due to a $0.6
million, or 15.8%, increase in student services, a $1.3 million, or 8.1%,
increase in sales and marketing expenses and a $5.1 million, or 25.9%, increase
in administrative expenses for the quarter ended June 30, 2008 over the quarter
ended June 30, 2007.  The increase in student services was primarily
due to increases in compensation and benefit expenses attributed to additional
financial aid and career services personnel as a result of a larger student
population during the second quarter of 2008 as compared to the second quarter
of 2007.  In addition, we began a pilot program to centralize the back
office administration of our financial aid department in an effort to improve
the effectiveness of our financial aid processing.  This resulted in
the hiring of additional financial aid representatives during the quarter ended
June 30, 2008.  The increase in sales and marketing expenses was due
to annual compensation increases to sales representatives as well as increased
investments in marketing to continue to grow our student population. The
increase in administrative expenses was primarily due to (a) a $3.1 million
increase in compensation and benefits, resulting from annual compensation
increases, including projected increases in employee bonuses and increased
cost of benefits provided to employees; (b) a $1.4 million increase in bad
debt expense, and (c) $0.2 million refunded to the U.S. Department of Education
resulting from a program review at Southwestern College.  As a
percentage of revenues, selling, general and administrative expenses for the
second quarter of 2008 increased to 54.6% from 52.8% for the second quarter of
2007.
  16
 Index
  For the
quarter ended June 30, 2008, our bad debt expense as a percentage of revenue was
6.5% as compared to 5.6% for the same quarter in 2007.  This increase
was primarily attributable to higher accounts receivable due to a 13.8% increase
in revenues during the second quarter of 2008 as compared to the second quarter
of 2007.  The number of days sales outstanding at June 30, 2008
increased slightly to 26.4 days compared to 25.0 days at June 30,
2007.  The increase in days sales outstanding is directly attributable
to our decision to internally finance the gap in student tuition for which
students cannot obtain third-party financing.  As of June 30, 2008, we
had made loan commitments to our students of $20.1 million as compared to $16.5
million and $15.7 million at March 31, 2008 and December 31, 2007,
respectively.  Loan commitments, net of interest that would be due on
the loans through maturity, were $13.7 million at June 30, 2008 as compared to
$11.3 million and $10.8 million at March 31, 2008 and December 31, 2007,
respectively.
 
 Net interest
expense.  Our net interest expense for the quarter ended June 30,
2008 was $0.6 million, essentially unchanged from the quarter ended June 30,
2007.
 
 Income
taxes.  Our provision for income taxes for the quarter ended June
30, 2008 was $0.9 million, or 41.5% of pretax income, as compared to $0.6
million, or 42.3% of pretax income, for the quarter ended June 30, 2007. 
The decrease in our effective tax rate for the quarter ended June 30, 2008 was
primarily attributable to shifts in state taxable income among various
states.
 
 Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007
 
 Revenues. 
Revenues increased by $18.2 million, or 12.1%, to $169.1 million for the six
months ended June 30, 2008 from $150.9 million for the six months ended June 30,
2007.  The increase in revenues for the period was primarily attributable
to a 10.8% increase in average student population, which increased to 18,499 for
the six months ended June 30, 2008 from 16,697 for the six months ended June 30,
2007.  The remainder of this increase was due to tuition
increases.  For a general discussion of trends in our student
enrollment, see “Seasonality and Trends” below.
 
 Educational
services and facilities expenses.  Our educational services and
facilities expenses for the six months ended June 30, 2008 were $72.6 million,
representing an increase of $5.1 million, or 7.5%, as compared to $67.5 million
for the six months ended June 30, 2007. The increase in educational
services and facilities expenses was due to instructional expenses and books and
tools expenses, which increased by $2.6 million, or 7.1%, and $1.2 million, or
16.9%, respectively, over the same period in 2007, reflecting a 13.9% increase
in student starts during the six months ended June 30, 2008 as compared to the
same period in 2007 and as a result of the overall increase in student
population.  We began 2008 with approximately 1,400 more students than
we had on January 1, 2007 and as of June 30, 2008 our population was
approximately 2,350 higher than as of June 30, 2007.   The
remainder of the increase in educational services and facilities expenses was
due to facilities expenses, which increased by approximately $1.3 million over
the same period in 2007.  This increase was due to an increase in
depreciation expense of $1.5 million resulting from increased levels of capital
expenditures during 2007 and the first six months of 2008 versus the comparable
periods in prior years.  These expenditures included the renovation
and conversion of our former auto school in Grand Prairie to a skilled trades
school, the opening of a culinary school at our Columbia, Maryland campus as
well as the opening of our new campus, Aliante, in North Las Vegas,
Nevada.  These expenditures were offset by decreases in repairs and
maintenance during the same period. As a percentage of revenues, educational
services and facilities expenses for the six months ended June 30, 2008
decreased to 42.9% from 44.7% for the same period in 2007.
 
 Selling, general
and administrative expenses.  Our selling, general and
administrative expenses for the six months ended June 30, 2008 were $92.6
million, representing an increase of $9.9 million, or 12.0%, as compared to
$82.6 million for the quarter ended June 30, 2007.  The increase in our
selling, general and administrative expenses during the period was primarily due
to a $0.8 million, or 10.9%, increase in student services, a $1.4 million, or
4.3%, increase in sales and marketing and a $7.7 million, or 18.4%, increase in
administrative expenses for the six months ended June 30, 2008 over the same
period in 2007.  The increase in student services was primarily due to
increases in compensation and benefit expenses attributed to additional
financial aid and career services personnel as a result of a larger student
population during the six months ended June 30, 2008 as compared to the same
period in 2007. In addition, we began a pilot program to centralize the back
office administration of our financial aid department in an effort to improve
the effectiveness of our financial aid processing.  This resulted in
the hiring of additional financial aid representatives during the first six
months of 2008.  The increase in sales and marketing expense was due
to annual compensation increases to sales representatives as well as increased
investments in marketing to continue to grow our student population. The
increase in administrative expenses was primarily due to (a) a $4.1 million
increase in compensation and benefits, resulting from annual compensation
increases, projected increases in employee bonuses and increased cost of
benefits provided to employees; (b)  a $1.8 million increase in bad
debt expense; (c) $0.2 million refunded to the U.S. Department of Education
resulting from a program review at Southwestern College; and (d) a $0.4 million
increase in software maintenance expenses resulting from increased software
licenses for our student management system. As a percentage of revenues,
selling, general and administrative expenses for the six months ended June 30,
2008 was 54.8%, essentially unchanged from the same period in
2007.
  17
 Index
  For the
six months ended June 30, 2008, our bad debt expense as a percentage of revenue
was 5.7% as compared to 5.1% for the same period in 2007.  This
increase was primarily attributable to higher accounts receivable due to a 12.1%
increase in revenues during the six months ended June 30, 2008 as compared to
the same period in 2007.  The number of days sales outstanding for the
six months ended June 30, 2008 increased slightly to 26.6 days compared to 24.6
days for the same period in 2007 primarily due to the our decision to internally
finance the gap in student tuition for which students cannot obtain third-party
financing.
 
 Net interest
expense.  Our net interest expense for the six months ended June 30,
2008 decreased slightly to $1.0 million from $1.1 million for the same period in
2007 due to lower average borrowings outstanding during the
period.
 
 Income
taxes.  Our provision for income taxes for the six months ended June
30, 2008 was $1.2 million, or 40.8% of pretax income, as compared to a benefit
of $0.1 million, or 40.0% of pretax loss, for the same period in
2007.
 
 Liquidity
and Capital Resources
 
 Our
primary capital requirements are for facility expansion and maintenance,
acquisitions and the development of new programs.  Our principal sources of
liquidity have been cash provided by operating activities and borrowings under
our credit agreement.
 
 The
following chart summarizes the principal elements of our cash flows (in
thousands):
 
 Six
      Months EndedJune
      30,2008
              
              
              2007Net
      cash provided (used in) by operating activities
              
              $
              8,357
              
              
              $
              (10,295
              )Net
      cash used in investing activities
              
              
              (12,560
              )
              
              
              (12,081
              )Net
      cash provided by financing activities
              
              
              9,592
              
              
              
              21,612
 
 At June
30, 2008, we had cash and cash equivalents of $8.9 million, representing an
increase of approximately $5.4 million as compared to $3.5 million as of
December 31, 2007.  Historically, we have financed our operating
activities and organic growth primarily through cash generated from
operations.  We have financed acquisitions primarily through
borrowings under our credit facility and cash generated from
operations.  During the first six months of 2008, we borrowed $23.0
million and repaid $7.0 million under our credit facility.  We
currently anticipate that we will be able to meet both our short-term cash
needs, as well as our need to fund operations and meet our obligations beyond
the next twelve months with cash generated by operations, existing cash balances
and, if necessary, borrowings under our credit agreement. In addition, in the
future we may also consider accessing financial markets as a source of liquidity
for capital requirements, acquisitions and general corporate purposes to the
extent such requirements are not satisfied by cash on hand or operating cash
flows.  At June 30, 2008, we had net borrowings available under our
$100 million credit agreement of approximately $74.9 million, including a $15.9
million sub-limit on letters of credit.
 
 Our
primary source of cash is tuition collected from the students. The majority of
students enrolled at our schools rely on funds received under various
government-sponsored student financial aid programs to pay a substantial portion
of their tuition and other education-related expenses. The largest of these
programs are Title IV Programs which represented approximately 80% of our cash
receipts relating to revenues in 2007. Students must apply for a new loan for
each academic period. Federal regulations dictate the timing of disbursements of
funds under Title IV Programs and loan funds are generally provided by lenders
in two disbursements for each academic year. The first disbursement is usually
received approximately 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. Certain types of
grants and other funding are not subject to a 30-day delay. Our programs range
from 14 to 105 weeks. In certain instances, if a student withdraws from a
program prior to a specified date, any paid but unearned tuition or prorated
Title IV financial aid is refunded according to state and federal
regulations.
 
 As a
result of the significance of the Title IV funds received by our students, we
are highly dependent on these funds to operate our business. Any reduction in
the level of Title IV funds that our students are eligible to receive or any
impact on our ability to be able to receive Title IV funds would have a
significant impact on our operations and our financial condition. See "Risk
Factors" in Item 1A, included in our Annual Report on Form 10-K for the year
ended December 31, 2007.
  18
 Index
  Cash
Flow Operating Activities
 
 Net cash
provided by operating activities was $8.4 million for the six months ended June
30, 2008 compared to net cash used of $10.3 million for the six months ended
June 30, 2007.  The $18.7 million increase in cash provided by operating
activities was primarily due to an increase in net income of approximately $5.0
million for the six months ended June 30, 2008 as compared to a net loss for the
six months ended June 30, 2007, an approximately $5.9 million increase of cash
received from federal fund programs and a reduction of approximately $3.3
million in cash paid for income taxes for the six months ended June 30, 2008 as
compared to the six months ended June 30, 2007, offset by a reduction in
unearned tuition of $5.8 million and other working capital items.
 
 Cash
Flow Investing Activities
 
 Net cash
used in investing activities increased by $0.5 million to $12.6 million for the
six months ended June 30, 2008 from $12.1 million for the six months ended June
30, 2007.  Our cash used in investing activities was primarily related to
purchases of property and equipment.  Our capital expenditures
primarily resulted from facility expansion, leasehold improvements, and
investments in classroom and shop technology.
 
 Capital
expenditures are expected to continue to increase in the remainder of 2008 as we
upgrade and expand current equipment and facilities or open new facilities to
meet increased student enrollments. We anticipate capital expenditures to range
between 8% and 10% of revenues in 2008 and expect to fund these capital
expenditures with cash generated from operating activities and, if necessary,
with borrowings under our credit agreement.
 
 Cash
Flow Financing Activities
 
 Net cash
provided by financing activities was $9.6 million for the six months ended June
30, 2008, as compared to $21.6 million for the six months ended June 30,
2007.  This decrease of $12.0 million was attributable to an increase in
repayments of borrowings of $7.0 million and repurchases of our common stock for
$6.4 million partially offset by an increase in our net borrowings under our
credit agreement of $1.5 million for the six months ended June 30, 2008, as
compared to the six months ended June 30, 2007. Due to normal seasonal
patterns, our student population is generally at the lowest level during the
first half of the year and increases during the second half of the
year.  As a result, during the first half of the year, we typically
borrow funds to finance our operations and repay those funds in the second half
of the year.
 
 On April
1, 2008, our Board of Directors approved the repurchase of up to 1,000,000
shares of our common stock over the period of one year.  During the
quarter ended June 30, 2008, we repurchased 600,000 shares of our common stock
for approximately $6.4 million.
 
 Under the
terms of our credit agreement, the lending syndicate provided us with a $100
million credit facility with a term of five years.  The credit agreement
permits the issuance of letters of credit of up to $20 million, the amount of
which reduces the availability of permitted borrowings under the
agreement.
 
 The
following table sets forth our long-term debt (in thousands):
 
 At
      June 30,
              
              
              At
      December 31,2008
              
              
              2007Credit
      agreement
              
              $
              21,000
              
              
              $
              5,000Finance
      obligation
              
              
              9,672
              
              
              
              9,672Automobile
      loans
              
              
              5
              
              
              
              16Capital
      leases (with rates ranging from 2.9% to 8.5%)
              
              
              596
              
              
              
              690Subtotal
              
              
              31,273
              
              
              
              15,378Less
      current maturities
              
              
              (168
              )
              
              
              (204
              )Total
      long-term debt
              
              $
              31,105
              
              
              $
              15,174
 
 Contractual
Obligations
 
 Long-term
Debt.  As of June 30, 2008, our long-term debt consisted of amounts
borrowed under our credit agreement, the finance obligation in connection with
our sale-leaseback transaction in 2001 and amounts due under capital lease
obligations.
 
 Lease
Commitments.  We lease offices, educational facilities and equipment
for varying periods through the year 2023 at basic annual rentals (excluding
taxes, insurance, and other expenses under certain leases).
  19
 Index
  The
following table contains supplemental information regarding our total
contractual obligations as of June 30, 2008, measured from the end of our fiscal
year, December 31, 2007 (in thousands):
 
 Payments
      Due by PeriodTotal
              
              
              Less
      than 1 year
              
              
              1-3
      years
              
              
              4-5
      years
              
              
              After
      5 yearsCredit
      agreement
              
              $
              21,000
              
              
              $
              -
              
              
              $
              21,000
              
              
              $
              -
              
              
              $
              -Capital
      leases (including interest)
              
              
              706
              
              
              
              207
              
              
              
              325
              
              
              
              174
              
              
              
              -Operating
      leases
              
              
              127,215
              
              
              
              16,359
              
              
              
              27,024
              
              
              
              24,274
              
              
              
              59,558Rent
      on finance obligation
              
              
              11,857
              
              
              
              1,381
              
              
              
              2,763
              
              
              
              2,763
              
              
              
              4,950Automobile
      loans (including interest)
              
              
              5
              
              
              
              5
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      contractual cash obligations
              
              $
              160,783
              
              
              $
              17,952
              
              
              $
              51,112
              
              
              $
              27,211
              
              
              $
              64,508
 
 
 Off-Balance
Sheet Arrangements
 
 We had no
off-balance sheet arrangements as of June 30, 2008, except for our letters of
credit of $4.1 million which are primarily comprised of letters of credit for
the DOE and security deposits in connection with certain of our real estate
leases. These off-balance sheet arrangements do not adversely impact our
liquidity or capital resources.
 
 Seasonality
and Trends
 
 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.  Student population varies as a result of new student
enrollments, graduations, student attrition and seasonal enrollment
patterns.  Historically, our schools have experienced lower student
populations in our first and second quarters and larger class starts in the
third and fourth quarters as well as higher student attrition in the first half
of the year.  Our second half growth is largely dependent on a successful
high school recruiting season.  We recruit our high school students
several months ahead of their scheduled start dates, and thus, while we have
visibility on the number of students who have expressed interest in attending
our schools, we cannot predict with certainty the actual number of new student
enrollments and the related impact on revenues.  Our expenses,
however, do not vary significantly over the course of a year with changes in our
student population and net revenues.  During the first half of the year, we
make significant investments in marketing, staff, programs and facilities to
ensure that we meet our second half targets and, as a result, such expenses do
not fluctuate significantly on a quarterly basis.  To the extent new
student enrollments, and related revenues, in the second half of the year fall
short of our estimates, our operating results could suffer.  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 students
and/or acquisitions.
 
 We
achieved positive organic growth in the second half of 2007 and into the first
and second quarters of 2008.  We began the second quarter of 2008 with
approximately 1,700 more students than we had on April 1, 2007, which we
attribute to improved execution resulting from the growth initiatives we
introduced in the third quarter of 2006 and not from any changes in the macro
environment. Similar to other public for-profit post secondary education
companies, in the recent past, the increase in our average undergraduate
enrollments had not met anticipated growth rates.  As a result of
the slow down in 2005 and 2006, we entered 2007 with fewer students enrolled
than we had in January 2006.  This trend continued through the first
quarter of 2007 and resulted in a shortfall in our expected enrollments during
the first quarter of 2007.  The slow down that has occurred in the
for-profit post secondary education sector appears to have had a greater impact
on companies, like ours, that are more dependent on their on-ground business as
opposed to on-line students.  We believe that the slow down can be
attributed to many factors, including (a) the economy (b) the availability of
student financing; (c) the dependency on television to attract students to our
school; (d) turnover of our sales representatives; and (e) increased competition
in the marketplace.  These trends began to reverse in the second
quarter of 2007.
 
 We
believe that our growth initiatives and the steps we have taken as well as our
program diversification have positioned us well to produce positive growth
over the long-term.
 
 Start-ups, campus
expansions and acquisitions also negatively impact operating income.  We
incur sales and marketing costs as well as campus personnel costs in advance of
the opening of each campus.  Typically we begin to incur such costs
approximately 15 months in advance of the campus opening with the majority of
such costs being incurred in the nine-month period prior to a campus
opening.
  20
 Index
  Update
Regarding Regulatory and Accreditation Matters
 
 The U.S.
Department of Education (“DOE”) conducted a program review at
Southwestern College (“SWC”) and issued an initial program review report,
dated February 6, 2008, in which it identified potential instances of
noncompliance with certain DOE requirements.  SWC responded to the DOE
initial program review report on April 3, 2008.  In a letter, dated
May 29, 2008, the DOE issued a Final Program Review Determination and SWC
refunded $0.2 million to the DOE.
 
 In a
letter received from the Accrediting Commission of Career Schools and Colleges
of Technology (“ACCSCT”), dated July 7, 2008, we were informed of a “show cause”
action regarding our Lincoln Technical Institute institution in
Philadelphia, PA.  An institution under “show cause” is required to
satisfy its accrediting agency within a prescribed period, typically 18 months,
that it has satisfactorily resolved the deficiency.  We expect to
respond to ACCSCT’s “show cause” action on or before August 22, 2008, for review
at ACCSCT’s November 2008 meeting.
  Item3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
 
 We are
exposed to certain market risks as part of our on-going business
operations.  We have a credit agreement with a syndicate of
banks.  Our obligations under the credit agreement are secured by a
lien on substantially all of our assets and our subsidiaries and any assets that
we or our subsidiaries may acquire in the future, including a pledge of
substantially all of our subsidiaries’ common stock. Outstanding borrowings bear
interest at the rate of adjusted LIBOR plus 1.0% to 1.75%, as defined, or a base
rate (as defined in the credit agreement).  As of June 30, 2008, we
had $21.0 million outstanding under our credit agreement.  The
interest rate under this borrowing was ranged from 3.48% to 5.25% at June 30,
2008.
 
 Based on
our outstanding debt balance, a change of one percent in the interest rate would
cause a change in interest expense of approximately $0.2 million, or less than
$.01 per basic share, on an annual basis.  Changes in interest rates
could have an impact on our operations, which are greatly dependent on students’
ability to obtain financing.  Any increase in interest rates could
greatly impact our ability to attract students and have an adverse impact on the
results of our operations.
 
 The
remainder of our interest rate risk is associated with miscellaneous capital
equipment leases, which are not significant.
  Item4.  CONTROLS AND PROCEDURES
 
 (a)Evaluation of disclosure controls
and procedures.  Our Chief Executive Officer and Chief Financial
Officer, after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Securities Exchange Act Rule 13a-15(e)) as of the
end of the quarterly period covered by this report, have concluded that our
disclosure controls and procedures are adequate and effective to reasonably
ensure that material information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specific by Securities and Exchange
Commissions’ Rules and Forms and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 (b) Changes in Internal Control Over
Financial Reporting.  There were no changes made during our most
recently completed fiscal quarter in our internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  PARTII. OTHER INFORMATION
  Item1.  LEGAL PROCEEDINGS
 
 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 or financial condition, results of operations or cash
flows.
  21
 Index
  Item2.  UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
 
 On April
1, 2008, our Board of Directors approved the repurchase of up to 1,000,000
shares of our common stock over the period of one year.  The
following table outlines repurchases of our common stock during the quarter
ended June 30, 2008:
 
 Period
              
              Total
      Number of Shares Purchased
              
              
              Average
      Price Paid per Share
              
              
              Total
      Number of Shares Purchased
              
              
              Maximum
      Number of Shares That May Yet Be PurchasedApril
      1, 2008 -- April 30, 2008
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,000,000May
      1, 2008 -- May 31, 2008
              
              
              600,000
              
              
              $
              10.63
              
              
              
              600,000
              
              
              
              400,000June
      1, 2008 -- June 30, 2008
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              400,000Total
              
              
              600,000
              
              
              $
              10.63
              
              
              
              600,000
              
              
              
              400,000
 
 
 Item4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 At our
annual meeting held on May 2, 2008, the shareholders voted to approve all of
management’s proposals as follows:
 
 1.           For
the election of eight directors to hold office until our next annual meeting,
the voting for each nominee was:
 
 Votes
      For
              
              Votes
      WithheldDavid
      F. Carney
              
              24,681,291
              
              12,549Alexis
      P. Michas
              
              23,985,676
              
              708,164James
      J. Burke, Jr.
              
              23,985,676
              
              708,164Jerry
      G. Rubenstein
              
              24,690,190
              
              3,650Paul
      E. Glaske
              
              24,690,190
              
              3,650Peter
      S. Burgess
              
              24,689,690
              
              4,150J.
      Barry Morrow
              
              24,689,690
              
              4,150Celia
      H. Currin
              
              24,690,190
              
              3,650
 
 2.           For
ratifying the appointment of Deloitte & Touche LLP as our independent
registered public accounting firm for our fiscal year ending December 31,
2008:
 
 Votes
      For
              
              Votes
      Against
              
              Abstained24,685,098
              
              3,292
              
              5,450
  22
 Index
  Item 6.  EXHIBITS
 
 EXHIBIT
INDEX
 
 The
following exhibits are filed with or incorporated by reference into this Form
10-Q.
 
 
 Exhibit
                Number
              
              Description3.1
              
              Amended
      and Restated Certificate of Incorporation of the Company
    (1).3.2
              
              Amended
      and Restated By-laws of the Company (2).4.1
              
              Stockholders’
      Agreement, dated as of September 15, 1999, among Lincoln Technical
      Institute, Inc., Back to School Acquisition, L.L.C. and Five Mile River
      Capital Partners LLC (1).4.2
              
              Letter
      agreement, dated August 9, 2000, by Back to School Acquisition, L.L.C.,
      amending the Stockholders’ Agreement (1).4.3
              
              Letter
      agreement, dated August 9, 2000, by Lincoln Technical Institute, Inc.,
      amending the Stockholders’ Agreement (1).4.4
              
              Management
      Stockholders Agreement, dated as of January 1, 2002, by and among Lincoln
      Technical Institute, Inc., Back to School Acquisition, L.L.C. and the
      Stockholders and other holders of options under the Management Stock
      Option Plan listed therein (1).4.5
              
              Assumption
      Agreement and First Amendment to Management Stockholders Agreement, dated
      as of December 20, 2007, by and among Lincoln Educational Services
      Corporation, Lincoln Technical Institute, Inc., Back to School
      Acquisition, L.L.C. and the Management Investors parties therein
      (6).4.6
              
              Registration
      Rights Agreement between the Company and Back to School Acquisition,
      L.L.C. (2).4.7
              
              Specimen
      Stock Certificate evidencing shares of common stock
(1).10.1
              
              Credit
      Agreement, dated as of February 15, 2005, among the Company, the
      Guarantors from time to time parties thereto, the Lenders from time to
      time parties thereto and Harris Trust and Savings Bank, as Administrative
      Agent (1).10.2
              
              Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and David F. Carney (3).10.3
              
              Separation
      and Release Agreement, dated as of October 15, 2007, between the Company
      and Lawrence E. Brown (4).10.4
              
              Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and Scott M. Shaw (3).10.5
              
              Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and Cesar Ribeiro (3).10.6
              
              Amended
      and Restated Employment Agreement, dated as of February 1, 2007, between
      the Company and Shaun E. McAlmont (3).10.7
              
              Lincoln
      Educational Services Corporation 2005 Long Term Incentive Plan
      (1).10.8
              
              Lincoln
      Educational Services Corporation 2005 Non Employee Directors Restricted
      Stock Plan (1).10.9
              
              Lincoln
      Educational Services Corporation 2005 Deferred Compensation Plan
      (1).
  23
 Index
  10.10
              
              Lincoln
      Technical Institute Management Stock Option Plan, effective January 1,
      2002 (1).10.11
              
              Form
      of Stock Option Agreement, dated January 1, 2002, between Lincoln
      Technical Institute, Inc. and certain participants (1).10.12
              
              Form
      of Stock Option Agreement under our 2005 Long Term Incentive Plan
      (7).10.13
              
              Form
      of Restricted Stock Agreement under our 2005 Long Term Incentive Plan
      (7).10.14
              
              Management
      Stock Subscription Agreement, dated January 1, 2002, among Lincoln
      Technical Institute, Inc. and certain management investors
      (1).10.15
              
              Stockholder’s
      Agreement among Lincoln Educational Services Corporation, Back to School
      Acquisition L.L.C., Steven W. Hart and Steven W. Hart 2003 Grantor
      Retained Annuity Trust (2).10.16
              
              Stock
      Purchase Agreement, dated as of March 30, 2006, among Lincoln Technical
      Institute, Inc., and Richard I. Gouse, Andrew T. Gouse, individually and
      as Trustee of the Carolyn Beth Gouse Irrevocable Trust, Seth A. Kurn and
      Steven L. Meltzer (5).31.1 *
              
              Certification
      of Chairman & Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2 *
              
              Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32 *
              
              Certification
      of Chairman & Chief Executive Officer and Chief Financial Officer
      pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 
 (1)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-1
      (Registration No. 333-123664).
 
 (2)
              Incorporated
      by reference to the Company’s Form 8-K dated June 28,
  2005.
 
 (3)
              Incorporated
      by reference to the Company’s Form 10-K for the year ended December 31,
      2006.
 
 (4)
              Incorporated
      by reference to the Company’s Form 8-K dated October 15,
    2007.
 
 (5)
              Incorporated
      by reference to the Company’s Form 10-Q for the quarterly period ended
      March 31, 2006.
 
 (6)
              Incorporated
      by reference to the Company’s Registration Statement on Form S-3
      (Registration No. 333-148406).
 
 (7)
              Incorporated
      by reference to the Company’s Form 10-K for the year ended December 31,
      2007.
 
 *
              Filed
      herewith.
 24
 Index
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
 
 
 LINCOLN
      EDUCATIONAL SERVICES CORPORATION
 
 
 Date:
      August 6, 2008
                By:
                /s/ Cesar RibeiroCesar
      RibeiroChief
      Financial Officer(Principal
      Accounting and Financial
Officer)
   25