Table of Contents

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 AND EXCHANGE ACT OF 1934	
For the quarterly period ended June 30, 2008
or
 
¨ 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the transition period from              to             
Commission File Number: 001-33140

CAPELLA EDUCATION COMPANY
(Exact name of registrant as specified in its charter) 

 
			
Minnesota	 	41-1717955	
(State or other jurisdiction of 
Incorporation or organization) 	 	(I.R.S. Employer 
Identification No.) 	
225 South Sixth Street, 9th Floor
Minneapolis, Minnesota 55402
(Address, including zip code, of principal executive offices) 
(888) 227-3552
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

		
Large accelerated filer   ¨	 	Accelerated filer   x	
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)	 	Smaller reporting company   ¨	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The total number of shares of common stock outstanding as of July 28, 2008, was 16,649,922.

 

Table of Contents
 CAPELLA EDUCATION COMPANY
FORM 10-Q
INDEX

 	  	Page	
PART I – FINANCIAL INFORMATION	  		
		
Item 1 Financial Statements	  	3	
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	10	
Item 3 Quantitative and Qualitative Disclosures About Market Risk	  	15	
Item 4 Controls and Procedures	  	16	
		
PART II – OTHER INFORMATION	  		
		
Item 1 Legal Proceedings	  	16	
Item 1A Risk Factors	  	16	
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	  	17	
Item 3 Defaults Upon Senior Securities	  	17	
Item 4 Submission of Matters to a Vote of Security Holders	  	17	
Item 5 Other Information	  	18	
Item 6 Exhibits	  	18	
SIGNATURES	  	19	
 
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 PART I – FINANCIAL INFORMATION
 
 Item 1.	Financial Statements	
CAPELLA EDUCATION COMPANY
Consolidated Balance Sheets
(In thousands, except par value)

 	  	As of June 30,
2008	 	 	As of December 31,
2007	 	
 	  	(Unaudited)	 	 	 	 	
ASSETS	  				 				
Current assets:	  				 				
Cash and cash equivalents	  	$	8,342	 	 	$	60,600	 	
Marketable securities	  	 	98,932	 	 	 	83,167	 	
Accounts receivable, net of allowance of $2,011 at June 30, 2008 and $951 at December 31, 2007	  	 	8,852	 	 	 	7,557	 	
Prepaid expenses and other current assets	  	 	7,469	 	 	 	12,593	 	
Deferred income taxes	  	 	1,889	 	 	 	1,896	 	
	  	 	 	 	 	 	 	 	
Total current assets	  	 	125,484	 	 	 	165,813	 	
Property and equipment, net	  	 	35,056	 	 	 	34,462	 	
	  	 	 	 	 	 	 	 	
Total assets	  	$	160,540	 	 	$	200,275	 	

LIABILITIES AND SHAREHOLDERS’ EQUITY	  				 				
Current liabilities:	  				 				
Accounts payable	  	$	4,764	 	 	$	6,089	 	
Accrued liabilities	  	 	18,072	 	 	 	23,826	 	
Deferred revenue	  	 	7,875	 	 	 	6,476	 	
	  	 	 	 	 	 	 	 	
Total current liabilities	  	 	30,711	 	 	 	36,391	 	
Deferred rent	  	 	1,239	 	 	 	1,167	 	
Other liabilities	  	 	335	 	 	 	335	 	
Deferred income taxes	  	 	4,436	 	 	 	5,508	 	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	36,721	 	 	 	43,401	 	
Shareholders’ equity:	  				 				
Common stock, $0.01 par value:	  				 				
Authorized shares – 100,000	  				 				
Issued and outstanding shares – 16,622 at June 30, 2008 and 17,363 at December 31, 2007	  	 	166	 	 	 	173	 	
Additional paid-in capital	  	 	152,540	 	 	 	196,643	 	
Accumulated other comprehensive income (loss)	  	 	(596	)	 	 	195	 	
Retained earnings (accumulated deficit)	  	 	(28,291	)	 	 	(40,137	)	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	123,819	 	 	 	156,874	 	
	  	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	160,540	 	 	$	200,275	 	
	  	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
 
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CAPELLA EDUCATION COMPANY
Consolidated Statements of Income
(In thousands, except per share amounts)

 	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
 	  	2008	  	2007	  	2008	  	2007	
 	  	(Unaudited)
(In thousands, except per share amounts)	
Revenues	  	$	66,049	  	$	53,918	  	$	131,300	  	$	106,742	
Costs and expenses:	  			  			  			  			
Instructional costs and services	  	 	30,844	  	 	24,587	  	 	59,860	  	 	48,110	
Marketing and promotional	  	 	19,573	  	 	16,850	  	 	40,966	  	 	35,170	
General and administrative	  	 	6,968	  	 	6,518	  	 	14,698	  	 	12,499	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total costs and expenses	  	 	57,385	  	 	47,955	  	 	115,524	  	 	95,779	
	  	 	 	  	 	 	  	 	 	  	 	 	
Operating income	  	 	8,664	  	 	5,963	  	 	15,776	  	 	10,963	
Other income, net	  	 	1,008	  	 	1,132	  	 	2,397	  	 	2,224	
	  	 	 	  	 	 	  	 	 	  	 	 	
Income before income taxes	  	 	9,672	  	 	7,095	  	 	18,173	  	 	13,187	
Income tax expense	  	 	3,314	  	 	2,312	  	 	6,327	  	 	4,560	
	  	 	 	  	 	 	  	 	 	  	 	 	
Net income	  	$	6,358	  	$	4,783	  	$	11,846	  	$	8,627	
	  	 	 	  	 	 	  	 	 	  	 	 	
Net income per common share:	  			  			  			  			
Basic	  	$	0.38	  	$	0.29	  	$	0.70	  	$	0.53	
	  	 	 	  	 	 	  	 	 	  	 	 	
Diluted	  	$	0.37	  	$	0.28	  	$	0.67	  	$	0.51	
	  	 	 	  	 	 	  	 	 	  	 	 	
Weighted average number of common shares outstanding:	  			  			  			  			
Basic	  	 	16,740	  	 	16,401	  	 	17,028	  	 	16,209	
	  	 	 	  	 	 	  	 	 	  	 	 	
Diluted	  	 	17,303	  	 	17,213	  	 	17,599	  	 	16,957	
	  	 	 	  	 	 	  	 	 	  	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
 
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CAPELLA EDUCATION COMPANY
Consolidated Statements of Cash Flows
(In thousands)

 	  	Six Months Ended
June 30,	 	
 	  	2008	 	 	2007	 	
 	  	(Unaudited)	 	
Operating activities	  				 				
Net income	  	$	11,846	 	 	$	8,627	 	
Adjustments to reconcile net income to net cash provided by operating activities:	  				 				
Provision for bad debts	  	 	2,469	 	 	 	1,605	 	
Depreciation and amortization	  	 	5,857	 	 	 	4,750	 	
Amortization of investment premium	  	 	942	 	 	 	15	 	
Asset impairment	  	 	11	 	 	 	31	 	
Gain realized on sale of marketable securities	  	 	(216	)	 	 	—  	 	
Stock-based compensation	  	 	2,421	 	 	 	1,732	 	
Excess tax benefits from stock-based compensation	  	 	(1,364	)	 	 	(2,025	)	
Deferred income taxes	  	 	(587	)	 	 	(417	)	
Changes in operating assets and liabilities:	  				 				
Accounts receivable	  	 	(3,764	)	 	 	(1,086	)	
Prepaid expenses and other current assets	  	 	6,571	 	 	 	1,539	 	
Accounts payable and accrued liabilities	  	 	(6,483	)	 	 	126	 	
Deferred rent	  	 	72	 	 	 	(317	)	
Deferred revenue	  	 	1,399	 	 	 	(586	)	
	  	 	 	 	 	 	 	 	
Net cash provided by operating activities	  	 	19,174	 	 	 	13,994	 	
Investing activities	  				 				
Capital expenditures	  	 	(7,058	)	 	 	(10,253	)	
Purchases of marketable securities	  	 	(72,255	)	 	 	(138,302	)	
Sales and maturities of marketable securities	  	 	54,496	 	 	 	128,212	 	
	  	 	 	 	 	 	 	 	
Net cash used in investing activities	  	 	(24,817	)	 	 	(20,343	)	
Financing activities	  				 				
Payments of capital lease obligations	  	 	—  	 	 	 	(1	)	
Excess tax benefits from stock-based compensation	  	 	1,364	 	 	 	2,025	 	
Proceeds from exercise of stock options	  	 	2,021	 	 	 	4,823	 	
Net proceeds from issuance of common stock	  	 	—  	 	 	 	11,041	 	
Repurchase of common stock	  	 	(50,000	)	 	 	—  	 	
	  	 	 	 	 	 	 	 	
Net cash (used in) provided by financing activities	  	 	(46,615	)	 	 	17,888	 	
	  	 	 	 	 	 	 	 	
Net (decrease) increase in cash and cash equivalents	  	 	(52,258	)	 	 	11,539	 	
Cash and cash equivalents at beginning of period	  	 	60,600	 	 	 	22,491	 	
	  	 	 	 	 	 	 	 	
Cash and cash equivalents at end of period	  	$	8,342	 	 	$	34,030	 	
	  	 	 	 	 	 	 	 	
Supplemental disclosures of cash flow information	  				 				
Income taxes paid	  	$	1,843	 	 	$	3,863	 	
	  	 	 	 	 	 	 	 	
Noncash transactions:	  				 				
Purchase of equipment included in accounts payable and accrued liabilities	  	$	951	 	 	$	1,047	 	
	  	 	 	 	 	 	 	 	
Retirement of equipment financed through capital lease obligations	  	$	—  	 	 	$	11	 	
	  	 	 	 	 	 	 	 	
The accompanying notes are an integral part of these consolidated financial statements.
 
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CAPELLA EDUCATION COMPANY
Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
1. Nature of Business
Capella Education Company (the Company) was incorporated on December 27, 1991. Through its wholly-owned subsidiary, Capella University (the University), the Company manages its business on the basis of one reportable segment. The University is an online post-secondary education services company that offers a variety of bachelor’s, master’s and doctoral degree programs primarily delivered to working adults. Capella University is accredited by The Higher Learning Commission and is a member of the North Central Association of Colleges and Schools (NCA).
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and the University, after elimination of all intercompany accounts and transactions.
Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (2007 Annual Report on Form 10-K).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Contingencies
The Company accrues for costs associated with contingencies including, but not limited to, regulatory compliance and legal matters when such costs are probable and reasonably estimable. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved. The Company bases these accruals on management’s best estimate of such costs, which may vary from the ultimate cost and expenses associated with any such contingency.
Recently Adopted Financial Accounting Pronouncements
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement No. 157 (FAS 157), Fair Value Measurements, on January 1, 2008. FAS 157 defines fair value, establishes a framework for measuring fair value in Generally Accepted Accounting Principles (GAAP), and expands disclosures about fair value measurements. The implementation of this Statement was not material to the Company’s consolidated financial position or results of operations.
3. Net Income Per Common Share
Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share increases the shares used in the per share calculation by the dilutive effects of options and restricted stock.
The table below is a reconciliation of the numerator and denominator in the basic and diluted net income per common share calculation.
 
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 	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
 	  	2008	  	2007	  	2008	  	2007	
Numerator:	  			  			  			  			
Net income	  	$	6,358	  	$	4,783	  	$	11,846	  	$	8,627	
Denominator:	  			  			  			  			
Denominator for basic net income per common share – weighted average shares outstanding	  	 	16,740	  	 	16,401	  	 	17,028	  	 	16,209	
Effect of dilutive stock options and restricted stock	  	 	563	  	 	812	  	 	571	  	 	748	
	  	 	 	  	 	 	  	 	 	  	 	 	
Denominator for diluted net income per common share	  	 	17,303	  	 	17,213	  	 	17,599	  	 	16,957	
	  	 	 	  	 	 	  	 	 	  	 	 	
Basic net income per common share	  	$	0.38	  	$	0.29	  	$	0.70	  	$	0.53	
Diluted net income per common share	  	$	0.37	  	$	0.28	  	$	0.67	  	$	0.51	
Options to purchase 152 and 36 common shares, respectively, were outstanding but not included in the computation of diluted net income per common share in the three months ended June 30, 2008 and 2007, respectively, because their effect would be antidilutive. Options to purchase 124 and 24 common shares, respectively, were outstanding but not included in the computation of diluted net income per common share in the six months ended June 30, 2008 and 2007, respectively, because their effect would be antidilutive.
4. Accrued Liabilities
Accrued liabilities consist of the following:

 	  	As of
June 30,
2008	  	As of
December 31,
2007	
Accrued compensation and benefits	  	$	4,755	  	$	8,879	
Accrued instructional fees	  	 	2,221	  	 	4,767	
Accrued vacation	  	 	1,697	  	 	1,032	
Customer deposits	  	 	1,756	  	 	1,658	
Other	  	 	7,643	  	 	7,490	
	  	 	 	  	 	 	
	  	$	18,072	  	$	23,826	
	  	 	 	  	 	 	
5. Operating Lease Obligations
The Company leases its office facilities and certain office equipment under various noncancelable operating leases. Effective March 17, 2008, the Company entered into an amendment of its current lease with Minneapolis 225 Holdings, LLC pursuant to which the Company will renew and expand its existing lease premises at 225 South Sixth Street in Minneapolis, Minnesota through 2015.
Future minimum lease commitments under the leases as of June 30, 2008, are as follows:

 	  	Operating	
2008	  	$	1,633	
2009	  	 	4,002	
2010	  	 	4,574	
2011	  	 	5,097	
2012	  	 	5,250	
2013 and thereafter	  	 	15,734	
	  	 	 	
Total	  	$	36,290	
	  	 	 	
The Company recognizes rent expense on a straight-line basis over the term of the leases, although the leases may include escalation clauses that provide for lower rent payments at the start of the lease term and higher lease payments at the end of the lease term. Cash or lease incentives received from lessors are recognized on a straight-line basis as a reduction to rent from the date the Company takes possession of the property through the end of the lease term. The Company records the unamortized portion of the incentive as a part of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.
6. Litigation
In the ordinary conduct of business, the Company is subject to various lawsuits and claims covering a wide range of matters, including, but not limited to, claims involving learners or graduates and routine employment matters. The Company does not believe that the outcome of any pending claims will have a material adverse impact on its consolidated financial position or results of operations.
 
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7. Common Stock
On March 3, 2008, the Company announced that its Board of Directors had authorized the Company to repurchase up to $50,000 of shares of common stock with no expiration date. As of June 30, 2008, the Company had repurchased 858 shares for total consideration of $50,000.
8. Stock-Based Compensation
The table below reflects our stock-based compensation expense recognized in the consolidated statements of income for the three and six months ended June 30, 2008 and 2007:

 	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
 	  	2008	  	2007	  	2008	  	2007	
Instructional costs and services	  	$	458	  	$	337	  	$	790	  	$	587	
Marketing and promotional	  	 	265	  	 	205	  	 	464	  	 	328	
General and administrative	  	 	656	  	 	506	  	 	1,167	  	 	817	
	  	 	 	  	 	 	  	 	 	  	 	 	
Stock-based compensation expense included in operating income	  	 	1,379	  	 	1,048	  	 	2,421	  	 	1,732	
Tax benefit	  	 	421	  	 	267	  	 	705	  	 	417	
	  	 	 	  	 	 	  	 	 	  	 	 	
Stock-based compensation expense, net of tax	  	$	958	  	$	781	  	$	1,716	  	$	1,315	
	  	 	 	  	 	 	  	 	 	  	 	 	
The tables below summarize stock option activity and other stock option information for the periods indicated:

Service-based Stock Options	  	Available
for Grant	 	 	Plan Options
Outstanding	 	 	Weighted-
Average
Exercise Price
per Share	
	  			 	Incentive	 	 	Non-Qualified	 	 		
Balance, December 31, 2007	  	1,795	 	 	505	 	 	768	 	 	$	23.24	
Granted	  	(98	)	 	—  	 	 	98	 	 	 	60.96	
Exercised	  	—  	 	 	(79	)	 	(32	)	 	 	17.08	
Canceled	  	21	 	 	(6	)	 	(17	)	 	 	30.06	
	  	 	 	 	 	 	 	 	 	 			
Balance, June 30, 2008	  	1,718	 	 	420	 	 	817	 	 	 	26.66	

Performance-based Stock Options	  	 	 	 	 	 	 	 	 	 	 	
Balance, December 31, 2007	  			 	—  	 	 	50	 	 	$	20.00	
Exercised	  			 	—  	 	 	(6	)	 	 	20.00	
	  			 	 	 	 	 	 	 			
Balance, June 30, 2008	  			 	—  	 	 	44	 	 	 	20.00	
	  			 	 	 	 	 	 	 			
The outstanding performance-based stock options had a weighted-average remaining contractual life of 7.6 years and an aggregate intrinsic value of $1,727 at June 30, 2008.

Service-based Stock Options	  	Number of
Shares	  	Weighted-
Average
Exercise
Price	  	Weighted-
Average
Remaining
Contractual
Term	  	Aggregate
Intrinsic
Value	
Balance at June 30, 2008	  	1,237	  	$	26.66	  	6.3	  	$	41,496	
Vested and expected to vest, June 30, 2008	  	1,191	  	$	26.35	  	6.3	  	$	40,309	
Exercisable, June 30, 2008	  	525	  	$	19.28	  	5.8	  	$	21,288	
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on June 30, 2008 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2008. The amount of aggregate intrinsic value will change based on the fair market value of the Company’s stock.
 
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Restricted stock activity for the three months ended June 30, 2008 is summarized as follows:

Restricted Stock	  	Number
of Shares	  	Weighted-
Average
Grant Date
Fair Value
per Share	
Balance, December 31, 2007	  	1	  	$	51.69	
Granted	  	4	  	 	53.69	
Vested	  	—  	  	 	—  	
Forfeited	  	—  	  	 	—  	
	  	 	  			
Balance, June 30, 2008	  	5	  	$	53.26	
	  	 	  			
The following table summarizes information regarding all stock option exercises for the periods indicated:

 	  	Three Months Ended
June 30,	  	Six Months Ended
June 30,	
 	  	2008	  	2007	  	2008	  	2007	
Proceeds from stock options exercised	  	$	1,383	  	$	4,494	  	$	2,021	  	$	4,823	
Tax benefits related to stock options exercised	  	 	1,013	  	 	2,774	  	 	1,447	  	 	2,869	
Intrinsic value of stock options exercised	  	 	3.340	  	 	7,856	  	 	5,002	  	 	8,333	
Intrinsic value of stock options exercised is estimated by taking the difference between the Company’s closing stock price on the date of exercise and the exercise price, multiplied by the number of options exercised for each option holder and then aggregated.
As of June 30, 2008, total compensation cost related to nonvested service-based stock options not yet recognized was $8,176, which is expected to be recognized over the next 25 months on a weighted-average basis.
9. Fair Value Measurements
The following table summarizes certain fair value information at June 30, 2008 for assets and liabilities measured at fair value on a recurring basis:

 	  	 	  	Fair Value Measurements Using	
Description	  	Fair Value	  	Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)	  	Significant
Other
Observable
Inputs
(Level 2)	  	Significant
Unobservable
Inputs
(Level 3)	
Cash and cash equivalents	  	$	8,342	  	$	8,342	  	$	—  	  	$	—  	
Marketable securities – Municipals	  	$	98,932	  	$	—  	  	$	98,932	  	$	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	107,274	  	$	8,342	  	$	98,932	  	$	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
10. Regulatory Supervision and Oversight
The University is subject to extensive regulation by federal and state governmental agencies and accrediting bodies. In particular, the Higher Education Act (HEA) and the regulations promulgated thereunder by the U.S. Department of Education (DOE) subject the University to significant regulatory scrutiny on the basis of numerous standards that schools must satisfy to participate in the various types of federal learner financial assistance under Title IV Programs.
To participate in the Title IV Programs, an institution must be authorized to offer its programs of instruction by the relevant agencies of the state in which it is located, accredited by an accrediting agency recognized by the DOE and certified as eligible by the DOE. The DOE will certify an institution to participate in the Title IV Programs only after the institution has demonstrated compliance with the HEA and the DOE’s extensive academic, administrative, and financial regulations regarding institutional eligibility. An institution must also demonstrate its compliance with these requirements to the DOE on an ongoing basis.
The Company performs periodic reviews of its compliance with the various applicable regulatory requirements. The Company has not been notified by any of the various regulatory agencies of any significant noncompliance matters that would adversely impact its ability to participate in Title IV programs, however, the Office of Inspector General (OIG) has conducted a compliance audit of Capella University. The audit commenced on April 10, 2006 and the Company subsequently
 
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provided the OIG with periodic information, responded to follow up inquiries and facilitated site visits and access to the Company’s records. The OIG completed its field work in January 2007 and the Company received a draft audit report on August 23, 2007. Capella University provided written comments on the draft audit report to the OIG on September 25, 2007. On March 7, 2008, the OIG’s final report was issued to the Acting Chief Operating Officer (COO) for Federal Student Aid (FSA), which is responsible for primary oversight of the Title IV funding programs. The Company responded to the final report on April 8, 2008. The FSA will subsequently issue final findings and requirements for Capella University. The FSA may take certain actions, including requiring that we refund certain federal student aid funds, requiring us to modify our Title IV administration procedures, and/or requiring us to pay fines or penalties.
Based on the final audit report, the most significant potential financial exposure pertains to repayments to the Department of Education that could be required if the FSA concludes that Capella University did not properly calculate the amount of Title IV funds required to be returned for learners that withdrew without providing an official notification of such withdrawal and without engaging in academic activity prior to such withdrawal. If it is determined that Capella University improperly withheld any portion of these funds, Capella University would be required to return the improperly withheld funds. For the three year audit period, and for the 2005-2006 aid year, the Company estimates that the total amount of Title IV funds not returned for learners who withdrew without providing official notification was less than $1,000 including interest, but not including fines and penalties.
Political and budgetary concerns significantly affect the Title IV Programs. Congress reauthorizes the HEA and other laws governing Title IV Programs approximately every five to eight years. The last reauthorization of the HEA was completed in 1998. Although the process for reauthorization of the HEA is underway, there is no assurance on when or if it will be completed. Because reauthorization has not yet been completed in a timely manner, Congress has extended the current provisions of the HEA through August 15, 2008, and it is expected to be reauthorized prior to that time. Additionally, Congress reviews and determines appropriations for Title IV programs on an annual basis through the budget and appropriations processes. As of June 30, 2008, programs in which the Capella University’s learners participate are operative and sufficiently funded.
11. Subsequent Event
On July 30, 2008, the Company’s Board of Directors authorized the Company to repurchase up to $60,000 of shares of common stock with no expiration date.
 
 Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report.
Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, statements regarding: proposed new programs; regulatory developments; projections, predictions, expectations, estimates or forecasts as to our business, financial and operational results and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in future tense, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as updated in our subsequent reports filed with the SEC, including any updates found in Part II, Item 1A of this report on Form 10-Q. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which
 
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such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the Securities and Exchange Commission (SEC).
Overview
Background
We are an exclusively online post-secondary education services company. Our wholly owned subsidiary, Capella University, is a regionally accredited university that offers a variety of undergraduate and graduate degree programs primarily for working adults. At June 30, 2008, we offered over 950 courses and 19 degree programs with 104 specializations at the undergraduate and graduate levels to more than 23,700 learners.
We were founded in 1991, and in 1993 we established our wholly owned university subsidiary, then named The Graduate School of America, to offer doctoral and master’s degrees through distance learning programs in management, education, human services and interdisciplinary studies. In 1995, we launched our online format for delivery of our doctoral and master’s degree programs over the Internet. In 1997, our university subsidiary received accreditation from the North Central Association of Colleges and Schools (later renamed The Higher Learning Commission of the North Central Association of Colleges and Schools). In 1998, we began the expansion of our original portfolio of academic programs by introducing doctoral and master’s degrees in psychology and a master of business administration degree. In 1999, to expand the reach of our brand in anticipation of moving into the bachelor’s degree market, we changed our name to Capella Education Company and the name of our university to Capella University. In 2000, we introduced our bachelor’s degree completion program in information technology, which provided instruction for the last two years of a four-year bachelor’s degree. In 2001, we introduced our bachelor’s degree completion program in business. In 2004, we introduced our four-year bachelor’s degree programs in business and information technology, as well as three master’s-level specializations in education targeted at K-12 teachers. In November 2006, we completed an initial public offering of our common stock. In May 2007, we completed a follow-on offering of our common stock. Additionally, during 2007, we introduced six new degree programs and 31 new specializations, including our first ever specializations in Public Safety and nine new PhD specializations. During the first half of 2008, we completed a $50 million stock repurchase program and Capella University’s accreditation was reaffirmed by The Higher Learning Commission (HLC). We implemented an enterprise resource planning (ERP) system from 2006 through 2008. The final module was implemented in July 2008. We have introduced eight new specializations and two new programs through July 2008.
Critical Accounting Policies and Use of Estimates
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007. During the six months  ended June 30, 2008, there have been no significant changes in our critical accounting policies.
Results of Operations
The following table sets forth statements of operations data as a percentage of revenues for each of the periods indicated:

 	  	Three Months Ended
June 30,	 	 	Six Months Ended
June 30,	 	
 	  	2008	 	 	2007	 	 	2008	 	 	2007	 	
Revenues	  	100.0	%	 	100.0	%	 	100.0	%	 	100.0	%	
Costs and expenses:	  			 			 			 			
Instructional costs and services	  	46.7	 	 	45.6	 	 	45.6	 	 	45.1	 	
Marketing and promotional	  	29.6	 	 	31.3	 	 	31.2	 	 	32.9	 	
General and administrative	  	10.6	 	 	12.0	 	 	11.2	 	 	11.7	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Total costs and expenses	  	86.9	 	 	88.9	 	 	88.0	 	 	89.7	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Operating income	  	13.1	 	 	11.1	 	 	12.0	 	 	10.3	 	
Other income, net	  	1.5	 	 	2.1	 	 	1.8	 	 	2.1	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Income before income taxes	  	14.6	 	 	13.2	 	 	13.8	 	 	12.4	 	
Income tax expense	  	5.0	 	 	4.3	 	 	4.8	 	 	4.3	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	9.6	%	 	8.9	%	 	9.0	%	 	8.1	%	

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Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Revenues. Our revenues for the three months ended June 30, 2008 were $66.0 million, representing an increase of $12.1 million, or 22.5%, as compared to $53.9 million for the three months ended June 30, 2007. This increase was primarily driven by 19.3 percentage points from increased enrollments and 4.5 percentage points from the impact of pricing increases, partially offset by a 0.6 percentage point decrease from a larger proportion of master’s and bachelor’s learners, who generated less revenue per learner than our doctoral learners. End-of-period enrollment increased 19.0% in 2008 compared to 2007. Tuition increases in 2007 generally ranged from 3% to 6% and were implemented in July 2007.
Instructional costs and services expenses. Our instructional costs and services expenses for the three months ended June 30, 2008 were $30.8 million, representing an increase of $6.3 million, or 25.4%, as compared to $24.6 million for the three months ended June 30, 2007. This increase was primarily due to increases in instructional pay and learner support services resulting from increased enrollments. In addition, we had greater learner support services and depreciation expenses as a result of our ERP implementation. Information technology expenses increased as a result of a higher mix of expensed versus capitalized software projects in 2008 compared to 2007. Finally, colloquia and graduation expenses increased due to greater attendance at these events in the second quarter.
Our instructional costs and services expenses as a percentage of revenues increased by 1.1 percentage points to 46.7% for the three months ended June 30, 2008, from 45.6% for the three months ended June 30, 2007. This increase was primarily due to increases in learner support services and depreciation expenses as a result of our ERP implementation; an increase in information technology expenses related to a higher mix of expensed versus capitalized software projects in 2008 compared to 2007; and an increase in expenses related to a faculty development event which took place during the second quarter of 2008. These increases were partially offset by a decrease in the ratio between faculty compensation and revenue and a decrease in accrued bonus expense.
Marketing and promotional expenses. Our marketing and promotional expenses for the three months ended June 30, 2008 were $19.6 million, representing an increase of $2.7 million, or 16.2%, as compared to $16.9 million for the three months ended June 30, 2007. This increase was driven by greater spending in online media and recruitment staffing. Our marketing and promotional expenses as a percentage of revenues decreased by 1.7 percentage points to 29.6% for the three months ended June 30, 2008, from 31.3% for the three months ended June 30, 2007. This decline as a percent of revenues was planned, and reflects a combination of a greater percentage of expected annual new enrollment marketing spending in the second quarter of 2007 compared to 2008, alignment of lead generation with the capacity of our enrollment counselors, marketing efficiencies across total enrollments, and a decrease in accrued bonus expense.
General and administrative expenses. Our general and administrative expenses for the three months ended June 30, 2008 were $7.0 million, representing an increase of $0.5 million, or 6.9%, as compared to $6.5 million for the three months ended June 30, 2007. This increase was driven by increased investments in infrastructure to support current and future growth, as well as an increase in bad debt expense due to short term disruptions in our collection efforts and temporarily increased credit limits granted to select learners who had experienced billing issues resulting from the ERP implementation. These increases were partially offset by a decrease in accrued bonus expense and information technology expenses as there were fewer employees dedicated to the ERP system implementation. We anticipate a severance charge of $0.7 million to $0.8 million for the three months ended September 30, 2008.
Our general and administrative expenses as a percentage of revenues were 10.6%, a decrease of 1.4 percentage points for the three months ended June 30, 2008, compared to 12.0% for the three months ended June 30, 2007. This decrease was driven by a decrease in accrued bonus expense and information technology expenses as there were fewer employees dedicated to the ERP system implementation. This decrease was partially offset by increased legal costs incurred in the normal course of our business and an increase in bad debt expense due to short term disruptions in our collection efforts and temporarily increased credit limits granted to select learners who had experienced billing issues resulting from the ERP implementation.
Other income, net. Other income, net decreased by $0.1 million, or 11.0%, to $1.0 million for the three months ended June 30, 2008, from $1.1 million for the three months ended June 30, 2007. The decrease was principally due to a decrease in interest income levels from lower interest rates earned in 2008 partially offset by higher average cash and marketable securities balances.
 
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Income tax expense. We recognized tax expense for the three months ended June 30, 2008 and 2007 of $3.3 million and $2.3 million, respectively, or at effective tax rates of 34.3% and 32.6%, respectively. The increase in our effective tax rate in the second quarter of 2008 from 2007 reflects a decrease in the impact of tax-exempt interest, an increase in the impact of non-deductible meals and entertainment expenses, and a slight increase in our state effective tax rate.
Net income. Net income was $6.4 million for the three months ended June 30, 2008, compared to net income of $4.8 million for the three months ended June 30, 2007, an increase of $1.6 million, because of the factors discussed above.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Revenues. Our revenues for the six months ended June 30, 2008 were $131.3 million, representing an increase of $24.6 million, or 23.0%, as compared to $106.7 million for the six months ended June 30, 2007. This increase was primarily driven by 19.7 percentage points from increased enrollments and 4.5 percentage points from tuition increases, partially offset by a 0.8 percentage point decrease from a larger proportion of master’s and bachelor’s learners, who generated less revenue per learner than our doctoral learners. End-of-period enrollment increased 19.0% in 2007 compared to 2006. Tuition increases in 2007 generally ranged from 3% to 6% and were implemented during July 2007.
Instructional costs and services expenses. Our instructional costs and services expenses for the six months ended June 30, 2008 were $59.9 million, representing an increase of $11.8 million, or 24.4%, as compared to $48.1 million for the six months ended June 30, 2007. This increase was primarily due to increases in instructional pay and learner support services resulting from increased enrollments. In addition, we had greater learner support services and depreciation expenses as a result of our ERP implementation. Information technology expenses increased as a result of a higher mix of expensed versus capitalized software projects in 2008 compared to 2007.
Our instructional costs and services expenses as a percentage of revenues increased by 0.5 percentage points to 45.6% for the six months ended June 30, 2008, as compared to 45.1% for the six months ended June 30, 2007. This increase was primarily due to increases in learner support services and depreciation expenses as a result of our ERP implementation and an increase in information technology expenses related to a higher mix of expensed versus capitalized software projects in 2008 compared to 2007. These increases were partially offset by a decrease in the ratio between faculty compensation and revenue and a decrease in accrued bonus expense.
Marketing and promotional expenses. Our marketing and promotional expenses for the six months ended June 30, 2008 were $41.0 million, representing an increase of $5.8 million, or 16.5%, as compared to $35.2 million for the six months ended June 30, 2007. This increase was driven by greater spending in online media and recruitment staffing. Our marketing and promotional expenses as a percentage of revenues decreased by 1.7 percentage points to 31.2% for the six months ended June 30, 2008, from 32.9% for the six months ended June 30, 2007. This decline as a percent of revenues was planned, and reflects a combination of a greater percentage of expected annual new enrollment marketing spending in the first half of 2007 compared to 2008, alignment of lead generation with the capacity of our enrollment counselors, marketing efficiencies across total enrollments, and a decrease in accrued bonus expense.
General and administrative expenses. Our general and administrative expenses for the six months ended June 30, 2008 were $14.7 million, representing an increase of $2.2 million or 17.6%, as compared to $12.5 million for the six months ended June 30, 2007. This increase was driven by increased investments in infrastructure to support current and future growth, and an increase in bad debt expense due to short term disruptions in our collection efforts and temporarily increased credit limits granted to select learners who had experienced billing issues resulting from the ERP implementation. These increases were partially offset by a decrease in accrued bonus expense.
Our general and administrative expenses as a percentage of revenues were 11.2%, a decrease of 0.5 percentage points for the six months ended June 30, 2008, compared to 11.7% for the six months ended June 30, 2007. This decrease was primarily due to a decrease in accrued bonus expense partially offset by an increase in bad debt expense due to short term disruptions in our collection efforts and temporarily increased credit limits granted to select learners who had experienced billing issues resulting from the ERP implementation.
Other income, net. Other income, net increased by $0.2 million, or 7.8%, to $2.4 million for the six months ended June 30, 2008, from $2.2 million for the six months ended June 30, 2007. The increase was primarily due to increased levels of interest income on higher average cash and marketable securities balances, partially offset by lower interest rates in 2008.
 
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Income tax expense. We recognized tax expense for the six months ended June 30, 2008 and 2007 of $6.3 million and $4.6 million, respectively, or at effective tax rates of 34.8% and 34.6%, respectively.
Net income. Net income was $11.8 million for the six months ended June 30, 2008, compared to net income of $8.6 million for the six months ended June 30, 2007, an increase of $3.2 million, because of the factors discussed above.
Liquidity and Capital Resources
Liquidity
We financed our operating activities and capital expenditures during the six months ended June 30, 2008 and 2007 primarily through cash provided by operating activities. Our cash, cash equivalents and marketable securities were $107.3 million and $143.8 million at June 30, 2008 and December 31, 2007, respectively. Our cash, cash equivalents and marketable securities decreased primarily due to the share repurchase program announced in March 2008. This repurchase program was completed in the second quarter of 2008 and, as of June 30, 2008, we had repurchased 0.9 million shares for total consideration of $50.0 million. On July 30, 2008, our Board of Directors authorized us to repurchase up to $60.0 million of shares of common stock with no expiration date.
We had a higher cash and cash equivalents balance at the beginning of 2008 due to cash received from stock option exercises and redemption of certain securities converted to cash and cash equivalents in light of market conditions, which occurred during the fourth quarter of 2007. During the first half of 2008, some of this cash and cash equivalents balance was used to purchase marketable securities as well as to fund the share repurchase program.
In August 2004, we entered into an unsecured $10.0 million line of credit with Wells Fargo Bank. The line of credit expires on June 30, 2009. There have been no borrowings under this line of credit at June 30, 2008 or December 31, 2007.
A significant portion of our revenues are derived from Title IV programs. Federal regulations dictate the timing of disbursements under Title IV programs. Learners must apply for new loans and grants each academic year, which started July 1, 2008. Loan funds are generally provided by lenders in multiple disbursements for each academic year. The disbursements are usually received by the start of the second week of the term. These factors, together with the timing of our learners beginning their programs, affect our operating cash flow.
Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash, cash equivalents and marketable securities, will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future.
Operating Activities
Net cash provided by operating activities was $19.2 million and $14.0 million for the six months ended June 30, 2008 and 2007, respectively. The increase from 2007 to 2008 was primarily due to a $3.2 million increase in net income, a $2.0 million increase in depreciation and bad debt expense, and lower tax payments due to timing. This was offset by a decrease in cash from operating assets and liabilities.
Investing Activities
Our cash used in investing activities is primarily related to the purchase of property and equipment and investments in marketable securities. Net cash used in investing activities was $24.8 million and $20.3 million for the six months ended June 30, 2008 and 2007, respectively. Investments in marketable securities consist primarily of purchases, sales and maturities of taxable or tax-exempt municipal securities.
Net purchases of these securities were $17.8 million and $10.1 million during the six months ended June 30, 2008 and 2007, respectively. This increase was driven by lower sales of marketable securities due to the higher cash and cash equivalents balance at December 31, 2007 than December 31, 2006, as we did not require additional sales of securities to fund our normal operations and the share repurchase program. Capital expenditures were $7.1 million and $10.3 million for the six months ended June 30, 2008 and 2007, respectively. The decrease from 2007 was primarily due to the higher mix of capitalized work performed on the ERP system in 2007 to complete the implementation in 2008.
We lease all of our facilities. We expect to make future payments on existing leases from cash generated from operations. Effective March 17, 2008, we entered into an amendment of our current lease with Minneapolis 225 Holdings, LLC pursuant to which we will renew and expand our existing lease premises at 225 South Sixth Street in Minneapolis, Minnesota through 2015.
 
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Financing Activities
Net cash used in financing activities was $46.6 million for the six months ended June 30, 2008, and net cash provided by financing activities was $17.9 million for the six months ended June 30, 2007. Financing activities during the six months ended June 30, 2008 were primarily related to the repurchase of common stock in the amount of $50.0 million, partially offset by $2.0 million in proceeds from stock option exercises and $1.4 million in excess tax benefits from stock option exercises. Financing activities during the six months ended June 30, 2007 were primarily related to proceeds of $11.0 million from the issuance of common stock in our May 2007 follow-on offering, $4.8 million in proceeds from stock option exercises and $2.0 million in excess tax benefits.
Contractual Obligations
The following table sets forth, as of June 30, 2008, the aggregate amounts of our significant contractual obligations and commitments with definitive payment terms due in each of the periods presented (in thousands):

 	  	Payments Due by Period	
 	  	Total	  	Less than
1 Year	  	1-3 Years	  	3-5 Years	  	More than
5 Years	
Operating leases (a)	  	$	36,290	  	$	1,633	  	$	8,576	  	$	10,347	  	$	15,734	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total contractual obligations	  	$	36,290	  	$	1,633	  	$	8,576	  	$	10,347	  	$	15,734	

(a)	Minimum lease commitments for our headquarters and miscellaneous office equipment. Effective March 17, 2008, we entered into an amendment of our current lease with Minneapolis 225 Holdings, LLC pursuant to which we will renew and expand our existing lease premises at 225 South Sixth Street in Minneapolis, Minnesota through 2015.	
Regulation and Oversight
We perform periodic reviews of our compliance with the various applicable regulatory requirements. We have not been notified by any of the various regulatory agencies of any significant noncompliance matters that would adversely impact its ability to participate in Title IV programs, however, the Office of Inspector General (OIG) has conducted a compliance audit of Capella University. The audit commenced on April 10, 2006 and we subsequently provided the OIG with periodic information, responded to follow up inquiries and facilitated site visits and access to the Company’s records. The OIG completed its field work in January 2007 and the Company received a draft audit report on August 23, 2007. Capella University provided written comments on the draft audit report to the OIG on September 25, 2007. On March 7, 2008, the OIG’s final report was issued to the Acting Chief Operating Officer (COO) for Federal Student Aid (FSA), which is responsible for primary oversight of the Title IV funding programs. We responded to the final report on April 8, 2008. The FSA will subsequently issue final findings and requirements for Capella University. The FSA may take certain actions, including requiring that we refund certain federal student aid funds, requiring us to modify our Title IV administration procedures, and/or requiring us to pay fines or penalties.
Based on the final audit report, the most significant potential financial exposure pertains to repayments to the Department of Education that could be required if the FSA concludes that Capella University did not properly calculate the amount of Title IV funds required to be returned for learners that withdrew without providing an official notification of such withdrawal and without engaging in academic activity prior to such withdrawal. If it is determined that Capella University improperly withheld any portion of these funds, Capella University would be required to return the improperly withheld funds. For the three year audit period, and for the 2005-2006 aid year, we estimate that the total amount of Title IV funds not returned for learners who withdrew without providing official notification was less than $1.0 million, including interest, but not including fines and penalties.
 
 Item 3.	Quantitative and Qualitative Disclosures About Market Risk	
Market Risk
We have no derivative financial instruments or derivative commodity instruments. We believe the risk related to marketable securities is limited due to the adherence to our investment policy that requires marketable securities to have a minimum Standard & Poor’s rating of A minus (or equivalent). All of our marketable securities as of June 30, 2008 and December 31, 2007 consisted of cash equivalents and marketable securities rated A minus or higher.
 
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Interest Rate Risk
We manage interest rate risk by investing excess funds in cash equivalents and marketable securities bearing a combination of fixed and variable interest rates, which are tied to various market indices. Our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. At June 30, 2008, a 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows related to investments in cash equivalents or interest earning marketable securities.
 
 Item 4.	Controls and Procedures	
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our chief executive officer and chief financial officer concluded that the company’s disclosure controls and procedures are effective, as of June 30, 2008, in ensuring that material information relating to us required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
In 2008, we completed the implementation of our ERP system designed to increase the efficiency of processing transactions and to produce more accurate and timely information for our learner-facing departments.
Except for the preceding change, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially  affect, our internal control over financial reporting.
 PART II – OTHER INFORMATION
 
 Item 1.	Legal Proceedings	
From time to time, we are a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business. We are not at this time a party, as plaintiff or defendant, to any legal proceedings which, individually or in the aggregate, would be expected to have a material adverse effect on our business, financial condition or results of operation.
 
 Item 1A.	Risk Factors	
Other than with respect to the risk factor below, there have been no material changes to the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2007, as updated in our Quarterly Report of Form 10-Q for the quarter ended March 31, 2008. The risk factor entitled “ System disruptions and vulnerability from security risks to our online computer networks could impact our ability to generate revenue and damage the reputation of Capella University, limiting our ability to attract and retain learners. We are currently migrating to a new enterprise resource planning system, and unplanned costs and decreases in productivity could adversely impact our financial results ” is revised by adding the following as a new sentence at the end of the second paragraph of the risk factor:
Following installation of our enterprise resource planning system, we may experience difficulties in using the system and our learners and prospective learners may have difficulties using and accepting the system and related new processes. Such difficulties could have a material adverse effect on our enrollment and financial results.
 
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 Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended June 30, 2008, the Company used $28.2 million to repurchase shares of common stock under its repurchase program (1) . The Company had no remaining authorization for common stock repurchases at June 30, 2008, as the $50.0 million share repurchase program was completed. On July 30, 2008, our Board of Directors authorized us to repurchase up to $60.0 million of shares of common stock with no expiration date.
A summary of the Company’s share repurchases during the quarter is set forth below:

Period	  	Total Number of
Shares Purchased	  	Average Price Paid
per Share	  	Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs	  	Approximate Dollar
Value of Shares That
May Yet Be
Purchased Under the
Plans or Programs	
4/1/2008 to 4/30/2008	  	263,792	  	$	60.11	  	263,792	  	$	12,392,269	
5/1/2008 to 5/31/2008	  	134,392	  	$	61.52	  	134,392	  	$	4,124,278	
6/1/2008 to 6/30/2008	  	66,747	  	$	61.79	  	66,747	  	$	—  	
	  	 	  	 	 	  	 	  	 	 	
Total	  	464,931	  	$	60.76	  	464,931	  	$	—  	

(1)	The Company’s repurchase program was announced on March 3, 2008 for repurchases up to an aggregate amount of $50.0 million in value of common stock with no expiration date. As of June 30, 2008, we had purchased 858,443 shares under this program at an average price of $58.24 totaling $50.0 million. Cash spent during the second quarter on the purchase of shares totaled $31.7 million. The amount of cash expended includes $3.5 million for shares purchased March 27, March 28, and March 31, 2008, but due to timing the cash payments for these purchases were made April 1, April 2, and April 3, 2008, respectively.	
 
 Item 3.	Defaults Upon Senior Securities	
None.
 
 Item 4.	Submission of Matters to a Vote of Security Holders	
At our Annual Meeting of Shareholders held on May 13, 2008, shareholders voted on the following proposals:
1. Election of Directors:

 	  	For	  	Withhold	
Mark N. Greene	  	16,195,365	  	240,463	
Jody G. Miller	  	16,361,161	  	74,667	
James A. Mitchell	  	16,362,297	  	73,531	
Stephen G. Shank	  	16,361,912	  	73,916	
Andrew M. Slavitt	  	16,318,640	  	117,188	
David W. Smith	  	16,362,257	  	73,571	
Jeffrey W. Taylor	  	16,318,757	  	117,071	
Sandra E. Taylor	  	16,361,627	  	74,201	
Darrell R. Tukua	  	16,361,642	  	74,186	
2. To approve the Capella Education Company Annual Incentive Plan.
 
17

Table of Contents

For	  	Against	  	Abstain	  	Broker Non-Vote	
16,039,720	  	375,468	  	20,640	  	—  	
3. To ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending December 31, 2008.

For	  	Against	  	Abstain	  	Broker Non-Vote	
16,168,408	  	239,999	  	27,421	  	—  	
There were 17,200,801 shares of our common stock entitled to vote at the meeting, and a total of 16,435,828 shares (95.55%) were represented at the meeting.
 
 Item 5.	Other Information	
None.
 
 Item 6.	Exhibits	
(a) Exhibits

Number	  	Description	  	Method of Filing	
3.1	  	Amended and Restated Articles of Incorporation.	  	Incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed with the
SEC on November 11, 2006.	
			
3.2	  	Amended and Restated By-Laws.	  	Incorporated by reference to Exhibit 3.4 to Amendment
No. 3 to the Company’s Registration Statement on
Form S-1 filed with the SEC on October 6, 2006.	
			
4.1	  	Specimen of common stock certificate.	  	Incorporated by reference to Exhibit 4.1 to Amendment
No. 4 to the Company’s Registration Statement on
Form S-1 filed with the SEC on October 19, 2006.	
			
10.1	  	Capella Education Company Annual Incentive Bonus
Plan	  	Filed electronically.	
			
31.1	  	Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.	  	Filed electronically.	
			
31.2	  	Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.	  	Filed electronically.	
			
32.1	  	Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.	  	Filed electronically.	
			
32.2	  	Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.	  	Filed electronically.	
 
18

Table of Contents
 SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

CAPELLA EDUCATION COMPANY	 		
		
/s/ S TEPHEN G. S HANK	 	July 31, 2008	
Stephen G. Shank	 		
Chairman and Chief Executive Officer	 		
(Principal Executive Officer)	 		
		
/s/ L OIS M. M ARTIN	 	July 31, 2008	
Lois M. Martin	 		
Senior Vice President and Chief	 		
Financial Officer (Principal Financial Officer)	 		
		
/s/ A MY L. R ONNEBERG	 	July 31, 2008	
Amy L. Ronneberg	 		
Vice President and Controller	 		
(Principal Accounting Officer)	 		
 
19

Exhibit 10.1
CAPELLA EDUCATION COMPANY
ANNUAL INCENTIVE BONUS PLAN
1. Purpose. The purpose of the Capella Education Company Annual Incentive Bonus Plan (the “Plan”) is to provide incentives to eligible management employees of Capella Education Company (the “Company”) and any subsidiary to produce a superior return to the shareholders of the Company and to encourage such eligible management employees to remain in the employ of the Company or any subsidiary.
2. Definitions. The terms defined in this section are used (and capitalized) elsewhere in the Plan.
“Award” means an award payable to a Participant pursuant to Section 4 hereof.
“Board” means the Board of Directors of the Company.
“Code” means the Internal Revenue Code of 1986, as amended.
“Committee” means the Compensation Committee of the Board or such other Board committee as may be designated by the Board to administer the Plan, provided that for any Award made to the Company’s Chief Executive Officer, the Executive Committee of the Board shall serve as the Committee.
“Covered Employee” includes all Participants whose compensation in the Performance Period for which the Award is calculated is or, in the Compensation Committee’s discretion, may be subject to the compensation expense deduction limitations set forth in Section 162(m) of the Code.
“Disability” means any physical or mental incapacitation whereby a Participant is unable for a period of twelve consecutive months or for an aggregate of twelve months in any twenty-four consecutive month period to perform his or her duties for the Company or any subsidiary.
“Eligible Employee” means an individual who is regular status, works a minimum of half time (average of 40 hours per two-week pay period) and is considered a management level employee (functional leader or above) of the Company or a subsidiary thereof.
“Learner Satisfaction” refers to the specific determination of learner satisfaction as measured by a learner satisfaction survey conducted by the Company.

“Participant” means an Eligible Employee designated by the Committee to participate in the Plan for a designated Performance Period.
“Performance-Based Compensation” means an Award to a Covered Employee that is intended to constitute “performance-based compensation” within the meaning of Section 162(m)(4)(C) of the Code and the regulations promulgated thereunder.
“Performance Period” means the Company’s fiscal year.
“Retirement” means, unless otherwise specified in a Participant’s Award, retirement at age 65.
3. Administration.
3.1 Authority of Committee. The Committee shall administer this Plan. The Committee shall have exclusive power, subject to the limitations contained in this Plan, to make Awards and to determine when and to whom Awards will be granted, and the form, amount and other terms and conditions of each Award, subject to the provisions of this Plan. The Committee shall have the authority to interpret this Plan and any Award made under this Plan, to establish, amend, waive and rescind any rules and regulations relating to the administration of this Plan, and to make all other determinations necessary or advisable for the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any Award in the manner and to the extent it shall deem desirable. The determinations of the Committee in the administration of this Plan, as described herein, shall be final, binding and conclusive, subject to the provisions of this Plan. A majority of the members of the Committee shall constitute a quorum for any meeting of the Committee.
3.2 Delegation. The Committee may delegate to the Chief Executive Officer and the Vice President of Human Resources the authority, with respect to Eligible Employees who are not executive officers of the Company, to (i) determine which such Eligible Employees will be granted Awards under the Plan, (ii) the amount and terms of Awards under the Plan for such Participants and (iii) take all other actions of the Committee, including administration and interpretation, of such Awards. Awards granted pursuant to such delegated authority shall be made consistent with the criteria established by the Committee and shall be subject to any other restrictions placed on the delegation by the Committee.
3.3 Indemnification. To the full extent permitted by law, (i) no member or former member of the Committee shall be liable for any action or determination taken or made in good faith with respect to the Plan or any Award made under the Plan, and (ii) the members or former members of the Committee shall be entitled to indemnification by the Company against and from any loss incurred by such members by reason of any such actions and determinations.

4. Awards.
4.1 Eligibility Criteria. Within 90 days following the commencement of each Performance Period, the Committee may select such Eligible Employees as it deems appropriate to participate in the Plan. Criteria that the Committee will consider when selecting Eligible Employees for participation include scope and level of responsibility, organizational impact, internal equity and external competitiveness. Awards for Eligible Employees who work less than full-time will be prorated accordingly.
4.2 Allocation of Awards. Eligible Employees selected to participate will be entitled to receive an award of bonus compensation based on the attainment of performance targets selected by the Committee and consisting of one or any combination of two or more of net revenue; stock price; market share; sales; earnings per share; return on equity; costs; operating income; net income before interest, taxes, depreciation and/or amortization; net income before or after extraordinary items; return on operating assets or levels of cost savings; earnings before taxes; net earnings; asset turnover; total shareholder return; pre-tax, pre-interest expense return on invested capital; return on incremental invested capital; free cash flow or cash flow from operations. As appropriate, any such targets may be expressed in absolute amounts, on a per share basis, as a change from preceding Performance Periods; or relative to a designated peer group or index of comparable companies. Subject to applicable regulatory restrictions, such targets may also relate to one or any combination of two or more of corporate (including such direct and indirect subsidiaries of the Company as the Committee may determine or on such consolidated basis as the Committee may determine), group, unit, division, affiliate or individual performance. In addition, with respect to an Award, or portion of an Award, that is not intended to qualify as Performance-Based Compensation, performance targets may include any other measures determined by the Committee, including customer satisfaction or learner success metrics (i.e. Learner Satisfaction).
4.3 Maximum Amount of Awards. No Covered Employee shall be entitled to receive an Award for any Performance Period that exceeds $2 million.
4.4 Adjustments. At any time during the Performance Period, the Committee may amend the targets for a Performance Period to reflect material adjustments in or changes to the Company’s policies, to reflect material Company changes such as mergers or acquisitions, and to reflect such other events having a material impact on the targets, provided that no such adjustment shall be made to an Award intended to qualify as Performance-Based Compensation if the effect of such adjustment would be to cause the Award to fail to qualify as Performance-Based Compensation. The Committee is authorized at any time during or after a Performance Period, in its sole and absolute discretion, to reduce or eliminate an Award payable to any Participant for any reason, including a Participant’s failure to perform his/her day-to-day job in a

satisfactory manner after the Company has provided reasonable notice of such failure, or changes in the position or duties of any Participant with the Company or any subsidiary of the Company during the Performance Period, whether due to any termination of employment (including death, Disability, Retirement, or termination with or without cause) or otherwise. No reduction in an Award made to any Participant shall increase the amount of the Award to any other Participant.
4.5 Payment of Awards. Following the completion of each Performance Period, the Committee shall certify in writing the degree to which the performance targets were attained and the Awards payable to Participants. Each Participant shall receive payment in cash of the Award as soon as practicable following the determination in respect thereof made pursuant to this Section 4.5, provided that payment shall be made no later than two and a half months after the Performance Period.
5. Effective Date of the Plan. The Plan shall become effective as of January 1, 2009; provided that this Plan is approved and ratified by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock of the Company present or represented and entitled to vote in person or by proxy on this matter at a meeting of the shareholders of the Company no later than December 31, 2008 and that the affirmative vote is of a majority of the minimum number of outstanding shares of Common Stock of the Company necessary to constitute a quorum for the transaction of business at the meeting. The Plan shall remain in effect until it has been terminated pursuant to Section 9.
6. Termination of Employment. Nothing in the Plan shall confer upon any Participant the right to continue in the employment of the Company or any subsidiary or affect any right which the Company or any subsidiary may have to terminate the employment of a Participant with or without cause. In the event any Participant ceases to be an employee for any reason other than Disability or Retirement during any Performance Period in which he/she is participating in the Plan or prior to payment of an Award for a Performance Period, he/she will not be eligible to receive any payment under an Award for such Performance Period unless otherwise provided for in the Company’s Senior Executive Severance Plan or Executive Severance Plan , as applicable and as in effect from time to time, in which case the payment of any Award shall be determined, adjusted and made in accordance with the Company’s Senior Executive Severance Plan or Executive Severance Plan , as applicable. Participants whose employment terminates due to Disability or Retirement during the Performance Period will be eligible to receive a prorated portion (based on the number of days during the Performance Period when the Participant was employed, divided by the total number of days in the Performance Period) of any payment under the Award, if earned, when payments are made to other Participants under the Plan.
7. New Hires; Promotions. New hires must commence employment as an Eligible Employee no later than October 1 of the Performance Period to be eligible to be considered a Participant for that Performance Period, and individual Awards for the Performance Period will be prorated from the date of hire. Employees must be promoted to being an Eligible

Employee no later than October 1 of the Performance Period to be eligible to be considered a Participant in the Plan during that Performance Period, and individual Awards for the Performance Period will be prorated from the date of promotion. Notwithstanding the foregoing, no Award that is intended to qualify as Performance-Based Compensation shall be made to any new hire or promoted Eligible Employee unless expressly approved by the Committee in accordance with the requirements of Section 162(m) of the Code and the regulations promulgated thereunder.
8. Tax Withholding. The Company shall have the right to withhold from cash payments under the Plan to a Participant or other person an amount sufficient to cover any required withholding taxes.
9. Amendment, Modification and Termination of the Plan. The Board may at any time terminate, suspend or modify the Plan and the terms and provisions of any Award to any Participant which has not been paid. Amendments are subject to approval of the shareholders of the Company only if such approval is necessary to maintain the Plan in compliance with the requirements of Section 162(m) of the Code, its successor provisions or any other applicable law or regulation. No Award may be granted during any suspension of the Plan or after its termination.
10. Unfunded Plan. The Plan shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by Awards under the Plan. No Participant shall, by virtue of this Plan, have any interest in any specific assets of the Company or any of its direct or indirect subsidiaries.
11. Other Benefit and Compensation Programs. Neither the adoption of the Plan by the Board nor its submission to the shareholders of the Company shall be construed as creating any limitation on the power of the Board to adopt such other incentive arrangements as it may deem appropriate. Payments received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant’s regular recurring compensation for purposes of the termination, indemnity or severance pay law of any state and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or any subsidiary unless expressly so provided by such other plan, contract or arrangement, or unless the Committee expressly determines otherwise.
12. Governing Law. To the extent that Federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of the State of Minnesota and construed accordingly.
Approved by shareholders: May 13, 2008

Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Stephen G. Shank, certify that:
 
 	1.	I have reviewed this quarterly report on Form 10-Q of Capella Education Company;	
 
 	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 
 	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 
 	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
 	5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
 	a)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 
 	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: July 31, 2008

/s/ Stephen G. Shank	
Stephen G. Shank	
Chairman and Chief Executive Officer	

Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Lois M. Martin, certify that:
 
 	1.	I have reviewed this quarterly report on Form 10-Q of Capella Education Company;	
 
 	2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:	
 
 	e)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;	
 
 	f)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;	
 
 	g)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and	
 
 	h)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and	
 
 	5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
 	c)	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and	
 
 	d)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.	
Date: July 31, 2008

/s/ Lois M. Martin	
Lois M. Martin	
Senior Vice President and Chief Financial Officer	

Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of Capella Education Company (the “Company”) on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen G. Shank, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Stephen G. Shank	
Stephen G. Shank	
Chairman and Chief Executive Officer	
July 31, 2008	
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of Capella Education Company (the “Company”) on Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Lois M. Martin, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Lois M. Martin	
Lois M. Martin	
Senior Vice President and Chief Financial Officer	
July 31, 2008	
This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.