RWB - Education Services Review

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Busin ess Serv ices Research

January 2013

Education Services

Class Notes

Jeffrey P. Meuler, [email protected]

Nick Nikitas, [email protected]


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10R.5

Tab le o f Con t ent s

(Use the links below to navigate. To return, click on the page header in the upper

left corner)

HIGHLIGHTS & STOCK REVIEW ..................................................................... 2

POLICY REVIEW .......................................................................................... 4

ELEMENTARY & SECONDARY ......................................................................... 5

POST-SECONDARY ...................................................................................... 9

E-LEARNING & TRAINING ........................................................................... 15

INTERNATIONAL ....................................................................................... 18

THE LEARNING HOUSE, INC. (PRIVATE) ....................................................... 21

(Please refer to Appendix-Important Disclosures and Analyst Certification on page 26)


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January 2013 Class Notes

BUSINESS SERVICES- EDUCATION SERVICES Page 2

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=Ed Services rally in December, but finish 2012 down for the third straight year:

2012 Post-Secondary year in review Education Services stocks continued tounderperform the broader market in 2012, marking the fourth consecutive calendaryear of underperformance. During 2012, the median stock performance for post-secondary education companies declined by 38% vs. an increase of 13% for the S&P500. In our view, the stock underperformance appears to have been driven by:

Macroeconomic. In our view, cyclical factors including the unemploymentrate, initial jobless claims, consumer confidence and willingness to take ondebt, all remained a headwind throughout the year.

Regulatory/Accreditation. Similarly, regulatory changes including changesin enrollment advisor compensation rules and a more stringent definition of"misrepresentation," as well as the expected implementation of GainfulEmployment (which was since vacated in district court), also likely served asa headwind to fundamentals. Accreditors also appear to have become moreproactive in managing their relationships with accredited institutions (orinstitutions applying for accreditation), as highlighted by WASC's initial denialof accreditation for Ashford University (BPI-not covered).

Secular headwinds -- increased competition and eroding student valueproposition. We do not believe that "transitory" headwinds worsenedrelative to a year ago (rather "transitory" headwinds arguably easedsomewhat, in our view). Rather, we attribute the continued weakness infundamentals to increasing secular headwinds of materially increasedcompetition, and an eroding student-value proposition (which combined arealso resulting in increased price sensitivity). In particular, we believe thatcompetition has increased materially for working adult, fully degreed onlinestudents, both among private sector providers, as well as a material increase

in fully online degreed offerings from "traditional" public and not-for-profitprivate colleges and universities. Hence, in our view, traditional collegesand universities are increasingly taking share of fully online students broadlyaway from most for-profit universities, and on the margin students aremigrating toward lower-priced options, and we expect both to continue.

Heading into 2013as a result, we are maintaining a cautious sector investmentview, as fundamentals remain challenged and starts trends remain volatile with fewproviders achieving sustainable growth. We expect continued share shift of fullyonline degreed students broadly away from for-profits toward "traditional" collegesand universities, and believe some investors may be underestimating the secularnature of the industry's challenges while over-ascribing "transitory" factors as drivingthe weakness. We recommend selective exposure through disciplined purchase of

LOPE and APEI; please see our full 2013 Post-Secondary Outlook report foradditional details.

The Association of Private Sector Colleges and Universities (APSCU) held itsannual symposium, highlighting a shift in conversation topics throughout the post-secondary education industry, including increased emphasis on fundamentals (vs.regulation/legislation), although the tone of business remains muted, with a focus onoperating in a new normal, and striving to improve affordability, instead of awaitingan industry inflection. The sector also appears to be striving to better work with itstraditional college/university counterparts as part of the broader post-secondary

Ed Indices Last MonthK-12 +10%

Higher Education +4%E-Learning & Training +6%

International +5%

Ed Indices YTDK-12 +3%

Higher Education -53%

E-Learning & Training -13%

International +42%

Market Statistics (Dec)NASDAQ +0%

S&P 500 +1%

Dow Jones +1%

Russell 2000 +3%

S&P 500 P/E Ratios2012E 13.9x

2013E 13.0x


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education landscape. Additional conference takeaways are provided in our APSCUSymposium Highlights research note.

Fall college enrollments decline 1.8%, with every sector excluding four-year privatenonprofit schools experiencing declines, according to recently released data from theNational Student Clearinghouse Research Center. Within sectors, for-profitinstitutions experienced the largest yoy decrease, with 4-year enrollments down 7.2%(on top of a 3.8% decline in 2011), while four-year private nonprofits were the only

institution to continue yoy gains (+0.5%). Broken out by sector and age group, yoydeclines were more prevalent for students age 24 and over, which continue todecline following peak enrollment levels in 2010 and were especially prevalent at for-profit institutions, although remained below declines of 8.3% for students 24 andunder.

Senators question default management tactics at for-profit schools In arecent letter sent to ED Secretary Arne Duncan, Senators from eight statesrequested the department increase its review of default rate and OPE-IDmanipulation tactics at post-secondary institutions. Citing consistently higher defaultrates among for-profit colleges (22.7% vs. 11% at public universities), as well asrecent reductions in two-year cohort-default-rates (CDRs), discrepancies betweeninstitutions two-year and three-year rates, and the consolidation of Office of

Postsecondary Education Identification (OPE-ID) numbers targeted at avoidingindustry regulations. The Senators urged the Department to examine current policies,and take increased steps to limit manipulative tactics on a go forward basis.

Pearson purchases equity stake in NOOK Media Pearson PLC (PSO - notcovered) recently announced a five percent equity stake ($89.5 million cashtransaction) in NOOK Media, LLC, a new company consisting of Barnes & NoblesNOOK e-reader and tablets, digital bookstore and 674 college bookstores across theUnited States. Following the transaction, which carries an implied valuation ofapproximately ~$1.8 billion, Barnes and Noble will continue to own a majority of thecompany (78.2%), and Microsoft will own approximately 16.8 percent.

Finally, earnings releases fromChinaEdu, Scholastic Corporation, and Learning

Tree International.

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2012: Ed Services Underperform Broader Markets for a Fourth Consecutive YearFiscal cliff negotiations brought a volatile end to 2012, with a 2% S&P 500 mid-monthgain wiped out by investor trepidation, as the U.S. economy headed towards 2013with Congress locked in an extended legislative stalemate. Rumors of a New YearsEve resolution led to a 1.6% gain on the final day of trading, and the S&P 500finished December up 1% and +13% for 2012. Following a disappointing year for themajority of our indices (ex. International which gained 26%; +5% for December), all of

our ed indices outperformed over the month, with K-12 (+10%; +3% for 2012), E-learning (+6%; down 13% in 2012), and Higher Ed (+4%), but down 53% for 2012.

After materially underperforming in November (-15%) with all three companies in thered, our K-12 index significantly outperformed the broader markets, gaining 10% overDecember. School Specialty was the only company to experience a decline overDecember, down 27% for the month and 62% for 2012, following another quarter ofdisappointing F2Q13 results and F13 guidance updates during last monthsearnings. K12, Inc. experienced the majority of gains, increasing 18%, and bouncing


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back from a 15% decline over the previous month, due to negative stateannouncements in Colorado and Georgia; however, since then Florida VirtualAcademy (FLVA) received approval from an additional county (Duval County PublicSchools), and state Board of Education members in Georgia recommended approvalof a state grant to GCA and encouraged the school to begin student recruitment forthe coming year, potentially leading to Decembers outperformance coupled with thestocks attractive growth story and current valuation levels. While risks to thecompanys business exist, we believe that current risks generally appear manageable

and the company has typically done a good job of managing risks and responding tosimilar issues in the past.

Higher ed stocks broadly outperformed with 10 out of 13 stocks posting gainsfollowing several months of declines (three month loss of 13%). Our index gained 4%for December, led by Lincoln Educational Services (+44%) and Career EducationCorp. (+17%), with both companies gaining significantly on no material news(potential short covering and low volume). DeVry, Inc. experienced the largestdecline, down 9%, with investors potentially taking gains following the stocks 35%rally over the past three months. For the year our higher ed index materiallyunderperformed the broader markets, declining 53% (-38% median) and marking thethird consecutive year of declines (fourth consecutive year of relativeunderperformance).

Our e-learning index increased 6% in December, with five of seven companiesposting gains. K12, Inc. and Smart Technologies, Inc., posted significant gains, up18% and 13%, respectively, while Learning Tree International (-5%) and RosettaStone (-3%; +62% ytd) were the only stocks to decline. Overall, e-learning stocksdeclined 13% in 2012, underperforming the S&P 500 after outperforming in 2011(+7% vs. 0% S&P 500 return)

The international index gained 5% in December, with continued gains for Brazilianeducation companies (Kroton Educacional +151%; Estacio Educacional +132%; andAnhanguera Educacional +72% ytd), partially offset by losses at Chinese educationcompanies. For the year, international stocks were the only index to outperform thebroader market, posting a 42% gain after significantly underperforming in 2011(-29%).

The three largest short interest increases as of December 15 versus the previousperiod (November 30) were ATA Inc. (+41%), New Oriental (+34%), and ChinaDistance (+17%). The three largest declines were ChinaEdu Corp. (-49%), LincolnEducational (-24%) and Learning Tree International (-24%).

mlif`v=obsfbt=Senate Passes Legislation Protecting Veterans BenefitsBill H.R. 4057, the Improving Transparency of Education Opportunities for VeteransAct of 2012, previously introduced by Rep. Bilirakis (R-FL), recently received

approval in both the Senate and House Committees and will now be sent toPresident Obama for passage. The bill, which amends title 38 (Veterans Benefits),requires the Secretary of Veterans Affairs to develop a comprehensive policy thatincreases the student and school level information provided to and accessed byveterans (incl. cohort default rates, enrollment, graduation and retention rates), andprohibits the approval of any educational institution that provides incentivecompensation based on securing enrollments. Following the enactment of the bill, theSecretary of Veterans Affairs will have 90 days to submit a report outliningcompliance suggestions for institutions, with the amendment applicable to programyears beginning on or after October 1, 2013.


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Senators Request ED Investigation in to School Default Management TacticsDemocratic Senators from eight states recently issued a letter to U.S. Department ofEducation Secretary Arne Duncan, requesting that the department increase its reviewof default rate and OPE-ID manipulation tactics at post-secondary institutions. Theletter, which was sent by Senators Harkin (D-IA), Durbin (D-IL), Blumenthal (D-CT),Lautenberg (D-NJ), Rockefeller (D-WV), Franken (D-MN), Boxer (D-CA), and Reed(D-RI), references a previous Senate HELP committee report entitled For ProfitHigher Education: The Failure to Safeguard the Federal Investment and EnsureStudent Success released at the end of July, and notes similar payment delay andforbearance tactics used to artificially drive down default rates.

While the Senators also applaud EDs continued efforts to restrict financial aid abuse,the letter requests additional oversight, citing consistently higher default rates amongfor-profit colleges (22.7% vs. 11% at public universities), as well as recent reductionsin two-year cohort-default-rates (CDRs), discrepancies between institutions two-yearand three-year rates, and the consolidation of Office of Postsecondary EducationIdentification (OPE-ID) numbers targeted at avoiding industry regulations. Further,the Senators believe that ED currently has the ability to limit loan defaultmanipulation, under the Higher Education Act, and urges the Department to examineand limit policies that constitute manipulation going forward.

bibjbkq^ov=C=pb`lka^ov==Scholastic Posts F2Q13 Results Below Expectations; Maintains F2013 GuidanceScholastic reported F2Q13 (November) revenue declined 10.1% to $616.2 million,below the $632.5 consensus estimate, as an increased school district focus onteacher training ahead of Common Core standards implementation led to a delay ineducational product and technology spend (higher-margin products). Operatingmargins declined ~400bps, with all five business segments down yoy, and EPS fromcontinuing operations of $1.89 declined from $2.62 in F2Q12, and was also belowthe consensus estimate of $2.05. Scholastic affirmed the companys F2013 outlook(revised on November 20), with expected total revenue of approximately $1.8 billionto $1.9 billion (down 12%-16% yoy), EPS of $1.40 to $1.60 per share (compared to$3.41/sh. in F12), and free cash flow of $100 million to $120 million (down from$206.3 million in 2012).

Learning Tree Posts F4Q Results; Continued Economic Headwinds Learning Tree reported F4Q12 (September) revenue of $32.1 million (-6.4%) andF12 revenue of $129.0 million (-3.5% yoy), largely due to a 7.1% decline ininternational revenue, with U.S. revenues roughly flat yoy. International participationwas largely flat; however, average revenue-per-student declined 7.2%, due to shorterduration course offerings, a reduction in average price across product lines(promotional product pricing), and exchange rate headwinds (-2.5%). Continuedinvestment in new product offerings exacerbated revenue declines, with a net loss of$11.9 million ($0.89/sh.) compared to net income of $3.2 million ($0.24/sh.) in F11.

Pearson Purchases Equity Stake in NOOK Media, LLCPearson (PSO) recently announced a five percent equity stake in NOOK Media($89.5 million cash transaction), a new company consisting of Barnes & NoblesNOOK e-reader and tablets, digital bookstore and 674 college bookstores across theUnited States. The majority of NOOK Media will continue to be owned by Barnes &Noble (78.2%), with Microsoft also owning approximately 16.8 percent, but Pearsonmay earn the option to purchase an additional five percent ownership interest in thefuture. Overall, Pearsons investment stake values the company at ~$1.8 billion.


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Massachusetts Senators Vote to Expand Virtual Public SchoolsSenators in Massachusetts recently passed bill H4274, voting to expand statewidevirtual schools and enrollment caps, with up to 10 schools potentially allowed to openby 2020. The bill, which would expand access at a gradual rate, allows the stateBoard of Education to approve up to three virtual schools between 2013-2016, withan additional three from 2016-2019, and up to four between 2019-2020. Enrollmentgrowth would also be restricted under the expansion, with total virtual schoolenrollment capped at two percent of the statewide public population, and at least fivepercent of students at any virtual school required to come from within the authorizingdistrict. However, local schools will also be able to restrict enrollment if more thanone percent of its students attend virtual schools. Virtual charters are scheduled toreceive 75 percent of the operating cost per full-time equivalent student (determinedbased on school district), with a cap of $5,000, and will initially be targeted towardschools serving students that have distinct medical issues, travel for arts or sports,are high performing, or have previously dropped out or have a fear of bullying.Massachusetts Virtual Academy at Greenfield (operated by K12, Inc.) will beguaranteed one of the licenses, and additional applications can be submitted byschool districts, charter schools, teachers, or parents.

OTHER ELEMENTARY & SECONDARY NEWS

Financial and M&A ActivityScholastic Corporation declared the companys quarterly (3Q) cash dividend of $0.125 per share (~1.7%annual yield), payable on March 15 to shareholders of record as of January 31.

Personnel ChangesThe Florida State Board of Education announced the selection of Dr. Tony Bennett as the states nextCommissioner of Education. Dr. Bennett previously served as Superintendent of Indianas public schools since2009.

Corporate DevelopmentsDuval County Public Schools approved the opening of the Florida Virtual Academy (FLVA), a new virtualpublic charter school operated by K12, Inc. FLVA was previously approved by three additional counties across

Florida (Palm Beach, Broward, Pinellas), with all four charter schools expected to open in 2013. FLVA atOsceola County is currently open to students in grades K-9.

State & Local News

Utah Governor Gary Herbert recently unveiled a new budget proposal,recommending additional education aid, specifically focused on science andtechnology education. The proposal, highlighted in an article from the Salt LakeTribune, would allocate approximately 30 percent of total funding to public education,with an additional investment of $298 million, including $96 million for enrollment

growth, and $29.8 million in increased funding for state colleges (targeted towardSTEM degrees and certificates). Overall, Governor Herberts proposal targets $5.4billion in general and education funding, including $2.6 billion (49%) for publicelementary and secondary education and $812.1 million (14.9%) for post-secondaryeducation.


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Sources of all funds Uses of all funds

Sources: Governor's budget recommendation fiscal year 2014, The Salt Lake Tribune

Californias NCLB waiver request application was recently denied by theDepartment of Education, according to an article in the San Jose Mercury News. Theannouncement leaves California in the minority among U.S. states, with 34applications already approved for waivers (incl. D.C.), and 10 additional states with

applications pending. Iowa is the only additional state to previously have its waiverdenied by ED.

K-12 SHORT INTEREST (AS OF DECEMBER 15)

Source: NASDAQ

Above are short interest data for select publicly traded K-12 companies. The tableincludes the number of short interest shares as of December 15, the percent changeversus the previous period (November 30), average daily volume, days-to-cover ratio(short interest divided by avg. volume) and the previous months days-to-cover ratio.

All three companies in our K-12 index declined over the period, with Scholastic Corp.,School Specialty, and K12, Inc. down 8%, 5%, and 3%, respectively. K12, Inc. shortinterest may have declined following the stocks outperformance over the month(+17.9%; Florida Virtual Academy (FLVA) received approval from an additionalcounty, and state Board of Education members in Georgia recommended approval ofa state grant to GCA and encouraged the school to begin student recruitment for thecoming year), following a 15 percent decline in November; however, short interest asa percentage of float remains the largest in our index at 37%. Scholastic Corp. short

interest declined the largest percent over the period (-8%), with investors potentiallytaking gains following last months 15% decline (reduced F13 guidance) and aheadof the companys F2Q13 earnings on December 20 (top and bottom-line resultsbelow consensus, maintained revised guidance).

Volume declined for two of three companies in our index, down 32% for ScholasticCorp. ahead of earnings, and 56% for K12, Inc., with days-to-cover ratios increasingsignificantly for both companies as a result. School Specialty, Inc. volume increased33% following disappointing F2Q13 earnings last month (roughly in-line results, butreduced F12 guidance), and days-to-cover declined from 6.1 days to 4.4 days.

Federal

funds27%Income

tax22%

Feesand

licenses

17%Unrestrict

edsales

tax13%Local

property

tax5%

Other

funds8%

Transport

ations

earmarks

3%

Gastax

3%

Corporate

franchise

tax2%

Public

education

30%

Medicaid

17%

Other

social

services

15%Capital/de

bt12% Transport

ation2%

Other8%

Transport

ations

earmarks

3%

Higher

education

12%

K-12 Education

K12, Inc. LRN 9,787,092 -3% 37% 223,476 -56% 43.8 19.7

Scholastic Corp. SCHL 2,680,407 -8% 10% 211,735 -32% 12.7 9.4

School Specialty, Inc. SCHS 2,138,346 -5% 19% 486,477 33% 4.4 6.1

Company Ticker Short Interest Previous% Chg vs

Previous

% of

FloatAvg Vol

% Chg vs

Previous

Days to

Cover


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TRAILING-TWELVE MONTH K-12 INDEX VS S&P 500 AND NASDAQ

Source: FactSet

DECEMBER K-12 COMPANY PRICE PERFORMANCE

Source:Capital IQ

80

90

100

110

120

130

140

12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12

K-12 Index Nasdaq S&P 500


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mlpqJpb`lka^ov=Post-Secondary Education 2012 Year In ReviewBaird-covered Education Services stocks continued to underperform the broadermarket in 2012, marking the fourth consecutive calendar year of underperformance --

during 2012 the median stock performance for a Baird-covered post-secondaryEducation Services company declined by 38% vs. an increase of 13% for the S&P500 (for performance by company, please see the table below). In our view, the stockunderperformance appears to have been driven by:

Macroeconomic. In our view, cyclical factors including the unemploymentrate, initial jobless claims, consumer confidence and willingness to take ondebt, all remained a headwind throughout the year.

Regulatory/Accreditation. Similarly, regulatory changes including changesin enrollment advisor compensation rules and a more stringent definition of"misrepresentation," as well as the expected implementation of GainfulEmployment (which was since vacated in district court), also likely served asa headwind to fundamentals. Accreditors also appear to have become more

proactive in managing their relationships with accredited institutions (orinstitutions applying for accreditation), as highlighted by WASC's initial denialof accreditation for Ashford University (BPI-not covered).

Secular headwinds -- increased competition and eroding student valueproposition. We do not believe that "transitory" headwinds worsenedrelative to a year ago (rather "transitory" headwinds arguably easedsomewhat, in our view). Rather, we attribute the continued weakness infundamentals to increasing secular headwinds of materially increasedcompetition, and an eroding student-value proposition (which combined arealso resulting in increased price sensitivity).

2012 Stock Performance

Educa t i on S e r v i ces - - S tock P e r fo r mance

Com pany Ticker 2008 2009 2010 20 11 2 012 2 010- 2012 Q1- 12 Q2- 12 Q3- 12 Q4- 12

Pos t -Secondary

American Public Education APEI -11% -8% 8% 16% -17% 5% -12% -16% 14% -1%

Apollo Group APOL 9% -21% -35% 36% -61% -65% -28% -6% -20% -28%

Capella Education CPLA -10% 28% -12% -46% -22% -63% 0% -3% 1% -19%

Career Education CECO -29% 30% -11% -62% -56% -85% 1% -17% -44% -7%

Corinthian Colleges COCO 6% -16% -62% -58% 13% -82% 91% -30% -17% 3%

DeVry DV 11% -1% -15% -19% -38% -57% -12% -8% -27% 5%

Education Management EDMC N/A N/A -18% 55% -84% -80% -51% -49% -55% 41%

Grand Canyon Education LOPE N/A 1% 3% -19% 47% 23% 11% 18% 12% 0%

ITT Educational Services ESI 11% 1% -34% -11% -70% -82% 16% -8% -47% -46%

Lincoln Educational Services LINC -10% 63% -27% -45% -25% -70% 1% -17% -34% 35%

Strayer Education STRA 27% 0% -27% -34% -39% -70% -2% 17% -40% -11%

Me dian 6% 1% - 18% - 19 % - 38% - 70% 0% - 8% - 27% - 1 %

S& P 500 SP50 - 38% 23% 13% 0 % 13% 28% 1 2% - 3% 6% - 1 %

Source: Fac tset

Notes: Stock performance reflects total return (assuming dividends were reinvested) for respective calendar year or quarter.

N/A indicates that stock was not trading for entirety of respective period.


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In terms of intra-year performance, there appears to have been five notable periods:

January - February 27th: following a better-than-expected 4Q11 earnings periodand notable return to starts growth for several education companies (incl. industrybellwether APOL), post-secondary stocks continued to broadly outperform the S&P500 throughout January and the majority of February, with a median return of +12%vs. an S&P 500 gain of +9%, although there continued to be a wide variancebetween stock performance by company depending on company-specific issues.

Feb 28th - May: industry bellwether APOL pre-announced F2Q12 (February)earnings, guiding to flat to low-single-digit yoy new student growth, downwardlyrevised from prior guidance for similar growth to F1Q of +13%, and noted that theyexpect new enrollment to continue to fluctuate for the remainder of the year vs. theirprior outlook for sustained yoy gains. The broader post-secondary industry followedsuit over the next three months, with Baird-covered post-secondary stocks declining34% compared to an S&P 500 loss of 4%.

June: following the three-month decline, education stocks bounced back in June,buoyed by better-than-expected informational F11 gainful employment data releasedby the U.S. Education Department and subsequently vacated in court, due to one ofthree student measures being deemed to be arbitrary and capricious in nature.

2H12: however, the rebound was short-lived, as post-secondary education stocksplunged over July, with a median decline of 30% (S&P 500 gain of 1%), due to amyriad of negative company specific and industry announcements over the month;including, accreditation issues at Bridgepoint Education, a generally disappointingC2Q earnings season, starting with a negative pre-announcement by DeVry, Inc.,and closed out with a Senate HELP report released following a lengthy review of for-profit education, entitled For Profit Higher Education: The Failure to Safeguard theFederal Investment and Ensure Student Success. Education services companiesexperienced significant volatility for the remainder of the year, behind continuedfundamental softening and negative public commentary regarding the industry,trading in line with the market between Aug-Nov (+3%), before ending the year with a+13% rally over December, as investors potentially closed out short gains ahead of

potential 2013 tax changes.

Educa t ion Serv ices - - S tock Per fo rmance

2012

Com pany Ticke r Jan .- Feb 27 th Feb . 28 t h- May June Ju ly Aug .- Dec .

Pos t -Secondary

American Public Education APEI 2% -35% 13% -22% 44%

Apollo Group APOL -5% -38% 14% -25% -23%

Capella Education CPLA 15% -26% 13% -24% 6%

Career Education CECO 41% -42% 2% -30% -25%

Corinthian Colleges COCO 125% -44% 5% -30% 21%

DeVry DV -4% -26% 14% -37% 22%

Education Management EDMC -32% -59% -11% -46% 16%

Grand Canyon Education LOPE 16% -2% 16% -21% 41%

ITT Educational Services ESI 27% -21% 7% -36% -55%

Lincoln Educational Services LINC 12% -34% 13% -33% 32%

Strayer Education STRA 10% -14% 21% -33% -20%

Me d ia n 12% - 34% 13% - 30% 1 6%

S& P 500 SP50 9% - 4% 4% 1% 3%

Source: F actset

Notes: Stock performance reflects total return (assuming dividends were reinvested)

for respective period.


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For-Profit Colleges Lead Fall Enrollment Declines Across Higher EdFall 2012 enrollments decreased across all post-secondary sectors, except at four-year private nonprofit schools, according to recently released data from the NationalStudent Clearinghouse Research Center. The report, which is the first in a series ofcurrent enrollment estimates to be released semi-annually (every December andMay), includes national enrollment estimates, along with subtotals by institutionalsector, age group, and gender, including approximately 94 percent of all Title IV,degree-granting enrollments in the nation. By sector, for-profit institutionsexperienced the largest yoy decline, with 4-year enrollments down 7.2% (on top of a3.8% decline in 2011), while four-year private nonprofits were the only institution tocontinue yoy gains (+0.5%). Broken out by age group, yoy declines were moreprevalent for students age 24 and over, which continue to decline following peakenrollment levels in 2010, and were especially prevalent at for-profit institutions,although remained below declines for students 24 and under (-8.3%).

Estimated National Enrollment by Sector

Estimated National Enrollment by Sector and Age Group

Source: National Student Clearinghouse Research Center

2.3%1.6%

2.7%

14.8%

0.3%0.2%1.4%

3.3%

3.8%

1.6%1.8%0.6%

0.5%

7.2%

3.1%

10%

5%

0%

5%

10%

15%

20%

AllSectors 4YearPublic 4YearPrivate

Nonprofit

4YearForProfit 2YearPublic

2010

2011

2012

1.2%

4.1%

1.0%

2.9%

1.9%

4.0%

7.1%

16.9%

0.7%

1.8%

0.4%

0.1%

1.7%

0.7%

2.5%

4.6%

2.6%

4.1%

0.9%

2.5%

0.7%

3.4%

0.1%

2.2%

0.8%

0.1%

8.3%

7.0%

1.6%

5.2%

10.0% 5.0% 0.0% 5.0% 10.0% 15.0% 20.0

24andUnder

Over24

24andUnder

Over24

24andUnder

Over24

24andUnder

Over24

24andUnder

Over24

AllSectors

FourYea

r

Public

FourYear

Private

Nonprofit

FourYear

ForProfit

Two

Year

Public

2012

2011

2010


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Career Education Provides Additional Information on Campus Teach Out Career Education Corporation announced additional details regarding the companyspreviously announced teach out of 23 domestic campuses. The company expects themajority of campus closures to be completed by 2Q14, and will incur charges of $33million to $41 million (majority recorded in 4Q12), including $25 million to $30 millionin non-cash impairment and $5 million to $7 million in cash severance and relatedcosts (both expected in 4Q12), with an additional $3 million to $4 million in cashretention bonuses recorded as accrued. The majority of campus closures will beconcentrated at the companys Sanford-Brown Colleges (19 out of 23 closures), withthe remaining four closures divided between two campuses of Colorado TechnicalInstitute (CTU), the International Academy of Design & Technology (IADT) inNashville, TN and Collins College in Phoenix, AZ.

Additionally, at the time of each campus closure CECO expects to realize a chargerelated to the net present value of any remaining lease obligations, reduced by anestimated amount of sublease income from the property. The final amount for eachcampus will be determined at the respective closure date, but total gross leaseobligations expense is expected to be approximately $75 million.

OTHER POST-SECONDARY NEWS

Personnel ChangesApollo Group announced that Dr. John G. Sperling, current executive chairman of the companys board ofdirectors and company founder, will retire effective December 31, 2012. Current vice chairman of the board,Peter V. Sperling has been elected to replace Dr. Sperling as chairman of the board of directors.

Universal Technical Institute announced the retirement of board of directors member, Richard Caputo,effective February 19. Mr. Caputo has served on the board since 1997 and is the longest-standing independentmember.

Corporate DevelopmentsDeVry Inc. introduced the Newton D. Becker Scholarship program, awarding more than $200,000 in financialassistance through 20 full CPA Exam Review Scholarships ($3,300 value) as well as additional aid ranging

from $800 to $1,600.

Career Education Corporation announced that the Accrediting Commission of Career Schools and Colleges(ACCSC) voted to vacate the June 2012 show cause order for ten of the companys campuses. The campusesmust continue to provide additional data regarding placement and independent re-verification, but will now beable to apply for new program approvals going forward. ACCSC also granted accreditation renewals to thecompanys Le Cordon Blue College of Culinary Arts in Miramar, FL (five years, effective August 2011) andBrown College in Mendota Heights, MN (four years, effective January 2011).


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POST-SECONDARY SHORT INTEREST (AS OF DECEMBER 15)

Source: NASDAQ

Above are short interest data for select publicly traded post-secondary companies.The table includes the number of short interest shares as of December 15, thepercent change versus the previous period (November 30), average daily volume,days-to-cover ratio (short interest divided by average volume) and the previousmonths days-to-cover ratio.

Our post-secondary stocks mostly experienced a decline in short interest during thefirst half of December, with investors decreasing short share in nine of thirteencompanies, as the majority of post-secondary names outperformed throughout themonth (ex. DV, ESI and LOPE). Lincoln Educational Services Corp. declined thelargest percentage, down 24%, coinciding with a significant 44% gain over themonth. Short interest as a percentage of float remains elevated for the majority of ourhigher ed index, with 9 out of 13 companies in double-digits, and three above 30%(ESI remains the highest shorted company at 50%).

Average volume changes were mixed across our index, with seven of 13 companiesexperiencing lower average volume; however, the changes were largely the result of

offsetting increases/decreases related to the timing of earnings releases over theprior month. Universal Technical Institute experienced the largest decline, down 50%over the period, with days-to-cover increasing from 1.9 days to 3.4 days as a result.Strayer Education and Education Management Corp. volumes increased the largestpercentages, up 64% and 47%, respectively, with days-to-cover ratios decliningsignificantly, as a result.

Post-secondary Education

American Public Education In. APEI 2,518,402 -10% 15% 104,174 -15% 24.2 23.0

Apollo Group, Inc. APOL 14,374,718 -9% 15% 2,244,657 -12% 6.4 6.2

Bridgepoint Ed Inc BPI 5,510,432 -6% 30% 214,808 -7% 25.7 25.3

Capella Education Co. CPLA 949,547 -8% 9% 88,636 -34% 10.7 7.7

Career Education Corp. CECO 3,965,315 -5% 6% 557,823 4% 7.1 7.8

Corinthian Colleges, Inc. COCO 25,648,878 2% 33% 566,176 -22% 45.3 35.0

DeVry, Inc. DV 7,978,211 4% 14% 1,004,094 26% 7.9 9.6

Education Management Corp. EDMC 3,355,319 -11% 15% 119,607 47% 28.1 46.0

Gra nd Ca nyo n Ed uca tio n, In c. L OPE 5,988,711 4% 14% 334,173 16% 17.9 20.0

ITT Educational Services, Inc. ESI 7,395,475 -2% 50% 544,241 36% 13.6 18.8

Lincoln Educational Services Corp. LINC 944,235 -24% 5% 108,612 -28% 8.7 8.2

Strayer Education, Inc. STRA 2,216,687 0% 20% 270,912 64% 8.2 13.4

Universal Technical Institute, Inc. UTI 649,001 -7% 4% 189,271 -50% 3.4 1.9

Days to

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% Chg vs

Previous

% of

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% Chg vs

PreviousCompany Ticker Short Interest


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TRAILING-TWELVE-MONTH POST-SECONDARY INDEX VS S&P 500 AND NASDAQ

Source: FactSet

DECEMBER POST-SECONDARY PRICE PERFORMANCE

Source:Capital IQ

40

50

60

70

80

90

100

110

120

130

12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12

Higher Ed Nasdaq S&P 500


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bJib^okfkd=C=qo^fkfkd=

Georgetown University Announces Partnership with EdXGeorgetown University became the latest top-tier university to introduce MassiveOpen Online Courses (MOOCs); following the schools recent announcement that itwill join edX, a not-for-profit enterprise launched last May by Harvard University and

MIT. Georgetowns decision to join the venture was part of universitys broaderInitiative on Technology-Enhanced Learning (ITEL), with the school investing $8million targeted toward expanding and strengthening the universitys global reach.GeorgetownX plans to launch in the fall of 2013, and is the third additional universityto join the edX platform in recent months, following the additions of UC Berkeley andthe University of Texas system.

EdX Announces Spring Course ExpansionWith enrollments totaling more than 500,000 unique users to date, edX has grownexponentially since its launch, and plans to continue actively exploring additionaluniversity partners from around world. As of fall 2012, the platform offered ninecourses across mainly STEM curricula; however, beginning in spring 2013, theinitiative plans to broaden its offering, introducing six new courses in both the

humanities and social sciences, including: Ancient Greek Hero and Human Healthand Global Environmental Change. The planned addition will accompany six popularcourses from the fall (Introduction to Computer Science and Programming;Introduction to Solid State Chemistry; Software as a Service I and II; Foundations ofComputer Graphics; and Introduction to Artificial Intelligence), with expectations foran additional set of spring 2013 courses to potentially be launched in the future.

Udemy Raises Series B $12 Mill ion InvestmentUdemy, an online marketplace facilitating learning between users in an on demandplatform, recently announced a Series B investment of $12 million led by InsightVenture Partners. The Series B, which is the third round of funding for the companyfollowing previous raises in October 2011 and August 2010, brings the total fundedamount to $16 million and also included additional funds from existing investorsLightbank, MHS Capital and Learn Capital. Udemy will primarily use the cash infusionto increase content as well as expand accessibility for users to additional platforms.Since the companys launch in early 2010, Udemy has increased its library of contentto more than 5,000 courses (400 added in October 2012 alone), with classesuploaded from leading subject matter experts, publishers and universities, covering avast array of topics, including: professional, business, technical, academic, creativeand lifestyle subjects. Udemy, which recently surpassed more than 500,000 usersacross the companys user base, has more than doubled its supply of courseofferings over the past 12 months, and increased revenue over 400%.

University of South Carolina Develops New Online Degree ProgramsThe University of South Carolina (USC) will soon be offering online degrees, via arecently announced partnership with Academic Partnerships, a learning technology

company helping traditional universities move online. The degree program, which isscheduled to be launched in fall 2013, will be delivered through the schools newPalmetto College brand, and will offer both undergraduate and graduate degrees tostudents with a masters in engineering management scheduled to be one of the firstdegree programs offered. Palmetto College is part of the USCs larger initiative,Back to Carolina Degree completion program, a previously announced programtargeting former USC students that for some reason or another did not reachgraduation.


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OTHER E-LEARNING & TRAINING NEWS

Financial and M&A ActivityGrockit, a social learning startup focused on student and lifelong learners announced a $20 million financinground led by Discovery Communications, bringing the companys total financing raised to $44.7 million.

Testive, an ed tech startup aiming to improve students SAT and overall test prep efficiency, announced a$500,000 seed round of funding led by angel investors, according to The EdTech Times.

Personnel ChangesAcademic Partnerships, a company partnering with traditional universities to bring degree programs online,appointed Bob Rae as the companys new President and Chief Operating Officer. Mr. Rae most recently servedas an executive at Mosaic Sales Solutions, a marketing and merchandising service firm.

Corporate Developments2U, Inc. (previously 2tor), announced another addition to the companys growing list of traditional non-profitschools offering programs via 2Us online platform, with American University partnering with the company tolaunch an online graduate program in International Relations (scheduled to begin in May 2013).

E-LEARNING & TRAINING SHORT INTEREST (AS OF DECEMBER 15)

Source: NASDAQ

Above are short interest data for select publicly traded e-learning and training

companies. The table includes the number of short interest shares as of December15, the percent change versus the previous period (November 30), average dailyvolume, days-to-cover ratio (short interest divided by average volume) and theprevious months days-to-cover ratio.

Short interest declined for all six of the e-learning and training companies in ourindex, with Learning Tree International and Weight Watchers leading the way (-24%and -15%, respectively). Quinstreet, Inc short interest remains the largest percentageof float in our index at 10%, but continues to decline, down 8% over the period, asinvestors likely continued to close out profitable positions due to the companys 28%decline throughout 2012.

Days-to-cover were mixed across the index with average volume declines for three of

six companies, more than offsetting decreases in short interest over the period andleading to increases in days-to-cover ratios. Rosetta Stone experienced the largestdecline in average volume (-29%), which led to an increase in days-to-cover from23.7 to 31.9, while Smart Technologies experienced the largest increase in volume(+19%; days-to-cover declined from 6.3 to 5.2 days).

E-Learning & Training Education

GP Strategies Corp. GPX 251,288 -13% 2% 56,364 -1% 4.5 5.1

Learning Tree International, Inc. LTRE 14,941 -24% 0% 5,336 -43% 2.8 2.1

Quinstreet, Inc. QNST 2,684,549 -8% 10% 93,394 6% 28.7 33.1

Rosetta Stone Inc. RST 1,020,506 -4% 9% 31,989 -29% 31.9 23.7

Smart Technologies, Inc. SMT 593,034 -1% 2% 113,797 19% 5.2 6.3

Weight Watchers Int. WTW 4,496,863 -15% 8% 675,091 3% 6.7 8.1

Company Ticker Short InterestDays to

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% Chg vs

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% of

FloatAvg Vol

% Chg vs

Previous


18/30



TRAILING-TWELVE-MONTH E-LEARNING & TRAINING INDEX VS S&P 500 AND NASDAQ

Source: FactSet

DECEMBER E-LEARNING & TRAINING PRICE PERFORMANCE

Source:Capital IQ

70

80

90

100

110

120

130

140

150

12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12

e-Learning & Training Nasdaq S&P 500


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fkqbok^qflk^i=ChinaEdu Reports 3Q12 Results; Continued Growth Behind Online EnrollmentsChinaEdu, a service provider for online degree programs of Chinese universities,reported 3Q12 net revenue increased 8.7% to $19.7 million, exceeding companyguidance as well as the consensus estimate of $19.1 million. Revenue growth within

its core online degree programs division expanded 9.4% to $15.8 million behind a21.4% increase in online enrollment for the fall semester to approximately 193,000students. Gross margin increased 280bps yoy to 61.0%, due to significantimprovement in the companys private schools network (+1090bps) driven byincreases in tuition and enrollment levels. Operating margin declined slightly yoy to15.5% (20bps), and net earnings per ADS of $0.12 was roughly in line with theconsensus estimate.

China Overtakes the United States as Australias Largest Knowledge PartnerLinks between Australian and Chinese higher ed institutions have reached an all-timehigh, with China recently surpassing the number of partnerships between Australiaand the United States, and becoming the countrys largest knowledge partner. Thestudy, completed by Universities Australia, the membership body representing

Australian universities, and highlighted in the Sydney Morning Herald, found that ofthe total number of partnerships, which can include academic or researchcollaborations, student and staff exchanges, and overseas study programs, 885university agreements existed with Chinese institutions (vs. 876 links with U.S.universities). The number of partnerships has also increased steadily over the pastdecade, increasing approximately 72 percent since 2003, and has largely beencentered on academic or research collaborations, with nine out of 10 partnershipsincluding some arrangement. Overall, Australian institutions had a total of 7,123 linkswith more than 100 other countries.

Microsoft Commits an Addit ional $250 Million Investment to Global LearningAt its annual Partners in Learning Global Forum, Microsoft recently announced anadditional $250 million commitment, renewing the program for an additional five year

stint. Since its inception in 2003, Microsoft Partners in Learning, an online communityconnecting teachers and school leaders around the world, has reached more than200 million teachers and students across 119 countries. The recently announcedfive-year additional commitment increases Microsofts total program funding to $750million by 2018, with the goal of growing the programs community to reach more than25 percent of teachers worldwide by 2018.

Additionally, Microsoft announced an investment of $75 million targeted at expandingdigital access to educational content across developing nations. The program, whichwill be in collaboration with World Vision Inc., the British Council, SOS ChildrensVillages International, Catholic Relief Services, Plan International and theInternational Rescue Committee, is part of a larger company initiative (MicrosoftYouthSpark), working to level the educational playing field for youth throughout the

world.

Enrollment Growth Flattens across Australian Private Higher EducationFollowing several years of significant growth, Australian student enrollment at privateinstitutions declined materially over the past year, increasing just 0.3% and declining1.8% in equivalent full-time student terms, according to recent data from theAustralian federal Department of Innovation, highlighted in The Australian. Thedecline in growth rates follows an extended period of elevated growth, with averageincreases of approximately 40 percent from 2007 to 2009 and 7 percent over the


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prior two years, and coincides with the countrys decision in 2009 to removeenrollment restrictions at public universities. The change, which allowed publicuniversities to enroll as many students as they can attract has also affectedinternational enrollments in Australian private institutions, where enrollments havedeclined 10% yoy and are materially below previous growth rates of 25 to 30 percentfrom 2007 to 2009.

OTHER INTERNATIONAL NEWS

Personnel ChangesATA Inc., a provider of testing based services in China, announced the resignation of Walter Wang, thecompanys co-founder and president, effective January 1, 2013. Mr. Wang will remain a member of ATAsBoard of Directors and continue to contribute to the company as a consultant.

INTERNATIONAL SHORT INTEREST (AS OF DECEMBER 15)

Source: NASDAQ

Above are short interest data for select publicly traded international companies. Thetable includes the number of short interest shares as of December 15, the percentchange versus the previous period (November 30), average daily volume, days-to-cover ratio (short interest divided by average volume) and the previous months days-to-cover ratio.

Short interest within our international index largely increased over the period, withfive of seven companies experiencing an increase in share. ATA Inc. (+41%; noincremental news and immaterial percentage of float) and New Oriental Education(+34% with short investors potentially adding share following the stocks three-month17% gain behind improving Chinese macro data, and continued rally following F2Q13earnings in October/Muddy Waters commentary regarding leaving China shorts).New Oriental short interest also remained the largest percentage of float in our indexat 11%.

Average volume across our index increased substantially with all companies days-to-cover ratios declining as a result. Ambow Educations days-to-cover ratio declined

the largest amount, decreasing from 38.2 days to 18.8 days, and ATA Inc.s averageincreased the largest percentage (+1042%), with days-to-cover declining from 0.4 to0.1 days, as a result. ChinaEdu Corp. was the only company in our internationalindex to experience a decline in average volume, decreasing 25%, with days-to-coverdeclining from 0.6 to 0.4 days when combined with a 49% decline in short interest.

International

Ambow Education Holding LTD AMBO 827,272 1% 5% 44,038 106% 18.8 38.2

ATA Inc. ATAI 2,558 41% 0% 46,650 1042% 0.1 0.4

ChinaEdu Corp. CEDU 3,324 -49% 0% 8,223 -25% 0.4 0.6

China Distance Education DL 8,750 17% 0% 25,312 60% 0.3 0.5

New Oriental Ed & Tech Grp EDU 13,551,351 34% 11% 3,864,265 80% 3.5 4.7

TAL Education Group XRS 262,898 8% 1% 155,784 43% 1.7 2.2

Xueda Education Group XUE 218,076 -9% 2% 86,243 70% 2.5 4.7

Company Ticker Short InterestDays to

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% Chg vs

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% of

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% Chg vs

Previous


21/30



TRAILING-TWELVE-MONTH INTERNATIONAL INDEX VS S&P 500 AND NASDAQ

Source: FactSet

DECEMBER INTERNATIONAL PRICE PERFORMANCE

Source:Capital IQ

60

70

80

90

100

110

120

130

140

12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12 12/12

International Nasdaq S&P 500


22/30



The Learning House, Inc. (PRIVATE)

The Learning House, Inc. is a third-party enabler, providing online solutions for colleges and universities to develop and growdegree programs and courses. The company, which was founded in 2001, currently partners with more than 100 colleges anduniversities across the country to offer a comprehensive suite of solutions covering: curriculum development andmanagement, faculty training, professional development, marketing and lead generation, admissions and enrollmentmanagement, student retention, 24/7 technical support, learning management systems, and management consultation. Inaddition to helping colleges adopt new online technologies, the company also owns and operates several lead generationwebsites, including eLearnPortal.com and FaithBased CollegesOnline.com

SUMMARY

Customer base. Over 100 colleges and universitiesacross the country including: Notre Dame College,Anderson University, Highland Community College, andCalifornia Institute of Finance of California Lutheran

University.

Product offering. Learning House offers solutionscovering: curriculum development and management,faculty training, professional development, marketing andlead generation, admissions and enrollment management,student retention, 24/7 technical support, learningmanagement systems, and management consultation. Inaddition to helping colleges adopt new onlinetechnologies, the company also owns and operatesseveral lead generation websites, includingeLearnPortal.com and FaithBased CollegesOnline.com

Company Structure. Learning House was founded in2001, and acquired in 2011 by Weld North Holdings, LLC,and investment company concentrating on education,health and wellness.

Awards: Inc. 5000 list (2011, 2010), Business First Fast50 (2011, 2010, 2009), ENTERPRISECORP High ImpactPortfolio (2010), ENTERPRISECORP Louisvilles HotDozen (2009).

Risks. Education is a challenging vertical, with potentialfor volatile demand and changes in market trends, alongwith significant competition across a highly fragmentedindustry.

STATISTICAL PROFILE

Headquarters: ........... .......... ........... ........... .. Louisville, KY

Founded: .................................................................. 2001

University Partners: .................................................. 100+

Revenue: ..... ........... .......... ........... .......... .... Not Disclosed

President and CEO: .......... ........... .... David T. Richardson

EVP and Chief Marketing Officer: ........... ...... Todd Zipper

VP of Curriculum: ................................ Victoria Alexander

VP of Client Relations: .............................. John Anderson

VP of Business Development: ...... .......... Mac Bornhauser

Chief Academic Officer:.David Clinefelter

VP of Product Development:............................. Matt Cobb

Director of Human Resources:...Paula Harper

VP of Finance: ................................................. Jim Lintner

The Learning House, Inc. is owned by Weld NorthHoldings, LLC.

Baird does not provide research coverage on LearningHouse or Weld North Holdings.

Sources: Company website, presentations.


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24/30


25/30

January 2013

BUSINESS SERVICES- EDUCATION SERVICES

Class Notes - Five Best Stock Performers Class Notes - Five Best Stock Performers

December 2012 2012Mkt Cap

Rank Company Ticker % Change ($ mil) Rank Company

1 ATA, Inc. ATAI 66.7% $156.8 1 Kroton Educacional S.A.

2 Lincoln Educational Services Corporation LINC 44.4% $127.3 2 Estcio Participaes S.A

3 Noah Education Holdings Ltd. NED 36.9% $86.5 3 China Distance Education Holdings Limited

4 Cambium Learning Group, Inc. ABCD 19.4% $53.6 4 Anhanguera Educacional Participacoes S.A.

5 K12, Inc. LRN 17.9% $734.9 5 Rosetta Stone, Inc.

Class Notes - Five Worst Stock Performers Class Notes - Five Worst Stock Performers

December 2012 2012Mkt Cap


1 ChinaCast Education Corporation CAST (48.6%) $4.5 1 ChinaCast Education Corporation

2 School Specialty Inc. SCHS (27.5%) $18.2 2 Education Management Corporation

3 Ambow Education Holding Ltd. AMBO (21.1%) $166.5 3 ITT Educational Services Inc.

4 Xueda Education Group XUE (17.5%) $161.3 4 Ambow Education Holding Ltd.

5 DeVry, Inc. DV (9.0%) $1,505.6 5 Cambium Learning Group, Inc.

Class Notes - Best Performance for Stocks with Market Cap >$1B Class Notes - Worst Performance for Stocks with M

December 2012 December 2012Mkt Cap


1 Kroton Educacional S.A. KROT3 11.6% $6,213.9 1 New Oriental Education & Technology Group

2 Apollo Group Inc. APOL 9.0% $2,351.6 2 Grand Canyon Education, Inc.

3 Anhanguera Educacional Participacoes S.A. AEDU3 7.1% $5,036.5 3 Weight Watchers International, Inc.

4 Estcio Participaes S.A ESTC3 6.6% $3,430.0 4 Estcio Participaes S.A

5 Weight Watchers International, Inc. WTW 0.8% $2,914.0 5 Anhanguera Educacional Participacoes S.A.

Source: Capital IQ


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_~=b~=p=`~=Research

Jeffrey [email protected](414) 298-7694

Nick [email protected](414) 298-5916

Investment Banking

Andrew [email protected](312) 609-4972

Howard [email protected](312) 609-5478

Dan [email protected](312) 609-4922

Equity Capital Markets

Peter [email protected]

(414) 765-7262

Baird Venture Partners

Jim [email protected](312) 609-4701


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^==f~=a=~= ~=`~=

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Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend toseek investment-banking related compensation from the company or companiesmentioned in this report within the next three months.

Robert W. Baird & Co. Incorporated may not be licensed to execute transactions inall foreign listed securities directly. Transactions in foreign listed securities may beprohibited for residents of the United States. Please contact a Baird representativefor more information.

Investment Ratings: Outperform (O) - Expected to outperform on a total return,risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral(N) - Expected to perform in line with the broader U.S. equity market over the next12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months.

Risk Ratings: L - Lower Risk - Higher-quality companies for investors seekingcapital appreciation or income with an emphasis on safety. Company characteristics

may include: stable earnings, conservative balance sheets, and an establishedhistory of revenue and earnings. A - Average Risk - Growth situations for investorsseeking capital appreciation with an emphasis on safety. Company characteristicsmay include: moderate volatility, modest balance-sheet leverage, and stable patternsof revenue and earnings. H - Higher Risk - Higher-growth situations appropriate forinvestors seeking capital appreciation with the acceptance of risk. Companycharacteristics may include: higher balance-sheet leverage, dynamic businessenvironments, and higher levels of earnings and price volatility. S - Speculative Risk- High-growth situations appropriate only for investors willing to accept a high degreeof volatility and risk. Company characteristics may include: unpredictable earnings,small capitalization, aggressive growth strategies, rapidly changing market dynamics,high leverage, extreme price volatility and unknown competitive challenges.

Valuation, Ratings and Risks. The recommendation and price target containedwithin this report are based on a time horizon of 12 months but there is no guaranteethe objective will be achieved within the specified time horizon. Price targets aredetermined by a subjective review of fundamental and/or quantitative factors of theissuer, its industry, and the security type. A variety of methods may be used todetermine the value of a security including, but not limited to, discounted cash flow,earnings multiples, peer group comparisons, and sum of the parts. Overall marketrisk, interest rate risk, and general economic risks impact all securities. Specificinformation regarding the price target and recommendation is provided in the text ofour most recent research report.

Distribution of Investment Ratings. As of December 31, 2012, Baird U.S. EquityResearch covered 695 companies, with 52% rated Outperform/Buy, 47% ratedNeutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 14% of

Outperform/Buy-rated and 8% of Neutral/Hold-rated companies have compensatedBaird for investment banking services in the past 12 months and/or Baird managed orco-managed a public offering of securities for these companies in the past 12months.

Analyst Compensation. Analyst compensation is based on: 1) The correlationbetween the analyst's recommendations and stock price performance; 2) Ratings anddirect feedback from our investing clients, our institutional and retail sales force (asapplicable) and from independent rating services; 3) The analyst's productivity,including the quality of the analyst's research and the analyst's contribution to the


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growth and development of our overall research effort and 4) Compliance with all ofRobert W. Bairds internal policies and procedures. This compensation criteria andactual compensation is reviewed and approved on an annual basis by Baird'sResearch Oversight Committee.Analyst compensation is derived from all revenue sources of the firm, includingrevenues from investment banking. Baird does not compensate research analystsbased on specific investment banking transactions.

A complete listing of all companies covered by Baird U.S. Equity Research andapplicable research disclosures can be accessed athttp://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx. You can also call 800-792-2473 or write: Robert W. Baird & Co.,Equity Research, 24

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Disclaimers

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This is not a complete analysis of every material fact regarding any company,industry or security. The opinions expressed here reflect our judgment at this dateand are subject to change. The information has been obtained from sources weconsider to be reliable, but we cannot guarantee the accuracy.

ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN ISAVAILABLE UPON REQUEST

The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 areunmanaged common stock indices used to measure and report performance of

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Copyright 2013 Robert W. Baird & Co. Incorporated

Other Disclosures

The information and rating included in this report represent the Analysts long-term(12 month) view as described above. The research analyst(s) named in this reportmay at times, discuss, at the request of our clients, including Robert W. Baird & Co.salespersons and traders, or may have discussed in this report, certain tradingstrategies based on catalysts or events that may have a near-term impact on themarket price of the equity securities discussed in this report. These trading strategiesmay differ from the analysts published price target or rating for such securities. Anysuch trading strategies are distinct from and do not affect the analysts fundamentallong-term (12 month) rating for such securities, as described above. In addition,Robert W. Baird & Co. Incorporated and/or its affiliates (Baird) may provide to certainclients additional or research supplemental products or services, such as outlooks,


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commentaries and other detailed analyses, which focus on covered stocks,companies, industries or sectors. Not all clients who receive our standard company-specific research reports are eligible to receive these additional or supplementalproducts or services. Baird determines in its sole discretion the clients who willreceive additional or supplemental products or services, in light of various factorsincluding the size and scope of the client relationships. These additional orsupplemental products or services may feature different analytical or researchtechniques and information than are contained in Bairds standard research reports.

Any ratings and recommendations contained in such additional or researchsupplemental products are consistent with the Analysts long-term ratings andrecommendations contained in more broadly disseminated standard researchreports.

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This report is for distribution into the United Kingdom only to persons who fall withinArticle 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financialpromotion) order 2001 being persons who are investment professionals and may notbe distributed to private clients. Issued in the United Kingdom by Robert W. BairdLimited, which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a

company authorized and regulated by the Financial Services Authority. For thepurposes of the Financial Services Authority requirements, this investment researchreport is classified as objective.

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Tampa

401 East Jackson StreetSuite 2900Tampa, FL 33602888.238.2672

Washington, D.C.1717 K Street NW

Suite 910

Washington, DC 20036202.303.1800

International Locations*

Frankfurt

Neue Mainzer Strasse 28

60311 FrankfurtGermany

011.49.69.13.01.49.0

Hong Kong

Suite 3304, 33/F

Bank of America TowerNo.12 Harcourt Road

Central, Hong Kong

011.852.2827.8822

LondonMint House

77 Mansell Street

London E1 8AF

UK011.44.207.488.1212

Shanghai

Rm 42-022, 42/F, Hang Seng Bank Tower

No.1000 Lujiazui Ring RoadPudong Shanghai 200120, China

011.86.21.6182.0980

*Baird and its operating affiliates have offices in the United States, Europe and Asia.

RWB - Education Services Review

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