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SECURITIES AND EXCHANGE COMMISSION
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
DELAWARE | 20-3356009 | |
(State or other jurisdiction of | (I.R.S. Employer | |
Incorporation or organization) | Identification No.) |
Phoenix, Arizona 85017
(Address, including zip code, of principal executive offices)
(Registrant’s telephone number, including area code)
Large accelerated filerþ | Accelerated filero | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
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• | Our balance sheet as of June 30, 2010 by increasing our allowance for doubtful accounts by $9.3 million; and | ||
• | Our income statement for the three and six months ended June 30, 2010 by decreasing revenues by $0.2 million, increasing instructional costs and services expense by $9.3 million and decreasing operating income and net income by $9.5 million and $5.7 million, respectively; and | ||
• | Our balance sheet as of June 30, 2011 by increasing our allowance for doubtful accounts by $18.8 million; and | ||
• | Our income statement for the three and six months ended June 30, 2011 by increasing instructional costs and services expense by $0.6 million and decreasing operating income and net income, by $0.6 million and $0.4 million, respectively, for the three months ended June 30, 2011 and by approximately $3.7 million, $3.7 million, and $2.2 million, respectively, for the six months ended June 30, 2011. |
• | Part I — Item 1. Financial Statements; | ||
• | Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and | ||
• | Part I — Item 4. Controls and Procedures | ||
• | Part II — Item 6. Exhibits. |
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FORM 10-Q
INDEX
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Item 1. | Financial Statements |
Consolidated Income Statements
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands, except per share amounts) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Restated | Restated | |||||||||||||||
Net revenue | $ | 103,118 | $ | 97,322 | $ | 204,827 | $ | 186,648 | ||||||||
Costs and expenses: | ||||||||||||||||
Instructional costs and services | 46,354 | 51,032 | 95,229 | 87,692 | ||||||||||||
Selling and promotional, including $2 and $2,628 for the three months ended June 30, 2011 and 2010, respectively, and $403 and $4,975 for the six months ended June 30, 2011 and 2010, respectively, to related parties | 27,709 | 28,976 | 57,541 | 55,852 | ||||||||||||
General and administrative | 7,038 | 6,176 | 13,870 | 12,280 | ||||||||||||
Exit costs | — | 116 | — | 205 | ||||||||||||
Total costs and expenses | 81,101 | 86,300 | 166,640 | 156,029 | ||||||||||||
Operating income | 22,017 | 11,022 | 38,187 | 30,619 | ||||||||||||
Interest expense | (29 | ) | (162 | ) | (136 | ) | (506 | ) | ||||||||
Interest income | 26 | 37 | 58 | 98 | ||||||||||||
Income before income taxes | 22,014 | 10,897 | 38,109 | 30,211 | ||||||||||||
Income tax expense | 9,141 | 4,163 | 15,755 | 11,997 | ||||||||||||
Net income | $ | 12,873 | $ | 6,734 | $ | 22,354 | $ | 18,214 | ||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.29 | $ | 0.15 | $ | 0.50 | $ | 0.40 | ||||||||
Diluted | $ | 0.29 | $ | 0.14 | $ | 0.49 | $ | 0.39 | ||||||||
Shares used in computing net income per common share: | ||||||||||||||||
Basic | 44,658 | 45,724 | 45,122 | 45,699 | ||||||||||||
Diluted | 45,018 | 46,557 | 45,551 | 46,441 | ||||||||||||
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Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Restated | Restated | |||||||||||||||
Net income | $ | 12,873 | $ | 6,734 | $ | 22,354 | $ | 18,214 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Unrealized losses on hedging derivatives | (54 | ) | (207 | ) | (1 | ) | (354 | ) | ||||||||
Unrealized losses on available for sale securities | — | — | — | (4 | ) | |||||||||||
Realized gains on available for sale securities | — | — | — | (19 | ) | |||||||||||
Comprehensive income | $ | 12,819 | $ | 6,527 | $ | 22,353 | $ | 17,837 | ||||||||
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Consolidated Balance Sheets
June 30, | December 31, | |||||||
(In thousands, except par value) | 2011 | 2010 | ||||||
(Unaudited) | ||||||||
Restated | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 14,652 | $ | 33,637 | ||||
Restricted cash and cash equivalents | 45,390 | 52,178 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $36,945 (Restated) and $30,112 at June 30, 2011 and December 31, 2010, respectively | 13,078 | 17,983 | ||||||
Income taxes receivable | 5,796 | 8,415 | ||||||
Deferred income taxes | 13,911 | 16,078 | ||||||
Other current assets | 5,619 | 4,834 | ||||||
Total current assets | 98,446 | 133,125 | ||||||
Property and equipment, net | 161,532 | 123,999 | ||||||
Restricted cash | 555 | 760 | ||||||
Prepaid royalties | 6,287 | 6,579 | ||||||
Goodwill | 2,941 | 2,941 | ||||||
Deferred income taxes | 3,564 | 2,800 | ||||||
Other assets | 5,257 | 4,892 | ||||||
Total assets | $ | 278,582 | $ | 275,096 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 27,480 | $ | 15,693 | ||||
Accrued compensation and benefits | 11,541 | 13,633 | ||||||
Accrued liabilities | 8,467 | 9,477 | ||||||
Accrued litigation loss | — | 5,200 | ||||||
Accrued exit costs | — | 64 | ||||||
Income taxes payable | 425 | 829 | ||||||
Student deposits | 46,700 | 48,873 | ||||||
Deferred revenue | 21,867 | 15,034 | ||||||
Due to related parties | 1,573 | 10,346 | ||||||
Current portion of capital lease obligations | 1,229 | 1,673 | ||||||
Current portion of notes payable | 1,841 | 2,026 | ||||||
Total current liabilities | 121,123 | 122,848 | ||||||
Capital lease obligations, less current portion | — | 151 | ||||||
Other noncurrent liabilities | 5,392 | 2,715 | ||||||
Notes payable, less current portion | 20,769 | 21,881 | ||||||
Total liabilities | 147,284 | 147,595 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity | ||||||||
Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at June 30, 2011 and December 31, 2010 | — | — | ||||||
Common stock, $0.01 par value, 100,000 shares authorized; 45,865 and 45,811 shares issued and 44,258 and 45,761 shares outstanding at June 30, 2011 and December 31, 2010, respectively | 459 | 458 | ||||||
Treasury stock, at cost, 1,607 and 50 shares of common stock at June 30, 2011 and December 31, 2010, respectively | (23,151 | ) | (782 | ) | ||||
Additional paid-in capital | 81,261 | 77,449 | ||||||
Accumulated other comprehensive loss | (446 | ) | (445 | ) | ||||
Accumulated earnings | 73,175 | 50,821 | ||||||
Total stockholders’ equity | 131,298 | 127,501 | ||||||
Total liabilities and stockholders’ equity | $ | 278,582 | $ | 275,096 | ||||
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Consolidated Statement of Stockholders’ Equity
(In thousands)
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Paid-in | Comprehensive | Accumulated | ||||||||||||||||||||||||||||
Shares | Par Value | Shares | Stated Value | Capital | Loss | Earnings | Total | |||||||||||||||||||||||||
Restated | Restated | |||||||||||||||||||||||||||||||
Balance at December 31, 2010 | 45,811 | $ | 458 | 50 | $ | (782 | ) | $ | 77,449 | $ | (445 | ) | $ | 50,821 | $ | 127,501 | ||||||||||||||||
Net income | — | — | — | — | — | — | 22,354 | 22,354 | ||||||||||||||||||||||||
Unrealized loss on hedging derivative, net of taxes of $0 | — | — | — | — | — | (1 | ) | — | (1 | ) | ||||||||||||||||||||||
Common stock purchased for treasury | — | — | 1,557 | (22,369 | ) | — | — | — | (22,369 | ) | ||||||||||||||||||||||
Exercise of stock options | 50 | 1 | — | — | 602 | — | — | 603 | ||||||||||||||||||||||||
Excess tax benefits from share-based compensation | — | — | — | — | 80 | — | — | 80 | ||||||||||||||||||||||||
Share-based compensation | 4 | — | — | — | 3,130 | — | — | 3,130 | ||||||||||||||||||||||||
Balance at June 30, 2011 | 45,865 | $ | 459 | 1,607 | $ | (23,151 | ) | $ | 81,261 | $ | (446 | ) | $ | 73,175 | $ | 131,298 | ||||||||||||||||
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Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Restated | ||||||||
Cash flows provided by operating activities: | ||||||||
Net income | $ | 22,354 | $ | 18,214 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Share-based compensation | 3,130 | 2,338 | ||||||
Excess tax benefits from share-based compensation | — | (536 | ) | |||||
Amortization of debt issuance costs | 30 | 32 | ||||||
Provision for bad debts | 18,277 | 19,563 | ||||||
Depreciation and amortization | 7,826 | 5,309 | ||||||
Non-capitalizable system conversion costs | — | 4,013 | ||||||
Litigation settlement | (5,200 | ) | — | |||||
Exit costs | (64 | ) | (481 | ) | ||||
Deferred income taxes | 1,392 | (9,802 | ) | |||||
Other | — | (59 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (13,372 | ) | (42,920 | ) | ||||
Prepaid expenses and other | (1,127 | ) | (3,107 | ) | ||||
Due to/from related parties | (8,773 | ) | 902 | |||||
Accounts payable | 4,996 | 3,062 | ||||||
Accrued liabilities and employee related liabilities | (3,102 | ) | 8,482 | |||||
Income taxes receivable/payable | 2,295 | 3,041 | ||||||
Deferred rent | 2,704 | 197 | ||||||
Deferred revenue | 6,833 | 9,099 | ||||||
Student deposits | (2,173 | ) | 12,780 | |||||
Net cash provided by operating activities | 36,026 | 30,127 | ||||||
Cash flows used in investing activities: | ||||||||
Capital expenditures | (38,276 | ) | (22,355 | ) | ||||
Change in restricted cash and cash equivalents | 6,993 | (27,386 | ) | |||||
Proceeds from sale or maturity of investments | — | 487 | ||||||
Net cash used in investing activities | (31,283 | ) | (49,254 | ) | ||||
Cash flows used in financing activities: | ||||||||
Principal payments on notes payable and capital lease obligations | (1,892 | ) | (1,515 | ) | ||||
Debt issuance costs | (70 | ) | — | |||||
Repurchase of common shares | (22,369 | ) | — | |||||
Excess tax benefits from share-based compensation | — | 536 | ||||||
Net proceeds from exercise of stock options | 603 | 955 | ||||||
Net cash used in financing activities | (23,728 | ) | (24 | ) | ||||
Net decrease in cash and cash equivalents | (18,985 | ) | (19,151 | ) | ||||
Cash and cash equivalents, beginning of period | 33,637 | 62,571 | ||||||
Cash and cash equivalents, end of period | $ | 14,652 | $ | 43,420 | ||||
Supplemental disclosure of cash flow information | ||||||||
Cash paid for interest | $ | 145 | $ | 409 | ||||
Cash paid for income taxes | $ | 11,793 | $ | 19,061 | ||||
Supplemental disclosure of non-cash investing and financing activities | ||||||||
Purchases of property and equipment included in accounts payable | $ | 6,791 | $ | 229 | ||||
Tax benefit of Spirit warrant intangible | $ | 127 | $ | 259 | ||||
Shortfall tax expense from share-based compensation | $ | 47 | $ | — |
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Three Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2011 | |||||||||||||||
As Reported | As Restated | As Reported | As Restated | |||||||||||||
Net revenue | $ | 97,522 | $ | 97,322 | $ | 103,118 | $ | 103,118 | ||||||||
Costs and expenses: | ||||||||||||||||
Instructional costs and services | 41,742 | 51,032 | 45,709 | 46,354 | ||||||||||||
Selling and promotional | 28,976 | 28,976 | 27,709 | 27,709 | ||||||||||||
General and administrative | 6,176 | 6,176 | 7,038 | 7,038 | ||||||||||||
Exit costs | 116 | 116 | — | — | ||||||||||||
Total costs and expenses | 77,010 | 86,300 | 80,456 | 81,101 | ||||||||||||
Operating income | 20,512 | 11,022 | 22,662 | 22,017 | ||||||||||||
Net interest expense | (125 | ) | (125 | ) | (3 | ) | (3 | ) | ||||||||
Income before income taxes | 20,387 | 10,897 | 22,659 | 22,014 | ||||||||||||
Income tax expense | 7,991 | 4,163 | 9,401 | 9,141 | ||||||||||||
Net income | $ | 12,396 | $ | 6,734 | $ | 13,258 | $ | 12,873 | ||||||||
Earnings per share: | ||||||||||||||||
Basic income per share(1) | $ | 0.27 | $ | 0.15 | $ | 0.30 | $ | 0.29 | ||||||||
Diluted income per share(1) | $ | 0.27 | $ | 0.14 | $ | 0.29 | $ | 0.29 | ||||||||
Basic weighted average shares outstanding | 45,724 | 45,724 | 44,658 | 44,658 | ||||||||||||
Diluted weighted average shares outstanding | 46,557 | 46,557 | 45,018 | 45,018 | ||||||||||||
(1) | The sum of quarterly income per share may not equal annual income per share due to rounding. |
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2011 | |||||||||||||||
As Reported | As Restated | As Reported | As Restated | |||||||||||||
Net revenue | $ | 186,848 | $ | 186,648 | $ | 204,827 | $ | 204,827 | ||||||||
Costs and expenses: | ||||||||||||||||
Instructional costs and services | 78,402 | 87,692 | 91,539 | 95,229 | ||||||||||||
Selling and promotional | 55,852 | 55,852 | 57,541 | 57,541 | ||||||||||||
General and administrative | 12,280 | 12,280 | 13,870 | 13,870 | ||||||||||||
Exit costs | 205 | 205 | — | — | ||||||||||||
Total costs and expenses | 146,739 | 156,029 | 162,950 | 166,640 | ||||||||||||
Operating income | 40,109 | 30,619 | 41,877 | 38,187 | ||||||||||||
Net interest expense | (408 | ) | (408 | ) | (78 | ) | (78 | ) | ||||||||
Income before income taxes | 39,701 | 30,211 | 41,799 | 38,109 | ||||||||||||
Income tax expense | 15,825 | 11,997 | 17,243 | 15,755 | ||||||||||||
Net income | $ | 23,876 | $ | 18,214 | $ | 24,556 | $ | 22,354 | ||||||||
Earnings per share: | ||||||||||||||||
Basic income per share(1) | $ | 0.52 | $ | 0.40 | $ | 0.54 | $ | 0.50 | ||||||||
Diluted income per share(1) | $ | 0.51 | $ | 0.39 | $ | 0.54 | $ | 0.49 | ||||||||
Basic weighted average shares outstanding | 45,699 | 45,699 | 45,122 | 45,122 | ||||||||||||
Diluted weighted average shares outstanding | 46,441 | 46,441 | 45,551 | 45,551 | ||||||||||||
(1) | The sum of quarterly income per share may not equal annual income per share due to rounding. |
As of June 30, 2010 | As of June 30, 2011 | |||||||||||||||
As Reported | As Restated | As Reported | As Restated | |||||||||||||
Accounts receivable, net of allowance for doubtful accounts | $ | 42,636 | $ | 33,146 | $ | 32,120 | $ | 13,078 | ||||||||
Allowance for doubtful accounts | 11,182 | 20,472 | 18,103 | 36,945 | ||||||||||||
Deferred income taxes — current | 11,355 | 15,183 | 6,230 | 13,911 | ||||||||||||
Total current assets | 132,933 | 127,271 | 109,807 | 98,446 | ||||||||||||
Total assets | 237,813 | 232,151 | 289,943 | 278,582 | ||||||||||||
Accumulated earnings | 39,491 | 33,829 | 84,536 | 73,175 | ||||||||||||
Total stockholders’ equity | 113,307 | 107,645 | 142,659 | 131,298 | ||||||||||||
Total liabilities and stockholders’ equity | 237,813 | 232,151 | 289,943 | 278,582 |
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, 2010 | June 30, 2011 | |||||||||||||||
As Reported | As Restated | As Reported | As Restated | |||||||||||||
Net income | $ | 23,876 | 18,214 | $ | 24,556 | $ | 22,354 | |||||||||
Provision for bad debts | 10,273 | 19,563 | 14,586 | 18,277 | ||||||||||||
Deferred income taxes | (5,974 | ) | (9,802 | ) | 2,881 | 1,392 | ||||||||||
Changes in accounts receivable | (43,120 | ) | (42,920 | ) | (13,372 | ) | (13,372 | ) | ||||||||
Net cash provided by operating activities | 30,127 | 30,127 | 36,026 | 36,026 |
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Accrued Exit | Accrued | |||||||||||||||
Costs at | Exit Costs at | |||||||||||||||
December 31, | Payments in | June 30, | ||||||||||||||
2010 | Exit Costs | 2011 | 2011 | |||||||||||||
Accrued exit costs | $ | 64 | $ | — | $ | (64 | ) | $ | — |
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Denominator: | ||||||||||||||||
Basic common shares outstanding | 44,658 | 45,724 | 45,122 | 45,699 | ||||||||||||
Effect of dilutive stock options and restricted stock | 360 | 833 | 429 | 742 | ||||||||||||
Diluted common shares outstanding | 45,018 | 46,557 | 45,551 | 46,441 | ||||||||||||
Balance at | Balance at | |||||||||||||||
Beginning of | Charged to | End of | ||||||||||||||
Period | Expense | Deductions(1) | Period | |||||||||||||
Allowance for doubtful accounts receivable: | ||||||||||||||||
Six months ended June 30, 2011 (Restated) | $ | 30,112 | 18,277 | (11,444 | ) | $ | 36,945 | |||||||||
Six months ended June 30, 2010 (Restated) | $ | 7,553 | 19,563 | (6,644 | ) | $ | 20,472 |
(1) | Deductions represent accounts written off, net of recoveries. |
As of | As of | |||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Land | $ | 8,282 | $ | 8,282 | ||||
Land improvements | 1,597 | 1,597 | ||||||
Buildings | 51,044 | 48,323 | ||||||
Equipment under capital leases | 4,502 | 4,502 | ||||||
Leasehold improvements | 13,501 | 11,407 | ||||||
Computer equipment | 40,166 | 36,742 | ||||||
Furniture, fixtures and equipment | 12,368 | 11,401 | ||||||
Internally developed software | 5,467 | 3,825 | ||||||
Other | 1,098 | 998 | ||||||
Construction in progress | 55,394 | 21,349 | ||||||
193,419 | 148,426 | |||||||
Less accumulated depreciation and amortization | (31,887 | ) | (24,427 | ) | ||||
Property and equipment, net | $ | 161,532 | $ | 123,999 | ||||
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
2011 | $ | 2,433 | ||
2012 | 5,344 | |||
2013 | 5,691 | |||
2014 | 5,280 | |||
2015 | 4,376 | |||
Thereafter | 13,615 | |||
Total minimum payments | $ | 36,739 | ||
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
(Unaudited)
Summary of Stock Options Outstanding | ||||||||||||||||
Weighted | Weighted | |||||||||||||||
Average | Average | |||||||||||||||
Exercise | Remaining | Aggregate | ||||||||||||||
Total | Price per | Contractual | Intrinsic | |||||||||||||
Shares | Share | Term (Years) | Value ($)(1) | |||||||||||||
Outstanding as of December 31, 2010 | 4,026 | 14.24 | ||||||||||||||
Granted | 1,250 | 15.34 | ||||||||||||||
Exercised | (50 | ) | 12.00 | |||||||||||||
Forfeited, canceled or expired | (75 | ) | 17.31 | |||||||||||||
Outstanding as of June 30, 2011 | 5,151 | $ | 14.48 | 8.17 | $ | — | ||||||||||
Exercisable as of June 30, 2011 | 1,644 | $ | 13.06 | 7.53 | $ | 1,841 | ||||||||||
Available for issuance as of June 30, 2011 | 1,995 | |||||||||||||||
(1) | Aggregate intrinsic value represents the value of the University’s closing stock price on June 30, 2011 ($14.18) in excess of the exercise price multiplied by the number of options outstanding or exercisable. |
2011 | 2010 | |||||||
Instructional costs and services | $ | 1,409 | $ | 918 | ||||
Selling and promotional | 149 | 100 | ||||||
General and administrative | 1,572 | 1,320 | ||||||
Share-based compensation expense included in operating expenses | 3,130 | 2,338 | ||||||
Tax effect of share-based compensation | (1,252 | ) | (935 | ) | ||||
Share-based compensation expense, net of tax | $ | 1,878 | $ | 1,403 | ||||
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Notes to Consolidated Financial Statements
(In thousands, except per share data)
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Notes to Financial Statements
(In thousands, except per share data)
(Unaudited)
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
• | our failure to comply with the extensive regulatory framework applicable to our industry, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements; |
• | the results of the ongoing program review being conducted by the Department of Education of our compliance with Title IV program requirements, and possible fines or other administrative sanctions resulting therefrom; |
• | the ability of our students to obtain federal Title IV funds, state financial aid, and private financing; |
• | potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies in the for-profit postsecondary education sector; |
• | risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards; |
• | our ability to hire and train new, and develop and train existing, enrollment counselors; |
• | the pace of growth of our enrollment; |
• | our ability to convert prospective students to enrolled students and to retain active students; |
• | our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis; |
• | industry competition, including competition for students and for qualified executives and other personnel; |
• | the competitive environment for marketing our programs; |
• | failure on our part to keep up with advances in technology that could enhance the online experience for our students; |
• | the extent to which obligations under our loan agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities; |
• | potential decreases in enrollment, the payment of refunds or other negative impacts on our operating results as a result of our change from a “term-based” financial aid system to a “borrower-based, non-term” or “BBAY” financial aid system; |
• | our ability to manage future growth effectively; and |
• | general adverse economic conditions or other developments that affect job prospects in our core disciplines. |
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• | Our balance sheet as of June 30, 2010 by increasing our allowance for doubtful accounts by $9.3 million; and | ||
• | Our balance sheet as of June 30, 2011 by increasing our allowance for doubtful accounts by $18.8 million; and | ||
• | Our income statement for the three and six months ended June 30, 2010 by decreasing revenues by $0.2 million, increasing instructional costs and services expense by $9.3 million and decreasing operating income and net income by $9.5 million and $5.7 million, respectively; and | ||
• | Our income statement for the three months and six months ended June 30, 2011 by increasing instructional costs and services expense by $0.6 million, and decreasing operating income and net income, by $0.6 million and $0.4 million, respectively, for the three months ended June 30, 2011 and by approximately $3.7 million, $3.7 million, and $2.2 million, respectively, for the six months ended June 30, 2011. |
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June 30, | ||||||||||||||||
2011(1) | 2010(1) | |||||||||||||||
# of Students | % of Total | # of Students | % of Total | |||||||||||||
Graduate degrees(2) | 17,205 | 43.5 | % | 15,916 | 43.8 | % | ||||||||||
Undergraduate degree | 22,320 | 56.5 | % | 20,385 | 56.2 | % | ||||||||||
Total | 39,525 | 100.0 | % | 36,301 | 100.0 | % | ||||||||||
June 30, | ||||||||||||||||
2011(1) | 2010(1) | |||||||||||||||
# of Students | % of Total | # of Students | % of Total | |||||||||||||
Online(3) | 37,915 | 95.9 | % | 35,145 | 96.8 | % | ||||||||||
Ground(4) | 1,610 | 4.1 | % | 1,156 | 3.2 | % | ||||||||||
Total | 39,525 | 100.0 | % | 36,301 | 100.0 | % | ||||||||||
(1) | Enrollment at June 30, 2011 and 2010 represents individual students who attended a course during the last two months of the calendar quarter. | |
(2) | Includes 1,409 and 870 students pursuing doctoral degrees at June 30, 2011 and 2010, respectively. | |
(3) | As of June 30, 2011 and 2010, 43.6% and 44.1%, respectively, of our online students are pursuing graduate degrees. | |
(4) | Includes both our traditional on-campus ground students, as well as our professional studies students. |
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• | Regulatory EnvironmentIn November 2009, the U.S. Department of Education convened two negotiated rulemaking teams related to Title IV program integrity issues and foreign school issues. The resulting program integrity rules promulgated in October 2010 and June 2011 address numerous topics. The most significant for our business are the modification of the standards relating to the payment of incentive compensation to employees involved in student recruitment and enrollment; the implementation of standards for state authorization of institutions of higher education; and the adoption of a definition of “gainful employment” for purposes of the requirement of Title IV student financial aid that a program of study offered by a proprietary institution prepare students for gainful employment in a recognized occupation. As explained more fully in Part II, Item IA,Risk Factors, the incentive compensation and state authorization rules are effective July 1, 2011. Also as explained in Part II, Item IA,Risk Factors, the gainful employment rule provisions governing disclosures to students and covering the implementation of new programs are effective July 1, 2011, and provisions relating to loan repayment and the debt-to-income ratio are effective July 1, 2012. | |
The program integrity rules require a large number of reporting and operational changes. We believe we are, or will be, in substantial compliance with these new reporting and disclosure requirements as of their respective effective dates. However, because of the scale and complexity of our educational programs, we may be unable to fully develop, test and implement all of the necessary modifications to our information management systems and administrative processes to maintain such compliance at all times in the future and, as a result, we may be subject to administrative or other sanctions if we are unable to comply with these reporting and disclosure requirements on a timely basis. In addition, these changes, individually or in combination, may impact our student enrollment, persistence and retention in ways that we cannot now predict and could adversely affect our business, financial condition, results of operations and cash flows. See Part II, Item IA,Risk Factors, for further discussion. | ||
• | New RulemakingOn May 5, 2011, the Department announced its intention to establish additional negotiated rulemaking committees to prepare proposed regulations under the Higher Education Act, as amended. Three public hearings were conducted in May 2011 at which interested parties suggested issues that should be considered for action by the negotiating committees. The Department also conducted roundtable discussions to inform policy in the areas of teacher preparation, college completion, and the proposed “First in the World” competition. More information can be found at http://www2.ed.gov/policy/highered/reg/hearulemaking/2011/index.html. | |
• | U.S. Congressional Hearings.Beginning last year, there has been increased focus by members of the U.S. Congress on the role that proprietary educational institutions play in higher education. In June 2010, the U.S. Senate Committee on Health, Education, Labor and Pensions (“HELP Committee”) held the first in a series of hearings to examine the proprietary education sector. At a subsequent hearing in August 2010, the Government Accountability Office (“GAO”) presented a report of its review of various aspects of the proprietary sector, including recruitment practices and the degree to which proprietary institutions’ revenue is composed of Title IV funding. Following the August hearing, Sen. Tom Harkin, the Chairman of the HELP Committee, requested a broad range of detailed information from 30 proprietary institutions, including Grand Canyon University. We have been and intend to continue being responsive to the requests of the HELP Committee. Sen. Harkin has held subsequent hearings, most recently on July 21, 2011, and we believe that future hearings may be held. In addition, other Congressional hearings have been or are expected to be held regarding various aspects of the education industry that may affect our business. | |
• | Other Actions by the U.S. Congress.Political and budgetary concerns significantly affect Title IV Programs. Although the HEA is not due to be reauthorized until 2013, Congress may revise that law at any time and, in so doing, increase the regulatory burden on Grand Canyon University. In addition, as the current debate over the national debt has made clear, Congress is likely to reduce funding for student financial aid programs in a number of ways, including reducing the maximum Pell Grants available to students and eliminating the interest subsidy available to undergraduate and/or graduate students. In fact, on April 15, 2011, President Obama signed the fiscal year 2011 spending bill, also known as the Continuing Resolution, which permanently eliminated year-round Pell Grant awards beginning with the 2011-2012 award year. A reduction in the maximum annual Pell Grant amount likely would result in increased student borrowing, which may adversely impact the gainful employment metrics and cohort default rates for Grand Canyon University. Any action by Congress that significantly reduces Title IV program funding or the eligibility of our institutions or students to participate in Title IV programs could have a material adverse effect on our financial condition, results of operations and cash flows. In addition to possible reductions in federal student financial aid, we believe that the availability of state-funded student financial aid will continue to decline as states deal with historic budget shortfalls. These reductions may reduce our enrollment and, to the extent that Title IV funds replace any state funding sources for our students, may adversely impact our 90/10 Rule calculation. We cannot predict the outcome of the federal or state budget negotiations. |
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• | Changes in the amount or availability of veterans’ educational benefits or Department of Defense tuition assistance programs could materially and adversely affect our business.In recent months, the U.S. Congress has increased its focus on Department of Defense tuition assistance and veterans educational benefits that are used for programs of study offered at proprietary education institutions, particularly distance education programs of study. To the extent that any laws or regulations are adopted that limit or condition the amount of educational benefits that veterans can use toward their costs of education at proprietary education institutions or in distance education programs, or that limit or condition the participation of proprietary education institutions or distance education programs in military tuition assistance programs or in Title IV Programs with respect to military tuition assistance programs, our enrollments, results of operations, financial condition and 90/10 Rule calculation could be materially and adversely affected. |
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating expenses | ||||||||||||||||
Instructional costs and services | 45.0 | 52.4 | 46.5 | 47.0 | ||||||||||||
Selling and promotional | 26.9 | 29.8 | 28.1 | 30.0 | ||||||||||||
General and administrative | 6.8 | 6.3 | 6.8 | 6.6 | ||||||||||||
Exit costs | 0.0 | 0.1 | 0.0 | 0.1 | ||||||||||||
Total operating expenses | 78.6 | 88.7 | 81.3 | 83.6 | ||||||||||||
Operating income | 21.4 | 11.3 | 18.7 | 16.4 | ||||||||||||
Interest expense | (0.0 | ) | (0.2 | ) | (0.1 | ) | (0.3 | ) | ||||||||
Interest income | 0.0 | 0.0 | 0.0 | 0.1 | ||||||||||||
Income before income taxes | 21.3 | 11.2 | 18.6 | 16.2 | ||||||||||||
Income tax expense | 8.9 | 4.3 | 7.7 | 6.5 | ||||||||||||
Net income | 12.5 | 6.9 | 10.9 | 9.7 | ||||||||||||
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Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year (1) | 2-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Long term notes payable | $ | 22.6 | $ | 1.0 | $ | 3.5 | $ | 3.4 | $ | 14.7 | ||||||||||
Capital lease obligations | 1.2 | 0.8 | 0.4 | 0.0 | 0.0 | |||||||||||||||
Purchase obligations(2) | 50.6 | 19.1 | 29.0 | 1.8 | 0.7 | |||||||||||||||
Operating lease obligations | 36.7 | 2.4 | 11.0 | 9.7 | 13.6 | |||||||||||||||
Total contractual obligations | $ | 111.1 | $ | 23.3 | $ | 43.9 | $ | 14.9 | $ | 29.0 | ||||||||||
(1) | Less than one year represents expected expenditures from July 1, 2011 through December 31, 2011. | |
(2) | The purchase obligation amounts include expected spending by period under contracts that were in effect at June 30, 2011. |
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
Based on its reevaluation, including consideration of the aforementioned material weakness, and the criteria discussed above, management has restated its conclusion relative to the effectiveness of our internal control over financial reporting as of June 30, 2011. Accordingly, management now concludes that our internal control over financial reporting was not effective at a reasonable assurance level as of June 30, 2011.
Remediation Steps to Address Material Weakness
Management has dedicated significant resources to correct the methodology relating to the calculation of our allowance for doubtful accounts and to ensure that we take proper steps to improve our internal controls and remedy our material weakness in our internal control over financial reporting and disclosure controls. Management has implemented effective control policies and procedures and remediated the underlying control deficiencies by taking the following actions:
• | conducted a full review of our methodology for estimating the allowance for doubtful accounts |
• | established controls and procedures adequate to timely identify changes to the composition of our accounts receivable |
• | established controls and procedures to enhance our ability to monitor collection trends. |
Management believes that the actions described above have remediated the identified material weakness and strengthened our internal control over financial reporting as of the date of this filing.
Item 1. | Legal Proceedings |
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Item 1A. | Risk Factors |
• | Modification of the standards relating to the payment of incentive compensation to employees involved in student recruitment and enrollment; |
• | Implementation of standards for state authorization of institutions of higher education; and |
• | Adoption of a definition of “gainful employment” for purposes of the requirement of Title IV student financial aid that a program of study offered by a proprietary institution prepare students for gainful employment in a recognized occupation. |
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• | Disclosures. Effective July 1, 2011, proprietary institutions of higher education as well as public and not-for profit institutions offering postsecondary non-degree programs must provide prospective students with disclosures on the types of employment associated with the program, total cost of the program, completion rate, job placement rate, if applicable, and median loan debt of program completers. |
• | Reporting. Effective October 1, 2011, institutions must annually submit information to the Department about students who complete a program leading to gainful employment in a recognized occupation, including the amount of debt incurred under private loans or institutional finance plans, graduation information, and end of year enrollment information. |
• | New Program Approval.Effective July 1, 2011, the final regulations require institutions to notify the Department of Education at least 90 days before the start of new educational programs leading to gainful employment in recognized occupations. This notification must include information on the need for the program, a wage analysis, an institutional program review and approval process, and a demonstration of accreditation. An institution is not required to obtain formal Department approval if the notification is submitted at least 90 days prior to the first day of class. However, if the Department decides during the course of review that an approval is warranted, a notice will be sent to the institution at least 30 days prior to the first day of class with a request for additional information. The Department also has announced that it will be issuing a Notice of Proposed Rulemaking (NPRM) on the process for seeking Title IV eligibility for new programs. The NPRM proposes to amend the existing rules on new program approvals that went into effect on July 1, 2011. |
• | Debt-to-Earnings Ratio and Loan Repayment Rate.The metrics used to define gainful employment in the final rule are based on debt-to-earnings and loan repayment rates, but with changes from the proposed rule issued July 2010. Under the final rule, a program leads to gainful employment in a recognized occupation if it meets one of the following metrics: |
• | Loan Repayment Rate — at least 35 percent of former students are repaying their loans. The repayment rate generally is measured using the student’s third and fourth year of repayment, with a few exceptions. If there are 30 or fewer borrowers in a two-year period, the repayment rate period will be expanded to include borrowers in the third, fourth, fifth and sixth years. If there are still fewer than 30 borrowers after that point, the program is considered to have passed the metric. |
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• | Debt to Earnings Ratio — either (a) the estimated annual loan repayment of a typical graduate does not exceed 30 percent of his or her discretionary income (income above 150% of the poverty level), or (b) the estimated annual loan payment of a typical graduate does not exceed 12 percent of his or her total earnings. The ratios generally will be based upon students in their third and fourth years after graduation, with the same exceptions pertaining to small cohort programs described immediately above, for the repayment rate metric. Debt will be calculated based upon the program’s median debt, which will include private loans. Annual payments will be calculated based on a 10-year standard repayment plan for certificate and associates degree programs, 15 years for bachelor’s and master’s programs, and 20 years for graduate and professional programs. Debt incurred for living expenses is excluded from the calculation. |
• | If a program failsboththe Loan Repayment and Debt to Earnings metrics, then (i)after one failure, the institution must provide a warning to students disclosing the amount by which the program missed minimal acceptable performance and the program’s plans for improvement and establish a three-day waiting period before a student can enroll, (ii) after two failures within three years, the institution must provide a warning to prospective and enrolled students in the failing program stating the plan it intends to take in response, the risks associated with enrolling or continuing in the program, that the student should “expect to have difficulty repaying” the loans, and if the school chooses to discontinue the program at this stage, the timeline for doing so, and (iii)after three failures within four years, the program loses eligibility for federal student aid. Institutions cannot then reestablish the program’s eligibility for at least three years. |
• | changes in the income level of persons employed in specific occupations or sectors; |
• | changes in student mix to persons requiring higher amounts of student loans to complete their programs; |
• | changes in student loan repayment rates, including the usage of deferments and forbearances; |
• | changes in student loan delinquency rates; |
• | changes in the nation’s economy, which may affect graduate employment, graduate earnings and, therefore, the ability of graduates to repay their student loans; |
• | personal employment decisions made by our students; |
• | increases in interest rates; |
• | changes in the Department’s interpretation of any element of the gainful employment requirements that result in a more expansive or harsher enforcement than is currently presented; and |
• | other factors. |
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Total Number of | Maximum Dollar | |||||||||||||||
Shares Purchased as | Value of Shares | |||||||||||||||
Average | Part of Publicly | That May Yet Be | ||||||||||||||
Total Number of | Price Paid | Announced | Purchased Under | |||||||||||||
Period | Shares Purchased | Per Share | Program | the Program | ||||||||||||
April 1, 2011 — April 30, 2011 | — | — | $ | 10,007,000 | ||||||||||||
May 1, 2011 — May 31, 2011 | 312,200 | 13.29 | 312,200 | $ | 5,859,000 | |||||||||||
June 1, 2011 — June 30, 2011 | 299,800 | 13.38 | 299,800 | $ | 1,849,000 | |||||||||||
Total | 612,000 | 13.33 | 612,000 | $ | 1,849,000 |
Item 3. | Defaults Upon Senior Securities |
Item 4. | Reserved |
Item 5. | Other Information |
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Item 6. | Exhibits |
Number | Description | Method of Filing | ||||
3.1 | Amended and Restated Certificate of Incorporation. | Incorporated by reference to Exhibit 3.1 to Amendment No. 6 to the University’s Registration Statement on Form S-1 filed with the SEC on November 12, 2008. | ||||
3.2 | Second Amended and Restated Bylaws. | Incorporated by reference to Exhibit 3.1 to the University’s Current Report on Form 8-K filed with the SEC on August 2, 2010. | ||||
4.1 | Specimen of Stock Certificate. | Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the University’s Registration Statement on Form S-1 filed with the SEC on September 29, 2008. | ||||
4.2 | Amended and Restated Investor Rights Agreement, dated September 17, 2008, by and among Grand Canyon Education, Inc. and the other parties named therein. | Incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the University’s Registration Statement on Form S-1 filed with the SEC on September 29, 2008. | ||||
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||||
31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||||
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 herewith. | ||||
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 herewith. |
† | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the University, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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GRAND CANYON EDUCATION, INC. | ||||
Date: November 14, 2011 | By: | /s/ Daniel E. Bachus | ||
Daniel E. Bachus | ||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
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Number | Description | Method of Filing | ||||
3.1 | Amended and Restated Certificate of Incorporation. | Incorporated by reference to Exhibit 3.1 to Amendment No. 6 to the University’s Registration Statement on Form S-1 filed with the SEC on November 12, 2008. | ||||
3.2 | Second Amended and Restated Bylaws. | Incorporated by reference to Exhibit 3.1 to the University’s Current Report on Form 8-K filed with the SEC on August 2, 2010. | ||||
4.1 | Specimen of Stock Certificate. | Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the University’s Registration Statement on Form S-1 filed with the SEC on September 29, 2008. | ||||
4.2 | Amended and Restated Investor Rights Agreement, dated September 17, 2008, by and among Grand Canyon Education, Inc. and the other parties named therein. | Incorporated by reference to Exhibit 4.2 to Amendment No. 2 to the University’s Registration Statement on Form S-1 filed with the SEC on September 29, 2008. | ||||
31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||||
31.2 | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed herewith. | ||||
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 herewith. | ||||
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 herewith. |
† | This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the University, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
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