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 (State or other jurisdiction of Incorporation or organization) |
20-3356009 (I.R.S. Employer Identification No.) |
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
2
| Our balance sheet as of March 31, 2011 by increasing our allowance for
doubtful accounts by $3.0 million; and |
||
| Our income statement for the three months ended March 31, 2011 by
increasing instructional costs and services expense by
$3.0 million and decreasing operating income and net
income by $3.0 million and $1.8 million, respectively. |
| Part I Item 1. Financial Statements; |
||
| Part I Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations; and |
||
| Part I Item 4. Controls
and Procedures |
||
| Part II Item 6. Exhibits. |
3
4
Item 1. | Financial Statements |
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands, except per share data) | 2011 | 2010 | ||||||
Restated | ||||||||
Net revenue |
$ | 101,709 | $ | 89,326 | ||||
Costs and expenses: |
||||||||
Instructional costs and services |
48,875 | 36,660 | ||||||
Selling and promotional, including $401
and $2,347 to related parties for March
31, 2011 and 2010, respectively |
29,832 | 26,876 | ||||||
General and administrative |
6,832 | 6,104 | ||||||
Exit costs |
| 89 | ||||||
Total costs and expenses |
85,539 | 69,729 | ||||||
Operating income |
16,170 | 19,597 | ||||||
Interest expense |
(107 | ) | (344 | ) | ||||
Interest income |
32 | 61 | ||||||
Income before income taxes |
16,095 | 19,314 | ||||||
Income tax expense |
6,614 | 7,834 | ||||||
Net income |
$ | 9,481 | $ | 11,480 | ||||
Earnings per share: |
||||||||
Basic income per share |
$ | 0.21 | $ | 0.25 | ||||
Diluted income per share |
$ | 0.21 | $ | 0.25 | ||||
Basic weighted average shares outstanding |
45,590 | 45,674 | ||||||
Diluted weighted average shares outstanding |
46,089 | 46,325 | ||||||
5
Three Months Ended | ||||||||
March 31, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Restated | ||||||||
Net income |
$ | 9,481 | $ | 11,480 | ||||
Other comprehensive income, net of tax: |
||||||||
Unrealized gains (losses) on hedging derivatives |
53 | (147 | ) | |||||
Unrealized losses on available for sale securities |
| (4 | ) | |||||
Realized gains on available for sale securities |
| (19 | ) | |||||
Comprehensive income |
$ | 9,534 | $ | 11,310 | ||||
6
March 31, | December 31, | |||||||
(In thousands, except par value) | 2011 | 2010 | ||||||
(Unaudited) | ||||||||
Restated | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 30,243 | $ | 33,637 | ||||
Restricted cash and cash equivalents |
49,740 | 52,178 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $31,366 (Restated) and
$30,112 at March 31, 2011 and December 31, 2010, respectively |
13,972 | 17,983 | ||||||
Income taxes receivable |
2,213 | 8,415 | ||||||
Deferred income taxes |
16,563 | 16,078 | ||||||
Other current assets |
4,578 | 4,834 | ||||||
Total current assets |
117,309 | 133,125 | ||||||
Property and equipment, net |
140,655 | 123,999 | ||||||
Restricted cash |
445 | 760 | ||||||
Prepaid royalties |
6,396 | 6,579 | ||||||
Goodwill |
2,941 | 2,941 | ||||||
Deferred income taxes |
2,487 | 2,800 | ||||||
Other assets |
5,254 | 4,892 | ||||||
Total assets |
$ | 275,487 | $ | 275,096 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 27,072 | $ | 15,693 | ||||
Accrued compensation and benefits |
15,144 | 13,633 | ||||||
Accrued liabilities |
7,453 | 9,477 | ||||||
Accrued litigation loss |
5,200 | 5,200 | ||||||
Accrued exit costs |
40 | 64 | ||||||
Income taxes payable |
1,223 | 829 | ||||||
Student deposits |
46,127 | 48,873 | ||||||
Deferred revenue |
19,218 | 15,034 | ||||||
Due to related parties |
1,958 | 10,346 | ||||||
Current portion of capital lease obligations |
1,638 | 1,673 | ||||||
Current portion of notes payable |
1,957 | 2,026 | ||||||
Total current liabilities |
127,030 | 122,848 | ||||||
Capital lease obligations, less current portion |
10 | 151 | ||||||
Other noncurrent liabilities |
2,679 | 2,715 | ||||||
Notes payable, less current portion |
21,432 | 21,881 | ||||||
Total liabilities |
151,151 | 147,595 | ||||||
Commitments and contingencies |
||||||||
Stockholders equity |
||||||||
Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued
and outstanding at March 31, 2011 and December 31, 2010 |
| | ||||||
Common stock, $0.01 par value, 100,000 shares authorized; 45,812 and 45,811
shares issued and 44,817 and 45,761 shares outstanding at March 31, 2011 and
December 31, 2010, respectively |
458 | 458 | ||||||
Treasury stock, at cost, 995 and 50 shares of common stock at March 31, 2011
and December 31, 2010, respectively |
(14,993 | ) | (782 | ) | ||||
Additional paid-in capital |
78,961 | 77,449 | ||||||
Accumulated other comprehensive loss |
(392 | ) | (445 | ) | ||||
Accumulated earnings |
60,302 | 50,821 | ||||||
Total stockholders equity |
124,336 | 127,501 | ||||||
Total liabilities and stockholders equity |
$ | 275,487 | $ | 275,096 | ||||
7
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 |
| | | | | | 9,481 | 9,481 | ||||||||||||||||||||||||
Unrealized
gain on hedging derivative, net of taxes of $21 |
| | | | | 53 | | 53 | ||||||||||||||||||||||||
Common stock purchased for treasury |
| | 945 | (14,211 | ) | | | | (14,211 | ) | ||||||||||||||||||||||
Exercise of stock options |
1 | | | | 13 | | | 13 | ||||||||||||||||||||||||
Excess tax benefits from share-based compensation |
| | | | 69 | | | 69 | ||||||||||||||||||||||||
Share-based compensation |
| | | | 1,430 | | | 1,430 | ||||||||||||||||||||||||
Balance at March 31, 2011 |
45,812 | $ | 458 | 995 | $ | (14,993 | ) | $ | 78,961 | $ | (392 | ) | $ | 60,302 | $ | 124,336 | ||||||||||||||||
8
Three Months Ended March 31, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Restated | ||||||||
Cash flows provided by operating activities: |
||||||||
Net income |
$ | 9,481 | $ | 11,480 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Share-based compensation |
1,430 | 1,037 | ||||||
Excess tax benefits from share-based compensation |
| (492 | ) | |||||
Amortization of debt issuance costs |
15 | 16 | ||||||
Provision for bad debts |
10,034 | 4,774 | ||||||
Depreciation and amortization |
3,826 | 2,661 | ||||||
Exit costs |
(24 | ) | (479 | ) | ||||
Deferred income taxes |
(224 | ) | (27 | ) | ||||
Other |
| (39 | ) | |||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(6,023 | ) | (4,862 | ) | ||||
Prepaid expenses and other |
(52 | ) | (1,655 | ) | ||||
Due to/from related parties |
(8,388 | ) | 1,400 | |||||
Accounts payable |
5,748 | 1,912 | ||||||
Accrued liabilities |
(513 | ) | 5,024 | |||||
Income taxes receivable/payable |
6,665 | 6,251 | ||||||
Student deposits |
(2,746 | ) | 1,911 | |||||
Deferred revenue |
4,184 | 20,168 | ||||||
Net cash provided by operating activities |
23,413 | 49,080 | ||||||
Cash flows used in investing activities: |
||||||||
Capital expenditures |
(14,668 | ) | (11,591 | ) | ||||
Change in restricted cash and cash equivalents |
2,753 | (2,931 | ) | |||||
Proceeds from sale or maturity of investments |
| 487 | ||||||
Net cash used in investing activities |
(11,915 | ) | (14,035 | ) | ||||
Cash flows (used in) provided by financing activities: |
||||||||
Principal payments on notes payable and capital lease obligations |
(694 | ) | (727 | ) | ||||
Purchase of treasury stock |
(14,211 | ) | | |||||
Excess tax benefits from share-based compensation |
| 492 | ||||||
Net proceeds from exercise of stock options |
13 | 502 | ||||||
Net cash (used in) provided by financing activities |
(14,892 | ) | 267 | |||||
Net (decrease) increase in cash and cash equivalents |
(3,394 | ) | 35,312 | |||||
Cash and cash equivalents, beginning of period |
33,637 | 62,571 | ||||||
Cash and cash equivalents, end of period |
$ | 30,243 | $ | 97,883 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid for interest |
$ | 107 | $ | 195 | ||||
Cash paid for income taxes |
$ | 219 | $ | 1,598 | ||||
Supplemental disclosure of non-cash investing and financing activities |
||||||||
Purchases of property and equipment included in accounts payable |
$ | 5,631 | $ | (1,357 | ) | |||
Tax benefit of Spirit warrant intangible |
$ | 70 | $ | 259 |
9
2011 | ||||||||
First Quarter | First Quarter | |||||||
As Reported | As Restated | |||||||
Net revenue |
$ | 101,709 | $ | 101,709 | ||||
Costs and expenses: |
||||||||
Instructional costs and
services |
45,830 | 48,875 | ||||||
Selling and promotional |
29,832 | 29,832 | ||||||
General and administrative |
6,832 | 6,832 | ||||||
Total costs and expenses |
82,494 | 85,539 | ||||||
Operating income |
19,215 | 16,170 | ||||||
Net interest expense |
(75 | ) | (75 | ) | ||||
Income before income taxes |
19,140 | 16,095 | ||||||
Income tax expense |
7,842 | 6,614 | ||||||
Net income |
$ | 11,298 | $ | 9,481 | ||||
Earnings per share: |
||||||||
Basic income per
share(1) |
$ | 0.25 | $ | 0.21 | ||||
Diluted income per share(1) |
$ | 0.25 | $ | 0.21 | ||||
Basic weighted average
shares outstanding |
45,590 | 45,590 | ||||||
Diluted weighted average
shares outstanding |
46,089 | 46,089 | ||||||
(1) | The sum of quarterly income per share may not equal annual income per share due to rounding. |
As of March 31, 2011 | ||||||||
As Reported | As Restated | |||||||
Accounts
receivable, net of allowance for doubtful accounts of $13,169 (As
Reported) and $31,366 (As Restated) |
32,369 | 13,972 | ||||||
Deferred income taxes |
9,143 | 16,563 | ||||||
Total current assets |
128,286 | 117,309 | ||||||
Total assets |
286,464 | 275,487 | ||||||
Accumulated earnings |
71,278 | 60,302 | ||||||
Total stockholders equity |
135,313 | 124,336 | ||||||
Total liabilities and
stockholders equity |
286,464 | 275,487 |
Three Months Ended | ||||||||
March 31, 2011 | ||||||||
As Reported | As Restated | |||||||
Net income |
11,298 | 9,481 | ||||||
Provision for bad debts |
6,988 | 10,034 | ||||||
Deferred income taxes |
1,004 | (224 | ) | |||||
Net cash provided by
operating activities |
23,413 | 23,413 |
10
11
Accrued Exit Costs | ||||||||||||||||
at | Accrued Exit | |||||||||||||||
December 31, | Costs at | |||||||||||||||
2010 | Exit Costs | Payments in 2011 | March 31, 2011 | |||||||||||||
Accrued exit costs |
$ | 64 | $ | | $ | (24 | ) | $ | 40 | |||||||
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Denominator: |
||||||||
Basic weighted average shares outstanding |
45,590,195 | 45,673,917 | ||||||
Effect of dilutive stock options and restricted stock |
498,720 | 650,856 | ||||||
Diluted weighted average shares outstanding |
46,088,915 | 46,324,773 | ||||||
12
Balance at | Balance at | |||||||||||||||
Beginning of | Charged to | End of | ||||||||||||||
Period | Expense | Deductions(1) | Period | |||||||||||||
Allowance for doubtful accounts receivable: |
||||||||||||||||
Three months
ended March 31, 2011 (Restated) |
$ | 30,112 | 10,034 | (8,780 | ) | $ | 31,366 | |||||||||
Three months ended March 31, 2010 |
$ | 7,553 | 4,774 | (4,479 | ) | $ | 7,848 |
(1) | Deductions represent accounts written off, net of recoveries. |
As of | ||||||||
As of March | December 31, | |||||||
31, 2011 | 2010 | |||||||
Land |
$ | 8,282 | $ | 8,282 | ||||
Land improvements |
1,597 | 1,597 | ||||||
Buildings |
49,939 | 48,323 | ||||||
Equipment under capital leases |
4,502 | 4,502 | ||||||
Leasehold improvements |
11,835 | 11,407 | ||||||
Computer equipment |
38,796 | 36,742 | ||||||
Furniture, fixtures and equipment |
11,896 | 11,401 | ||||||
Internally developed software |
4,390 | 3,825 | ||||||
Other |
1,098 | 998 | ||||||
Construction in progress |
36,390 | 21,349 | ||||||
168,725 | 148,426 | |||||||
Less accumulated depreciation and amortization |
(28,070 | ) | (24,427 | ) | ||||
Property and equipment, net |
$ | 140,655 | $ | 123,999 | ||||
2011 |
$ | 3,745 | ||
2012 |
6,243 | |||
2013 |
7,020 | |||
2014 |
6,640 | |||
2015 |
5,764 | |||
Thereafter |
24,188 | |||
Total minimum payments |
$ | 53,600 | ||
13
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 |
4,026,172 | 14.24 | ||||||||||||||
Granted |
1,226,250 | 15.34 | ||||||||||||||
Exercised |
(1,154 | ) | 12.00 | |||||||||||||
Forfeited, canceled or expired |
(29,208 | ) | 18.22 | |||||||||||||
Outstanding as of March 31, 2011 |
5,222,060 | $ | 14.47 | 8.42 | $ | 157 | ||||||||||
Exercisable as of March 31, 2011 |
1,671,032 | $ | 12.95 | 7.77 | $ | 2,590 | ||||||||||
Available for issuance as of March 31, 2011 |
1,978,459 | |||||||||||||||
(1) | Aggregate intrinsic value represents the value of the Universitys
closing stock price on March 31, 2011 ($14.50) in excess of the
exercise price multiplied by the number of options outstanding or
exercisable. |
2011 | 2010 | |||||||
Instructional costs and services |
$ | 620 | $ | 379 | ||||
Selling and promotional |
64 | 37 | ||||||
General and administrative |
746 | 621 | ||||||
Share-based compensation expense included in operating expenses |
1,430 | 1,037 | ||||||
Tax effect of share-based compensation |
(572 | ) | (415 | ) | ||||
Share-based compensation expense, net of tax |
$ | 858 | $ | 622 | ||||
14
15
16
Item 2. | Managements 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 including pending rulemaking by the Department of
Education; |
| 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 qualified executives and other
personnel; |
| risks associated with 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. |
17
| Our balance sheet as of March 31, 2011 by increasing our allowance for
doubtful accounts by $3.0 million; and |
||
| Our income statement for the three months ended March 31, 2011 by
increasing instructional costs and services expense by $3.0 million and decreasing operating income and net
income by $3.0 million and $1.8 million, respectively. |
18
March 31, | ||||||||||||||||
2011(1) | 2010 | |||||||||||||||
# of Students | % of Total | # of Students | % of Total | |||||||||||||
Graduate degrees(2) |
18,438 | 43.4 | % | 16,213 | 41.7 | % | ||||||||||
Undergraduate degree |
24,067 | 56.6 | % | 22,641 | 58.3 | % | ||||||||||
Total |
42,505 | 100.0 | % | 38,854 | 100.0 | % | ||||||||||
March 31, | ||||||||||||||||
2011(1) | 2010 | |||||||||||||||
# of Students | % of Total | # of Students | % of Total | |||||||||||||
Online(3) |
38,655 | 90.9 | % | 35,796 | 92.1 | % | ||||||||||
Ground(4) |
3,850 | 9.1 | % | 3,058 | 7.9 | % | ||||||||||
Total |
42,505 | 100.0 | % | 38,854 | 100.0 | % | ||||||||||
(1) | Enrollment at March 31, 2011 represents individual students who attended a course during the last two months of
the calendar quarter. Prior to our transition to BBAY, enrollment had been defined as individual students that
attended a course in a term that was in session as of the end of the quarter. |
|
(2) | Includes 1,301 and 615 students pursuing doctoral degrees at March 31, 2011 and 2010, respectively. |
|
(3) | As of March 31, 2011 and 2010, 45.8% and 43.4%, 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. |
19
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Net revenue |
100.0 | % | 100.0 | % | ||||
Operating expenses |
||||||||
Instructional costs and services |
48.1 | 41.0 | ||||||
Selling and promotional |
29.3 | 30.1 | ||||||
General and administrative |
6.7 | 6.8 | ||||||
Exit costs |
0.0 | 0.1 | ||||||
Total operating expenses |
84.1 | 78.1 | ||||||
Operating income |
15.9 | 21.9 | ||||||
Interest expense |
(0.1 | ) | (0.4 | ) | ||||
Interest income |
0.0 | 0.1 | ||||||
Income before income taxes |
15.8 | 21.6 | ||||||
Income tax expense |
6.5 | 8.8 | ||||||
Net income |
9.3 | 12.9 | ||||||
20
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Total | 1 Year (1) | 2-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Long term notes payable |
$ | 23.4 | $ | 1.5 | $ | 3.5 | $ | 3.6 | $ | 14.8 | ||||||||||
Capital lease obligations |
1.6 | 1.5 | 0.1 | 0.0 | 0.0 | |||||||||||||||
Purchase obligations(2) |
53.2 | 37.1 | 16.1 | 0.0 | 0.0 | |||||||||||||||
Operating lease obligations |
53.6 | 3.7 | 13.3 | 12.4 | 24.2 | |||||||||||||||
Total contractual obligations |
$ | 131.8 | $ | 43.8 | $ | 33.0 | $ | 16.0 | $ | 39.0 | ||||||||||
(1) | Less than one year represents expected expenditures from April 1, 2011 through December 31, 2011. |
|
(2) | The purchase obligation amounts include expected spending by period under contracts that were in
effect at March 31, 2011. |
21
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
| 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. |
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
22
Total Number of Shares | Maximum Dollar Value | |||||||||||||||
Purchased as Part of | of Shares That May Yet | |||||||||||||||
Total Number of | Average Price | Publicly Announced | Be Purchased Under that | |||||||||||||
Period | Shares Purchased | Paid Per Share | Programs | Programs | ||||||||||||
January 1, 2011 January 31, 2011 |
| | $ | 24,218,000 | ||||||||||||
February 1, 2011 February 28, 2011 |
100,000 | 15.78 | 100,000 | $ | 22,640,000 | |||||||||||
March 1, 2011 March 31, 2011 |
845,200 | 14.95 | 845,200 | $ | 10,007,000 | |||||||||||
Total |
945,200 | 15.03 | 945,200 | $ | 10,007,000 |
Item 3. | Defaults Upon Senior Securities |
Item 4. | Reserved |
Item 5. | Other Information |
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 Universitys 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 Universitys 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 Universitys 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 Universitys Registration Statement on Form S-1 filed with the SEC on September 29, 2008. | ||||
10.1 | Amended and Restated Loan Agreement, dated
April 8, 2011 by and between the University and
Bank of America, N.A.
|
Incorporated by reference to Exhibit 10.1 to the Universitys Quarterly Report on Form 10-Q filed with the SEC on May 9, 2011. | ||||
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. |
23
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) |
||||
24
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 Universitys 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 Universitys 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 Universitys 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 Universitys Registration Statement on Form S-1 filed with the SEC on September 29, 2008. | ||||
10.1 | Amended and Restated Loan Agreement, dated
April 8, 2011 by and between the University and
Bank of America, N.A.
|
Incorporated by reference to Exhibit 10.1 to the Universitys Quarterly Report on Form 10-Q filed with the SEC on May 9, 2011. | ||||
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. |
25
Date: November 14, 2011 | /s/ Brian E. Mueller | |||
Brian E. Mueller | ||||
Chief Executive Officer (Principal Executive Officer) |
||||
Date: November 14, 2011 | /s/ Daniel E. Bachus | |||
Daniel E. Bachus | ||||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the University. |
/s/ Brian E. Mueller
|
||
Chief Executive Officer (Principal Executive Officer) |
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the University. |
/s/ Daniel E. Bachus
|
||
Chief Financial Officer (Principal Financial and Principal Accounting Officer) |
Income Statements (Unaudited) (Parenthetical) (USD $) In Thousands | 3 Months Ended | |
---|---|---|
Mar. 31, 2011 | Mar. 31, 2010 | |
Costs and expenses: | ||
Selling and promotional expenses to related parties | $ 401 | $ 2,347 |
Statements of Comprehensive Income (Unaudited) (USD $) In Thousands | 3 Months Ended | |
---|---|---|
Mar. 31, 2011 | Mar. 31, 2010 | |
Statements of Comprehensive Income [Abstract] | ||
Net income | $ 9,481 | $ 11,480 |
Other comprehensive income, net of tax: | ||
Unrealized gains (losses) on hedging derivatives | 53 | (147) |
Unrealized losses on available for sale securities | (4) | |
Realized gains on available for sale securities | (19) | |
Comprehensive income | $ 9,534 | $ 11,310 |
Document and Entity Information | 3 Months Ended | |
---|---|---|
Mar. 31, 2011 | Nov. 01, 2011 | |
Document and Entity Information [Abstract] | ||
Entity Registrant Name | Grand Canyon Education, Inc. | |
Entity Central Index Key | 0001434588 | |
Document Type | 10-Q | |
Document Period End Date | Mar. 31, 2011 | |
Amendment Flag | true | |
Amendment Description | Amendment No.1 to Form 10-Q | |
Document Fiscal Year Focus | 2011 | |
Document Fiscal Period Focus | Q1 | |
Current Fiscal Year End Date | --12-31 | |
Entity Well-known Seasoned Issuer | No | |
Entity Voluntary Filers | No | |
Entity Current Reporting Status | Yes | |
Entity Filer Category | Large Accelerated Filer | |
Entity Common Stock, Shares Outstanding | 44,331,047 |
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Summary of Significant Accounting Policies | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of Significant Accounting Policies |
3. Summary of Significant Accounting Policies
Unaudited Interim Financial Information
The accompanying unaudited interim financial statements of the University have been prepared
in accordance with U.S. generally accepted accounting principles, consistent in all material
respects with those applied in its financial statements included in
its Annual Report on Form 10-K/A
for the fiscal year ended December 31, 2010. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting principles for complete
financial statements. Such interim financial information is unaudited but reflects all adjustments
that in the opinion of management are necessary for the fair presentation of the interim periods
presented. Interim results are not necessarily indicative of results for a full year. This
Quarterly Report on Form 10-Q/A should be read in conjunction with the University’s audited financial
statements and footnotes included in its Annual Report on Form 10-K/A for the fiscal year ended
December 31, 2010 from which the December 31, 2010 balance sheet information was derived.
Restricted Cash and Cash Equivalents
A significant portion of the University’s revenue is received from students who participate in
government financial aid and assistance programs. Restricted cash and cash equivalents primarily
represents amounts received from the federal and state governments under various student aid grant
and loan programs, such as Title IV. These funds are received subsequent to the completion of the
authorization and disbursement process for the benefit of the student. The U.S. Department of
Education requires Title IV funds collected in advance of student billings to be segregated in a
separate cash or cash equivalent account until the students are billed for their portion. The
University also classifies the $5,200 that it agreed to pay to settle the qui tam matter as
restricted cash, subject to the distribution of the settlement amount from escrow in accordance
with the terms of the settlement agreement. The University records all of these amounts as a
current asset in restricted cash and cash equivalents. Restricted cash and cash equivalents is
excluded from cash and cash equivalents until the cash is no longer restricted. The majority of
these funds remain as restricted cash and cash equivalents for an average of 60 to 90 days from the
date of receipt.
In the fourth quarter of 2010, the counterparty to the University’s interest rate swap made a
collateral call and the University posted $760 of pledged collateral as noncurrent restricted cash.
The pledged collateral was reduced to $445 as of March 31, 2011.
Derivatives and Hedging
Derivative financial instruments are recorded on the balance sheet as assets or liabilities
and re-measured at fair value at each reporting date. For derivatives designated as cash flow
hedges, the effective portion of the gain or loss on the derivative is reported as a component of
other comprehensive income and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. Gains and losses on the derivative representing
either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized in current earnings.
Derivative financial instruments enable the University to manage its exposure to interest rate
risk. The University does not engage in any derivative instrument trading activity. Credit risk
associated with the University’s derivatives is limited to the risk that a derivative counterparty
will not perform in accordance with the terms of the contract. Exposure to counterparty credit
risk is considered low because these agreements have been entered into with institutions with
strong credit ratings, and they are expected to perform fully under the terms of the agreements.
On June 30, 2009, the University entered into an interest rate corridor instrument and an
interest rate swap to manage its 30 Day LIBOR interest exposure related to its variable rate debt,
which commenced in April 2009 and matures in April 2014. The fair value of the interest rate
corridor instrument as of March 31, 2011 and December 31, 2010 was $25 and $27, respectively, which
is included in other assets. The fair value of the interest rate swap is a liability of $583 and
$686 as of March 31, 2011 and December 31, 2010, respectively, which is included in other
noncurrent liabilities. The fair values of each derivative instrument were determined using a
hypothetical derivative transaction and Level 2 of the hierarchy of valuation inputs. These
derivative instruments were designated as cash flow hedges of variable rate debt obligations. The
adjustment of $74 and $245 in the first three months of 2011 and 2010, respectively, for the
effective portion of the loss on the derivatives is included as a component of other comprehensive
income, net of taxes.
The interest rate corridor instrument hedges variable interest rate risk starting July 1, 2009
through April 30, 2014 with a notional amount of $11,268 as of March 31, 2011. The corridor
instrument permits the University to hedge its interest rate risk at several thresholds; the
University will pay variable interest rates based on the 30 Day LIBOR rates monthly until that
index reaches 4%. If 30 Day LIBOR is equal to 4% through 6%, the University will pay 4%. If 30
Day LIBOR exceeds 6%, the University will pay actual 30 Day LIBOR less 2%. This reduces the
University’s exposure to potential increases in interest rates.
The interest rate swap commenced on May 1, 2010 and continues each month thereafter until
April 30, 2014 and has a notional amount of $11,268 as of March 31, 2011. The University will
receive 30 Day LIBOR and pay 3.245% fixed interest on the amortizing notional amount. Therefore,
the University has hedged its exposure to future variable rate cash flows through April 30, 2014.
The interest rate swap is not subject to a master netting arrangement and collateral has been
called by the counterparty and reflected in a restricted cash account as of March 31, 2011 and
December 31, 2010 in the amount of $445 and $760, respectively.
As of March 31, 2011 no derivative ineffectiveness was identified. Any ineffectiveness in the
University’s derivative instruments designated as hedges would be reported in interest expense in
the income statement. For the three months ended March 31, 2011 $8 of credit risk was recorded in
interest expense on the derivatives. At March 31, 2011, the University is not expected to
reclassify gains or losses on derivative instruments from accumulated other comprehensive (loss)
income into earnings during the next 12 months.
Fair Value of Financial Instruments
As of March 31, 2011, the carrying value of cash and cash equivalents, accounts receivable,
account payable and accrued expenses approximate their fair value based on the liquidity or the
short-term maturities of these instruments. The carrying value of debt approximates fair value as
it is based on variable rate index. The carrying value of capital lease obligations approximate
fair value based upon market interest rates available to the University for debt of similar risk
and maturities. Derivative financial instruments are carried at fair value, determined using Level
2 of the hierarchy of valuation inputs, with the use of inputs other than quoted prices that are
observable for the asset or liability.
Revenue Recognition
Net revenues consist primarily of tuition and fees derived from courses taught by the
University online, at its 100 acre traditional campus in Phoenix, Arizona, and onsite at the
facilities of employers, as well as from related educational resources such as access to online
materials. Tuition revenue and most fees and related educational resources are recognized pro-rata
over the applicable period of instruction, net of scholarships provided by the University. For the
three months ended March 31, 2011 and 2010, the University’s revenue was reduced by approximately
$19,769 and $13,771, respectively, as a result of scholarships that the University offered to
students. The University maintains an institutional tuition refund policy, which provides for all
or a portion of tuition to be refunded if a student withdraws during stated refund periods.
Certain states in which students reside impose separate, mandatory refund policies, which override
the University’s policy to the extent in conflict. If a student withdraws at a time when only a
portion, or none of the tuition is refundable, then in accordance with its revenue recognition
policy, the University continues to recognize the tuition that was not refunded as pro-rata over
the applicable period of instruction. Since the University recognizes revenue pro-rata over the
term of the course and because, under its institutional refund policy, the amount subject to refund
is never greater than the amount of the revenue that has been deferred, under the University’s
accounting policies revenue is not recognized with respect to amounts that could potentially be
refunded. The University’s change in April 2010 to a non-term borrower-based institution from a
term based institution for federal student financial aid funding purposes does not have any impact
on the timing and recognition of revenues.
Instructional Costs and Services
Instructional costs and services consist primarily of costs related to the administration and
delivery of the University’s educational programs. This expense category includes salaries,
benefits and share-based compensation for full-time and adjunct faculty and administrative
personnel, information technology costs, bad debt expense, curriculum and new program development
costs (which are expensed as incurred) and costs associated with other support groups that provide
services directly to the students. This category also includes an allocation of depreciation,
amortization, royalty to former owner, rent, and occupancy costs attributable to the provision of educational services,
primarily at the University’s Phoenix, Arizona campus.
Selling and Promotional
Selling and promotional expenses include salaries, benefits and share-based compensation of
personnel engaged in the marketing, recruitment, and retention of students, as well as advertising
costs associated with purchasing leads, hosting events and seminars, and producing marketing
materials. This category also includes an allocation of depreciation, amortization, rent, and
occupancy costs attributable to selling and promotional activities at the Company’s facilities in
Arizona. Selling and promotional costs are expensed as incurred.
Through December 2010, the University was a party to a revenue sharing arrangement (the
Collaboration Agreement) with Mind Streams, L.L.C. (Mind Streams), a related party pursuant to
which it paid a percentage of the net revenue that it actually received from applicants recruited
by those entities that matriculated at Grand Canyon University. Mind Streams bore all costs
associated with the recruitment of these applicants.
As a result of new rules adopted by the U.S. Department of Education and effective July 1,
2011, the University determined that revenue sharing arrangements like the Collaboration Agreement,
and the manner in which it pays amounts under the Collaboration Agreement, will most likely no
longer be permitted. Accordingly, the University and Mind Streams entered into an agreement, dated
December 30, 2010, pursuant to which the University agreed to pay Mind Streams an amount equal to
(a) $8,500, plus (b) Mind Streams’ applicable share of any net revenue actually received by the
University on or before February 28, 2011 with respect to any such
Mind Streams identified students commencing University courses prior to November 1, 2010. In
return, Mind Streams agreed to (i) accept such amounts in full and complete satisfaction of all
amounts owed by the University to Mind Streams under the Collaboration Agreement, and (ii) transfer
to the University a proprietary database of potential student leads. A payment of $8,500 was made
in January 2011 in conjunction with this agreement. Additionally in 2010, Gail Richardson, the
father of Brent D. Richardson, the University’s Executive Chairman, and Christopher C. Richardson,
the University’s General Counsel and a director, formed a new entity, Lifetime Learning, which
plans to generate and sell leads to the University and other entities in the education sector. For
the three months ended March 31, 2011 and 2010, the University expensed approximately $401 and
$2,347, respectively, pursuant to these arrangements, exclusive of the settlement arrangement
discussed above. As of March 31, 2011 and December 31, 2010 $564, and $9,367, respectively, were
due to these related parties.
General and Administrative
General and administrative expenses include salaries, benefits and share-based compensation of
employees engaged in corporate management, finance, human resources, compliance, and other
corporate functions. General and administrative expenses also include an allocation of
depreciation, amortization, rent, and occupancy costs attributable to the departments providing
general and administrative functions.
Exit Costs
In November 2009, the University finalized a plan to centralize its student services
operations in Arizona and, as a result, closed its student services facility in Utah. The exit
costs incurred in connection with this decision have been expensed and are presented separately on
the income statement. The costs incurred included severance payments; relocation expenses; future
lease payments, net of estimated sublease rentals; and the write off of leasehold improvements
associated with this leased space. The following is a summary of the University’s exit activities:
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Segment Information
The University operates as a single educational delivery operation using a core infrastructure
that serves the curriculum and educational delivery needs of both its ground and online students
regardless of geography. The University’s Chief Executive Officer manages the University’s
operations as a whole and no expense or operating income information is generated or evaluated on
any component level.
Reclassifications
Certain reclassifications have been made to the prior period balances to conform to the
current period.
Recent Accounting Pronouncements
The University has reviewed and evaluated all recent accounting pronouncements and believes
there are none that could potentially have a material impact on the University’s financial
condition, results of operations, or disclosures.
|
Income Taxes | 3 Months Ended |
---|---|
Mar. 31, 2011 | |
Income Taxes [Abstract] | |
Income Taxes |
8. Income Taxes
The University’s uncertain tax positions are related to tax years that remain subject to
examination by tax authorities. As of March 31, 2011, the earliest tax year still subject to
examination for federal and state purposes is 2007 and 2005, respectively.
|
Statement of Stockholders' Equity (Unaudited) (Parenthetical) (Accumulated Other Comprehensive Loss, USD $) In Thousands | 3 Months Ended |
---|---|
Mar. 31, 2011 | |
Accumulated Other Comprehensive Loss | |
Tax effect on unrealized loss on hedging derivatives | $ 21 |
Valuation and Qualifying Accounts | 3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation and Qualifying Accounts [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Valuation and Qualifying Accounts |
5. Valuation and Qualifying Accounts
|
Regulatory | 3 Months Ended |
---|---|
Mar. 31, 2011 | |
Regulatory [Abstract] | |
Regulatory |
10. Regulatory
The University is subject to extensive regulation by federal and state governmental agencies
and accrediting bodies. In particular, the Higher Education Act of 1965, as amended (the “Higher
Education Act”), and the regulations promulgated thereunder by the Department of Education, subject
the University to significant regulatory scrutiny on the basis of numerous standards that schools
must satisfy in order to participate in the various federal student financial assistance programs
under Title IV of the Higher Education Act.
To participate in the Title IV programs, an institution must be authorized to offer its
programs of instruction by the relevant agency of the state in which it is located, accredited by
an accrediting agency recognized by the Department of Education and certified as eligible by the
Department of Education. The Department of Education will certify an institution to participate in
the Title IV programs only after the institution has demonstrated compliance with the Higher
Education Act and the Department of Education’s extensive regulations regarding institutional
eligibility. An institution must also demonstrate its compliance to the Department of Education on
an ongoing basis. The University submitted its application for recertification in March 2008 in
anticipation of the expiration of its provisional certification on June 30, 2008. The Department of
Education did not make a decision on the University’s recertification application by June 30, 2008,
and therefore the University’s participation in the Title IV programs had been automatically
extended thereafter on a month-to-month basis pending the Department of Education’s decision.
While this decision remained pending, on January 12, 2011, the University disclosed the termination
of certain voting agreements that had the effect of triggering a change in control under Department of Education regulations because it caused the University’s largest
stockholder group to own and control less than 25% of the outstanding voting stock. On April 8,
2011, following the completion of the Department of Education’s review of the information that the
University provided in connection with the termination of the voting agreements, the Department of
Education notified the University that it approved its application for a change of ownership and
issued to the University a new, provisional program participation agreement to participate in the Title IV
programs. While this certification is provisional, it does remove the University from
month-to-month status, provides for the University’s continued participation in Title IV programs
through December 31, 2013, and does not impose any conditions (such as any letter of credit requirement) or other restrictions on the University
during the provisional period other than the standard restrictions applicable to a provisional
certification. In accordance with the terms of the provisional certification, the University may
apply for recertification on a full basis by submitting a complete application by no later than
September 30, 2013.
Because the University operates in a highly regulated industry, it, like other industry
participants, may be subject from time to time to investigations, claims of non-compliance, or
lawsuits by governmental agencies or third parties, which allege statutory violations, regulatory
infractions, or common law causes of action. While there can be no assurance that regulatory
agencies or third parties will not undertake investigations or make claims against the University,
or that such claims, if made, will not have a material adverse effect on the University’s business,
results of operations or financial condition, management believes the University is in compliance
with applicable regulations in all material respects.
In connection with its administration of the Title IV federal student financial aid programs,
the Department of Education periodically conducts program reviews at selected schools that receive
Title IV funds. In July 2010, the Department of Education initiated a program review of Grand
Canyon University covering the 2008-2009 and 2009-2010 award years. As part of this program
review, a Department of Education program review team conducted a site visit on the University’s
campus and reviewed, and in some cases requested further information regarding, the University’s
records, practices and policies relating to, among other things, financial aid, enrollment,
enrollment counselor compensation, program eligibility and other Title IV compliance matters. Upon
the conclusion of the site visit, the University was informed by the program review team that it
would (i) conduct further review of the University’s documents and records offsite, (ii) upon
completion of such review, schedule a formal exit interview to be followed by a preliminary program
review report in which any preliminary findings of non-compliance would be presented, and (iii)
conclude the review by issuance of a final determination letter. The program review team has not
yet scheduled a formal exit interview with the University. Accordingly, at this point, the program
review remains open and the University intends to continue to cooperate with the review team until
the program review is completed.
While the University has not yet received notification of the timing of its exit interview or
the Department of Education’s preliminary program review report or final determination letter,
following the conclusion of the site visit the University became aware that the program review team
had two preliminary findings of concern. The first issue is whether a compensation policy in use
during part of the period under review improperly rewarded some enrollment counselors based on
success in enrolling students in violation of applicable law. As the University has previously
disclosed, while it believes that the University’s compensation policies and practices at issue in
the program review were not based on success in enrolling students in violation of applicable law,
the Department of Education’s regulations and interpretations of the incentive compensation law do
not establish clear criteria for compliance in all circumstances and some of the University’s
practices in prior years were not within the scope of any of the specific “safe harbors” provided
in the compensation regulations and applicable during that period.
The second issue is whether, during the award years under review, certain programs offered
within the University’s College of Liberal Arts provided students with training to prepare them for
gainful employment in a recognized occupation. This “gainful employment” standard has been a
requirement for Title IV eligibility for programs offered at proprietary institutions of higher
education such as Grand Canyon University although, pursuant to legislation passed in 2008 and
effective as of July 1, 2010, this requirement no longer applies to designated liberal arts
programs offered by the University and certain other institutions that have held accreditation by a
regional accrediting agency since a date on or before October 1, 2007 (the University has held a
regional accreditation since 1968). Subsequent to the site visit, the program review team
submitted a written request to the University in which the program review team stated the view
that, prior to July 1, 2010, traditional liberal arts programs were not considered as being
eligible under Title IV but then requested additional information from the University that would
help the Department of Education determine whether the programs offered within the University’s
College of Liberal Arts were eligible under Title IV because they did provide training to prepare
students for gainful employment in a recognized occupation. While the University was not informed
as to which specific programs offered within the University’s College of Liberal Arts the program
review team believes may be ineligible, in August 2010 the University provided the Department of
Education with the requested information which the University believes will demonstrate that the
programs offered within the University’s College of Liberal Arts met this requirement. The
University has received no further communications from the Department of Education regarding the
program review.
The University’s policies and procedures are planned and implemented to comply with the
applicable standards and regulations under Title IV. If and to the extent the Department of
Education’s final determination letter identifies any compliance issues, the University is
committed to resolving such issues and ensuring that Grand Canyon University operates in compliance
with all Department of Education requirements. Program reviews may remain unresolved for months or
years with little or no communication from the Department of Education, and may involve multiple
exchanges of information following the site visit. The University cannot presently predict whether
or if further information requests will be made, when the exit interview will take place, when the
preliminary program review report or final determination letter will be issued, or when the program
review will be closed. If the Department of Education were to make significant findings of
non-compliance in the final program review determination letter, including any finding related to
the two issues discussed above, then, after exhausting any administrative appeals available to the
University, the University could be required to pay a fine, return Title IV monies previously
received, or be subjected to other administrative sanctions. While the University cannot currently
predict the outcome of the Department of Education review, any adverse finding could damage the
University’s reputation in the industry and have a material adverse effect on the University’s
business, results of operations, cash flows and financial position.
|
Property and Equipment | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property and Equipment [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property and Equipment |
6. Property and Equipment
Property and equipment consist of the following:
|
Net Income Per Common Share | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income Per Common Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income Per Common Share |
4. Net Income Per Common Share
Basic net income per common share is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding for the period. Diluted
earnings per common share reflects the assumed conversion of all potentially dilutive securities,
consisting of stock options, for which the estimated fair value exceeds the exercise price, less
shares which could have been purchased with the related proceeds, unless anti-dilutive. For
employee equity awards, repurchased shares are also included for any unearned compensation adjusted
for tax.
The table below reflects the calculation of the weighted average number of common shares
outstanding, on an as if converted basis, used in computing basic and diluted earnings per common
share.
Diluted weighted average shares outstanding exclude the incremental effect of shares that
would be issued upon the assumed exercise of stock options. For the three months ended March 31,
2011 and 2010, approximately 2,244,541 and 506,868, respectively, of the University’s stock options
outstanding were excluded from the calculation of diluted earnings per share as their inclusion
would have been anti-dilutive. These options could be dilutive in the future.
|
Balance Sheets (Parenthetical) (USD $) In Thousands, except Per Share data | Mar. 31, 2011 | Dec. 31, 2010 |
---|---|---|
Current assets | ||
Net of allowance for doubtful accounts | $ 31,366 | $ 30,112 |
Stockholders' equity | ||
Preferred stock, par value | $ 0.01 | $ 0.01 |
Preferred stock, shares authorized | 10,000 | 10,000 |
Preferred stock, shares issued | 0 | 0 |
Preferred stock, shares outstanding | 0 | 0 |
Common stock, par value | $ 0.01 | $ 0.01 |
Common stock, shares authorized | 100,000 | 100,000 |
Common stock, shares issued | 45,812 | 45,811 |
Common stock, shares outstanding | 44,817 | 45,761 |
Treasury stock, shares outstanding | 995 | 50 |
Nature of Business | 3 Months Ended |
---|---|
Mar. 31, 2011 | |
Nature of Business [Abstract] | |
Nature of Business |
1. Nature of Business
Grand Canyon Education, Inc. (the “University”) is a regionally accredited provider of
postsecondary education services focused on offering graduate and undergraduate degree programs in
its core disciplines of education, business, healthcare, and liberal arts. The University offers
courses online, at its approximately 100 acre traditional ground campus in Phoenix, Arizona and
onsite at the facilities of employers. The University is accredited by The Higher Learning
Commission of the North Central Association of Colleges and Schools.
|
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Share-Based Compensation | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Compensation [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-Based Compensation |
9. Share-Based Compensation
On September 27, 2008 the University’s shareholders approved the adoption of the 2008 Equity
Incentive Plan (“Incentive Plan”) and the 2008 Employee Stock Purchase (“ESPP”). A total of
4,199,937 shares of the University’s common stock were originally authorized for issuance under the
Incentive Plan. On January 1, of each subsequent year in accordance with the terms of the
Incentive Plan, the number of shares authorized for issuance under the Incentive Plan automatically
increased by 2.5% of the number of shares of common stock issued and outstanding on the previous
December 31, raising the total number of shares of common stock authorized for issuance under the
Incentive Plan to 7,622,034 shares. Although the ESPP has not yet been implemented, a total of
1,049,984 shares of the University’s common stock have been authorized for sale under the ESPP.
A summary of the activity related to stock options granted under the University’s Incentive
Plan since December 31, 2010 is as follows:
Share-based Compensation Expense
The table below outlines share-based compensation expense for the quarter ended March 31, 2011
and 2010 related to restricted stock and stock options granted:
|
Restatement of Financial Statements | 3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Mar. 31, 2011 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restatement of Financial Statements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restatement of Financial Statements |
2. Restatement of Financial Statements
On November 3, 2011, the University determined that there was an error in the methodology it
used to estimate its allowance for doubtful accounts and that its financial statements for the
three months ended March 31, 2011 needed to be restated.
In recent periods, the University experienced a significant change in the composition of its
receivable balances since its transition to the borrower-based financial aid model in the second
quarter of 2010 in which the receivables due from former students had grown as a percentage of the
total amount outstanding. However, the University’s historical process for estimating the
allowance for doubtful accounts did not consider the disaggregation of receivable balances by
student based on enrollment status. As a result, the growth in the inactive student receivables was
not evident when making the allowance estimate in prior periods. As the University’s collection
experience indicates that receivables from former students carry a higher risk, this disaggregated
information should have been considered in determining the probability of loss within the
University’s receivables. If such information had been evaluated, management would have increased
the allowance for doubtful accounts to reflect the increased risk profile of the receivables in
prior periods. Accordingly, the Audit Committee of the Board of Directors together with
management, determined that, because management should have taken the additional steps
necessary to develop the disaggregated information for use in the analysis of reserve requirements
and resulting allowance for doubtful accounts, the financial statements for the fiscal year ended
December 31, 2010 and for the quarters ended June 30, 2010,
September 30, 2010, March 31, 2011 and June 30, 2011 should be restated to correct the allowance
for doubtful accounts.
The following
table summarizes the unaudited quarterly results of operations as originally
reported and as restated for the three months ended March 31, 2011.
The
following is a summary of the changes on the University’s
balance sheet.
The
following is a summary of the changes on the University’s statement of cash flows.
|
Subsequent Events | 3 Months Ended |
---|---|
Mar. 31, 2011 | |
Subsequent Events [Abstract] | |
Subsequent Events |
12. Subsequent Events
On April 8, 2011, the University entered into an amended and restated loan agreement with Bank
of America, N.A. (the “Amended Agreement”). Under the Amended Agreement, the bank (a) extended the
maturity date of the University’s existing loan from April 30, 2014 to March 31, 2016 and decreased
the interest rate on the outstanding balance from the BBA Libor Rate plus 225 basis points to the
BBA Libor Rate plus 200 basis points (all other terms of the existing loan remain the same), and
(b) provided to the University a revolving line of credit in the amount of $50,000 through March
31, 2016 to be utilized for working capital, capital expenditures, share repurchases and other
general corporate purposes. The Amended Agreement contains standard covenants that are
substantially consistent with those included in the prior agreement, including covenants that,
among other things, restrict the University’s ability to incur additional debt or make certain
investments, require the University to maintain compliance with certain applicable regulatory
standards, and require the University to maintain a certain financial condition. Indebtedness under
the Amended Agreement is secured by all of the University’s assets.
|
Statement of Stockholders' Equity (Unaudited) (USD $) In Thousands | Total | Common Stock | Treasury Stock | Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Accumulated Earnings |
---|---|---|---|---|---|---|
Beginning Balance at Dec. 31, 2010 | $ 127,501 | $ 458 | $ (782) | $ 77,449 | $ (445) | $ 50,821 |
Beginning Balance, shares at Dec. 31, 2010 | 45,811 | 50 | ||||
Net income | 9,481 | 9,481 | ||||
Unrealized gain on hedging derivatives, net of taxes of $21 | 53 | 53 | ||||
Common stock purchased for treasury | (14,211) | (14,211) | ||||
Common stock purchased for treasury, Shares | 945 | |||||
Exercise of stock options | 13 | 13 | ||||
Exercise of stock options, shares | 1 | |||||
Excess tax benefits from share-based compensation | 69 | 69 | ||||
Share-based compensation | 1,430 | 1,430 | ||||
Ending Balance at Mar. 31, 2011 | $ 124,336 | $ 458 | $ (14,993) | $ 78,961 | $ (392) | $ 60,302 |
Ending Balance, shares at Mar. 31, 2011 | 45,812 | 995 |
Commitments and Contingencies | 3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Mar. 31, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and Contingencies |
7. Commitments and Contingencies
Leases
The University leases certain land, buildings and equipment under non-cancelable operating
leases expiring at various dates through 2023. Future minimum lease payments under operating leases
due each year are as follows at March 31, 2011:
Total rent expense and related taxes and operating expenses under operating leases for the
three months ended March 31, 2011 and 2010 were $1,593 and $1,084, respectively.
Legal Matters
From time to time, the University is a party to various lawsuits, claims, and other legal
proceedings that arise in the ordinary course of business, some of which are covered by insurance.
When the University is aware of a claim or potential claim, it assesses the likelihood of any loss
or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably
estimated, the University records a liability for the loss. If the loss is not probable or the
amount of the loss cannot be reasonably estimated, the University discloses the nature of the
specific claim if the likelihood of a potential loss is reasonably possible and the amount involved
is material. With respect to the majority of pending litigation matters, the University’s ultimate
legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases,
any potential losses related to those matters are not considered probable.
In connection with the qui tam lawsuit that had been filed against the University in August
2007 in the United States District Court for the District of Arizona (the “Court”) by a
then-current employee on behalf of the federal government, and in connection with the related
settlement agreement approved by the Court in August 2010, the University continues to maintain a
$5,200 accrued litigation loss and a commensurate amount of restricted cash of $5,200 in an
interest-bearing segregated account controlled by the University, for payment to the United States
and the relator in accordance with the terms of the settlement agreement on the earlier of
September 1, 2011 or the issuance by the Department of Education to the University of a full
three-year Title IV program participation agreement.
Upon resolution of any pending legal matters, the University may incur charges in excess of
presently established reserves. Management does not believe that any such charges would,
individually or in the aggregate, have a material adverse effect on the University’s financial
condition, results of operations or cash flows.
Tax Reserves, Non-Income Tax Related
From time to time the University has exposure to various non-income tax related matters that
arise in the ordinary course of business. At March 31, 2011 and December 31, 2010, the University
had reserved approximately $83 and $92, respectively, for tax matters where its ultimate exposure
is considered probable and the potential loss can be reasonably estimated.
|
Treasury Stock | 3 Months Ended |
---|---|
Mar. 31, 2011 | |
Treasury Stock [Abstract] | |
Treasury Stock |
11. Treasury Stock
On August 16, 2010, the University announced that its Board of Directors had authorized the
University to repurchase up to $25,000 of common stock, from time to time, depending on market
conditions and other considerations. The expiration date on the repurchase authorizations is
September 30, 2011 and repurchases occur at the University’s discretion. Repurchases may be made
in the open market or in privately negotiated transactions, pursuant to the applicable Securities
and Exchange Commission rules. The amount and timing of future share repurchases, if any, will be
made as market and business conditions warrant. Since the approval of the share repurchase plan,
the University has purchased 995,200 shares of common stock shares at an aggregate cost of $14,993
which includes 945,200 shares of common stock at an aggregate cost of $14,211 during the three
months ended March 31, 2011, which are recorded at cost in the accompanying balance sheets and
statement of stockholders’ equity.
|
Income Statements (Unaudited) (USD $) In Thousands, except Per Share data | 3 Months Ended | |
---|---|---|
Mar. 31, 2011 | Mar. 31, 2010 | |
Income Statements [Abstract] | ||
Net revenue | $ 101,709 | $ 89,326 |
Costs and expenses: | ||
Instructional costs and services | 48,875 | 36,660 |
Selling and promotional, including $401 and $2,347 to related parties for March 31, 2011 and 2010, respectively | 29,832 | 26,876 |
General and administrative | 6,832 | 6,104 |
Exit costs | 89 | |
Total costs and expenses | 85,539 | 69,729 |
Operating income | 16,170 | 19,597 |
Interest expense | (107) | (344) |
Interest income | 32 | 61 |
Income before income taxes | 16,095 | 19,314 |
Income tax expense | 6,614 | 7,834 |
Net income | $ 9,481 | $ 11,480 |
Earnings per share: | ||
Basic income per share | $ 0.21 | $ 0.25 |
Diluted income per share | $ 0.21 | $ 0.25 |
Basic weighted average shares outstanding | 45,590 | 45,674 |
Diluted weighted average shares outstanding | 46,089 | 46,325 |