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LOPE > SEC Filings for LOPE > Form 10-Q/A on 14-Nov-2011All Recent SEC Filings

Show all filings for GRAND CANYON EDUCATION, INC.

Form 10-Q/A for GRAND CANYON EDUCATION, INC.


14-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations has been restated to reflect the restatement of the balance sheets and statements of income, stockholders' equity and cash flows for the three and six month periods ended June 30, 2011 and 2010 and should be read in conjunction with our financial statements and related notes that appear elsewhere in this report.
Forward-Looking Statements
This Quarterly Report on Form 10-Q/A, including Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, contains certain "forward-looking statements," which include information relating to future events, future financial performance, strategies, expectations, competitive environment, regulation, and availability of resources. These forward-looking statements include, without limitation, statements regarding: proposed new programs; expectations regarding the material adverse effect that regulatory developments or other matters may have on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management's goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as "may," "should," "could," "would," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions, as well as statements in future tense, identify forward-looking statements. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management's good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:
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.

Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010, as updated in our subsequent reports filed with the Securities and Exchange Commission ("SEC"), including any updates found in Part II, Item 1A of this Quarterly Report on Form 10-Q/A or our other reports on Form 10-Q/A or Form 10-Q. You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made and we assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.


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Restatement of Financial Statements
The University is filing this Form 10-Q/A as a result of the correction of an error in the University's methodology relating to the manner in which the University estimates its allowance for doubtful accounts, which requires the University to restate its financial statements for the year ended December 31, 2010 and its unaudited interim financial statements for the three and six months ended June 30, 2011 and 2010.
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 and in consultation with Ernst & Young LLP, the University's independent registered public accounting firm, 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.
As a result, the University concluded that it understated bad debt expense and overstated operating income and net income by approximately $0.6 million, $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, and by approximately $9.3 million, $9.5 million and $5.7 million, respectively for both the three and six months ended June 30, 2010. Accordingly, we have restated:
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.

As a result of this restatement, amounts in our statements of cash flows and stockholders' equity for the three and six months ended June 30, 2011 and 2010 have also been restated. Our total cash flows from operations for the three and six months ended June 30, 2011 and 2010 remain unchanged. A summary of the effects of this restatement to our financial statements included within this Form 10-Q/A is presented in Note 2 in the accompanying notes to consolidated financial statements.


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Overview
We are a regionally accredited provider of postsecondary education services focused on offering graduate and undergraduate degree programs in our core disciplines of education, business, healthcare, and liberal arts. We offer programs online, at our approximately 110 acre traditional campus in Phoenix, Arizona and onsite at the facilities of employers.
At June 30, 2011, we had approximately 39,500 students, an increase of 8.9% over the approximately 36,300 students we had at June 30, 2010. At June 30, 2011, 95.9% of our students were enrolled in our online programs, and 43.6% of our online students were pursuing master's or doctoral degrees. In addition, revenue per student increased between periods as we increased tuition prices for students in our online and professional studies programs by 0.0% to 6.5%, depending on the program, with an estimated blended rate increase of 3.2% for our 2011-12 academic year, as compared to tuition price increases for students in our online and professional studies programs of 0.0% to 5.7% for our 2010-11 academic year, depending on the program, with an estimated blended rate increase of 3.5% for the prior academic year. Tuition for our traditional ground programs had no increase for our 2011-12 or 2010-11 academic years. In addition, we experienced an increase in the number of students taking four credit courses between years. Operating income was $41.9 million for the six months ended June 30, 2011, an increase of $1.8 million over the $40.1 million in operating income for the six months ended June 30, 2010.
The following is a summary of our student enrollment at June 30, 2011 and 2010 (which included less than 530 students pursuing non-degree certificates in each period) by degree type and by instructional delivery method:

                                                      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.

Critical Accounting Policies and Use of Estimates Our critical accounting policies are disclosed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010. During the six months ended June 30, 2011, there have been no significant changes in our critical accounting policies.
Key Trends, Developments and Challenges
Our key trends, developments and challenges are disclosed in our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Trends, Developments and Challenges" in our Annual Report on Form 10-K/A for our fiscal year ended December 31, 2010, which is incorporated herein by reference. During the six months ended June 30, 2011, there have been no significant changes in these trends, other than those discussed below.


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The following developments and trends present opportunities, challenges and risks toward achieving our goal of providing attractive returns to our shareholders:
Regulatory Environment In 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 Rulemaking On 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.

Results of Operations
The following table sets forth income statement data as a percentage of net
revenue for each of the periods indicated:

                                          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

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010 Net revenue. Our net revenue for the quarter ended June 30, 2011 was $103.1 million, an increase of $5.8 million, or 6.0%, as compared to net revenue of $97.3 million for the quarter ended June 30, 2010. This increase was primarily due to an increase in online enrollment and, to a lesser extent, increases in the average tuition per student as a result of tuition price increases and an increase in the number of students taking four credit courses between years, partially offset by an increase in institutional scholarships and reduced revenue caused by our transition to BBAY from a term-based financial aid system. End-of-period enrollment increased to approximately 39,500, as we were able to continue our growth and increase our recruitment, marketing, and enrollment operations. We are anticipating increased pressure on new and continuing enrollments due primarily to the increasing challenges presented in the economy, the impact of new and proposed regulations, and increased competition.
Instructional costs and services expenses. Our instructional costs and services expenses for the quarter ended June 30, 2011 were $46.4 million, a decrease of $4.7 million, or 9.2%, as compared to instructional costs and services expenses of $51.0 million for the quarter ended June 30, 2010. This decrease was primarily due to a decrease of $4.0 million, as compared to the second quarter of 2010, in non-capitalizable system conversion costs related to our conversion to a new system in that quarter and a decrease in bad debt expense of $6.6 million between periods partially offset by increases in employee compensation, faculty compensation, depreciation and amortization, and other instructional compensation and related expenses of $2.6 million, $1.4 million, $1.1 million, and $0.9 million, respectively. The increase in employee compensation is primarily due to an increase in headcount (both staff and faculty) needed to provide student instruction and support services to support the increase in enrollments. This increase, however, is partially offset by the reversal of $0.7 million of amounts accrued in previous periods that were to be paid to non-enrollment employees for students they previously recruited and for which bonuses were to be paid when those students completed 24 credit hours. Bad debt expense decreased to $8.2 million or 8.0% of net revenues in the second quarter of 2011 from $14.8 million or 15.2% of revenues in the second quarter of 2010 as a result of a decrease in aged receivables between periods as a result of our conversion to BBAY in the second quarter of 2010. Our instructional costs and services expenses as a percentage of net revenue decreased by 7.4% to 45.0% for the quarter ended June 30, 2011, as compared to 52.4% for the quarter ended June 30, 2010 primarily due to decreases in bad debt expense and the non-capitalized system conversion cost incurred in the second quarter of 2010. In addition, we experienced an increase in employee compensation and faculty compensation as a percentage of revenue as we have seen decreases in class size as the result of increasing the number of starts, increased instructional supplies due to increased licensing fees related to educational resources and increased miscellaneous costs associated with making continued improvements in curriculum development and developing new and enhanced innovative educational tools, partially offset by our ability to leverage the fixed cost structure of our campus-based facilities and ground faculty across an increasing revenue base and the non-capitalizable system costs incurred in the second quarter of 2010.


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Selling and promotional expenses. Our selling and promotional expenses for the quarter ended June 30, 2011 were $27.7 million, a decrease of $1.3 million, or 4.4%, as compared to selling and promotional expenses of $29.0 million for the quarter ended June 30, 2010. This decrease is primarily the result of decreases in employee compensation and advertising of $0.8 million and $0.3 million, respectively. These decreases are primarily due to changes made by the University to comply with the new employee compensation rules that went into effect July 1, 2011. Specifically during the second quarter of 2011 we reversed $1.5 million of amounts accrued in previous periods that were to be paid to enrollment employees for students they previously recruited and for which bonuses were to be paid when those students completed 24 credit hours and the termination of our revenue sharing arrangement with MindStreams, L.L.C. in December 2010. Our selling and promotional expenses as a percentage of net revenue decreased by 2.8% to 26.9% for the quarter ended June 30, 2011, from . . .

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