x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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Minnesota
(State or other jurisdiction of
incorporation or organization)
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|
41-1717955
(I.R.S. Employer
Identification No.)
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|
|
|
Capella Tower
225 South Sixth Street, 9
th
Floor
Minneapolis, Minnesota
(Address of principal executive offices)
|
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55402
(Zip Code)
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Large accelerated filer
|
o
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Accelerated filer
|
x
|
|
|
|
|
Non-accelerated filer
|
o
(Do not check if a smaller reporting company)
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Smaller reporting company
|
o
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Page
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PART I – FINANCIAL INFORMATION
|
|
|
|
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Item 1
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||
Item 2
|
||
Item 3
|
||
Item 4
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||
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PART II – OTHER INFORMATION
|
|
|
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Item 1
|
||
Item 1A
|
||
Item 2
|
||
Item 3
|
||
Item 4
|
||
Item 5
|
||
Item 6
|
||
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Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
|
2013
|
|
2012
|
|
2013
|
|
2012
|
||||||||
|
(Unaudited)
|
||||||||||||||
Revenues
|
$
|
103,693
|
|
|
$
|
106,180
|
|
|
$
|
208,935
|
|
|
$
|
215,580
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
||||||||
Instructional costs and services
|
44,900
|
|
|
46,704
|
|
|
91,867
|
|
|
95,137
|
|
||||
Marketing and promotional
|
24,101
|
|
|
25,437
|
|
|
49,602
|
|
|
50,859
|
|
||||
Admissions advisory
|
6,727
|
|
|
7,482
|
|
|
13,498
|
|
|
15,170
|
|
||||
General and administrative
|
10,500
|
|
|
8,501
|
|
|
21,328
|
|
|
18,421
|
|
||||
Total costs and expenses
|
86,228
|
|
|
88,124
|
|
|
176,295
|
|
|
179,587
|
|
||||
Operating income
|
17,465
|
|
|
18,056
|
|
|
32,640
|
|
|
35,993
|
|
||||
Other income (expense), net
|
(25
|
)
|
|
60
|
|
|
(225
|
)
|
|
17
|
|
||||
Income before income taxes
|
17,440
|
|
|
18,116
|
|
|
32,415
|
|
|
36,010
|
|
||||
Income tax expense
|
7,018
|
|
|
6,704
|
|
|
13,238
|
|
|
13,491
|
|
||||
Net income
|
10,422
|
|
|
11,412
|
|
|
19,177
|
|
|
22,519
|
|
||||
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
186
|
|
||||
Net income attributable to Capella Education Company
|
$
|
10,422
|
|
|
$
|
11,412
|
|
|
$
|
19,177
|
|
|
$
|
22,705
|
|
Net income attributable to Capella Education Company per common share:
|
|
|
|
|
|
|
|
||||||||
Basic
|
$
|
0.84
|
|
|
$
|
0.85
|
|
|
$
|
1.55
|
|
|
$
|
1.68
|
|
Diluted
|
$
|
0.83
|
|
|
$
|
0.85
|
|
|
$
|
1.54
|
|
|
$
|
1.67
|
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
||||||||
Basic
|
12,394
|
|
|
13,369
|
|
|
12,394
|
|
|
13,541
|
|
||||
Diluted
|
12,498
|
|
|
13,425
|
|
|
12,489
|
|
|
13,604
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
|
2013
|
|
2012
|
|
2013
|
|
2012
|
||||||||
|
(Unaudited)
|
||||||||||||||
Net income
|
$
|
10,422
|
|
|
$
|
11,412
|
|
|
$
|
19,177
|
|
|
$
|
22,519
|
|
Net loss attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
186
|
|
||||
Net income attributable to Capella Education Company
|
10,422
|
|
|
11,412
|
|
|
$
|
19,177
|
|
|
$
|
22,705
|
|
||
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
||||||||
Foreign currency translation gain (loss)
|
77
|
|
|
(91
|
)
|
|
188
|
|
|
(81
|
)
|
||||
Unrealized gains (losses) on available for sale securities, net of tax
|
(24
|
)
|
|
(90
|
)
|
|
(21
|
)
|
|
(191
|
)
|
||||
Comprehensive income attributable to Capella Education Company
|
$
|
10,475
|
|
|
$
|
11,231
|
|
|
$
|
19,344
|
|
|
$
|
22,433
|
|
|
Six Months Ended June 30,
|
||||||
|
2013
|
|
2012
|
||||
|
(Unaudited)
|
||||||
Operating activities
|
|
|
|
||||
Net income
|
$
|
19,177
|
|
|
$
|
22,519
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
||||
Provision for bad debts
|
7,060
|
|
|
7,043
|
|
||
Depreciation and amortization
|
13,596
|
|
|
14,403
|
|
||
Amortization of investment discount/premium
|
308
|
|
|
475
|
|
||
Impairment of property and equipment
|
229
|
|
|
956
|
|
||
Loss on disposal of property and equipment
|
39
|
|
|
77
|
|
||
Share-based compensation
|
2,606
|
|
|
1,933
|
|
||
Excess tax benefits from share-based compensation
|
(66
|
)
|
|
(37
|
)
|
||
Deferred income taxes
|
(43
|
)
|
|
(1,631
|
)
|
||
Changes in operating assets and liabilities:
|
|
|
|
||||
Accounts receivable
|
(6,044
|
)
|
|
(5,154
|
)
|
||
Prepaid expenses and other current assets
|
820
|
|
|
(54
|
)
|
||
Accounts payable and accrued liabilities
|
6,189
|
|
|
(3,109
|
)
|
||
Income tax payable
|
(1,486
|
)
|
|
(2,766
|
)
|
||
Deferred rent
|
(713
|
)
|
|
(95
|
)
|
||
Deferred revenue
|
(116
|
)
|
|
1,069
|
|
||
Net cash provided by operating activities
|
41,556
|
|
|
35,629
|
|
||
Investing activities
|
|
|
|
||||
Capital expenditures
|
(10,310
|
)
|
|
(11,697
|
)
|
||
Proceeds from the sale of property and equipment
|
—
|
|
|
303
|
|
||
Redemption of noncontrolling interest
|
—
|
|
|
(1,576
|
)
|
||
Purchases of marketable securities
|
(22,426
|
)
|
|
—
|
|
||
Sales and maturities of marketable securities
|
7,135
|
|
|
32,035
|
|
||
Net cash provided by (used in) investing activities
|
(25,601
|
)
|
|
19,065
|
|
||
Financing activities
|
|
|
|
||||
Excess tax benefits from share-based compensation
|
66
|
|
|
37
|
|
||
Net proceeds from exercise of stock options
|
524
|
|
|
244
|
|
||
Repurchases of common stock
|
(2,137
|
)
|
|
(25,483
|
)
|
||
Net cash used in financing activities
|
(1,547
|
)
|
|
(25,202
|
)
|
||
Effect of foreign exchange rates on cash
|
(47
|
)
|
|
(6
|
)
|
||
Net increase in cash and cash equivalents
|
14,361
|
|
|
29,486
|
|
||
Cash and cash equivalents at beginning of period
|
93,220
|
|
|
61,977
|
|
||
Cash and cash equivalents at end of period
|
$
|
107,581
|
|
|
$
|
91,463
|
|
Supplemental disclosures of cash flow information
|
|
|
|
||||
Income taxes paid
|
$
|
14,770
|
|
|
$
|
18,014
|
|
Noncash transactions:
|
|
|
|
||||
Purchase of equipment included in accounts payable and accrued liabilities
|
$
|
207
|
|
|
$
|
438
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
|
2013
|
|
2012
|
|
2013
|
|
2012
|
||||||||
Numerator:
|
|
|
|
|
|
|
|
||||||||
Net income attributable to Capella Education Company
|
$
|
10,422
|
|
|
$
|
11,412
|
|
|
$
|
19,177
|
|
|
$
|
22,705
|
|
Denominator:
|
|
|
|
|
|
|
|
||||||||
Denominator for basic net income attributable to Capella Education Company per common share— weighted average shares outstanding
|
12,394
|
|
|
13,369
|
|
|
12,394
|
|
|
13,541
|
|
||||
Effect of dilutive stock options, restricted stock, and market stock units
|
104
|
|
|
56
|
|
|
95
|
|
|
63
|
|
||||
Denominator for diluted net income attributable to Capella Education Company per common share— weighted average shares outstanding
|
12,498
|
|
|
13,425
|
|
|
12,489
|
|
|
13,604
|
|
||||
Basic net income attributable to Capella Education Company per common share
|
$
|
0.84
|
|
|
$
|
0.85
|
|
|
$
|
1.55
|
|
|
$
|
1.68
|
|
Diluted net income attributable to Capella Education Company per common share
|
$
|
0.83
|
|
|
$
|
0.85
|
|
|
$
|
1.54
|
|
|
$
|
1.67
|
|
|
As of June 30, 2013
|
||||||||||||||
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
||||||||
Tax-exempt municipal securities
|
$
|
37,246
|
|
|
$
|
21
|
|
|
$
|
(39
|
)
|
|
$
|
37,228
|
|
Total
|
$
|
37,246
|
|
|
$
|
21
|
|
|
$
|
(39
|
)
|
|
$
|
37,228
|
|
|
|
|
|
|
|
|
|
||||||||
|
As of December 31, 2012
|
||||||||||||||
|
Amortized Cost
|
|
Gross Unrealized
Gains
|
|
Gross Unrealized (Losses)
|
|
Estimated Fair Value
|
||||||||
Tax-exempt municipal securities
|
$
|
22,263
|
|
|
$
|
25
|
|
|
$
|
(9
|
)
|
|
$
|
22,279
|
|
Total
|
$
|
22,263
|
|
|
$
|
25
|
|
|
$
|
(9
|
)
|
|
$
|
22,279
|
|
|
As of June 30, 2013
|
|
As of December 31, 2012
|
||||
Due within one year
|
$
|
5,706
|
|
|
$
|
7,929
|
|
Due after one year through five years
|
31,522
|
|
|
14,350
|
|
||
Total
|
$
|
37,228
|
|
|
$
|
22,279
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
|
2013
|
|
2012
|
|
2013
|
|
2012
|
||||||||
Maturities of tax-exempt marketable securities
|
$
|
750
|
|
|
$
|
12,970
|
|
|
$
|
7,135
|
|
|
$
|
32,035
|
|
Total
|
$
|
750
|
|
|
$
|
12,970
|
|
|
$
|
7,135
|
|
|
$
|
32,035
|
|
|
|
Fair Value Measurements as of June 30, 2013 Using
|
||||||||||||||
Description
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||
Assets:
|
|
|
|
|
|
|
|
|
||||||||
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
||||||||
Cash
|
|
$
|
40,893
|
|
|
$
|
40,893
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
|
42,728
|
|
|
42,728
|
|
|
—
|
|
|
—
|
|
||||
Variable rate demand notes
|
|
23,960
|
|
|
23,960
|
|
|
—
|
|
|
—
|
|
||||
Marketable securities:
|
|
|
|
|
|
|
|
|
||||||||
Tax-exempt municipal securities
|
|
37,228
|
|
|
—
|
|
|
37,228
|
|
|
—
|
|
||||
Total assets at fair value on a recurring basis:
|
|
$
|
144,809
|
|
|
$
|
107,581
|
|
|
$
|
37,228
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
||||||||
Liabilities:
|
|
|
|
|
|
|
|
|
||||||||
Accrued liabilities:
|
|
|
|
|
|
|
|
|
||||||||
RDI contingent consideration
|
|
$
|
6,186
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,186
|
|
Total liabilities at fair value on a recurring basis:
|
|
$
|
6,186
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,186
|
|
|
|
Fair Value Measurements as of December 31, 2012 Using
|
||||||||||||||
Description
|
|
Fair Value
|
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
||||||||
Assets:
|
|
|
|
|
|
|
|
|
||||||||
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
||||||||
Cash
|
|
$
|
21,122
|
|
|
$
|
21,122
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Money market funds
|
|
643
|
|
|
643
|
|
|
—
|
|
|
—
|
|
||||
Variable rate demand notes
|
|
71,455
|
|
|
71,455
|
|
|
—
|
|
|
—
|
|
||||
Marketable securities:
|
|
|
|
|
|
|
|
|
||||||||
Tax-exempt municipal securities
|
|
22,279
|
|
|
—
|
|
|
22,279
|
|
|
—
|
|
||||
Total assets at fair value on a recurring basis:
|
|
$
|
115,499
|
|
|
$
|
93,220
|
|
|
$
|
22,279
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
||||||||
Liabilities:
|
|
|
|
|
|
|
|
|
||||||||
Other liabilities:
|
|
|
|
|
|
|
|
|
||||||||
RDI contingent consideration
|
|
$
|
6,252
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,252
|
|
Total liabilities at fair value on a recurring basis:
|
|
$
|
6,252
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,252
|
|
Unobservable Inputs
|
|
Range
|
Weighted average cost of capital
|
|
5%
|
Timing of cash flows
|
|
0 - 24 months
|
Probability of TDAP achievement
|
|
100%
|
Balance, December 31, 2012
|
|
$
|
6,252
|
|
Decrease of RDI contingent consideration liability
|
|
(66
|
)
|
|
Balance, June 30, 2013
|
|
$
|
6,186
|
|
|
As of June 30, 2013
|
|
As of December 31, 2012
|
||||
Accrued compensation and benefits
|
$
|
8,796
|
|
|
$
|
9,165
|
|
Accrued instructional
|
6,220
|
|
|
6,172
|
|
||
Accrued vacation
|
1,976
|
|
|
1,112
|
|
||
RDI contingent consideration
|
6,186
|
|
|
—
|
|
||
Other
|
12,536
|
|
|
9,943
|
|
||
Total
|
$
|
35,714
|
|
|
$
|
26,392
|
|
2013
|
$
|
3,281
|
|
2014
|
6,459
|
|
|
2015
|
6,520
|
|
|
2016
|
6,553
|
|
|
2017
|
6,688
|
|
|
2018 and thereafter
|
5,595
|
|
|
Total
|
$
|
35,096
|
|
Board authorizations:
|
|
||
July 2008
|
$
|
60,000
|
|
August 2010
|
60,662
|
|
|
February 2011
|
65,000
|
|
|
December 2011
|
50,000
|
|
|
Total amount authorized
|
235,662
|
|
|
Total value of shares repurchased
|
229,520
|
|
|
Residual authorization
|
$
|
6,142
|
|
|
Six Months Ended June 30,
|
||||||
|
2013
|
|
2012
|
||||
Shares repurchased
|
55
|
|
|
709
|
|
||
Total consideration, excluding commissions
|
$
|
2,135
|
|
|
$
|
25,455
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
||||||||||||
|
2013
|
|
2012
|
|
2013
|
|
2012
|
||||||||
Instructional costs and services
|
$
|
294
|
|
|
$
|
241
|
|
|
$
|
761
|
|
|
$
|
539
|
|
Marketing and promotional
|
94
|
|
|
76
|
|
|
243
|
|
|
192
|
|
||||
Admissions advisory
|
10
|
|
|
13
|
|
|
26
|
|
|
26
|
|
||||
General and administrative
|
626
|
|
|
488
|
|
|
1,576
|
|
|
1,176
|
|
||||
Share-based compensation expense included in operating income
|
1,024
|
|
|
818
|
|
|
2,606
|
|
|
1,933
|
|
||||
Tax benefit from share-based compensation expense
|
379
|
|
|
305
|
|
|
964
|
|
|
721
|
|
||||
Share-based compensation expense, net of tax
|
$
|
645
|
|
|
$
|
513
|
|
|
$
|
1,642
|
|
|
$
|
1,212
|
|
|
Foreign Currency Translation (Loss) Gain
|
|
Unrealized Gains (Loss) on Marketable Securities
|
|
Accumulated Other Comprehensive (Loss) Income
(1)
|
||||||
Beginning balance, December 31, 2012
|
$
|
(32
|
)
|
|
$
|
10
|
|
|
$
|
(22
|
)
|
Current period change
|
188
|
|
|
(21
|
)
|
|
167
|
|
|||
Ending balance, June 30, 2013
|
$
|
156
|
|
|
$
|
(11
|
)
|
|
$
|
145
|
|
(1)
|
Accumulated other comprehensive (loss) income is presented net of tax of
$7 thousand
and
$6 thousand
as of
June 30, 2013
and
December 31, 2012
, respectively.
|
•
|
Capella University (the University) is a regionally accredited university that offers a variety of undergraduate and graduate degree programs primarily for working adults.
|
•
|
Resource Development International Limited (RDI) is an independent provider of United Kingdom (UK) university distance learning qualifications that markets, develops and delivers these programs worldwide via its offices and partners across Asia, North America, Africa and Europe.
|
•
|
Sophia Learning, LLC (Sophia) is a social teaching and learning platform that integrates education with technology.
|
•
|
Initiatives to improve learner success
. As we continue to position Capella to drive sustainable growth, we are focused on improving learner success rates particularly in the first four quarters of enrollment, while maintaining a high standard of academic quality and rigor. We have implemented various measures likely to affect our growth and profitability, at least in the near-term, including the following:
|
•
|
Investing in our actionable analytics capabilities to further leverage data, refine our models and accurately predict the likelihood of a prospective and new learner persisting to critical thresholds of success in the learner's first four quarters of enrollment;
|
•
|
Piloting programs such as assessments and orientations to create personalized pathways for different learner groups which focus on transitioning learners into the online environment, creating a supportive community, and providing a proactive support structure;
|
•
|
Providing timely and clear information to our learners, faculty, advisors and staff to help learners persist and successfully complete their programs;
|
•
|
Optimizing our marketing approaches to increase emphasis on attracting learners who are more likely to persist in our programs;
|
•
|
Promoting affordability and encouraging learners to remain enrolled by offering learner success grants to new learners who meet admissions requirements, enroll, and apply within certain timeframes; and,
|
•
|
Diversifying outside of Capella University by creating innovative new learning technologies that have potential to increase affordability, and better serve the life-long learning needs of working adult professionals and therefore increase learner success.
|
•
|
New enrollment and persistence.
Capella University new enrollments in the second quarter of 2013 grew 12.7 percent, calculated from last day a new learner can drop a course without financial penalty. New enrollment growth in the second quarter of 2013 resulted from strong performance across all degree programs. Although new enrollment growth is an important metric, the combination of new enrollment and persistence are key drivers for total enrollment and revenue performance. We are building a sustainable business model focused on total enrollment growth.
|
•
|
Comprehensive marketing strategy.
Our strategic shift from a demand driven strategy towards a comprehensive marketing strategy, which is focused on building relationships with prospective learners early in the decision cycle, reinforces our commitment to quality inquiries by:
|
•
|
Introducing prospective learners to Capella through channels such as mass media and strategic relationships with employers,
|
•
|
Connecting with prospective learners by generating and nurturing inquiries through direct media such as natural search, our website, and display media, and
|
•
|
Engaging with prospective learners by developing meaningful relationships such as through social media or direct engagement.
|
•
|
Current
market and regulatory environment.
The market continues to present challenging conditions and competition is strong; however, we remain focused on attracting the right learners and learner success. We believe our initiatives to improve learner success through innovation will position us to continue to be a leader in the online postsecondary education market. Additionally, we are working to even more closely align with employers. Developments in the federal regulatory environment impact us as well, including the upcoming reauthorization of the Higher Education Act of 1965, as amended, and the current Department of Education rulemaking process. Many states have also become more active in regulating on-line education and enforcing consumer protection laws, especially with proprietary institutions. While we have a strong track record of regulatory compliance, such actions, even if not directed at Capella University, may make our operating environment more challenging.
|
•
|
Establishing new growth platforms.
We seek to drive long-term growth that is an extension of our core competencies into new markets. We are pursuing this extension through a small business development team that is exploring early stage opportunities. This may result in increased new business development costs focused on researching, identifying, and cultivating these new opportunities.
|
•
|
Redesign of programs and specializations
. In our continued efforts to drive affordability and speed to competency, we are focused on maximizing efficiencies in our existing programs while delivering the same learning outcomes. Our curriculum is based on competency mappings, which we are able to leverage as we redesign existing offerings. We believe these types of redesigns have the potential to increase persistence rates, learner success, and affordability.
|
•
|
New learning models.
We received approval from The Higher Learning Commission for two direct assessment programs for which we applied, the Master's of Business Administration in General Business Administration and Bachelor's in Business Administration. This new learning model, called FlexPath, allows learners to complete course work at their own pace throughout each quarter and complete activities to demonstrate specific competencies by the end of the quarter. We are currently waiting for approval by the Department of Education (the Department) of our FlexPath offerings before opening enrollment into the programs. We believe this direct assessment model provides an opportunity to expand our served market and increase affordability, including tuition costs, time to completion, and flexibility.
|
•
|
Announcement of New Rulemaking by the U.S. Department of Education.
On April 15, 2013 the Department announced its intent to establish a negotiated rulemaking committee covering the following areas: Title IV Federal Student Aid; changes to the definition of “adverse credit” for borrowers in the Federal Direct PLUS Loan program; state authorization pertaining to distance and correspondence education; state authorization for foreign locations of institutions; clock-to-credit hour conversions; gainful employment; and changes made to the Violence Against Women Act. The Department held three public hearings in May 2013 for interested parties to provide comments on these topics with negotiations beginning in September 2013. The Department indicated that this proposed rulemaking would be part of a series of rulemakings to achieve a long-term agenda in higher education focused on: access, affordability, academic quality and completion. On June 12, 2013 the Department announced the first in its series of rulemakings by issuing a call for nominations to serve on the committee focusing on gainful employment. The committee is scheduled to meet September 9 through 11, and October 21 through 23, 2013. This rulemaking committee will not meet the November 1, 2013 publication deadline for a July 1, 2014 effective date. Therefore, the earliest effective date for regulations coming out of this round of rulemaking would be July 1, 2015.
|
•
|
Background on Gainful Employment Rulemaking by the Department.
In 2010, the Department issued Title IV program integrity rules that addressed numerous topics, including the adoption of a definition of “gainful employment” for purposes of the requirement for Title IV student financial aid that a program of study offered by a proprietary institution prepare learners for gainful employment in a recognized occupation.
|
•
|
Minnesota Office of Higher Education Student Debt Information Request.
The Minnesota Office of Higher Education (MOHE) is developing state level metrics related to Average Student Loan Debt. The data request was sent to all schools located within the state. The final report will be published by institution and sector (public 2-year, public 4-year, private not-for-profit, and private for-profit) covering average educational loan debt (excluding
|
•
|
Student Loan Cohort Default Rates
. To remain eligible to participate in Title IV programs, an educational institution's student loan cohort default rates must remain below certain specified levels. Under current regulations, an educational institution will lose its eligibility to participate in Title IV programs if its two-year measuring period student loan cohort default rate equals or exceeds 25% for three consecutive cohort years, or 40% for any given year. Capella University's two-year cohort default rates for the 2010 and 2009 cohorts are 7.0% and 6.6%, respectively. This increase is primarily due to the overall economic environment, and an increased percentage of Capella University learners enrolled in a bachelor's program, who generally have a higher default rate compared to graduate learners. During the first quarter of 2013, the 2011 two-year draft cohort default rates were released by the Department. Capella University's 2011 two-year draft cohort default rate is 10.3%. The 2011 two-year draft rate will be finalized in September 2013.
|
|
Three Months Ended June 30,
|
||||||||||||||||||||||
|
$ (in thousands, unaudited)
|
|
$ Change
|
|
% Change
|
|
% of Revenue
|
||||||||||||||||
|
2013
|
|
2012
|
|
2013 vs. 2012
|
|
2013
|
|
2012
|
|
2013 vs. 2012
|
||||||||||||
Revenues
|
$
|
103,693
|
|
|
$
|
106,180
|
|
|
$
|
(2,487
|
)
|
|
(2.3
|
)%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
0.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Instructional costs and services
|
44,900
|
|
|
46,704
|
|
|
(1,804
|
)
|
|
(3.9
|
)
|
|
43.3
|
|
|
44.0
|
|
|
(0.7
|
)
|
|||
Marketing and promotional
|
24,101
|
|
|
25,437
|
|
|
(1,336
|
)
|
|
(5.3
|
)
|
|
23.3
|
|
|
24.0
|
|
|
(0.7
|
)
|
|||
Admissions advisory
|
6,727
|
|
|
7,482
|
|
|
(755
|
)
|
|
(10.1
|
)
|
|
6.5
|
|
|
7.0
|
|
|
(0.5
|
)
|
|||
General and administrative
|
10,500
|
|
|
8,501
|
|
|
1,999
|
|
|
23.5
|
|
|
10.1
|
|
|
8.0
|
|
|
2.1
|
|
|||
Total costs and expenses
|
86,228
|
|
|
88,124
|
|
|
(1,896
|
)
|
|
(2.2
|
)
|
|
83.2
|
|
|
83.0
|
|
|
0.2
|
|
|||
Operating income
|
17,465
|
|
|
18,056
|
|
|
(591
|
)
|
|
(3.3
|
)
|
|
16.8
|
|
|
17.0
|
|
|
(0.2
|
)
|
|||
Other income (expense), net
|
(25
|
)
|
|
60
|
|
|
(85
|
)
|
|
(141.7
|
)
|
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
|||
Income before income taxes
|
17,440
|
|
|
18,116
|
|
|
(676
|
)
|
|
(3.7
|
)
|
|
16.8
|
|
|
17.1
|
|
|
(0.3
|
)
|
|||
Income tax expense
|
7,018
|
|
|
6,704
|
|
|
314
|
|
|
4.7
|
|
|
6.8
|
|
|
6.3
|
|
|
0.5
|
|
|||
Effective tax rate
|
40.2
|
%
|
|
37.0
|
%
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income attributable to Capella Education Company
|
$
|
10,422
|
|
|
$
|
11,412
|
|
|
$
|
(990
|
)
|
|
(8.7
|
)%
|
|
10.0
|
%
|
|
10.8
|
%
|
|
(0.8
|
)%
|
|
Six Months Ended June 30,
|
||||||||||||||||||||||
|
$ (in thousands, unaudited)
|
|
$ Change
|
|
% Change
|
|
% of Revenue
|
||||||||||||||||
|
2013
|
|
2012
|
|
2013 vs. 2012
|
|
2013
|
|
2012
|
|
2013 vs. 2012
|
||||||||||||
Revenues
|
$
|
208,935
|
|
|
$
|
215,580
|
|
|
$
|
(6,645
|
)
|
|
(3.1
|
)%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
0.0
|
%
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||
Instructional costs and services
|
91,867
|
|
|
95,137
|
|
|
(3,270
|
)
|
|
(3.4
|
)
|
|
44.0
|
|
|
44.1
|
|
|
(0.1
|
)
|
|||
Marketing and promotional
|
49,602
|
|
|
50,859
|
|
|
(1,257
|
)
|
|
(2.5
|
)
|
|
23.7
|
|
|
23.6
|
|
|
0.1
|
|
|||
Admissions advisory
|
13,498
|
|
|
15,170
|
|
|
(1,672
|
)
|
|
(11.0
|
)
|
|
6.5
|
|
|
7.1
|
|
|
(0.6
|
)
|
|||
General and administrative
|
21,328
|
|
|
18,421
|
|
|
2,907
|
|
|
15.8
|
|
|
10.2
|
|
|
8.5
|
|
|
1.7
|
|
|||
Total costs and expenses
|
176,295
|
|
|
179,587
|
|
|
(3,292
|
)
|
|
(1.8
|
)
|
|
84.4
|
|
|
83.3
|
|
|
1.1
|
|
|||
Operating income
|
32,640
|
|
|
35,993
|
|
|
(3,353
|
)
|
|
(9.3
|
)
|
|
15.6
|
|
|
16.7
|
|
|
(1.1
|
)
|
|||
Other income (expense), net
|
(225
|
)
|
|
17
|
|
|
(242
|
)
|
|
(1,423.5
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
(0.1
|
)
|
|||
Income before income taxes
|
32,415
|
|
|
36,010
|
|
|
(3,595
|
)
|
|
(10.0
|
)
|
|
15.5
|
|
|
16.7
|
|
|
(1.2
|
)
|
|||
Income tax expense
|
13,238
|
|
|
13,491
|
|
|
(253
|
)
|
|
(1.9
|
)
|
|
6.3
|
|
|
6.3
|
|
|
—
|
|
|||
Effective tax rate
|
40.8
|
%
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income
|
19,177
|
|
|
22,519
|
|
|
(3,342
|
)
|
|
(14.8
|
)
|
|
9.2
|
|
|
10.4
|
|
|
(1.2
|
)
|
|||
Net loss attributable to noncontrolling interest
|
—
|
|
|
186
|
|
|
(186
|
)
|
|
(100.0
|
)
|
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
|||
Net income attributable to Capella Education Company
|
$
|
19,177
|
|
|
$
|
22,705
|
|
|
$
|
(3,528
|
)
|
|
(15.5
|
)%
|
|
9.2
|
%
|
|
10.5
|
%
|
|
(1.3
|
)%
|
•
|
Adjustments resulting from the translation of assets and liabilities of the foreign subsidiaries into U.S. dollars using exchange rates in effect at the balance sheet dates. These translation adjustments are recorded in accumulated other comprehensive income;
|
•
|
Earnings volatility translation of income and expense items of the foreign subsidiaries using an average monthly exchange rate for the respective periods; and
|
•
|
Gains and losses resulting from foreign exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from foreign currency transactions. These items are recorded in other income (expense), net in the Consolidated Statements of Income.
|
Period
|
Total Number of Shares
Purchased
|
|
Average Price Paid per
Share
|
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
|
|
Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
|
||||||
4/1/2013 to 4/30/2013
|
500
|
|
|
$
|
33.38
|
|
|
500
|
|
|
$
|
8,128,234
|
|
5/1/2013 to 5/31/2013
|
48,200
|
|
|
38.93
|
|
|
48,200
|
|
|
6,251,754
|
|
||
6/1/2013 to 6/30/2013
|
2,345
|
|
|
46.79
|
|
|
2,345
|
|
|
6,142,041
|
|
||
Total
|
51,045
|
|
|
39.24
|
|
|
51,045
|
|
|
6,142,041
|
|
(1)
|
The Company announced its current share repurchase program in July 2008. As of
June 30, 2013
, the Company's Board of Directors has authorized repurchases up to an aggregate amount of
$235.7 million
in value of common stock under the current program. The Board of Directors authorizes the Company to repurchase outstanding shares of common stock, from time to time, depending on market conditions and other considerations. There is no expiration date on the repurchase authorizations and repurchases occur at the Company's discretion.
|
Number
|
|
Description
|
|
Method of Filing
|
|
|
|
|
|
3.1
|
|
Amended and Restated Articles of Incorporation.
|
|
Incorporated by reference to Exhibit 3.1 to the
Company’s Current Report on Form 8-K filed with the SEC on November 11, 2006.
|
|
|
|
|
|
3.2
|
|
Second Amended and Restated By-Laws.
|
|
Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on December 10, 2008.
|
|
|
|
|
|
4.1
|
|
Specimen of common stock certificate.
|
|
Incorporated by reference to Exhibit 4.1 to Amendment No. 4 to the Company’s Registration Statement on Form S-1 filed with the SEC on October 19, 2006.
|
|
|
|
|
|
10.1
|
|
Form of Market Stock Unit Agreement (Section (16(B) Officer) under the Capella Education Company 2005 Stock Incentive Plan
|
|
Filed electronically.
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Filed electronically.
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
Filed electronically.
|
|
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed electronically.
|
|
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Filed electronically.
|
|
|
|
|
|
EX-101.INS
|
|
XBRL Instance Document
(1)
|
|
Filed electronically.
|
|
|
|
|
|
EX-101.SCH
|
|
XBRL Taxonomy Extension Schema Document
(1)
|
|
Filed electronically.
|
|
|
|
|
|
EX-101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document
(1)
|
|
Filed electronically.
|
|
|
|
|
|
EX-101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document
(1)
|
|
Filed electronically.
|
|
|
|
|
|
EX-101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document
(1)
|
|
Filed electronically.
|
|
|
|
|
|
EX-101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
(1)
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Filed electronically.
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(1)
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The XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
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CAPELLA EDUCATION COMPANY
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/s/ J. Kevin Gilligan
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July 23, 2013
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J. Kevin Gilligan
Chief Executive Officer
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(Principal Executive Officer)
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/s/ Steven L. Polacek
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July 23, 2013
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Steven L. Polacek
Senior Vice President and Chief Financial Officer
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(Principal Financial and Accounting Officer)
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1.
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Award Agreement
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These Terms and Conditions, together with the signature page to which they are attached, comprise a Market Stock Unit Award Agreement (“Agreement”) between Capella Education Company, a Minnesota corporation (the “Company”), and the recipient identified on the signature page (the “Recipient”), effective as of the date of grant specified on the signature page (the “Grant Date”). To the extent any capitalized terms used in this Agreement are not defined, they shall have the meaning ascribed to them in the Company's 2005 Stock Incentive Plan, as amended (the “Plan”).
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2.
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Grant of Market Stock Units
. The Recipient is hereby granted the number of market stock units (“Units”) specified on the signature page to this Agreement.
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3.
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Vesting and Payment of Units
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Ending Value (1)
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% of Units That Vest
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# of Units That Vest
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4.
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Effect of Termination of Employment
. If Recipient ceases to be an Employee prior to the
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5.
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Change in Control
. If a Change in Control (as defined below) of the Company shall occur, and within three years of such Change in Control, (i) Recipient's employment with the Company shall be terminated other than for Cause, or (ii) Recipient shall voluntarily leave employment with the Company for Good Reason (as defined below), then, upon the date of such termination or voluntary leaving of employment for Good Reason, then all of the Units subject to this Agreement shall immediately vest and be paid in full as provided in Section 3(b).
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6.
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Adjustments for Changes in Capitalization
. The number of Units subject to this Agreement and the Ending Values and the numbers of Units specified in the table in Section 3(a) shall be subject to adjustments for changes in the Company's capitalization as provided in Section 16 of the Plan.
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7.
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No Transfer
. The Units may not be pledged, assigned or transferred except as expressly provided in Section 6.3 of the Plan.
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8.
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No Shareholder Rights Until Payment
. The Recipient shall not have any of the rights of a shareholder of the Company (including the right to vote and receive dividends) in connection with the award of Units subject to this Agreement unless and until Shares are issued to him/her upon payment of the Units.
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9.
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Forfeiture Events
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(1)
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perform services for any Competitor as employee, consultant, contractor or otherwise;
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(2)
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solicit or attempt to solicit any employee or independent contractor of the Company to cease working for the Company;
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(3)
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use or disclose to any person any Confidential Information for any purpose;
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(4)
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take any action that might divert any opportunity from the Company or any of its affiliates, successors or assigns (the “Related Parties”) that is within the scope of the present or future operations or business of any Related Parties;
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(5)
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contact, call upon or solicit any customer of the Company, or attempt to divert or take away from the Company the business of any of its customers;
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(6)
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contact, call upon or solicit any prospective customer of the Company that Recipient became aware of or were introduced to in the course of Recipient's duties for the Company, or otherwise divert or take away from the Company the business of any prospective customer of the Company; or
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(7)
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engage in any activity that is harmful to the interests of the Company, including, without limitation, any conduct during the term of Recipient's employment that violates the Company's codes of conduct or other policies.
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(1)
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any Units that have not vested as of the date of such determination shall be immediately forfeited; and
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(2)
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Recipient shall automatically forfeit any rights Recipient may have with respect to the Units as of the date of such determination.
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10.
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Discontinuance of Employment
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This Agreement shall not give Recipient a right to continued employment with the Company or any parent or subsidiary of the Company, and the Company or any such parent or subsidiary employing Recipient may terminate his/her employment at any time and otherwise deal with Recipient without regard to the effect it may have upon him/her under this Agreement.
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11.
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Tax Withholding
. As a condition precedent to making a payment hereunder, Recipient shall be required to pay to the Company (or the Subsidiary or Affiliate employing Recipient), in accordance with the provisions of Section 14 of the Plan, an amount equal to the amount of any required domestic or foreign tax withholding obligation, including any social security obligation. The Company (or the Subsidiary or Affiliate employing Recipient) may withhold Shares equal in value to the amount of such tax withholding obligation, or may permit Recipient to arrange for the satisfaction of such tax withholding obligation by payment of the estimated tax obligation to the Company (or the Subsidiary or Affiliate employing Recipient). Payment may be made by electronic transfer, check or authority to withhold from salary.
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12.
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Interpretation of This Agreement
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All decisions and interpretations made by the Committee with regard to any question arising hereunder or under the Plan shall be binding and conclusive upon the Company and Recipient. If there is any inconsistency between the provisions of this Agreement and the Plan, the provisions of the Plan shall govern.
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13.
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Award Subject to Plan, Articles of Incorporation and By-Laws
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Recipient acknowledges that the Units are subject to the Plan, the Articles of Incorporation, as amended from time to time, and the By-Laws, as amended from time to time, of the Company, and any applicable federal or state laws, rules or regulations.
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14.
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Binding Effect
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This Agreement shall be binding in all respects on the heirs, representatives, successors and assigns of Recipient.
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15.
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Choice of Law
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This Agreement is entered into under the laws of the State of Minnesota and shall be construed and interpreted thereunder (without regard to its conflict of law principles).
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16.
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Section 409A of the Code
. The provisions of this Agreement shall be interpreted and construed in a manner intended to comply with Section 409A of the Code, the regulations issued thereunder or any exception thereto. Each payment under this Agreement is intended to be excepted from Section 409A under the short-term deferral exception as specified in Treas. Reg. § 1.409A-l(b)(4).
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1.
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I have reviewed this quarterly report on Form 10-Q of Capella Education Company;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4.
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ J. Kevin Gilligan
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J. Kevin Gilligan
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Chief Executive Officer
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1.
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I have reviewed this quarterly report on Form 10-Q of Capella Education Company;
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2.
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
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3.
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
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4.
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The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
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a)
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
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b)
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
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c)
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Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
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d)
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Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
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5.
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The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
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a)
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All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
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b)
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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/s/ Steven L. Polacek
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Steven L. Polacek
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Senior Vice President and Chief Financial Officer
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(1)
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ J. Kevin Gilligan
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J. Kevin Gilligan
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Chief Executive Officer
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July 23, 2013
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(1)
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
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(2)
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The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ Steven L. Polacek
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Steven L. Polacek
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Senior Vice President and Chief Financial Officer
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July 23, 2013
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