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EXCEL - IDEA: XBRL DOCUMENT - CAPELLA EDUCATION COFinancial_Report.xls
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - CAPELLA EDUCATION COcpla_10-qxex311x093014.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - CAPELLA EDUCATION COcpla_10-qxex312x093014.htm
EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - CAPELLA EDUCATION COcpla_10-qxex321x093014.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - CAPELLA EDUCATION COcpla_10-qxex322x093014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________ 
FORM 10-Q
____________________________________________ 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014
or
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33140 
____________________________________________
CAPELLA EDUCATION COMPANY
(Exact name of registrant as specified in its charter)
____________________________________________
 
Minnesota
(State or other jurisdiction of
incorporation or organization)
 
41-1717955
(I.R.S. Employer
Identification No.)
 
 
 
Capella Tower
225 South Sixth Street, 9th Floor
Minneapolis, Minnesota
(Address of principal executive offices)
 
55402
(Zip Code)

(888) 227-3552
(Registrant’s telephone number, including area code)
____________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
x
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The total number of shares of common stock outstanding as of October 23, 2014 was 12,230,515.



CAPELLA EDUCATION COMPANY
FORM 10-Q
INDEX
 


2


PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CAPELLA EDUCATION COMPANY
Consolidated Balance Sheets
(In thousands, except par value)
 
As of September 30, 2014
 
As of December 31, 2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
90,451

 
$
124,097

Marketable securities, current
36,258

 
18,342

Accounts receivable, net of allowance of $6,719 at September 30, 2014 and $7,091 at December 31, 2013
17,006

 
16,919

Prepaid expenses and other current assets
11,033

 
10,548

Deferred income taxes
2,809

 
2,846

Total current assets
157,557

 
172,752

Marketable securities, non-current
33,583

 
17,740

Property and equipment, net
37,728

 
39,993

Goodwill
17,106

 
16,969

Intangibles, net
2,062

 
2,795

Other assets
1,453

 

Total assets
$
249,489

 
$
250,249

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,090

 
$
7,939

Accrued liabilities
29,041

 
33,164

Dividends payable
4,365

 
4,346

Deferred revenue
12,469

 
10,736

Total current liabilities
50,965

 
56,185

Deferred rent
2,598

 
3,221

Other liabilities
3,190

 
2,541

Deferred income taxes
5,674

 
6,283

Total liabilities
62,427

 
68,230

 
 
 
 
Shareholders’ equity:
 
 
 
Common stock, $0.01 par value: Authorized shares — 100,000; Issued and Outstanding shares — 12,250 at September 30, 2014 and 12,361 at December 31, 2013
122

 
124

Additional paid-in capital
109,679

 
104,546

Accumulated other comprehensive loss
(473
)
 
(114
)
Retained earnings
77,734

 
77,463

Total shareholders’ equity
187,062

 
182,019

Total liabilities and shareholders’ equity
$
249,489

 
$
250,249


The accompanying notes are an integral part of these consolidated financial statements.

3


CAPELLA EDUCATION COMPANY
Consolidated Statements of Income
(In thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Revenues
$
103,097

 
$
100,703

 
$
313,525

 
$
309,638

Costs and expenses:
 
 
 
 
 
 
 
Instructional costs and services
47,143

 
45,984

 
139,973

 
137,851

Marketing and promotional
25,509

 
26,489

 
74,383

 
76,091

Admissions advisory
7,019


6,796

 
21,092

 
20,294

General and administrative
10,250

 
10,924

 
31,604

 
32,252

Lease amendment charges

 

 
2,690

 

Total costs and expenses
89,921

 
90,193

 
269,742

 
266,488

Operating income
13,176

 
10,510

 
43,783

 
43,150

Other expense, net
(46
)
 
(238
)
 
(559
)
 
(463
)
Income before income taxes
13,130

 
10,272

 
43,224

 
42,687

Income tax expense
5,373

 
4,262

 
17,606

 
17,500

Net income
$
7,757

 
$
6,010

 
$
25,618

 
$
25,187

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.63

 
$
0.48

 
$
2.08

 
$
2.03

Diluted
$
0.62

 
$
0.48

 
$
2.04

 
$
2.01

Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
12,268

 
12,394

 
12,301

 
12,394

Diluted
12,505

 
12,591

 
12,545

 
12,522

Cash dividends declared per common share
$
0.35

 
$

 
$
1.05

 
$


The accompanying notes are an integral part of these consolidated financial statements.



4


CAPELLA EDUCATION COMPANY
Consolidated Statements of Comprehensive Income
(In thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Net income
$
7,757

 
$
6,010

 
$
25,618

 
$
25,187

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
137

 
97

 
(367
)
 
285

Unrealized gains (losses) on available for sale securities, net of tax
(9
)
 
34

 
8

 
13

Comprehensive income
$
7,885

 
$
6,141

 
$
25,259

 
$
25,485


The accompanying notes are an integral part of these consolidated financial statements.


5


CAPELLA EDUCATION COMPANY
Consolidated Statements of Cash Flows
(In thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
 
(Unaudited)
Operating activities
 
 
 
Net income
$
25,618

 
$
25,187

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for bad debts
11,232

 
11,225

Depreciation and amortization
18,016

 
19,717

Amortization of investment discount/premium
1,319

 
540

Impairment of property and equipment
277

 
229

Loss on disposal of property and equipment
77

 
46

Share-based compensation
3,927

 
3,991

Excess tax benefits from share-based compensation
(451
)
 
(134
)
Deferred income taxes
(537
)
 
(242
)
Payment of contingent consideration
(906
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(11,273
)
 
(11,519
)
Prepaid expenses and other current assets
(670
)
 
(1,006
)
Accounts payable and accrued liabilities
(230
)
 
6,863

Income taxes payable
149

 
(2,536
)
Deferred rent
(623
)
 
(795
)
Deferred revenue
1,548

 
1,622

Net cash provided by operating activities
47,473

 
53,188

Investing activities
 
 
 
Capital expenditures
(15,788
)
 
(14,801
)
Investment in partnership interest
(1,453
)
 

Purchases of marketable securities
(48,957
)
 
(22,426
)
Maturities of marketable securities
13,890

 
7,635

Net cash used in investing activities
(52,308
)
 
(29,592
)
Financing activities
 
 
 
Excess tax benefits from share-based compensation
451

 
134

Net proceeds from exercise of stock options
3,663

 
2,684

Payment of dividends
(12,961
)
 

Repurchases of common stock
(14,032
)
 
(4,808
)
Payment of contingent consideration
(5,945
)
 

Net cash used in financing activities
(28,824
)

(1,990
)
Effect of foreign exchange rates on cash
13

 
(42
)
Net increase (decrease) in cash and cash equivalents
(33,646
)
 
21,564

Cash and cash equivalents at beginning of period
124,097

 
93,220

Cash and cash equivalents at end of period
$
90,451

 
$
114,784

Supplemental disclosures of cash flow information
 
 
 
Income taxes paid
$
18,327

 
$
20,283

Noncash transactions:
 
 
 
Purchase of equipment included in accounts payable and accrued liabilities
$
425

 
$
366

Declaration of cash dividend to be paid
$
4,346

 
$

Repurchases of common stock included in accrued liabilities
$
241

 
$

The accompanying notes are an integral part of these consolidated financial statements.

6


CAPELLA EDUCATION COMPANY
Notes to Consolidated Financial Statements
(Unaudited)

1. Nature of Business

Capella Education Company (the Company) was incorporated on December 27, 1991, and is the parent company of its wholly owned subsidiaries, Capella University (the University), Resource Development International Limited (RDI), Sophia Learning, LLC (Sophia), and Capella Learning Solutions (CLS). The University, founded in 1993, is an online postsecondary education services company offering a variety of bachelor's, master's and doctoral degree programs primarily delivered to working adults. The University is accredited by the Higher Learning Commission and is a member of the North Central Association of Colleges and Schools. In 2011, the Company acquired RDI, which is an independent provider of United Kingdom (UK) university distance learning qualifications and markets, develops and delivers programs worldwide via its offices and partners across Asia, North America, Africa and Europe. Sophia provides a social teaching and learning platform that integrates education with technology. CLS is a subsidiary created in 2013 that provides online training solutions and services to corporate partners which are delivered through Capella's online learning platform. With the Company's focus on academic quality in an online delivery format, it has one reporting segment.

2. Summary of Significant Accounting Policies

Consolidation
The consolidated financial statements include the accounts of the Company, the University, CLS, RDI and its subsidiaries, and Sophia, after elimination of intercompany accounts and transactions. RDI operates on a fiscal year ending October 31, which is also the date used for consolidation.

Unaudited Interim Financial Information
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of the Company's consolidated results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. Preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and footnotes. Actual results could differ from those estimates. This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s consolidated financial statements and footnotes included in its Annual Report on Form
10-K for the fiscal year ended December 31, 2013 (2013 Annual Report on Form 10-K).

Certain reclassifications have been made to the accrued liabilities table as of December 31, 2013 in Note 7 to align with current reporting methods.

Refer to the Company’s “Summary of Significant Accounting Policies” footnote included within the 2013 Annual Report on Form 10-K for a complete summary of the Company’s significant accounting policies.

3. Recent Accounting Pronouncements
 
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern, which is included in Accounting Standards Codification (ASC) 205, Presentation of Financial Statements. This update provides an explicit requirement for management to assess an entity's ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The guidance will be effective for the Company's annual reporting period beginning January 1, 2017, and applied prospectively; early adoption is also permitted. The Company does not expect adoption of this guidance to have a material impact on its financial condition, results of operations, or disclosures.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which is included in ASC 606, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that creates a single source of revenue guidance for all companies in all industries. The model is more principles-based than current guidance, and is

7


primarily based on recognizing revenue at an amount that reflects consideration to which the entity expects to be entitled to in exchange for transferring goods or services to a customer. The guidance will be effective for the Company's interim and annual reporting periods beginning January 1, 2017. The standard allows the Company to transition to the new model using either a full or modified retrospective approach, and early adoption is not permitted. The Company is currently evaluating the impact this standard will have on its business practices, financial condition, results of operations, and disclosures.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters. This update addresses diversity in practice regarding the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investments in a foreign entity. In addition, the standard addresses diversity in practice for the treatment of business combinations achieved in stages involving a foreign entity. The guidance was effective for the Company's interim and annual reporting periods beginning January 1, 2014, and applied prospectively. The adoption of this guidance did not have a material impact on the Company's financial condition, results of operations, or disclosures.

In February 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, which is included in Accounting Standards Codification (ASC) 220, Comprehensive Income. This update improves the reporting of reclassifications out of accumulated other comprehensive income. The guidance was effective for the Company's interim and annual reporting periods beginning January 1, 2013, and applied prospectively. The adoption of this guidance did not have a material impact on the Company's financial condition, results of operations, or disclosures.

The Company has reviewed and considered all other recent accounting pronouncements and believes there are none that could potentially have a material impact on its financial condition, results of operations, or disclosures.

4. Net Income per Common Share

Basic net income per common share is based on the weighted average number of shares of common stock outstanding during the period. Dilutive shares are computed using the Treasury Stock method and include the incremental effect of shares that would be issued upon the assumed exercise of stock options, settlement of restricted stock, and satisfaction of service conditions for market stock units.
The following table presents a reconciliation of the numerator and denominator in the basic and diluted net income per common share calculation, in thousands, except per share data: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income
$
7,757

 
$
6,010

 
$
25,618

 
$
25,187

Denominator:
 
 
 
 
 
 
 
Denominator for basic net income per common share— weighted average shares outstanding
12,268

 
12,394

 
12,301

 
12,394

Effect of dilutive stock options, restricted stock, and market stock units
237

 
197

 
244

 
128

Denominator for diluted net income per common share— weighted average shares outstanding
12,505

 
12,591

 
12,545

 
12,522

Basic net income per common share
$
0.63

 
$
0.48

 
$
2.08

 
$
2.03

Diluted net income per common share
$
0.62

 
$
0.48

 
$
2.04

 
$
2.01


Options to purchase common shares were outstanding, but not included in the computation of diluted net income per common share, because their effect would be anti-dilutive. The following table summarizes these securities, in thousands:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Anti-dilutive securities excluded from diluted earnings per share calculation
232

 
323

 
213

 
569



8


5. Marketable Securities

The following is a summary of available-for-sale securities, in thousands: 
 
As of September 30, 2014
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross Unrealized (Losses)
 
Estimated Fair Value
Tax-exempt municipal securities
$
61,097

 
$
56

 
$
(9
)
 
$
61,144

Corporate debt securities
8,686

 
14

 
(3
)
 
8,697

Total
$
69,783

 
$
70

 
$
(12
)
 
$
69,841

 
 
 
 
 
 
 
 
 
As of December 31, 2013
 
Amortized Cost
 
Gross Unrealized
Gains
 
Gross Unrealized (Losses)
 
Estimated Fair Value
Tax-exempt municipal securities
$
30,422

 
$
46

 
$

 
$
30,468

Corporate debt securities
5,615

 
3

 
(4
)
 
$
5,614

Total
$
36,037

 
$
49

 
$
(4
)
 
$
36,082


The unrealized gains and losses on the Company’s investments in municipal and corporate debt securities as of September 30, 2014 and December 31, 2013 were caused by changes in market values primarily due to interest rate changes. All of the Company's securities in an unrealized loss position as of September 30, 2014 had been in an unrealized loss position for less than twelve months. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities prior to the recovery of their amortized cost basis, which may be maturity. No other-than-temporary impairment charges were recorded during the three and nine months ended September 30, 2014 and 2013.
The following table summarizes the remaining contractual maturities of the Company’s marketable securities, in thousands: 
 
As of September 30, 2014
 
As of December 31, 2013
Due within one year
$
36,258

 
$
18,342

Due after one year through five years
33,583

 
17,740

Total
$
69,841

 
$
36,082


The following table summarizes the proceeds from the maturities of available-for-sale securities, in thousands: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Maturities of marketable securities
$
6,915

 
$
500

 
$
13,890

 
$
7,635

Total
$
6,915

 
$
500

 
$
13,890

 
$
7,635


The Company did not record any gross realized gains or gross realized losses in net income during the three and nine months ended September 30, 2014 and 2013. Additionally, there were no proceeds from sales of marketable securities prior to maturity during the three and nine months ended September 30, 2014 and 2013.

6. Fair Value Measurements

The following tables summarize certain information for assets and liabilities measured at fair value on a recurring basis, in thousands: 

9


 
 
Fair Value Measurements as of September 30, 2014 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
 
$
67,143

 
$
67,143

 
$

 
$

Money market funds
 
19,928

 
19,928

 

 

Variable rate demand notes
 
3,380

 
3,380

 

 

Marketable securities:
 
 
 
 
 
 
 
 
Tax-exempt municipal securities
 
61,144

 

 
61,144

 

Corporate debt securities
 
8,697

 

 
8,697

 

Total assets at fair value on a recurring basis:
 
$
160,292

 
$
90,451

 
$
69,841

 
$

 
 
Fair Value Measurements as of December 31, 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
 
$
47,796

 
$
47,796

 
$

 
$

Money market funds
 
57,066

 
57,066

 

 

Variable rate demand notes
 
19,235

 
19,235

 

 

Marketable securities:
 
 
 
 
 
 
 
 
Tax-exempt municipal securities
 
30,468

 

 
30,468

 

Corporate debt securities
 
$
5,614

 

 
5,614

 

Total assets at fair value on a recurring basis:
 
$
160,179

 
$
124,097

 
$
36,082

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
RDI contingent consideration
 
$
6,304

 
$

 
$

 
$
6,304

Total liabilities at fair value on a recurring basis:
 
$
6,304

 
$

 
$

 
$
6,304


The Company measures cash and cash equivalents at fair value primarily using real-time quotes for transactions in active exchange markets involving identical assets. The Company’s marketable securities are classified within Level 2 and are valued using readily available pricing sources for comparable instruments utilizing market observable inputs. The Company does not hold securities in inactive markets. The Company did not have any transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy during the three and nine months ended September 30, 2014 and 2013.

The Company did not have any liabilities requiring fair value measurement as of September 30, 2014.

Level 3 Measurements

RDI Contingent Consideration

In connection with the acquisition of RDI, the Company was required to make an additional payment to the former shareholders of RDI when RDI was awarded Taught Degree Awarding Powers (TDAP) by the British government. Refer to Note 12 of the Company's 2013 Annual Report on Form 10-K for additional details regarding the acquisition of RDI.

On April 14, 2014, RDI received notice from the British government that it had successfully been awarded TDAP. TDAP will enable RDI to independently validate its own degrees going forward under the auspices of the Quality Assurance Agency, a government body that reviews the standards and quality of all UK universities. Pursuant to the terms of the acquisition

10


agreement in 2011, the Company made an additional payment of £4.0 million (approximately $6.9 million) to the former shareholders of RDI on May 12, 2014.

Prior to payment, the contingent consideration was classified as a liability under ASC 805 Business Combinations (ASC 805), which required the Company to re-measure the liability at fair value at each reporting date until it was extinguished. The Company classified the RDI contingent consideration liability within Level 3 of the fair value measurement hierarchy as its fair value was determined using inputs not readily observable in the market.

The following table presents a reconciliation of the fair value of the RDI contingent consideration, in thousands:

Three Months Ended September 30,

Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$


$
6,186


$
6,304


$
6,252

Increase in RDI contingent consideration liability


68


547


2

Payment of RDI contingent consideration liability

 

 
(6,851
)
 

Balance, end of period
$


$
6,254


$


$
6,254


The change in the fair value of the RDI contingent consideration liability was recorded in other expense, net in the consolidated statements of income during the three and nine months ended September 30, 2014 and 2013. The fair value of the RDI contingent consideration liability was recorded as accrued liabilities in the consolidated balance sheet at December 31, 2013.

The cash payment made to settle the RDI contingent consideration liability is recorded as cash used in operating activities and cash used in financing activities in the consolidated statement of cash flows during the nine months ended September 30, 2014. The portion of the payment recorded as cash used in operating activities represents the accumulated change in fair value of the contingent consideration liability between the acquisition date of July 15, 2011 and the payment date of May 12, 2014, and the portion of the payment recorded as financing activities represents the initial fair value of the liability recorded at the July 15, 2011 acquisition date.

7. Accrued Liabilities

Accrued liabilities consist of the following, in thousands: 
 
As of September 30, 2014
 
As of December 31, 2013
Accrued compensation and benefits
$
8,189

 
$
10,333

Accrued instructional
4,577

 
5,043

Accrued vacation
1,913

 
1,040

Accrued invoices
9,437

 
7,240

RDI contingent consideration

 
6,304

Lease amendment(1)
2,449

 

Other
2,476

 
3,204

Total
$
29,041

 
$
33,164

 
(1)
On April 3, 2014, the Company accepted notice to activate an amendment to its lease with Minneapolis 225 Holdings, LLC, and also consolidated certain of its other leased office space during the nine months ended September 30, 2014. Refer to Note 8 for details of these arrangements.

8. Commitments and Contingencies

Operating Leases
The Company leases its office facilities and certain office equipment under various noncancelable operating leases. Effective August 29, 2011, the Company entered into an amendment of its lease with Minneapolis 225 Holdings, LLC pursuant to which the Company renewed and extended its existing lease for premises at 225 South Sixth Street in Minneapolis, Minnesota through October 31, 2018. Renewal terms under this lease allow the Company to extend the lease for up to two additional five-year terms.


11


On April 3, 2014, the Company accepted notice to activate an amendment to this lease. Pursuant to the amendment, in June 2014, the Company returned 54,940 square feet of its previously leased space of 426,165 square feet. Employees located in this area were relocated to other areas within the Company's remaining space. The Company recorded a charge of approximately $2.6 million during the nine months ended September 30, 2014 in connection with this amendment, which is included within the lease amendment charge line item of the consolidated statements of income. The Company anticipates expense savings of approximately $7.0 million through October 31, 2018, with approximately $0.4 million of those savings expected in the fourth quarter of 2014.

The Company also consolidated certain of its other leased office space which resulted in an additional charge of $0.1 million during the nine months ended September 30, 2014. This amount is included within the lease amendment charge line item of the consolidated statements of income.

The following presents the Company's future minimum lease commitments as of September 30, 2014, in thousands:
 
2014
$
1,753

2015(1)
8,107

2016
6,186

2017
6,010

2018
4,878

2019 and thereafter

Total
$
26,934


(1) Includes $1.9 million lease termination payment related to the April 3, 2014 lease amendment.

The Company recognizes rent expense on a straight-line basis over the term of the lease, although the lease may include escalation clauses providing for lower payments at the beginning of the lease term and higher payments at the end of the lease term. Cash or lease incentives received from lessors are recognized on a straight-line basis as a reduction of rent expense from the date the Company takes possession of the property through the end of the lease term. The Company records the unamortized portion of the incentive as a component of deferred rent, in accrued liabilities or long-term liabilities, as appropriate.

On January 4, 2012, RDI entered into an agreement to assign its lease in the UK to Glasgow Caledonian University (GCU) for the remainder of the lease term, which expires in May 2020. Under the terms of the agreement, GCU covenants to the lessor that it will pay the remaining rents under the lease term. However, the lessor required that RDI act as guarantor for GCU in the event GCU defaults under the lease. The Company believes default by GCU under the lease, and therefore any future payment by RDI as guarantor to GCU under this arrangement, is remote.  

Revolving Credit Facility
On September 30, 2011, the Company entered into an unsecured revolving credit agreement (the Credit Agreement) with Bank of America, N.A., and certain other lenders. The Credit Agreement provides $100.0 million of borrowing capacity (the credit facility), with an increase option of an additional $50.0 million. The Credit Agreement expires on September 30, 2016.

Borrowings under the Credit Agreement bear interest at a rate equal to the London Interbank Offered Rate (LIBOR) plus an applicable rate of 1.75% to 2.25% based on the Company’s consolidated leverage ratio or, at the Company’s option, an alternative base rate (defined as the higher of (a) the federal funds rate plus 0.5%; (b) Bank of America’s prime rate; or (c) the one-month LIBOR plus 1.0%) plus an applicable rate of 0.75% to 1.25% based on the Company’s consolidated leverage ratio. The Credit Agreement requires payment of a commitment fee, based on the Company’s consolidated leverage ratio, charged on the unused credit facility. The Company recorded commitment fee expenses of $0.1 million and $0.2 million in other expense, net, for the three months ended September 30, 2014 and 2013, and the nine months ended September 30, 2014 and 2013, respectively. Outstanding letters of credit are also charged a fee, based on the Company’s consolidated leverage ratio. The Company capitalized approximately $0.5 million of debt issuance costs related to the credit facility, which are being amortized on a straight-line basis over a period of five years. Interest expense for the amortization of debt issuance costs is recorded in other expense, net.

The Credit Agreement contains certain covenants that, among other things, require maintenance of certain financial ratios, as defined in the agreement. Failure to comply with the covenants contained in the Credit Agreement will constitute an event of default and could result in termination of the agreement and require payment of all outstanding borrowings. As of

12


September 30, 2014, there were no borrowings under the credit facility, and the Company was in compliance with all debt covenants.

Litigation
In the ordinary conduct of business, the Company is subject to various lawsuits and claims covering a wide range of matters including, but not limited to, claims involving learners or graduates and routine employment matters. While the outcome of these matters is uncertain, the Company does not believe there are any significant matters as of September 30, 2014 that are probable or estimable, for which the outcome could have a material adverse impact on its consolidated financial position or results of operations.

9. Share Repurchase Program and Dividends

Share Repurchase Program
The Company announced its current share repurchase program in July 2008. The Board of Directors authorizes repurchases of outstanding shares of common stock from time to time depending on market conditions and other considerations. A summary of the Company’s comprehensive share repurchase activity from the program's commencement through September 30, 2014, all of which was part of its publicly announced program, is presented below, in thousands: 
Board authorizations:
 
July 2008
$
60,000

August 2010
60,662

February 2011
65,000

December 2011
50,000

August 2013
50,000

Total amount authorized
285,662

Total value of shares repurchased
250,606

Residual authorization
$
35,056


The following table summarizes shares repurchased, in thousands:
 
Nine Months Ended September 30,
 
2014
 
2013
Shares repurchased
237

 
104

Total consideration, excluding commissions
$
14,263

 
$
4,804


As of September 30, 2014, the Company had purchased an aggregate of 5.6 million shares under the program’s outstanding authorizations at an average price per share of $44.76 totaling $250.6 million.

Dividends
During the nine months ended September 30, 2014, the Company declared the following cash dividends, in thousands except per share amounts:
Declaration Date
 
Record Date
 
Payment Date
 
Dividend per Share
 
Total Dividend Amount
February 20, 2014
 
March 26, 2014
 
April 10, 2014
 
$
0.35

 
$
4,382

May 6, 2014
 
June 11, 2014
 
July 10, 2014
 
$
0.35

 
$
4,354

August 7, 2014
 
September 10, 2014
 
October 10, 2014
 
$
0.35

 
$
4,346


During the three months ended September 30, 2014, the dividend of $0.35 per outstanding share of common stock declared on August 7, 2014 was recorded as a reduction to retained earnings. Of the total dividend amount, $4.3 million is attributable to shares of common stock outstanding as of the record date and restricted stock units expected to vest in the next twelve months. This amount is classified as dividends payable in the Company's consolidated balance sheet as of September 30, 2014. The remaining balance is attributable to restricted stock units expected to vest subsequent to the next twelve months and is classified as other liabilities in the Company's consolidated balance sheet as of September 30, 2014. All future dividends are subject to declaration by the Company's Board of Directors and may be adjusted due to future business needs or other factors deemed relevant by the Board of Directors.

13



There were no dividends declared or paid during the three and nine months ended September 30, 2013.

10. Share-Based Compensation

Share-Based Incentive Plans
On May 6, 2014, the Company implemented a stock incentive plan (the 2014 Plan) that allows for incentive stock options, non-qualified stock options, stock appreciation rights (SARs), restricted stock awards (RSAs), stock unit awards, and other stock-based awards to be granted to employees, directors, officers, and others. The 2014 Plan authorized the issuance of 480,000 shares of the Company's common stock, plus 830,888 shares that remained available for future grants under the 2005 Stock Incentive Plan (the 2005 Plan) on the effective date of the 2014 Plan. Upon effectiveness of the 2014 Plan, no further awards will be made under the 2005 Plan. As of September 30, 2014, the maximum number of shares of common stock reserved under the 2014 Plan was approximately 1.3 million, of which 1.3 million shares were available for grant.

The Board of Directors establishes the terms and conditions of all grants, subject to the 2014 Plan and applicable provisions of the Internal Revenue Code (the Code). Under the 2014 Plan, options must be granted at an exercise price not less than the fair market value of the Company’s common stock on the grant date. The options expire on the date determined by the Board of Directors, but may not extend more than ten years from the grant date. The options generally become exercisable over a four-year period. Restricted stock units (RSUs) generally vest over a three year period. Canceled options and RSUs become available for reissuance under the 2014 Plan. Upon an exercise of stock options, the Company issues new shares.

The Company also has issued stock options under two discontinued plans (the 2005 Plan and the 1999 Plan). Stock options, restricted stock units, and market stock units issued pursuant to the 2005 Plan, and stock options issued pursuant to the 1999 Plan, are still outstanding. However, unexercised options that are canceled upon termination of employment are not available for reissuance under the 2005 or 1999 Plan.

Share-Based Compensation Expense
The table below reflects the Company’s share-based compensation expense recognized in the consolidated statements of income, in thousands:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Instructional costs and services
$
238

 
$
380

 
$
546

 
$
1,141

Marketing and promotional
102

 
181

 
149

 
424

Admissions advisory
14

 
8

 
44

 
34

General and administrative
815

 
816

 
3,188

 
2,392

Share-based compensation expense included in operating income
1,169

 
1,385

 
3,927

 
3,991

Tax benefit from share-based compensation expense
431

 
510

 
1,270

 
1,474

Share-based compensation expense, net of tax
$
738

 
$
875

 
$
2,657

 
$
2,517


Effective in 2014, the Company evaluated the allocation of share-based compensation among its operating expense categories and determined reallocation of expenses related to certain executives and directors was necessary to best align with the Company's organizational structure. Prior to 2014, share-based compensation expense related to awards granted to certain executives and members of the Company's Board of Directors was allocated among all of the Company's operating expense categories. Effective in 2014, the Company is prospectively including all share-based compensation expense related to awards granted to these individuals as general and administrative.

11. Acquisitions and Other Investments

During the nine months ended September 30, 2014, the Company made a cost method investment of $1.5 million in a limited partnership, with a commitment to invest up to an additional $3.5 million over the next ten years. The partnership invests in innovative companies in the health care field. The Company's investment comprises less than 3.0% of the total partnership interest and is classified as other assets in the consolidated balance sheets as of September 30, 2014.



14


12. Accumulated Other Comprehensive Loss

The following table summarizes the components of accumulated other comprehensive loss, in thousands:
 
Foreign Currency Translation Loss
 
Unrealized Gain on Marketable Securities
 
Accumulated Other Comprehensive Loss(1)
Beginning balance, December 31, 2013
$
(142
)
 
$
28

 
$
(114
)
Current period change
(367
)
 
8

 
(359
)
Ending balance, September 30, 2014
$
(509
)
 
$
36

 
$
(473
)

(1)
Accumulated other comprehensive loss is presented net of tax of $22 thousand and $17 thousand as of September 30, 2014 and December 31, 2013, respectively.

There were no reclassifications out of accumulated other comprehensive loss to net income for the three and nine months ended September 30, 2014 and 2013.

13. Regulatory Supervision and Oversight

Political and budgetary concerns significantly affect the Title IV Programs. Congress reauthorizes the Higher Education Act (HEA) and other laws governing Title IV Programs approximately every five to eight years. The last reauthorization of the HEA was completed in August 2008. Additionally, Congress reviews and determines appropriations for Title IV programs on an annual basis through the budget and appropriations processes. As of September 30, 2014, programs in which the University's learners participate are operative and sufficiently funded.


15


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

The following discussion of our historical results of operations and our liquidity and capital resources should be read in conjunction with the consolidated financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). In addition, certain statements in our future filings with the Securities and Exchange Commission (SEC), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to, statements regarding: proposed new programs; regulatory developments; 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, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. 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 “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as updated in our subsequent reports filed with the SEC, including any updates found in Part II, Item 1A of this or other Quarterly Reports on Form 10-Q. The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC.

Executive Overview
We are an online postsecondary education services company. As of September 30, 2014, our wholly owned subsidiaries included the following:
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.
Capella Learning Solutions (CLS) provides online training solutions and services to corporate partners which are delivered through Capella's online learning platform.

We believe we have the right operating strategies in place to continually differentiate ourselves in our markets and drive growth
by supporting learner success, producing affordable degrees, optimizing our comprehensive marketing strategy, serving a
broader set of our learner's professional needs, and establishing new growth platforms. Technology and the talent of our faculty
and employees enable these strategies. We believe these strategies and enablers will allow us to continue to deliver high quality,
affordable education, resulting in continued growth over the long-term. We will continue to invest in these enablers to
strengthen the foundation and future of our business.

Key Trends, Developments and Challenges
The following developments and trends present opportunities, challenges and risks toward achieving our goal of providing attractive returns to our shareholders:


16


Enrollment and persistence. New enrollment is an important indicator of revenue growth and Company profitability. Overall, new enrollments grew 11.9 percent in the third quarter of 2014 compared to a 1.3 percent decrease in the same period in 2013. New enrollment is calculated from the last day a new learner can drop a course without financial penalty. New enrollment growth in 2014 was led by our master's 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. In the third quarter of 2014, we reached a significant milestone by returning to total enrollment growth of 2.1 percent after experiencing total enrollment declines since fiscal year 2011. We are committed to building a sustainable business model focused on total enrollment growth.

Doctoral enrollment. During the third quarter of 2014, year-over-year Doctoral total enrollment declined by 5.4 percent. It will take some time for our Doctoral programs to return to total enrollment growth due to a combination of factors, including the extended decision cycles for prospects at the Doctoral level and stronger Doctoral graduations in 2013 and 2014. We are extending our learner success focus to the comprehensive and dissertation portion of our Doctoral programs. Our goal is to address the learner population that is not making sufficient and timely academic progress in this phase and expect this initiative to create some pressure on our Doctoral enrollments in the near-term. To support the return to Doctoral growth we are focusing on redesigning our program offerings, improving affordability, and expanding our professional doctorate portfolio.

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. While certain initiatives could affect our growth and profitability in the near-term, we believe these efforts are in the best interest of our learners and over the long-term will improve learner success and lifetime revenue, which, in turn, positions us for more sustainable long-term growth. These initiatives include the following:

Optimizing and enhancing 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, implementing, and optimizing 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 persist by offering learner success grants to new learners who meet admissions requirements, enroll, apply within certain timeframes, and stay continuously enrolled; 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.

As a result of these initiatives, early cohort persistence improved by approximately four percent over the prior year. Early cohort persistence measures the four-quarter weighted moving average new cohort persistence rate during learners' first four quarters of enrollment. Our learner success strategy primarily focuses on the first four quarters, since learners tend to persist at a very high rate after that time period.

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 their 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 and professional organizations;
Connecting with prospective learners by generating and nurturing inquiries through direct media such as natural search, our website, and display media; and

17


Engaging with prospective learners by developing meaningful relationships such as through social media or direct engagement.
  
Our comprehensive marketing strategy is designed to produce long-term efficiencies and increase our ability to attract high-quality learners on a sustainable basis. While some of these initiatives may adversely impact our new enrollment, revenues, and operating margins for a period of time as we pursue improved long-term results, we believe that our return to reporting total enrollment growth in the third quarter of 2014 highlights the success of this strategy.

Establishing new growth platforms. We seek to drive long-term growth that is an extension of our core competencies into new and expanded markets. This may result in increased new business development costs focused on researching, identifying, and cultivating these new market opportunities.
 
We received approval to offer a new learning model called FlexPath in 2013. This new learning model is decoupled from the credit-hour requirements and allows learners to complete coursework at their own pace throughout each quarter and complete activities to demonstrate specific competencies by the end of the quarter. This offering is unique in that Capella University is the first institution with approval from the Higher Learning Commission and the Department of Education to offer programs at the Bachelor's and graduate level. These approvals allow learners enrolled in FlexPath to apply for federal financial aid. We believe this direct assessment model provides an opportunity to expand our served market and drive affordability through lower tuition costs, reduced time to completion, and increased flexibility. Currently, we offer six Department of Education approved programs including the Bachelor's and Master's of Business Administration, the Bachelor's and Master's in Information Technology, and the Bachelor's and Master's in Psychology.

We are making steady progress in developing FlexPath, but important work remains. Our goal is to ensure learners have the right experience and that we understand what our learners need to succeed. By year-end 2014, we expect FlexPath to approach three percent of total enrollment in our Master's and Bachelor programs.

In addition to benefiting FlexPath enrollments, our differentiated marketing strategy has also accelerated new enrollment growth in certain of our credit-hour based programs. Therefore, although FlexPath is a significant component of our long-term growth strategy, the primary driver for our total enrollment growth remains our credit-hour based programs.

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.

Current market and regulatory environment. The market conditions remain challenging and competition is strong; however, we continue to focus 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 release of the final gainful employment rules and the reauthorization of the Higher Education Act of 1965, as amended, and the current Department of Education rulemaking processes. Many states have also become more active in regulating online education, especially regarding approval to operate requirements, and enforcement of consumer protection laws by state attorneys general, with a focus on proprietary institutions. While we have a strong track record of regulatory compliance, such actions, even if not directed at Capella University, may result in unforeseen consequences and may make our operating environment more challenging.

Lease amendment. On April 3, 2014, we accepted notice to activate an amendment to our current lease for our premises at 225 South Sixth Street in Minneapolis, MN. Pursuant to the amendment, in June 2014, we returned 54,940 square feet of our previously leased space of 426,165 square feet. Employees located in this area were relocated to other areas within our remaining space. We recorded a charge of approximately $2.6 million during the nine months ended September 30, 2014 in connection with this amendment, which is included within the lease amendment charge line item of the consolidated statements of income. We anticipate expense savings of approximately $7.0 million through October 31, 2018, with approximately $0.4 million of those savings expected in the fourth quarter of 2014.

18



We also consolidated other leased office space resulting in an additional charge of $0.1 million during the nine months ended September 30, 2014. This amount is included within the lease amendment charge line item of the consolidated statements of income.

Regulatory Environment
The following summarizes significant regulatory matters applicable to our business. For a more detailed discussion of the regulatory environment and related risks, refer to Part 2, Item 7, Key Trends, Developments and Challenges, and Regulatory Environment in our 2013 Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Gainful Employment. The Department of Education published a Notice of Proposed Rulemaking (NPRM) on March 25, 2014. The proposed rule applies to all Gainful Employment (GE) programs, which include non-degree programs at public and private non-profit institutions, and all programs offered by for-profit institutions. The proposed rule is similar to the draft language last discussed at the third negotiated rulemaking committee session in December 2013. The rule establishes two “accountability metrics” that GE programs must satisfy in order to remain eligible for Title IV federal student aid, specifically debt to earnings (DTE) ratios and programmatic cohort default rate (pCDR) thresholds. Unlike the accountability metrics in the Department of Education’s previous GE rule, the accountability metrics under the Department of Education's current proposal operate independently from one another. Consequently, in order for a GE program to maintain its Title IV eligibility under the proposed rule, it must satisfy both the DTE and pCDR requirements. The proposed rule also requires institutions to provide certifications regarding a GE program’s satisfaction of programmatic accreditation and state licensure requirements. Additionally, the proposed rule includes requirements for the reporting of student and program data by institutions to the Department of Education, and expands the disclosure requirements that have been in effect since July 1, 2011. The rule further makes other conforming and technical revisions to the Title IV program participation agreement and related regulations.

The rule closed for public comment on May 25, 2014. The Department of Education has until November 1, 2014 to publish a final rule in order for the rule to be effective July 1, 2015. The substance of final regulations dealing with gainful employment cannot be predicted at this time.

Current negotiated rulemaking. On November 20, 2013, the Department of Education announced another round of negotiated rulemaking to focus on the following issues: cash management of funds provided under the Title IV Federal Student Aid programs, including the use of debit cards and the handling of Title IV credit balances; state authorization for programs offered through distance education or correspondence education; state authorization for foreign locations of institutions located in a State; clock to credit hour conversion; definition of “adverse credit” for borrowers in the Federal Direct PLUS Loan Program; and application of the repeat coursework provisions to graduate and undergraduate programs. Negotiations took place February 19-21, March 26-28, and April 23-25, 2014. An additional session took place May 19-20, 2014 to examine the remaining issues and take a consensus vote on the entire rule making package. The Committee did not reach consensus at this session, and the development of the draft rule shifted back to the Department of Education.

On August 8, 2014, the Department of Education published a NPRM on the definition of “adverse credit” for borrowers in the Federal Direct PLUS Loan Program. The NPRM reflects agreed upon language established by the negotiated rulemaking committee. Public comment period ended on September 8, 2014, and a final rule was published on October 23, 2014. No other NPRMs from this round of negotiated rulemaking have been issued.

Program Participation Agreement. The Department of Education approved Capella University's Program Participation Agreement (PPA) in August 2014. Capella University is fully certified by the Department of Education to participate in Title IV programs through June 30, 2020.

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 PLUS loans) of degree recipients by award level for 2011-2012. The student loan debt is debt from all sources (federal, state, institution, private) known to the institution. We are working with MOHE on this request. The date for the report to be published has not been determined.


19


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, if an institution's three-year cohort default rate exceeds 30% for three consecutive years, it must establish a default prevention task force and develop a default prevention plan with measurable objectives for improving the cohort default rate. We believe that our current repayment management efforts meet these requirements.

If the institution's three-year cohort default rate for the 2011 cohort exceeds 40%, the institution will cease to be eligible to participate in Title IV programs, and if the institution's three-year cohort default rate exceeds 30% for three consecutive years, beginning with the 2009 cohort, the institution will cease to be eligible to participate in Title IV programs. Capella University's three-year cohort default rates for the 2011, 2010, and 2009 cohorts are 13.0%, 10.9%, and 9.7%, respectively. The increase is primarily due to the overall economic environment, and a slight increase in the percentage of Capella University learners enrolled in a bachelor's program, who generally have a higher default rate compared to graduate learners.

Critical Accounting Policies and Use of Estimates
Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013. During the nine months ended September 30, 2014, there have been no significant changes to our critical accounting policies.

Results of Operations
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
The following selected financial data table should be referenced in connection with a review of the discussion of our results of operations for the three months ended September 30, 2014:
 
Three Months Ended September 30,
 
(Unaudited)
 
$ Change
 
% Change
 
% of Revenue
$ in thousands
2014
 
2013
 
2014 vs. 2013
 
2014
 
2013
 
2014 vs. 2013
Revenues
$
103,097

 
$
100,703

 
$
2,394

 
2.4
 %
 
100.0
 %
 
100.0
 %
 
0.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Instructional costs and services
47,143

 
45,984

 
1,159

 
2.5

 
45.8

 
45.7

 
0.1

Marketing and promotional
25,509

 
26,489

 
(980
)
 
(3.7
)
 
24.7

 
26.4

 
(1.7
)
Admissions advisory
7,019

 
6,796

 
223

 
3.3

 
6.8

 
6.7

 
0.1

General and administrative
10,250

 
10,924

 
(674
)
 
(6.2
)
 
9.9

 
10.8

 
(0.9
)
Total costs and expenses
89,921

 
90,193

 
(272
)
 
(0.3
)
 
87.2

 
89.6

 
(2.4
)
Operating income
13,176

 
10,510

 
2,666

 
25.4

 
12.8

 
10.4

 
2.4

Other expense, net
(46
)
 
(238
)
 
192

 
(80.7
)
 

 
(0.2
)
 
0.2

Income before income taxes
13,130

 
10,272

 
2,858

 
27.8

 
12.8

 
10.2

 
2.6

Income tax expense
5,373

 
4,262

 
1,111

 
26.1

 
5.2

 
4.2

 
1.0

Effective tax rate
40.9
%
 
41.5
%
 
 
 
 
 
 
 
 
 
 
Net income
$
7,757

 
$
6,010

 
$
1,747

 
29.1
 %
 
7.6
 %
 
6.0
 %
 
1.6
 %

Revenues. The increase in revenues compared to the same quarter in the prior year was primarily related to Capella University new enrollment growth, tuition increases, and an increase in average courses per learner. Capella University weighted average tuition increase in the current quarter was less than three percent and was implemented in July 2014. These increases were

20


partially offset by a larger proportion of bachelor's and master's learners who generate less revenue per learner than our doctoral learners, an increase in grants to support our initiatives to improve learner success, other discounts, and a decrease in non-Capella University revenues.
Instructional costs and services expenses. Instructional costs and services expenses, and instructional costs and services expenses as a percent of revenue, increased compared to the same quarter in the prior year primarily due to increased investment in our initiative to focus on coaching new learners during the first year of their academic experience, continued investment in course and program development, and increased headcount. This overall increase was partially offset by a decrease in amortization expense as a result of certain intangible assets associated with RDI becoming fully amortized in 2014, the prospective reallocation of share-based compensation expense related to awards granted to certain Company executives and members of its Board of Directors as general and administrative in 2014, and expense savings associated with the lease amendment which was effective in the second quarter of 2014.
Marketing and promotional expenses. Marketing and promotional expenses, and marketing and promotional expenses as a percent of revenue, decreased compared to the same quarter in the prior year primarily driven by cost efficiencies gained through optimization of our Capella University marketing efforts. This overall decrease was partially offset by additional employee expenses driven by increased headcount.
Admissions advisory expenses. Admissions advisory expenses, and admissions advisory expenses as a percent of revenue, increased compared to the same quarter in the prior year primarily due to increased enrollment services headcount to support higher Capella University inquiry volume.
General and administrative expenses. General and administrative expenses, and general and administrative expenses as a percent of revenue, decreased compared to the same quarter in the prior year primarily as a result of investments in our non-Capella University new market platforms and severance expense in the prior year. These decreases were partially offset by increased RDI expenses, and the reallocation of share-based compensation expense from instructional costs and services and marketing and promotional in 2014.
Other expense, net. Other expense, net was $46 thousand for the three months ended September 30, 2014, and $0.2 million for the three months ended September 30, 2013. The decrease compared to the same quarter in the prior year is primarily attributable to foreign currency exchange rates, and the impact of the change in fair value of the RDI contingent consideration liability in the prior year. The RDI contingent consideration liability was paid during the quarter ended June 30, 2014 as a result of the awarding of Taught Degree Awarding Powers (TDAP).

Income tax expense. The decrease in our effective tax rate compared to the same quarter in the prior year was primarily driven by a decrease in foreign operating losses in the current period. We do not receive a benefit on these losses due to the establishment of a full valuation allowance.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
The following selected financial data table should be referenced in connection with a review of the discussion of our results of operations for the nine months ended September 30, 2014:

21


 
Nine Months Ended September 30,
 
(Unaudited)
 
$ Change
 
% Change
 
% of Revenue
$ in thousands
2014
 
2013
 
2014 vs. 2013
 
2014
 
2013
 
2014 vs. 2013
Revenues
$
313,525

 
$
309,638

 
$
3,887

 
1.3
 %
 
100.0
 %
 
100.0
 %
 
0.0
 %
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Instructional costs and services
139,973

 
137,851

 
2,122

 
1.5

 
44.6

 
44.5

 
0.1

Marketing and promotional
74,383

 
76,091

 
(1,708
)
 
(2.2
)
 
23.7

 
24.6

 
(0.9
)
Admissions advisory
21,092

 
20,294

 
798

 
3.9

 
6.7

 
6.6

 
0.1

General and administrative
31,604

 
32,252

 
(648
)
 
(2.0
)
 
10.1

 
10.4

 
(0.3
)
Lease amendment charges
2,690

 

 
2,690

 
100.0

 
0.9

 

 
0.9

Total costs and expenses
269,742

 
266,488

 
3,254

 
1.2

 
86.0

 
86.1

 
(0.1
)
Operating income
43,783

 
43,150

 
633

 
1.5

 
14.0

 
13.9

 
0.1

Other expense, net
(559
)
 
(463
)
 
(96
)
 
20.7

 
(0.2
)
 
(0.1
)
 
(0.1
)
Income before income taxes
43,224

 
42,687

 
537

 
1.3

 
13.8

 
13.8

 

Income tax expense
17,606

 
17,500

 
106

 
0.6

 
5.6

 
5.7

 
(0.1
)
Effective tax rate
40.7
%
 
41.0
%
 
 
 
 
 
 
 
 
 
 
Net income
$
25,618

 
$
25,187

 
$
431

 
1.7
 %
 
8.2
 %
 
8.1
 %
 
0.1
 %

Revenues. The increase in revenues compared to the same period in the prior year was primarily related to Capella University tuition increases and new enrollment growth, as well as RDI enrollment growth. Capella University tuition increase in the current period was less than three percent, which represents a weighted average of price increases implemented in July 2014 and 2013. This overall increase was partially offset by the impact of a larger proportion of bachelor's and certificate learners who generate less revenue per learner than our master's and doctoral learners, an increase in grants to support our initiatives to improve learner success, and other discounts.
Instructional costs and services expenses. Instructional costs and services expenses, and instructional costs and services expenses as a percent of revenue, increased compared to the same period in the prior year primarily due to increased investment in our initiative to focus on coaching new learners during the first year of their academic experience, and continued investment in course and program development. This overall increase was partially offset by a decrease in amortization expense as a result of certain intangible assets associated with RDI becoming fully amortized in 2014, lower depreciation expense as a result of certain assets becoming fully depreciated in 2014, and the prospective reallocation of share-based compensation expense related to awards granted to certain Company executives and members of its Board of Directors as general and administrative in 2014.
Marketing and promotional expenses. Marketing and promotional expenses, and marketing and promotional expenses as a percent of revenue, decreased compared to the same period in the prior year primarily driven by cost efficiencies gained through optimization of our Capella University and RDI marketing efforts, lower depreciation expense as a result of certain assets becoming fully depreciated in 2014, as well as the prospective reallocation of share-based compensation expense to general and administrative in 2014. This overall decrease was partially offset by additional employee expenses driven by increased headcount.
Admissions advisory expenses. Admissions advisory expenses, and admissions advisory expenses as a percent of revenue, increased compared to the same period in the prior year primarily due to increased enrollment services headcount to support higher Capella University inquiry volume.
General and administrative expenses. General and administrative expenses, and general and administrative expenses as a percent of revenue, decreased compared to the same period in the prior year primarily as a result of the prior year’s investment in our non-Capella University new market platforms, including delivery of a significant employer project; and reduced headcount in the current year. This decrease was partially offset by the reallocation of approximately $0.8 million of share-based compensation expense from instructional costs and services and marketing and promotional in 2014, increased participation in monitoring and shaping government regulations, as well as an increase in human resources contract staff.
Lease amendment charges. On April 3, 2014, we accepted notice to activate an amendment to our current lease for our premises at 225 South Sixth Street in Minneapolis, Minnesota. Pursuant to the amendment, in June 2014, we returned 54,940 square feet of our previously leased space of 426,165 square feet. We recorded a charge of $2.6 million during the nine months

22


ended September 30, 2014 in connection with this amendment. We also consolidated other leased office space resulting in an additional charge of $0.1 million during the nine months ended September 30, 2014.
Other expense, net. Other expense, net was $0.6 million for the nine months ended September 30, 2014, and $0.5 million for the nine months ended September 30, 2013. The increase in expense compared to the same period in the prior year was primarily due to the change in fair value of the RDI contingent consideration liability which was paid during the quarter ended June 30, 2014 as a result of the awarding of TDAP; and also the result of foreign currency exchange rates and management fees related to our limited partnership investment.
Income tax expense. The decrease in our effective tax rate compared to the same period in the prior year was primarily driven by a decrease in foreign operating losses in the current period. We do not receive a benefit on these losses due to the establishment of a full valuation allowance.

Liquidity and Capital Resources

Liquidity
We financed our operating activities and capital expenditures during the nine months ended September 30, 2014 and 2013 primarily through cash provided by operating activities. Our cash and cash equivalents were $90.5 million and $124.1 million at September 30, 2014 and December 31, 2013, respectively. Our cash and cash equivalents decreased primarily due to net purchases of marketable securities, increased cash used in financing activities for repurchases of common stock, the payment of dividends, payment of the contingent consideration liability to RDI as a result of achievement of TDAP, and general business activities. This overall decrease in cash was partially offset by cash provided by operating activities.

On September 30, 2011, we entered into an unsecured revolving credit agreement (the Credit Agreement) with Bank of America, N.A., and certain other lenders. The Credit Agreement provides $100.0 million of borrowing capacity, with an increase option of an additional $50.0 million. The Credit Agreement term ends September 30, 2016. As of September 30, 2014, there were no borrowings under the credit facility and we were in compliance with all debt covenants.

Significant portions of our revenues are derived from Title IV programs. Federal regulations dictate the timing of disbursements under Title IV programs. Learners must apply for new loans and grants each academic year, which begins July 1. Loan funds are provided through the William D. Ford Direct Loan program in multiple disbursements for each academic year. The disbursements are usually received by the beginning of the third week of the term. These factors, together with the timing of when our learners begin their programs, affect our operating cash flow. Based on current market conditions and recent regulatory or legislative actions, we do not anticipate any significant near-term disruptions in the availability of Title IV funding for our learners.

On July 15, 2011, we acquired 100% of the share capital of RDI for £7.9 million (approximately $12.6 million), net of cash acquired. In connection with the agreement, we were required to make an additional payment of £4.0 million to the former shareholders of RDI when RDI was granted Taught Degree Awarding Power (TDAP). On April 14, 2014, RDI received notice from the British government of being awarded TDAP. Pursuant to the terms of the acquisition agreement, upon achievement of TDAP on May 12, 2014, we made an additional payment of £4.0 million (approximately $6.9 million) to the former shareholders of RDI.

Based on our current level of operations and anticipated growth, we believe our cash provided by operations and other sources of liquidity, including cash, cash equivalents and marketable securities, will provide adequate funds for ongoing operations and planned capital expenditures for the foreseeable future. We can further supplement our liquidity position with the $100.0 million credit facility to fund our operations or to fund strategic investments, if needed.

Operating Activities
Net cash provided by operating activities was $47.5 million and $53.2 million for the nine months ended September 30, 2014 and 2013, respectively. The decrease was primarily due to the effects of changes in operating assets and liabilities, including the accumulated change in fair value of the RDI contingent consideration liability paid to the former shareholders of RDI upon achievement of TDAP, as well as a decrease in depreciation and amortization expense. These decreases were partially offset by the increase in net income.

Investing Activities

23


Net cash used in investing activities is primarily related to the purchase or maturity of investments in marketable securities and investments in property and equipment. Net cash used in investing activities was $52.3 million and $29.6 million for the nine months ended September 30, 2014 and 2013, respectively.

Cash used in investing activities for the nine months ended September 30, 2014 consisted primarily of purchases of marketable securities and investments in property and equipment, which were partially offset by maturities of marketable securities. Net purchases and maturities of marketable securities represented a cash outflow of $35.1 million and $14.8 million during the nine months ended September 30, 2014 and 2013.

We believe the credit quality and liquidity of our investment portfolio as of September 30, 2014 is strong. The unrealized gains and losses of the portfolio may remain volatile as changes in the general interest rate environment and supply/demand fluctuations of the securities within our portfolio impact daily market valuations. To mitigate the risk associated with this market volatility, we deploy a relatively conservative investment strategy focused on capital preservation and liquidity. But even with this approach, we may incur investment losses as a result of unusual and unpredictable market developments and we may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline further due to unpredictable market developments. In addition, these unusual and unpredictable market developments may also create liquidity challenges for certain of the assets in our investment portfolio.

Capital expenditures were $15.8 million and $14.8 million for the nine months ended September 30, 2014 and 2013, respectively, which primarily consisted of investments in learner success and enrollment management initiatives, academic quality, foundational priorities, enhancements to our visitor center and content management system, and investments in FlexPath programs.

We lease all of our facilities. We expect to make future payments on existing leases from cash generated from operations.

Financing Activities
Net cash used in financing activities was $28.8 million and $2.0 million for the nine months ended September 30, 2014 and 2013, respectively. The increase in net cash used in financing activities is primarily the result of payments of cash dividends of $13.0 million in the current period, and higher repurchases of our common stock compared to the prior period. In the first nine months of 2014, we repurchased $14.3 million of common stock under our share repurchase program compared to $4.8 million in the first nine months of 2013. Due to timing, cash payments made for shares repurchased in the first nine months of 2014 were $14.0 million.

Additionally, as a result of the achievement of TDAP, we made a cash payment of £4.0 million (approximately $6.9 million) to the former shareholders of RDI on May 12, 2014. Net cash used in financing activities of approximately $6.0 million reflects the initial fair value of the RDI contingent consideration liability recorded at acquisition, while the remaining amount of $0.9 million included within cash flows from operating activities represents the accumulated change in fair value of the RDI contingent consideration liability.


24


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market Risk
The Company has no derivative financial instruments or derivative commodity instruments, and believes the risk related to cash equivalents and marketable securities is limited due to the adherence to its investment policy, which focuses on capital preservation and liquidity. In addition, all investments must have a minimum Standard & Poor’s rating of A minus (or equivalent) by at least one agency at the purchase date. All of the Company's cash equivalents and marketable securities were rated A- or higher as of September 30, 2014, and BBB+ or higher as of December 31, 2013, by at least one rating agency. In addition, the Company utilizes money managers who conduct initial and ongoing credit analysis on its investment portfolio to monitor and minimize the potential impact of market risk associated with its cash, cash equivalents and marketable securities. Despite the investment risk mitigation strategies the Company employs, it may incur investment losses as a result of unusual and unpredictable market developments and may experience reduced investment earnings if the yields on investments deemed to be low risk remain low or decline further in this time of economic uncertainty. Unusual and unpredictable market developments may also create liquidity challenges for certain assets in the Company's investment portfolio.

Interest Rate Risk
The Company manages interest rate risk by investing excess funds in cash equivalents and marketable securities bearing a combination of fixed and variable interest rates, which are tied to various market indices. The Company's future investment income may fall short of expectations due to changes in interest rates or it may suffer losses in principal if it is forced to sell securities that have declined in market value due to changes in interest rates. At September 30, 2014, a 10% increase or decrease in interest rates would not have a material impact on the Company's future earnings, fair values, or cash flows.

Foreign Currency Exchange Risk
The Company uses the U.S. dollar as its reporting currency. The functional currencies of its foreign subsidiaries are generally the local currencies. Accordingly, the Company's foreign currency exchange risk is related to the following exposures:

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 expense, net in the consolidated statements of income.

The Company has not used derivative contracts to hedge foreign currency exchange rate fluctuations.

25



Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of its management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act).

Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective, as of September 30, 2014, in ensuring that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Securities Exchange Act is accumulated and communicated to management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting
There was no change in the Company's internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.


26


PART II - OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, the Company is a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. While the outcomes of these matters are uncertain, management does not expect that the ultimate costs to resolve these matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in the “Risk Factors” section as updated in the Company's Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities
None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers
During the three months ended September 30, 2014, the Company repurchased $4.3 million of common stock under its share repurchase program.(1) Its remaining authorization for common stock repurchases was $35.1 million at September 30, 2014. The following presents the Company's share repurchases during the quarter ended September 30, 2014: 
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 
7/1/2014 to 7/31/2014
28,748

 
$
57.13

 
28,748

 
$
37,757,349

8/1/2014 to 8/31/2014
14,728

 
66.17

 
14,728

 
36,782,761

9/1/2014 to 9/30/2014
27,342

 
63.15

 
27,342

 
35,056,077

Total
70,818

 
61.33

 
70,818

 
35,056,077

 
(1)
The Company announced its current share repurchase program in July 2008. As of September 30, 2014, the Company's Board of Directors has authorized repurchases up to an aggregate amount of $285.7 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.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

27


Item 6. Exhibits
(a) Exhibits 
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.
 
 
 
 
 
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
  
XBRL Taxonomy Extension Presentation Linkbase Document(1) 
  
Filed electronically.

(1) 
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.

28


SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
CAPELLA EDUCATION COMPANY
 
/s/ J. Kevin Gilligan

October 28, 2014
J. Kevin Gilligan
Chief Executive Officer
(Principal Executive Officer)
 
/s/ Steven L. Polacek

October 28, 2014
Steven L. Polacek
Senior Vice President and Chief Financial Officer 
(Principal Financial and Accounting Officer)
 

29