10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

 

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: 001-34211

 

 

GRAND CANYON EDUCATION, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   20-3356009

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2600 W. Camelback Road

Phoenix, Arizona 85017

(Address, including zip code, of principal executive offices)

(602) 247-4400

(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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The total number of shares of common stock outstanding as of November 5, 2018, was 48,133,425.

 

 

 


Table of Contents

Table of Contents

GRAND CANYON EDUCATION, INC.

FORM 10-Q

INDEX

 

     Page  

PART I – FINANCIAL INFORMATION

     3  

Item 1 Financial Statements

     3  

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

     22  

Item 3 Quantitative and Qualitative Disclosures About Market Risk

     32  

Item 4 Controls and Procedures

     32  

PART II – OTHER INFORMATION

     32  

Item 1 Legal Proceedings

     32  

Item 1A Risk Factors

     33  

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

     33  

Item 3 Defaults Upon Senior Securities

     33  

Item 4 Mine Safety Disclosures

     33  

Item 5 Other Information

     34  

Item 6 Exhibits

     34  

SIGNATURES

     36  

101.INS XBRL Instance Document

101.SCH XBRL Taxonomy Extension Schema

101.CAL XBRL Taxonomy Extension Calculation Linkbase

101.LAB XBRL Taxonomy Extension Label Linkbase

101.PRE XBRL Taxonomy Extension Presentation Linkbase

101.DEF XBRL Taxonomy Extension Definition Linkbase

 

2


Table of Contents

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

GRAND CANYON EDUCATION, INC.

Consolidated Income Statements

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2018     2017     2018     2017  

(In thousands, except per share data)

        

Service revenue

   $ 155,454     $ —       $ 155,454     $ —    

University related revenue

     —         236,209       512,499       702,716  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     155,454       236,209       667,953       702,716  
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Technology and academic services

     11,101       10,494       32,476       31,095  

Counseling services and support

     51,116       46,100       152,701       138,382  

Marketing and communication

     31,546       28,130       90,168       82,865  

General and administrative

     10,092       8,343       23,273       21,182  

University related expenses

     6,569       83,450       173,735       237,784  

Loss on Transaction

     15,610       —         17,600       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

     126,034       176,517       489,953       511,308  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     29,420       59,692       178,000       191,408  

Interest income on Secured Note

     13,248       —         13,248       —    

Interest expense

     (558     (567     (961     (1,642

Investment interest and other

     371       1,445       2,919       2,186  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     42,481       60,570       193,206       191,952  

Income tax expense

     8,720       21,266       39,726       56,889  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 33,761     $ 39,304     $ 153,480     $ 135,063  
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic income per share

   $ 0.71     $ 0.83     $ 3.22     $ 2.87  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income per share

   $ 0.70     $ 0.81     $ 3.17     $ 2.80  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     47,682       47,316       47,592       47,083  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     48,422       48,292       48,429       48,197  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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GRAND CANYON EDUCATION, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2018     2017     2018     2017  

(In thousands)

        

Net income

   $ 33,761     $ 39,304     $ 153,480     $ 135,063  

Other comprehensive income, net of tax:

        

Unrealized gains (losses) on available-for-sale securities, net of taxes of $44 and $25 for the three months ended September 30, 2018 and 2017, respectively, and $6 and $257 for the nine months ended September 30, 2018 and 2017, respectively

     (133     40       (20     416  

Unrealized gains (losses) on hedging derivatives, net of taxes of $2 and $20 for the three months ended September 30, 2018 and 2017, respectively, and $81 and $65 for the nine months ended September 30, 2018 and 2017, respectively

     (4     (30     248       (104
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 33,624     $ 39,314     $ 153,708     $ 135,375  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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GRAND CANYON EDUCATION, INC.

Consolidated Balance Sheets

 

     September 30,     December 31,  
     2018     2017  
     (Unaudited)        
ASSETS:     

(In thousands, except par value)

    

Current assets

    

Cash and cash equivalents

   $ 44,879     $ 153,474  

Restricted cash and cash equivalents

     61,667       94,534  

Investments

     68,754       89,271  

Accounts receivable, net

     65,120       10,908  

Interest receivable on secured note

     4,381       —    

Income tax receivable

     1,791       2,086  

Other current assets

     8,607       24,589  
  

 

 

   

 

 

 

Total current assets

     255,199       374,862  

Property and equipment, net

     110,908       922,284  

Note receivable

     882,900       —    

Prepaid royalties

     —         2,763  

Goodwill

     2,941       2,941  

Other assets

     743       723  
  

 

 

   

 

 

 

Total assets

   $ 1,252,691     $ 1,303,573  
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

Current liabilities

    

Accounts payable

   $ 16,996     $ 29,139  

Accrued compensation and benefits

     17,857       23,173  

Accrued liabilities

     13,511       20,757  

Income taxes payable

     —         16,182  

Student deposits

     —         95,298  

Deferred revenue

     —         46,895  

Current portion of notes payable

     6,572       6,691  
  

 

 

   

 

 

 

Total current liabilities

     54,936       238,135  

Other noncurrent liabilities

     —         1,200  

Deferred income taxes, noncurrent

     4,421       18,362  

Notes payable, less current portion

     54,976       59,925  
  

 

 

   

 

 

 

Total liabilities

     114,333       317,622  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $0.01 par value, 10,000 shares authorized; 0 shares issued and outstanding at September 30, 2018 and December 31, 2017

     —         —    

Common stock, $0.01 par value, 100,000 shares authorized; 52,570 and 52,277 shares issued and 48,134 and 48,125 shares outstanding at September 30, 2018 and December 31, 2017, respectively

     526       523  

Treasury stock, at cost, 4,436 and 4,152 shares of common stock at September 30, 2018 and December 31, 2017, respectively

     (119,982     (100,694

Additional paid-in capital

     251,828       232,670  

Accumulated other comprehensive loss

     (652     (724

Retained earnings

     1,006,638       854,176  
  

 

 

   

 

 

 

Total stockholders’ equity

     1,138,358       985,951  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,252,691     $ 1,303,573  
  

 

 

   

 

 

 

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

 

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GRAND CANYON EDUCATION, INC.

Consolidated Statement of Stockholders’ Equity

(In thousands)

(Unaudited)

 

                                       Accumulated              
                                Additional      Other              
     Common Stock      Treasury Stock     Paid-in      Comprehensive     Retained        
     Shares      Par Value      Shares      Cost     Capital      Loss     Earnings     Total  

Balance at December 31, 2017

     52,277      $ 523        4,152      $ (100,694   $ 232,670      $ (724   $ 854,176     $ 985,951  

Cumulative effect from the adoption of accounting pronouncements, net of taxes

     —          —          —          —         —          —         (1,174     (1,174

Comprehensive income

     —          —          —          —         —          228       153,480       153,708  

Adoption impact – ASU 2018-02

     —          —          —          —         —          (156     156       —    

Common stock purchased for treasury

     —          —          39        (4,135     —          —         —         (4,135

Restricted shares forfeited

     —          —          94        —         —          —         —         —    

Share-based compensation

     163        2        151        (15,153     17,064        —         —         1,913  

Exercise of stock options

     130        1        —          —         2,094        —         —         2,095  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

     52,570      $ 526        4,436      $ (119,982   $ 251,828      $ (652   $ 1,006,638     $ 1,138,358  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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GRAND CANYON EDUCATION, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Nine Months Ended
September 30,
 
(In thousands)    2018     2017  

Cash flows provided by operating activities:

  

Net income

   $ 153,480     $ 135,063  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Share-based compensation

     17,066       9,562  

Provision for bad debts

     8,669       13,351  

Depreciation and amortization

     31,783       40,467  

Deferred income taxes

     (13,551     3,813  

Loss on transaction, net of costs and asset impairment

     12,605       —    

Other

     1,411       1,751  

Changes in assets and liabilities:

    

Accounts receivable from GCU

     (69,501     —    

Accounts receivable

     (7,784     (14,827

Prepaid expenses and other

     (555     (3,784

Accounts payable

     (11,938     4,007  

Accrued liabilities and employee related liabilities

     (8,666     6,710  

Income taxes receivable/payable

     (15,887     8,156  

Deferred rent

     (189     (271

Deferred revenue

     6,881       75,699  

Student deposits

     (7,288     (9,770
  

 

 

   

 

 

 

Net cash provided by operating activities

     96,536       269,927  
  

 

 

   

 

 

 

Cash flows used in investing activities:

    

Capital expenditures

     (90,152     (75,604

Purchases of land and building improvements related to off-site development

     (330     (10,152

Disposition, net of cash

     (131,550     —    

Funding to GCU at closing in excess of required capital

     (7,377     —    

Repayment of excess funds by GCU

     7,377       —    

Funding to GCU for capital expenditures

     (12,803     —    

Return of equity method investment

     —         685  

Purchases of investments

     (31,455     (76,630

Proceeds from sale or maturity of investments

     50,561       49,617  
  

 

 

   

 

 

 

Net cash used in investing activities

     (215,729     (112,084
  

 

 

   

 

 

 

Cash flows used in financing activities:

    

Principal payments on notes payable and capital lease obligations

     (5,076     (5,102

Net borrowings from revolving line of credit

     —         (25,000

Repurchase of common shares including shares withheld in lieu of income taxes

     (19,288     (9,657

Net proceeds from exercise of stock options

     2,095       6,755  
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,269     (33,004
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents and restricted cash

     (141,462     124,839  

Cash and cash equivalents and restricted cash, beginning of period

     248,008       130,907  
  

 

 

   

 

 

 

Cash and cash equivalents and restricted cash, end of period

   $ 106,546     $ 255,746  
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Cash paid for interest

   $ 738     $ 1,633  

Cash paid for income taxes

   $ 69,161     $ 45,413  

Supplemental disclosure of non-cash investing and financing activities

    

Sale transaction to GCU through Secured Note financing

   $ 870,097     $ —    

Purchases of property and equipment included in accounts payable

   $ 924     $ 6,437  

Reclassification of capitalized costs – adoption of ASC 606

   $ 9,015     $ —    

Reclassification of deferred revenue – adoption of ASC 606

   $ 7,451     $ —    

Reclassification of tax effect within accumulated other comprehensive income

   $ 156     $ —    

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

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

1. Nature of Business

Grand Canyon Education, Inc. (together with its subsidiaries, the “Company” or “GCE”) is a publicly traded education services company. GCE provides a full array of support services in the post-secondary education sector and has developed significant technological solutions, infrastructure and operational processes to provide service in these areas on a large scale. GCE currently provides services to Grand Canyon University, an Arizona non-profit corporation (“GCU”), its client, that include technology and academic services, counseling services and support, marketing and communication services, and several back office services such as accounting, reporting, tax, human resources, and procurement services. On July 1, 2018 the Company consummated a transaction that impacted the nature of our business. See Note 2 to our consolidated financial statements for a full description of this transaction. The Company’s wholly-owned subsidiaries were historically used to facilitate expansion of the university campus prior to the transaction.

GCU owns and operates a comprehensive regionally accredited university (the “University”) that offers over 230 graduate and undergraduate degree programs, emphases and certificates across nine colleges both online and on ground at its over 262 acre campus in Phoenix, Arizona, at leased facilities and at facilities owned by third party employers.

2. The Transaction

Asset Purchase Agreement and Related Agreements

On July 1, 2018, the Company consummated an Asset Purchase Agreement (the “Asset Purchase Agreement”) with GCU (formerly known as Gazelle University). Prior to the consummation of the transactions contemplated by the Asset Purchase Agreement (the “Transaction”), the Company operated the University.

Pursuant to the Asset Purchase Agreement:

 

 

The Company transferred to GCU the real property and improvements comprising the University campus as well as tangible and intangible academic and related operations and assets related to the University (the “Transferred Assets”), and GCU assumed liabilities related to the Transferred Assets. Accordingly, GCU now owns and operates the University. The Asset Purchase Agreement contains customary representations, warranties, covenants, agreements and indemnities.

 

 

The final purchase price that GCU paid for the Transferred Assets at closing (and after giving effect to a post-closing adjustment as provided in the Asset Purchase Agreement) was $870,097. The final purchase price was equal to the book value of the tangible Transferred Assets as of July 1, 2018, plus $1.00 for the intangible Transferred Assets.

 

 

GCU paid the purchase price for the Transferred Assets by issuing to the Company a senior secured note (the “Secured Note”) that is governed by a credit agreement between the Company and GCU (the “Credit Agreement”). The Credit Agreement contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that the Company will loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term on the terms set forth therein.

 

 

In connection with the closing of the Asset Purchase Agreement, the Company and GCU entered into a long-term master services agreement (the “Master Services Agreement”) pursuant to which the Company provides identified technology and academic services, counseling services and support, marketing and communication services, and several back office services to GCU in return for 60% of GCU’s tuition and fee revenue. The Master Services Agreement has an initial term of fifteen (15) years, subject to renewal options, although GCU has the right to terminate the Master Services Agreement early after the later of seven (7) years or the payment in full of the Secured Note. If GCU were to terminate the Master Services Agreement early, then GCU would be required to pay the Company a termination fee equal to one-hundred percent (100%) of the fees paid in the trailing twelve (12) month period. If the Master Services Agreement were not renewed after the initial fifteen (15) year term, GCU would be required to pay the Company a non-renewal fee equal to fifty percent (50%) of the fees paid in the trailing twelve (12) month period.

As a result of the Transaction, effective July 1, 2018, various aspects of the Company’s operations changed in important ways. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Change in the Structure of Our Operations.”

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Disposed Assets, previously Assets and Liabilities Held for Sale

The Company received Board approval to consummate the Transaction on June 28, 2018, and completed the Transaction on July 1, 2018. As a result, the Company determined that it had met the accounting requirements to classify the assets and liabilities to be transferred in the Transaction as assets and liabilities held for sale as of June 30, 2018. The assets and liabilities held for sale were sold as part of the Transaction on July 1, 2018. Accordingly, the following balances were transferred to GCU as of July 1, 2018:

 

Restricted cash and cash equivalents

   $ 97,443  

Accounts receivable, net of allowance for doubtful accounts of $6,093

     9,780  

Other assets

     7,677  

Property and equipment, net of accumulated depreciation of $166,066

     870,097  
  

 

 

 

Total assets held for sale, current

   $ 984,997  
  

 

 

 

Accrued and other liabilities

   $ 5,025  

Student deposits

     88,010  

Deferred revenue

     46,325  

Note payable

     79  
  

 

 

 

Total liabilities held for sale, current

   $ 139,439  
  

 

 

 

The Company received a Secured Note for the Transferred Assets. The Company also transferred cash equal to $34,107 representing a working capital adjustment as part of the closing. Except for identified liabilities assumed by GCU, GCE retained responsibility for all liabilities of the business arising from pre-closing operations. For the nine months ended September 30, 2018 the Company had a loss of $17,600, included in Loss on Transaction due to transaction costs of $4,995 and an asset impairment of $3,037 for the nine months ended September 30, 2018. In addition, the Company transferred to GCU cash of $9,568 to fund a deferred compensation plan for GCU employees that were formerly GCE employees (the “Transferred Employees”) and that held unvested restricted stock of GCE that was forfeited upon the Transaction. Included in the university related expenses for the three months ended September 30, 2018 is $7,880 of share-based compensation expense resulting from the modification and vesting of previously issued restricted stock grants held by Transferred Employees, employer tax expense of $191 related to the share-based compensation modification, net of reversals of employee related liabilities that were not part of the Transferred Assets for the Transaction of $1,502.

Variable Interest Entity and Related Party Considerations

ASC 810-10-15-17 provides scope exceptions to the variable interest entity analysis that include a not-for profit entity carve out. GCU is not a related party to the Company in accordance with ASC Topic 850. The following factors were considered:

 

 

Since GCU is a non-profit corporation, the Company has no ownership interest or voting rights in GCU.

 

 

GCU is a separate non-profit entity under the control of an independent board of trustees, none of whose members have ever served in a management or corporate board role at the Company. GCU’s board of trustees has adopted bylaws and a related conflict of interest policy that, among other things, (i) prevents any trustee of GCU from attending any meeting, or voting on any matter, as to which such trustee has a conflict of interest, (ii) establishes a special committee of independent trustees to oversee on behalf of GCU all matters related to the Master Services Agreement and GCU’s relationship with the Company, and (iii) prohibits any trustee from having any financial interest in, or role with, the Company. Accordingly, the Company’s relationship with GCU, both pursuant to the Master Services Agreement and operationally, is no longer as owner and operator, but as a third party service provider to an independent customer. While the Company believes that its relationship with GCU will remain strong, GCU’s board of trustees and management will have fiduciary and other duties that will require them to focus on the best interests of GCU and over time those interests could diverge from those of the Company.

 

 

Mr. Brian E. Mueller has served as the Chief Executive Officer of the Company since 2008 and the Chairman of the Board of the Company since 2017 and has also served as the President of the University since 2012. In connection with the Transaction, the Board of Directors of the Company and the board of trustees of GCU each independently determined that Mr. Mueller should retain those roles. Accordingly, Mr. Mueller remains the Chairman of the Board and Chief Executive Officer of the Company and continues to serve as the President of GCU. As noted above, however, Mr. Mueller is prohibited from serving on the board of trustees of GCU. Aside from Mr. Mueller, no other employee of GCU or GCE has a dual role in both organizations. A structure has been put in place that prevents Mr. Mueller from participating in operational matters involving the Company and GCU, including with respect to the Master Services Agreement.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

   

The terms of the Master Services Agreement vest in GCU and its board of trustees full authority over decision making related to the day-to-day operations of GCU, including, without limitation, (i) selecting, hiring and firing its personnel, (ii) selecting and adopting academic programs and courses, (iii) establishing admission standards and admitting students, (iv) overseeing instruction, (v) setting credit and student performance requirements, (vi) determining graduation requirements, and (vii) conferring degrees. Per the terms of the MSA, GCE has no authority over GCU’s day-to-day operations.

 

   

If GCU were to default under the Credit Agreement, the Company would be able to pursue assets of GCU, which are pledged as collateral for the Secured Note. However, the Company would not become the owner or operator of GCU.

 

   

There is no parent entity and subsidiary relationship between the Company and GCU.

 

   

The Company and GCU both engaged their own outside corporate counsel, outside regulatory counsel, and financial advisors to represent each party’s interest during the Transaction.

Second Amendment to Credit Agreement

The Company is a party to a credit agreement with Bank of America, N.A. as Administrative Agent, and other lenders, dated December 21, 2012 and amended as of January 15, 2016. Effective July 1, 2018, the Company and the lenders amended the credit agreement (the “Amendment”). Under the terms of the Amendment, (a) the lenders released the collateral securing the Company’s obligations under the credit agreement in order to enable the Company to consummate the Asset Purchase Agreement described above and modified certain financial and regulatory covenants to reflect the transactions described above, including the fact that the Company no longer operates a regulated educational institution, and (b) the Company (i) provided to the Administrative Agent cash collateral securing its remaining obligations under the credit agreement until such time as the Transaction has been approved by the U.S. Department of Education (the “Department of Education”), and (ii) agreed to collaterally assign its rights under the Asset Purchase Agreement, the Secured Note and the Master Services Agreement. The amount that is considered cash collateral is included as restricted cash on the consolidated balance sheet. The credit agreement, as amended by the Amendment, contains standard covenants, including covenants that, among other things, restrict the Company’s ability to incur additional debt or make certain investments and that require the Company to maintain a certain financial condition.

3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles and pursuant to the rules and regulations of the United States Securities and Exchange Commission and the instructions to Form 10-Q and Article 10, consistent in all material respects with those applied in its financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017. They do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Such interim financial information is unaudited but reflects all adjustments that in the opinion of management are necessary for the fair presentation of the interim periods presented. Interim results are not necessarily indicative of results for a full year. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and footnotes included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 from which the December 31, 2017 balance sheet information was derived. For purposes hereof, the term “university related revenue” refer to the Company’s revenue from operations prior to the sale of the University to GCU, and the term “university related expenses” refers to the Company’s expenses related to the operation of the University prior to the sale of the University to GCU and that are now the responsibility of GCU.

Restricted Cash and Cash Equivalents

A significant portion of the Company’s university related revenue was received from students who participated in government financial aid and assistance programs. Prior to July 1, 2018, restricted cash and cash equivalents represented amounts received from the federal and state governments under various student aid grant and loan programs, such as Title IV. The Company received these funds subsequent to the completion of the authorization and disbursement process and held them for the benefit of the student. The Department of Education requires Title IV funds collected in advance of student billings to be restricted until the course begins. Prior to the Transaction, the Company recorded all of these amounts as a current asset in restricted cash and cash equivalents. The majority of these funds remained as restricted for an average of 60 to 90 days from the date of receipt. Restricted cash and cash equivalents at September 30, 2018 represents the cash collateral on the credit agreement.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Investments

The Company considers its investments in municipal bonds, mutual funds, municipal securities, certificates of deposit and commercial paper as available-for-sale securities. Available-for-sale securities are carried at fair value, determined using Level 1 and Level 2 of the hierarchy of valuation inputs, with the use of quoted market prices and inputs other than quoted prices that are observable for the assets, with unrealized gains and losses, net of tax, reported as a separate component of other comprehensive income. Unrealized losses considered to be other-than-temporary are recognized currently in earnings. Amortization of premiums, accretion of discounts, interest and dividend income and realized gains and losses are included in interest and other income.

Derivatives and Hedging

Derivative financial instruments are recorded on the balance sheet as assets or liabilities and re-measured at fair value at each reporting date. For derivatives designated as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

Derivative financial instruments enable the Company to manage its exposure to interest rate risk. The Company does not engage in any derivative instrument trading activity. Credit risk associated with the Company’s derivative is limited to the risk that a derivative counterparty will not perform in accordance with the terms of the contract. Exposure to counterparty credit risk is considered low because these agreements have been entered into with institutions with Aa or higher credit ratings, and they are expected to perform fully under the terms of the agreements.

On February 27, 2013, the Company entered into an interest rate corridor to manage its 30 Day LIBOR interest exposure related to its variable rate debt. The fair value of the interest rate corridor instrument as of September 30, 2018 and December 31, 2017 was $801 and $509, respectively, which is included in other assets. The fair value of the derivative instrument was determined using a hypothetical derivative transaction and Level 2 of the hierarchy of valuation inputs. This derivative instrument was originally designated as a cash flow hedge of variable rate debt obligations. The adjustment of $330 and $169 for the nine months ended September 30, 2018 and 2017, respectively, for the effective portion of the gains and losses on the derivatives is included as a component of other comprehensive income, net of taxes.    

The interest rate corridor instrument reduces variable interest rate risk starting March 1, 2013 through December 20, 2019 with a notional amount of $61,667 as of September 30, 2018. The corridor instrument’s terms permit the Company to hedge its interest rate risk at several thresholds; the Company pays variable interest monthly based on the 30 Day LIBOR rates until that index reaches 1.5%. If 30 Day LIBOR is equal to 1.5% through 3.0%, the Company pays 1.5%. If 30 Day LIBOR exceeds 3.0%, the Company pays actual 30 Day LIBOR less 1.5%.

As of September 30, 2018, no derivative ineffectiveness was identified. Any ineffectiveness in the Company’s derivative instrument designated as a hedge is reported in interest expense in the income statement. At September 30, 2018, the Company expects to reclassify gains or losses on derivative instruments from accumulated other comprehensive income (loss) into earnings during the next 12 months as the derivative instrument expires in December 2019.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, investments, accounts receivable, accounts payable and accrued compensation and benefits and accrued liabilities expenses approximate their fair value based on the liquidity or the short-term maturities of these instruments. The carrying value of notes receivable, non-current approximates fair value as the Secured Note resulted from the Transaction and was negotiated at fair market value. The carrying value of notes payable approximates fair value as it is based on variable rate index. Derivative financial instruments are carried at fair value, determined using Level 2 of the hierarchy of valuation inputs as defined in the FASB Accounting Standards Codification (“Codification”), with the use of inputs other than quoted prices that are observable for the asset or liability.

The fair value of investments, primarily municipal securities, was determined using Level 2 of the hierarchy of valuation inputs, with the use of inputs other than quoted prices that are observable for the assets. The unit of account used for valuation is the individual underlying security. The municipal securities are comprised of city and county bonds related to schools, water and sewer, utilities, transportation, healthcare and housing.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Revenue Recognition

University related revenue – prior to July 1, 2018

On January 1, 2018, the Company adopted “Revenue from Contracts with Customers” using the modified retrospective method applied to all contracts. Prior to the Transaction on July 1, 2018, net revenues consisted primarily of tuition, net of scholarships, and fees derived from courses taught by the University online, on ground, and at facilities it leased or those of employers, as well as from related educational resources that the University provided to its students, such as access to online materials. Tuition revenue was recognized pro-rata over the applicable period of instruction. A contract was entered into with a student and covered a course or semester. Revenue recognition occurred once a student started attending a course. The Company also charged online students an upfront learning management fee, which was deferred and recognized over the initial course. The Company had no costs that were capitalized to obtain or to fulfill a contract with a customer. Ancillary revenues included housing and fee revenues that were recognized over the period the services were provided and also included revenues from sales and services such as food and beverage, merchandise, hotel, golf and arena events that were recognized as sales occurred or services were performed as these services were transferred at a point in time. For the six months ended June 30, 2018 and the nine months ended September 30, 2017, the Company’s revenue was reduced by approximately $101,176 and $135,630, respectively, as a result of scholarships that the Company offered to students. Sales tax collected from students is excluded from net revenues. Collected but unremitted sales tax is included as an accrued liability in our consolidated balance sheet.

The following table presents our revenues disaggregated by the nature of transfer of services for the six months ended June 30, 2018:

 

Tuition revenues

   $ 522,430  

Ancillary revenues (housing, meals, fees, golf, hotel, arena, other)

     91,245  
  

 

 

 

Total revenues

     613,675  
  

 

 

 

Scholarships

     (101,176
  

 

 

 

Net Revenues

   $ 512,499  
  

 

 

 

The Company’s receivables represented unconditional rights to consideration from its contracts with students; accordingly, students were not billed until they started attending a course and the revenue recognition process had commenced. Once a student had been invoiced, payment was due immediately. Included in each invoice to the student were all educational related items including tuition, net of scholarships, housing, educational materials, fees, etc. The Company did not have any contract assets. The Company’s contract liabilities were reported as deferred revenue and student deposits in the consolidated balance sheets. Deferred revenue and student deposits in any period represented the excess of tuition, fees, and other student payments received as compared to amounts recognized as revenue on the consolidated income statement and were reflected as current liabilities in the accompanying consolidated balance sheets. The Company’s education programs had starting and ending dates that differ from its fiscal quarters. Therefore, at the end of each fiscal quarter, a portion of revenue from these programs was not yet earned. The majority of the University’s traditional ground students did not attend courses during the summer months (May through August), which affected our results for our second and third fiscal quarters.

The Company had identified a performance obligation associated with the provision of its educational instruction and other educational services, housing services, and other academic related services and used the output measure for recognition as the period of time over which the services were provided to our students. The Company had identified performance obligations related to its hotel, golf course, restaurants, sale of branded promotional items and other ancillary activities and recognized revenue at the point in time goods or services were provided to its customers. The Company maintained an institutional tuition refund policy, which provided for all or a portion of tuition to be refunded if a student withdrew during stated refund periods. Certain states in which students reside impose separate, mandatory refund policies, which overrode the Company’s policy to the extent in conflict. If a student withdrew at a time when only a portion, or none of the tuition was refundable, then in accordance with its revenue recognition policy, the Company continued to recognize the tuition that was not refunded pro-rata over the applicable period of instruction. The Company did not record revenue on amounts that may be refunded. However, for students that had taken out financial aid to pay their tuition and for which a return of such money to the Department of Education under Title IV was required as a result of his or her withdrawal, the Company reassessed collectability for these students each quarter for the estimated revenue that will be returned and recognized the revenue in future periods when payment was received. The Company had elected the short-term contract exemption with respect to its performance obligations under its contracts with students as all such contracts had original terms of less than one year.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Service revenue commenced July 1, 2018

Starting July 1, 2018, the Company generates all of its revenue through the Master Services Agreement, pursuant to which the Company provides identified technology and academic services, counseling services and support, marketing and communication services, and several back office services to GCU in return for 60% of GCU’s tuition and fee revenue. Effective July 1, 2018, the Company adopted “Revenue from Contracts with Customers” applied to our Master Service Agreement, our only revenue-producing contract, as an education service provider.

The Company’s contract with GCU has an initial 15 year term, subject to renewal options, although GCU has the right to terminate the Master Services Agreement early after the later of seven (7) years or the payment in full of the Secured Note. Refer to Note 2 for further discussion on the fees associated with early termination or non-renewal by GCU. The Company’s contract has a single performance obligation, as the promises to provide the identified services are not distinct within the context of the Master Services Agreement. The single performance obligation is delivered as our client receives and consumes benefits, which occurs ratably over the service period. Service revenue is recognized over time using the output method of measuring progress towards complete satisfaction of the single performance obligation. The output method provides a faithful depiction of the performance toward complete satisfaction of the performance obligation and can be tied to the time elapsed which is consumed evenly over the month and is a direct measurement of the value provided to our client. The service fees received from our client over the term of the agreement are variable in nature in that they are dependent upon the number of students attending the University and revenues generated from those students during the service period. Due to the variable nature of the consideration over the life of the service arrangement, the Company considered forming an expectation of the variable consideration to be received over the service life of this one performance obligation. However, since the performance obligation represents a series of distinct services, the Company will recognize the variable consideration that becomes known and billable each month because these fees related to the distinct service period (month) in which the fees are earned. The Company meets the criteria in the standard and will exercise the practical expedient and not disclose the aggregate amount of the transaction price allocated to the single performance obligation that is unsatisfied as of the end of the reporting period. The Company does not disclose the value of unsatisfied performance obligations because the directly allocable variable consideration is allocated entirely to a wholly unsatisfied promise to transfer a service that forms part of a single performance obligation. The service fees are calculated and settled monthly with GCU, resulting in a settlement duration of less than one year. There are no refunds or return rights under the Master Services Agreement.

The Company’s receivables represent unconditional rights to consideration from our contract with GCU. Accounts receivable, net is stated at net realizable value, and the Company utilizes the allowance method to provide for doubtful accounts based on its evaluation of the collectability of the amounts due. There are no unbilled revenue amounts included in our accounts receivable. There have been no amounts written off and no reserves established as of September 30, 2018. The Company receives service revenue payments monthly. The Company will continue to review and revise its allowance methodology based on historical collection experience.

The Company does not have any contract assets or contract liabilities as the Company calculates the service fee and bills its client on the last day of each month. The Company has no costs that are capitalized to obtain or to fulfill a contract with a customer.

Prepaid Royalty

In connection with its February 2004 acquisition of the assets of Grand Canyon University from a non-profit foundation, the Company recorded a future royalty payment obligation that was included in the Prepaid Royalty in the accompanying consolidated balance sheet, which was being amortized over a 20 year period. This asset was to be expensed over the periods that online education revenues were earned. At the completion of the Transaction on July 1, 2018, the remaining prepaid royalty assets were deemed impaired and $3,037 was expensed and included in Loss on Transaction in the consolidated income statement.

Internally Developed Technology

The Company capitalizes certain costs related to internal-use software, primarily consisting of direct labor associated with creating the software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation or operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs of design, coding, integration, and testing of the software developed. Capitalization of costs requires judgment in determining when a project has reached the application development stage and the period over which we expect to benefit from the use of that software. Once the software is placed in service, these costs are amortized over the estimated useful life of the software, which is generally three years. These assets are a component of our property and equipment, net in our consolidated balance sheet.

Long-Lived Assets (other than goodwill)

The Company evaluates the recoverability of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Financial Statement Presentation

On July 1, 2018 the Company consummated the Transaction, which impacted the nature of its business. See Note 2 to our consolidated financial statements for a full description of the Transaction. GCE now provides services to GCU, its client, that include technology and academic services, counseling services and support, marketing and communication services, and several back office services such as accounting, reporting, tax, human resources, and procurement services. The Company made changes in its presentation of operating expenses and reclassified prior periods to conform to the current presentation. The Company determined that these changes would provide more meaningful information as this new presentation provides transparency for costs that will be incurred as a service provider and costs that will not reoccur in the future as they are related to university expenses that were transferred to GCU in the Transaction.

Technical and Academic Services

Technical and academic services (previously primarily a component of instructional costs and services) consist primarily of costs related to ongoing maintenance of educational infrastructure, including online course delivery and management, student records, assessment, customer relations management and other internal administrative systems. This also includes costs to provide support for curriculum and new program development, support for faculty training and development, technical support and assistance with state compliance. This expense category includes salaries, benefits and share-based compensation, information technology costs, curriculum and new program development costs (which are expensed as incurred) and other costs associated with these support services. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location.

Counseling Services and Support

Counseling services and support (previously primarily components of instructional costs and services and admissions advisory related expenses) consist primarily of costs including team-based counseling and other support to prospective and current students as well as financial aid processing. This expense category includes salaries, benefits and share-based compensation, and other costs such as dues, fees and subscriptions and travel costs. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location.

Marketing and Communication

Marketing and communication includes lead acquisition, digital communication strategies, brand identity advertising, media planning and strategy, video, data science and analysis, marketing to potential students and other promotional and communication services. This category was primarily from our historical captions of advertising and marketing and promotional. This expense category includes salaries, benefits and share-based compensation for marketing and communication personnel, brand advertising, marketing leads and other promotional and communication expenses. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location. Advertising costs are expensed as incurred.

General and Administrative

General and administrative expenses include salaries, benefits and share-based compensation of employees engaged in corporate management, finance, human resources, compliance, and other corporate functions. This category also includes an allocation of depreciation, amortization, rent, and occupancy costs attributable to the provision of these services, primarily at the Company’s Phoenix, Arizona location.

University related expenses

University related expenses (previously primarily instructional costs and services) represent the costs that were transferred to GCU in the Transaction and that are no longer incurred by the Company.

We have reclassified our operating expenses for prior periods to conform to the above disaggregation and revisions to our presentation. There were no changes to total operating expenses or operating income as a result of these reclassifications. The following table presents our operating expenses as previously reported and as reclassified on our Consolidated Income Statement for each of the quarters in 2017 and the first two quarters of 2018.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

     2017  
     First Quarter
As Reported
     First Quarter
As Reclassified
     Second Quarter
As Reported
     Second Quarter
As Reclassified
 

Costs and expenses:

           

Technology and academic services

     —          10,381        —          10,220  

Counseling services and support

     —          46,312        —          45,970  

Marketing and communication

     —          27,309        —          27,426  

General and administrative

     9,941        7,033        10,058        5,806  

University related expenses

     —          80,543        —          73,791  

Instructional costs and services

     102,574        —          95,030        —    

Admissions advisory and related

     31,972        —          31,085        —    

Advertising

     24,631        —          24,776        —    

Marketing and promotional

     2,460        —          2,264        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

     171,578        171,578        163,213        163,213  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2017  
     Third Quarter
As Reported
     Third Quarter
As Reclassified
     Fourth Quarter
As Reported
     Fourth Quarter
As Reclassified
 

Costs and expenses:

           

Technology and academic services

     —          10,494        —          10,739  

Counseling services and support

     —          46,100        —          50,213  

Marketing and communication

     —          28,130        —          26,227  

General and administrative

     12,915        8,343        10,845        5,975  

University related expenses

     —          83,450        —          86,356  

Loss on transaction

     —          —          —          562  

Instructional costs and services

     104,303        —          108,933        —    

Admissions advisory and related

     31,426        —          34,061        —    

Advertising

     25,523        —          23,678        —    

Marketing and promotional

     2,350        —          2,555        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

     176,517        176,517        180,072        180,072  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     2018  
     First Quarter
As Reported
     First Quarter
As Reclassified
     Second Quarter
As Reported
     Second Quarter
As Reclassified
 

Costs and expenses:

           

Technology and academic services

     —          10,697        —          10,678  

Counseling services and support

     —          50,747        —          50,838  

Marketing and communication

     —          28,527        —          30,095  

General and administrative

     11,309        7,419        11,969        5,762  

University related expenses

     —          87,649        —          79,517  

Loss on transaction

     —          550        —          1,440  

Instructional costs and services

     111,027        —          102,237        —    

Admissions advisory and related

     34,854        —          34,254        —    

Advertising

     25,715        —          27,602        —    

Marketing and promotional

     2,684        —          2,268        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total costs and expenses

     185,589        185,589        178,330        178,330  
  

 

 

    

 

 

    

 

 

    

 

 

 

Commitments and Contingencies

The Company accrues for contingent obligations when it is probable that a liability has been incurred and the amount is reasonably estimable. When the Company becomes aware of a claim or potential claim, the likelihood of any loss exposure is assessed. If it is probable that a loss will result and the amount of the loss is estimable, the Company records a liability for the estimated loss. If the loss is not probable or the amount of the potential loss is not estimable, the Company will disclose the claim if the likelihood of a potential loss is reasonably possible and the amount of the potential loss could be material. Estimates that are particularly sensitive to future changes include tax, legal, and other regulatory matters, which are subject to change as events evolve, and as additional information becomes available during the administrative and litigation process. The Company expenses legal fees as incurred.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Concentration of Credit Risk

The Company believes the credit risk related to cash equivalents and investments is limited due to its adherence to an investment policy that requires investments to have a minimum BBB rating, depending on the type of security, by one major rating agency at the time of purchase. All of the Company’s cash equivalents and investments as of September 30, 2018 and December 31, 2017 consist of investments rated BBB or higher by at least one rating agency. Additionally, the Company utilizes more than one financial institution to conduct initial and ongoing credit analysis on its investment portfolio to monitor and lower the potential impact of market risk associated with its cash equivalents and investment portfolio. The Company is also subject to credit risk for its accounts receivable balance. The Company has not experienced any losses on receivables to date. To manage accounts receivable risk, the Company maintains an allowance for doubtful accounts, if needed. Our dependence on one customer subjects us to the risk that declines in our customer’s operations would result in a sustained reduction in revenues for the Company.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Segment Information

The Company operates as a single educational services company using a core infrastructure that serves the curriculum and educational delivery needs of its client, GCU. The Company’s Chief Executive Officer manages the Company’s operations as a whole and no expense or operating income information is generated or evaluated on any component level.

Accounting Pronouncements Adopted in 2018

In May 2014, the FASB issued “Revenue from Contracts with Customers, as amended.” The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. The accounting guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgements and changes in judgements and assets recognized from costs incurred to obtain or fulfill a contract. The Company adopted this new standard on January 1, 2018, using the modified retrospective method applied to all contracts. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows. The Company elected the short-term contract exemption with respect to disclosures associated with its performance obligations as all performance obligations as of the end of any reporting period have original terms of less than a year. The cumulative effect for the Company upon adoption of this new standard was $1,174, net of tax. The adoption impact resulted from the removal of $9,015 of costs that were direct and incremental previously capitalized for online students, and the removal of deferred revenue from an upfront learning fee of $7,451. These fees are no longer capitalized and amortized over the average expected term of a student. The fee is now amortized over the first course for the online student.

In January 2016, the FASB issued “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the amendments is the requirement for changes in the fair value of equity investments, with certain exceptions, to be recognized through net income rather than other comprehensive income (“OCI”). This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard was effective for us as of January 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows.

In May 2017, the FASB issued “Compensation – Stock Compensation – Scope of Modification Accounting.” This standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. This standard was effective for fiscal years beginning after December 15, 2017. Early adoption was permitted, including adoption in any interim period. Accordingly, the standard was adopted by us as of July 1, 2018. The vesting conditions for approximately 100 former GCE employees who became GCU employees upon the closing of the Transaction, were accelerated contingent upon the closing of the Transaction. As a result, the incremental share-based compensation expense from the modification on 82 restricted stock awards for the accelerated vesting date was $7,880 and is included in the university related expenses in the consolidated income statement.

 

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Table of Contents

GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

In February 2018, the FASB issued “Income Statement – Reporting Comprehensive Income.” This standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Elimination of the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. Accordingly, the standard was adopted by us as of April 1, 2018. The adoption of this guidance did not have a material impact on the Company’s financial condition, results of operations or statement of cash flows.

Recent Accounting Pronouncements

In February 2016, the FASB issued “Leases.” The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and a lease liability on the balance sheet for all leases with lease terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, and early adoption is permitted. Accordingly, the standard is effective for us on January 1, 2019 using a modified retrospective transition approach. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company continues to evaluate the impact that the future adoption of this standard will have on our consolidated financial statements and we believe the adoption will slightly increase our assets and liabilities, and will increase our financial statement disclosures.

In August 2017, the FASB issued “Targeted Improvements to Accounting for Hedging Activities.” This standard targets improvements in the hedge relationship documentation, testing and disclosures for derivatives. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted for fiscal years and interim period within those years, beginning in August 2017. Accordingly, the standard is effective for us on January 1, 2019 and we are currently evaluating the impact that the standard will have on our consolidated financial statements.

The Company has determined that no other recent accounting pronouncements apply to its operations or could otherwise have a material impact on its consolidated financial statements.

4. Investments

The following is a summary of investments as of September 30, 2018 and December 31, 2017. The Company considered all investments as available for sale.

 

     As of September 30, 2018  
     Adjusted
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
     Estimated
Fair
Value
 

Municipal securities

   $ 69,192      $ —        $ (438    $ 68,754  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 69,192      $ —        $ (438    $ 68,754  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2017  
     Adjusted
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
     Estimated
Fair
Value
 

Municipal securities

   $ 84,768      $ —        $ (409    $ 84,359  

Certificates of Deposit

   $ 4,915      $ —        $ (3    $ 4,912  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments

   $ 89,683      $ —        $ (412    $ 89,271  
  

 

 

    

 

 

    

 

 

    

 

 

 

The cash flows of municipal securities are backed by the issuing municipality’s credit worthiness. All municipal securities are due in one year or less as of September 30, 2018. For the nine months ended September 30, 2018, the net unrealized losses on available-for-sale securities was $329, net of taxes.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

5. Net Income Per Common Share

Basic earnings per common share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the assumed conversion of all potentially dilutive securities, consisting of stock options and restricted stock awards, for which the estimated fair value exceeds the exercise price, less shares which could have been purchased with the related proceeds, unless anti-dilutive. For employee equity awards, repurchased shares are also included for any unearned compensation adjusted for tax. The table below reflects the calculation of the weighted average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted earnings per common share.

 

     Three Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2018      2017      2018      2017  

Denominator:

           

Basic weighted average shares outstanding

     47,682        47,316        47,592        47,083  

Effect of dilutive stock options and restricted stock

     740        976        837        1,114  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding

     48,422        48,292        48,429        48,197  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted weighted average shares outstanding excludes the incremental effect of unvested restricted stock and shares that would be issued upon the assumed exercise of stock options in accordance with the treasury stock method. For the nine months ended September 30, 2018 and 2017, approximately 0 and 3, respectively, of the Company’s stock options and restricted stock awards outstanding were excluded from the calculation of diluted earnings per share as their inclusion would have been anti-dilutive. These options and restricted stock awards could be dilutive in the future.

6. Allowance for Doubtful Accounts

 

     Balance at
Beginning
of Period
     Charged to
Expense
     Deductions(1)     Transfers(2)     Balance at
End of
Period
 

Nine months ended September 30, 2018(2)

   $ 5,907        8,669        (8,483     (6,093   $ 0  

Nine months ended September 30, 2017

   $ 5,918        13,351        (12,978     —       $ 6,291  

 

(1)

Deductions represent accounts written off, net of recoveries.

(2)

Allowance was transferred to GCU with other educational assets and liabilities on July 1, 2018. See Note 2.

7. Property and Equipment

Property and equipment consist of the following:

 

     September 30,      December 31,  
     2018      2017  

Land

   $ 5,579      $ 160,126  

Land improvements

     2,242        25,630  

Buildings

     51,409        595,384  

Buildings and leasehold improvements

     9,564        117,460  

Equipment under capital leases

     —          5,937  

Computer equipment

     82,974        116,477  

Furniture, fixtures and equipment

     4,874        63,470  

Internally developed software

     37,933        36,173  

Other

     —          1,176  

Construction in progress

     2,695        32,390  
  

 

 

    

 

 

 
     197,270        1,154,223  
     

Less accumulated depreciation and amortization

     (86,362      (231,939
  

 

 

    

 

 

 

Property and equipment, net

   $ 110,908      $ 922,284  
  

 

 

    

 

 

 

8. Commitments and Contingencies

Legal Matters

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, some of which are covered by insurance. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Company records a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the specific claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. With respect to the majority of pending litigation matters, the Company’s ultimate legal and financial responsibility, if any, cannot be estimated with certainty and, in most cases, any potential losses related to those matters are not considered probable.

Upon resolution of any pending legal matters, the Company may incur charges in excess of presently established reserves. Management does not believe that any such charges would, individually or in the aggregate, have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Tax Reserves, Non-Income Tax Related

From time to time the Company has exposure to various non-income tax related matters that arise in the ordinary course of business. The Company reserve is not material for tax matters where its ultimate exposure is considered probable and the potential loss can be reasonably estimated.

9. Income Taxes

The Company has deferred tax assets and liabilities that reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As a result of the Transaction, discussed in Note 2, significant changes were recorded with respect to deferred tax assets and liabilities.

Significant components of the Company’s deferred income tax assets and liabilities, included in Deferred income taxes, non-current on the consolidated balance sheets are as follows:

 

     As of September 30,
2018
     As of December 31,
2017
 

Deferred tax assets:

     

Share-based compensation

   $ 2,729      $ 4,201  

Employee compensation

     758        950  

Allowance for doubtful accounts

     155        1,685  

Deferred tuition revenue

     147        1,294  

Deferred scholarship

     —          618  

Intangibles

     —          590  

State taxes

     713        985  

Other

     204        526  
  

 

 

    

 

 

 

Deferred tax assets

     4,706        10,849  
  

 

 

    

 

 

 

Deferred tax liability:

     

Property and equipment

     (8,335      (28,028

Goodwill

     (762      (762

Other

     (30      (421
  

 

 

    

 

 

 

Deferred tax liability

     (9,127      (29,211
  

 

 

    

 

 

 

Net deferred tax liability

   $ (4,421    $ (18,362
  

 

 

    

 

 

 

The net deferred tax liability on the accompanying consolidated balance sheet is comprised of the following:

 

     As of September 30,
2018
     As of December 31,
2017
 

Deferred income taxes, current

   $ 1,744      $ 5,214  

Deferred income taxes, non-current

     (6,165      (23,576
  

 

 

    

 

 

 

Net deferred tax liability

   $ (4,421    $ (18,362
  

 

 

    

 

 

 

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

10. Share-Based Compensation

Incentive Plan

Prior to June 2017, the Company made grants of restricted stock and stock options under its 2008 Equity Incentive Plan (the “2008 Plan”). In January 2017, the Board of Directors of the Company approved, and at the Company’s 2017 annual meeting of stockholders held on June 14, 2017, the Company’s stockholders adopted a 2017 Equity Incentive Plan (the “2017 Plan”) under which a maximum of 3,000 shares may be granted. As of September 30, 2018, 1,910 shares were available for grants under the 2017 Plan. All grants of equity incentives made after June 2017 will be made from the 2017 Plan.

Restricted Stock

During the nine months ended September 30, 2018, the Company granted 160 shares of common stock with a service vesting condition to certain of its executives, officers, faculty and employees. The restricted shares have voting rights and vest in five annual installments of 20%, with this first installment vesting in March of the calendar year following the date of grant (the “first vesting date”) and on each of the four anniversaries of the first vesting date. Upon vesting, shares will be held in lieu of taxes equivalent to the minimum statutory tax withholding required to be paid when the restricted stock vests. During the nine months ended September 30, 2018, the Company withheld 151 shares of common stock in lieu of taxes at a cost of $15,153 on the restricted stock vesting dates. In June 2018, following the annual stockholders meeting, the Company granted 3 shares of common stock under the 2017 Plan to the non-employee members of the Company’s Board of Directors. The restricted shares granted to these directors have voting rights and vest on the earlier of (a) the one year anniversary of the date of grant or (b) immediately prior to the following year’s annual stockholders’ meeting. In conjunction with the Transaction, the Compensation Committee of the Company’s Board of Directors decided to modify the vesting condition for certain restricted stock awards for approximately 100 Transferred Employees who transferred employment from GCE to GCU, with the acceleration being contingent upon the closing of the Transaction on July 1, 2018. Refer to Note 2 for further discussion on the Transaction. As a result, the incremental share-based compensation expense from the modification on 82 restricted stock awards for the accelerated vesting date was $7,880 and is included in the university related expenses in the consolidated income statement. Additionally, the Company transferred cash to GCU totaling $9,568 to fund a deferred compensation plan in an amount equal to the value of the 86 shares forfeited by the Transferred Employees at the closing of the Transaction. This amount is included in the loss on transaction in the consolidated income statement.

A summary of the activity related to restricted stock granted under the Company’s Incentive Plan since December 31, 2017 is as follows:

 

     Total
Shares
     Weighted Average
Grant Date

Fair Value per Share
 

Outstanding as of December 31, 2017

     776      $ 49.16  

Granted

     163      $ 92.34  

Vested

     (384    $ 65.57  

Forfeited, canceled or expired

     (94    $ 71.68  
  

 

 

    

Outstanding as of September 30, 2018

     461      $ 63.27  
  

 

 

    

Stock Options

During the nine months ended September 30, 2018, no options were granted. A summary of the activity since December 31, 2017 related to stock options granted under the Company’s Incentive Plan is as follows:

 

     Summary of Stock Options Outstanding  
     Total
Shares
     Weighted
Average
Exercise
Price per
Share
     Weighted
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic
Value ($)(1)
 

Outstanding as of December 31, 2017

     694      $ 17.31        

Granted

     —        $ —          

Exercised

     (130    $ 16.07        

Forfeited, canceled or expired

     —        $ —          
  

 

 

          

Outstanding as of September 30, 2018

     564      $ 17.60        2.03      $ 53,657  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of September 30, 2018

     564      $ 17.60        2.03      $ 53,657  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Aggregate intrinsic value represents the value of the Company’s closing stock price on September 28, 2018 ($112.80) in excess of the exercise price multiplied by the number of shares underlying options outstanding or exercisable, as applicable.

 

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GRAND CANYON EDUCATION, INC.

Notes to Consolidated Financial Statements

(In thousands, except per share data)

(Unaudited)

 

Share-based Compensation Expense

The table below outlines share-based compensation expense for the nine months ended September 30, 2018 and 2017 related to restricted stock and stock options granted:

 

     2018      2017  

Technical and academic services

   $ 1,195      $ 1,160  

Counseling support and services

     3,707        3,566  

Marketing and communication

     40        19  

General and administrative

     2,530        2,535  

University related expenses

     9,594        2,282  
  

 

 

    

 

 

 

Share-based compensation expense included in operating expenses

     17,066        9,562  

Tax effect of share-based compensation

     (4,267      (3,825
  

 

 

    

 

 

 

Share-based compensation expense, net of tax

   $ 12,799      $ 5,737  
  

 

 

    

 

 

 

 

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Table of Contents

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes that appear elsewhere in this report.

Forward-Looking Statements

This Quarterly Report on Form 10-Q, including Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains certain “forward-looking statements” within the meaning of Section 27A of Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements regarding: the Transaction; proposed new programs; statements as to whether regulatory developments or other matters may or may not have a material adverse effect on our financial position, results of operations, or liquidity; statements concerning projections, predictions, expectations, estimates, or forecasts as to our business, financial and operational results, and future economic performance; and statements of management’s goals and objectives and other similar expressions concerning matters that are not historical facts. Words such as “may,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in future tense, identify forward-looking statements.

Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time those statements are made or management’s good faith belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to:

 

   

the failure of the Company to operate successfully as a third party service provider to GCU, and GCU’s failure to operate the University as successfully as it was previously operated by the Company;

 

   

the occurrence of any event, change or other circumstance that could give rise to the termination of any of the key Transaction agreements;

 

   

our failure to comply with the extensive regulatory framework applicable to us either directly as a third party service provider or indirectly through our university client, including Title IV of the Higher Education Act and the regulations thereunder, state laws and regulatory requirements, and accrediting commission requirements;

 

   

the ability of our university client’s students to obtain federal Title IV funds, state financial aid, and private financing;

 

   

potential damage to our reputation or other adverse effects as a result of negative publicity in the media, in the industry or in connection with governmental reports or investigations or otherwise, affecting us or other companies in the education services sector;

 

   

risks associated with changes in applicable federal and state laws and regulations and accrediting commission standards, including pending rulemaking by ED applicable to us directly or indirectly through our university client;

 

   

competition from other education service companies in our geographic region and market sector, including competition for students, qualified executives and other personnel;

 

   

our ability to properly manage risks and challenges associated with strategic initiatives, including potential acquisitions or divestitures of, or investments in, new businesses, acquisitions of new properties and new university clients, and expansion of services provided to our existing university client;

 

   

our expected tax payments and tax rate, including the effect of the Tax Cuts and Jobs Act of 2017;

 

   

our ability to hire and train new, and develop and train existing, employees;

 

   

the pace of growth of our university client’s enrollment and its effect on the pace of our own growth;

 

   

our ability to, on behalf of our university client, convert prospective students to enrolled students and to retain active students to graduation;

 

   

our success in updating and expanding the content of existing programs and developing new programs in a cost-effective manner or on a timely basis for our university client;

 

   

risks associated with the competitive environment for marketing the programs of our university client;

 

   

failure on our part to keep up with advances in technology that could enhance the experience for our university client’s students;

 

   

the extent to which obligations under our credit agreement, including the need to comply with restrictive and financial covenants and to pay principal and interest payments, limits our ability to conduct our operations or seek new business opportunities;

 

   

our ability to manage future growth effectively; and

 

   

general adverse economic conditions or other developments that affect the job prospects of our university client’s students.

 

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Table of Contents

Additional factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017, as updated in our subsequent reports filed with the Securities and Exchange Commission (“SEC”), including any updates found in Part II, Item 1A of this Quarterly Report on Form 10-Q or our other reports on Form 10-Q. You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date the statements are made and we assume no obligation to update forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting forward-looking information, except to the extent required by applicable securities laws. If we do update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

 

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Table of Contents

Explanatory Note

On July 1, 2018, the Company consummated the Transaction with GCU. See Note 2 to consolidated financial statement for a full description of the Transaction.

Prior to July 1, 2018, the Company owned and operated the University. Accordingly, the results of operations discussed herein reflect the Company’s operations prior to July 1, 2018 which was made up exclusively of the operations of the University. Commencing July 1, 2018, the results of operations do not include the operations of GCU but rather reflect the operations of the Company as a service/technology provider as described below.

Overview of Results. End-of-period enrollment at our client, GCU increased 8.2% between September 30, 2018 and September 30, 2017 to 98,715 from 91,230. The Company attributes the growth in our client’s enrollment between years to the increasing brand recognition and the value proposition that it affords to traditional-aged students and their parents and to working adult students. Our client’s net revenues increased over the first nine months of the prior year primarily due to the enrollment growth and due to an increase in ancillary revenues resulting from the increased traditional student enrollment at GCU (e.g. housing, food, etc.). Although our client’s online enrollment continues to grow, as the proportion of traditional colleges and universities providing alternative learning modalities increases, the Company and our client will face increasing competition for working adult students from such institutions, including those with well-established reputations for excellence. Our client’s revenue per student increased in the nine months ended September 30, 2018 compared to the same period in 2017 primarily due to a shift in the timing of GCU’s start dates for its ground traditional students resulting in one more revenue producing day in 2018 as compared to 2017 and an increase in residential students as a percentage of ground enrollment. Residential students generate greater revenue per student when factoring in room, board and fees, than our working adult students. Our client, GCU, has not raised its tuition for its traditional ground programs in ten years and tuition increases for working adult programs have averaged 1% or less.

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, 2017. During the nine months ended September 30, 2018, there have been no significant changes in our critical accounting policies other than the change in revenue recognition related to our becoming an education service provider as of July 1, 2018, as discussed in Note 3 to the consolidated financial statements in Part I, Item 1 of this report.

 

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Table of Contents

Change in the Structure of Our Operations.

As a result of the Transaction, various aspects of the Company’s operations have changed in important ways. These changes include, but are not limited to, the following:

 

   

The Company no longer owns and operates a regulated institution of higher education, but instead provides a bundle of services in support of GCU’s operations. See Note 2 to Consolidated Financial Statements for a full description of the services provided under the Master Services Agreement. While, prior to July 1, 2018, the Company had never operated as a third party service provider regulated by the Department of Education, all of the services that it provides to GCU under the Master Services Agreement are services that it had always provided internally in support of the University’s academic operations prior to the Transaction. As a result, while the Company has limited to no experience operating as a service provider to third parties, it believes that its significant investment in technological solutions, infrastructure and processes to provide superior service to students, its experience and expertise in these services areas, its experience providing such services at the scale required for GCU to continue to operate in a manner consistent with past practices, and the fact that it retained all of the assets and employees involved in the delivery of such services enables it to perform in the manner and to the service levels required under the Master Services Agreement and also positions the Company to engage additional university customers in the future.

 

   

GCU is a separate non-profit entity under the control of an independent board of trustees, none of whose members have ever served in a management or corporate board role at the Company. GCU’s board of trustees has adopted bylaws and a related conflict of interest policy that, among other things, (i) prevents any trustee of GCU from attending any meeting, or voting on any matter, as to which such trustee has a conflict of interest, (ii) establishes a special committee of independent trustees to oversee on behalf of GCU all matters related to the Master Services Agreement and GCU’s relationship with the Company, and (iii) prohibits any trustee from having any financial interest in, or role with, the Company. Accordingly, the Company’s relationship with GCU, both pursuant to the Master Services Agreement and operationally, is no longer as owner and operator, but as a third party service provider to an independent customer. While the Company believes that its relationship with GCU will remain strong, GCU’s board of trustees and management has fiduciary and other duties that require them to focus on the best interests of GCU and over time those interests could diverge from those of the Company.

 

   

Mr. Brian E. Mueller has served as the Chief Executive Officer of the Company since 2008 and the Chairman of the Board of the Company since 2017 and has also served as the President of the University since 2012. In connection with the Transaction, the Board of Directors of the Company and the board of trustees of GCU each independently determined that Mr. Mueller should retain those roles. Accordingly, Mr. Mueller remains the Chairman of the Board and Chief Executive Officer of the Company and continues to serve as the President of GCU. As noted above, however, Mr. Mueller is prohibited from serving on the board of trustees of GCU. Aside from Mr. Mueller, no other employee of GCU or GCE has a dual role in both organizations. A structure has been put in place that prevents Mr. Mueller from participating in operational matters involving the Company and GCU, including with respect to the Master Services Agreement.

 

   

As a result of the change in the structure of our operations, the risks associated with our business have changed. See Part II. Other Information – Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q filed for the quarter ended June 30, 2018 for a description of these risks.

Results of Operations

The following table sets forth certain income statement data as a percentage of net revenue for each of the periods indicated. University related expenses and the loss on Transaction have been excluded from the table below:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2018     2017     2018     2017  

Operating expenses

        

Technology and academic services

     7.1     4.4     4.9     4.4

Counseling services and support

     32.9       19.5       22.9       19.7  

Marketing and communication

     20.3       11.9       13.5       11.8  

General and administrative

     6.5       3.5       3.5       3.0  

 

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Table of Contents

As reflected in the table above, the income statement data as a percentage of revenue is not comparable between periods. This is a result of a reduction in revenues associated with the Company transitioning to an education service provider as of July 1, 2018. As a result, the Company has also provided two additional tables to enhance comparability between periods by showing, on a comparable basis, the types of levels of operating expenses the Company currently incurs as compared to prior to the Transaction. The Company has calculated 60% of university related revenues for periods prior to July 1, 2018, as adjusted “Non-GAAP” net revenue, which is the percentage of GCU’s tuition and fee revenue to which the Company is entitled under the Master Services Agreement. The percentages set forth below for periods prior to July 1, 2018 have been derived by dividing the indicated expense by adjusted “Non-GAAP” net revenue. University related expenses and the loss on Transaction have been excluded from the table below:

 

Adjusted “Non-GAAP” net revenue    Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2018      2017      2018      2017  

Service revenue

   $ 155,454      $ —        $ 155,454      $ —    

University related revenue

     —          236,209        512,499        702,716  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net revenue

     155,454        236,209        667,953        702,716  
  

 

 

    

 

 

    

 

 

    

 

 

 

60% of university related revenue

     —          141,725        307,499        421,630  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted “Non-GAAP” net revenue

   $ 155,454      $ 141,725      $ 462,953      $ 421,630  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Non- GAAP %

   Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2018     2017     2018     2017  

Operating expenses

        

Technology and academic services

     7.1     7.4     7.0     7.4

Counseling services and support

     32.9       32.5       33.0       32.8  

Marketing and communication

     20.3       19.8       19.5       19.7  

General and administrative

     6.5       5.9       5.0       5.0  

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Service revenue and University related revenue. Our service revenue for the three months ended September 30, 2018 was $155.5 million compared to university related revenue of $236.2 million for the three months ended September 30, 2017. Commencing July 1, 2018, the results of our operations no longer include the operations of the University but rather reflect the operations of the Company as a service/technology provider. As a service provider to GCU, the Company receives, as service revenue, 60% of GCU’s tuition and fee revenue and no longer has university related revenue, thus resulting in the decrease from the prior period. 60% of university related revenue for the three months ended September 30, 2017 was $141.7 million. The 9.7% increase year over year in comparable service fee revenue was primarily due to an increase in GCU’s enrollment and, to a lesser extent, an increase in GCU’s ancillary revenues (e.g. from housing, food, etc.) resulting from the increased traditional student enrollment, partially offset by an increase in institutional scholarships. End-of-period enrollment at our client, GCU increased 8.2% between September 30, 2018 and September 30, 2017 to 98,715 from 91,230.

Technology and academic services. Our technology and academic services expenses for the three months ended September 30, 2018 were $11.1 million, an increase of $0.6 million, or 5.8%, as compared to technology and academic services expenses of $10.5 million for the three months ended September 30, 2017. This increase was primarily due to increases in employee compensation and related expenses including share based compensation of $0.6 million. The increase in employee compensation and related expenses are primarily due to the increase in the number of staff needed to support our client, GCU, and their increased enrollment growth, tenure based salary adjustments and an increase in benefit costs between years. Our technical and academic services as a percentage of net revenues decreased 0.3% to 7.1% for the three months ended September 30, 2018, from 7.4% for the three months ended September, 2017 primarily due to our ability to leverage our technical and academic services personnel across an increasing revenue base partially offset by the planned reinvestment of a portion of our lower tax rate in increased employee compensation and benefit costs.

Counseling services and support. Our counseling services and support expenses for the three months ended September 30, 2018 were $51.1 million, an increase of $5.0 million, or 10.9%, as compared to counseling services and support expenses of $46.1 million for the three months ended September 30, 2017. This increase is primarily the result of increases in employee compensation and related expenses including share based compensation, depreciation and amortization and occupancy costs, and other counseling

 

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services and support related expenses of $4.2 million, $0.4 million, and $0.4 million, respectively. The increase in employee compensation and related expenses is primarily due to increased headcount to support our client, GCU, and its increased enrollment growth, tenure based salary adjustments and an increase in benefit costs between years. The increase in depreciation and amortization and occupancy costs is the result of our placing into service an administrative building in close proximity to our client’s campus. Our counseling services and support expenses as a percentage of revenue increased 0.4% to 32.9% for the three months ended September 30, 2018, from 32.5% for the three months ended September 30, 2017 primarily due to the planned reinvestment of a portion of our lower tax rate in increased employee compensation and benefit costs.

Marketing and communication. Our marketing and communication expenses for the three months ended September 30, 2018 were $31.5 million, an increase of $3.4 million, or 12.1%, as compared to marketing and communication expenses of $28.1 million for the three months ended September 30, 2017. This increase is primarily the result of increased national brand and other advertising of $3.2 million, and other communication expenses of $0.2 million. Our marketing and communication expenses as a percentage of net revenue increased by 0.5% to 20.3% for the three months ended September 30, 2018, from 19.8% for the three months ended September 30, 2017 primarily due to timing of the advertising spend. Marketing and communication costs as a percentage of net revenue is down slightly during the first nine months of 2018 as compared to the first nine months of 2017.

General and administrative. Our general and administrative expenses for the three months ended September 30, 2018 was $10.1 million, an increase of $1.8 million, or 21.0%, as compared to general and administrative expenses of $8.3 million for the three months ended September 30, 2017. This increase was primarily due to increases in contributions made in lieu of state income taxes to school sponsoring organizations from $2.0 million for the three months ended September 30, 2017 to $3.7 million for the three months ended September 30, 2018 and a $0.1 million increase in employee compensation. Our general and administrative expenses as a percentage of net revenue increased by 0.6% to 6.5% for the three months ended September 30, 2018, from 5.9% for the three months ended September 30, 2017 due to the increase in contributions made in lieu of state income taxes to school sponsoring organizations as a percentage of revenue.

Loss on transaction. The loss on transaction for the three months ended September 30, 2018 was $15.6 million due to transaction costs of $3.0 million and an asset impairment of $3.0 million for the three months ended September 30, 2018. In addition, the Company transferred to GCU cash of $9.6 million to fund a deferred compensation plan for GCU employees that were formerly GCE employees and that held unvested restricted stock of GCE that was forfeited upon the Transaction.

University related expenses. Our university related expenses for the three months ended September 30, 2018 were $6.6 million, a decrease of $76.8 million, or 92.1%, as compared to university related expenses of $83.4 million for the three months ended September 30, 2017. The expenses included in the three months ended September 30, 2018 are primarily due to the Company’s Board of Directors modifying the vesting condition for certain restricted stock awards for personnel that would be transferred to GCU, which resulted in $7.9 million of share-based compensation expense, and employer taxes of $0.2 million on such modification. This amount was partially offset by reversals of employee related liabilities of $1.5 million for employees that transferred to GCU that were not part of the transferred assets for the Transaction. The expenses included in the three months ended September 30, 2017 represent university related expenses for activities that have now transferred to our client, GCU, and are not related to our current business activities as a service provider for educational institutions.

Interest income on Secured Note. Interest income on Secured Note for the three months ended September 30, 2018 was $13.2 million, an increase of $13.2 million, as compared to interest income of nil for the three months ended September 30, 2017. As a result of the Transaction with GCU on July 1, 2018, the Company recognizes interest income on its Secured Note with GCU, earning interest at 6%, with monthly interest payments.

Interest expense. Interest expense for the three months ended September 30, 2018 was $0.6 million for both of the three months ended September 30, 2018 and 2017. Although the interest rate on our credit facility increased, debt balances are lower during the past year, and we experienced a decrease in the revolving line of credit fees, which we elected not to renew when the revolver expired in December 2017.

Investment interest and other. Investment interest and other for the three months ended September 30, 2018 was $0.4 million, a decrease of $1.0 million, as compared to $1.4 million in the three months ended September 30, 2017. This decrease was primarily due to lower investment balances as a result of the cash transferred in conjunction with the Transaction consummated on July 1, 2018 as compared to investment balances in the prior year.

Income tax expense. Income tax expense for the three months ended September 30, 2018 was $8.7 million, a decrease of $12.6 million, or 59.0%, as compared to income tax expense of $21.3 million for the three months ended September 30, 2017. This decrease is the result of a decrease in our effective tax rate and a decrease in our taxable income between periods. Our effective tax rate was 20.5% during the third quarter of 2018 compared to 35.1% during the third quarter of 2017. The lower effective tax rate year over

 

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year is a result of the Tax Cuts and Jobs Act (the “Act”) which was signed into law on December 22, 2017. The Act reduces the corporate federal tax rate from a maximum of 35% to a flat 21% rate effective January 1, 2018. Our contributions made in lieu of state income taxes to school sponsoring organizations increased from $2.0 million for the three months ended September 30, 2017 to $3.7 million for the three months ended September 30, 2018. The effective tax rates for both periods were lower than our annual rates due to these contributions. The decrease in our taxable income between periods is attributable to the loss on transaction expenses of $15.6 million and university related expenses of $6.6 million incurred in the third quarter of 2018.

Net income. Our net income for the three months ended September 30, 2018 was $33.8 million, a decrease of $5.5 million, as compared to $39.3 million for the three months ended September 30, 2017, due to the factors discussed above.

Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Service revenue and University related revenue. Our service revenue and university related revenue for the nine months ended September 30, 2018 was $155.5 million, and $512.5 million, respectively, as compared to university related revenues of $702.7 million for the nine months ended September 30, 2017. Commencing July 1, 2018, the results of our operations no longer include the operations of the University but rather reflect the operations of the Company as a service/technology provider. As a service provider to GCU, the Company receives, as service revenue, 60% of GCU’s tuition and fee revenue and no longer has university related revenue, thus resulting in the decrease from the prior period. 60% of university related revenues for the nine months ended September 30, 2017 was $421.6 million. The sum of service revenue for the three months ended September 30, 2018 of $155.5 million and 60% of university related revenue for the six months ended June 30, 2018 of $307.5 million, totals $463.0 million. The 9.8% increase year over year in comparable service fee revenue was primarily due to an increase in GCU’s enrollment and, to a lesser extent, an increase in GCU’s ancillary revenues (e.g. from housing, food, etc.) resulting from the increased traditional student enrollment, partially offset by an increase in institutional scholarships. End-of-period enrollment at our client, GCU increased 8.2% between September 30, 2018 and September 30, 2017 to 98,715 from 91,230.

Technology and academic services. Our technology and academic services expenses for the nine months ended September 30, 2018 were $32.5 million, an increase of $1.4 million, or 4.4%, as compared to technology and academic services expenses of $31.1 million for the nine months ended September 30, 2017. This increase was primarily due to increases in employee compensation and related expenses including share based compensation, depreciation and amortization and occupancy expense, and other expenses of $0.9 million, $0.3 million, and $0.2 million, respectively. The increase in employee compensation and related expenses are primarily due to the increase in the number of staff needed to support our client, GCU, and their increased enrollment growth, tenure based salary adjustments and an increase in benefit costs between years. The increase in depreciation and amortization and occupancy costs is the result of our placing into service an administrative building in close proximity to our client’s campus. Our technical and academic services as a percentage of net revenues decreased 0.4% to 7.0% for the nine months ended September 30, 2018, from 7.4% for the nine months ended September 30, 2017 primarily due to our ability to leverage our technical and academic services expenses across an increasing revenue base partially offset by the planned reinvestment of a portion of our lower tax rate in increased employee compensation and benefit costs.

Counseling services and support. Our counseling services and support expenses for the nine months ended September 30, 2018 were $152.7 million, an increase of $14.3 million, or 10.3%, as compared to counseling services and support expenses of $138.4 million for the nine months ended September 30, 2017. This increase is primarily the result of increases in employee compensation and related expenses including share based compensation, other counseling services and support related expenses, and depreciation and amortization and occupancy expense of $12.5 million, $1.3 million, and $0.5 million, respectively. The increase in employee compensation and related expenses is primarily due to increased headcount, tenure based salary adjustments and an increase in benefit costs between years. The increase in other expenses is primarily related to dues, fees and subscription, and travel expenses. The increase in depreciation and amortization and occupancy costs is the result of our placing into service an administrative building in close proximity to our client’s campus. Our counseling services and support expenses as a percentage of revenue increased 0.2% to 33.0% for the nine months ended September 30, 2018, from 32.8% for the nine months ended September 30, 2017 primarily due to increased employee compensation and benefit costs between years primarily due to the planned reinvestment of a portion of our lower tax rate in increased employee compensation and benefit costs.

Marketing and communication. Our marketing and communication expenses for the nine months ended September 30, 2018 were $90.2 million, an increase of $7.3 million, or 8.8%, as compared to marketing and communication expenses of $82.9 million for the nine months ended September 30, 2017. This increase is primarily the result of increased national brand and other advertising of $7.1 million, and other communication expenses of $0.2 million. Our marketing and communication expenses as a percentage of net revenue decreased by 0.2% to 19.5% for the nine months ended September 30, 2018, from 19.7% for the nine months ended September 30, 2017.

 

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General and administrative. Our general and administrative expenses for the nine months ended September 30, 2018 was $23.3 million, an increase of $2.1 million, or 9.9%, as compared to general and administrative expenses of $21.2 million for the nine months ended September 30, 2017. This increase was primarily due to increases in employee compensation and related expenses including share-based compensation of $0.6 million, and increases in contributions made in lieu of state income taxes to school sponsoring organizations from $2.0 million for the nine months ended September 30, 2017 to $3.7 million for the nine months ended September 30, 2018, partially offset by slight decrease on other general and administrative activities of $0.2 million. The increase in employee compensation and related expenses is primarily due to an increase in benefit costs between years. Our general and administrative expenses as a percentage of net revenue stayed flat at 5.0% for both the nine months ended September 30, 2018 and 2017 primarily due to an increase in contributions made in lieu of state income taxes to school sponsoring organizations and increased benefit costs, partially offset by our ability to leverage our general and administrative expenses across an increasing revenue base.

Loss on Transaction. Our loss on transaction expenses for the nine months ended September 30, 2018 was $17.6 million due to transaction costs of $5.0 million and an asset impairment of $3.0 million for the nine months ended September 30, 2018. In addition, the Company transferred to GCU cash of $9.6 million to fund a deferred compensation plan for GCU employees that were formerly GCE employees and that held unvested restricted stock of GCE that was forfeited upon the Transaction.

University related expenses. Our university related expenses for the nine months ended September 30, 2018 were $173.7 million, a decrease of $64.1 million, or 26.9%, as compared to university related expenses of $237.8 million for the nine months ended September 30, 2017. These expenses represent the costs transferred to the university for the six months ended June 30, 2018 and in the three months ended September 30, 2018 are primarily due to the Company’s Board of Directors modifying the vesting condition for certain restricted stock awards for personnel that would be transferred to GCU, which resulted in $7.9 million of share-based compensation expense, and employer taxes of $0.2 million on such modification. This amount was partially offset by reversals of employee related liabilities totaling $1.5 million that were not part of the transferred assets for the Transaction. The expenses included in the nine months ended September 30, 2017 represent university related expenses for activities that have now transferred to our client, GCU, and are not related to our current business activities as a service provider for educational institutions.

Interest income on Secured Note. Interest income on Secured Note for the nine months ended September 30, 2018 was $13.2 million, an increase of $13.2 million, as compared to interest income of nil for the nine months ended September 30, 2017. As a result of the Transaction with GCU on July 1, 2018, the Company recognizes interest income from its Secured Senior Note with GCU, earning interest at 6%, with monthly interest payments.

Interest expense. Interest expense for the nine months ended September 30, 2018 was $1.0 million, a decrease of $0.6 million, as compared to interest expense of $1.6 million for the nine months ended September 30, 2017. This decrease was primarily due to increased capitalized interest during the first six months of 2018 due to our increase in capital spending during this period as compared to the prior year, lower debt balances and a decrease in the revolving line of credit fees, which we elected not to renew when the revolver expired in December 2017, partially offset by a higher interest rate on our borrowings.

Investment interest and other. Investment interest and other for the nine months ended September 30, 2018 was $2.9 million, an increase of $0.7 million, as compared to $2.2 million in the nine months ended September 30, 2017. This decrease was primarily due to lower investment balances as a result of the cash transferred in conjunction with the Transaction consummated on July 1, 2018 as compared to investment balances in the prior year.

Income tax expense. Income tax expense for the nine months ended September 30, 2018 was $39.7 million, a decrease of $17.2 million, or 30.2%, as compared to income tax expense of $56.9 million for the nine months ended September 30, 2017. This decrease is the result of a decrease in our effective tax rate, partially offset by a slight increase in our taxable income between periods. Our effective tax rate was 20.6% during the nine months ended September 30, 2018 compared to 29.6% during the nine months ended September 30, 2017. The lower effective tax rate year over year is a result of the Act. The contributions in lieu of state income taxes to school sponsoring organizations contributed to the lower effective tax rate as our contributions increased from $2.0 million in the nine months ended September 30, 2017 to $3.7 million in the nine months ended September 30, 2018. Additionally, the Company continues to receive the benefit from our adoption of the share-based compensation standard. This standard required us to recognize excess tax benefits from share-based compensation awards that vested or settled in the consolidated income statement. The favorable impact from excess tax benefits was $7.9 million and $15.4 million in the nine months ended September 30, 2018, and 2017, respectively. The inclusion of excess tax benefits and deficiencies as a component of our income tax expense will increase volatility within our provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on our stock price at the date the restricted awards vest, our stock price on the date an option is exercised, and the quantity of options exercised. Our restricted stock vests in March each year so the favorable benefit will primarily impact the first quarter each year.

 

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Net income. Our net income for the nine months ended September 30, 2018 was $153.5 million, an increase of $18.4 million, as compared to $135.1 million for the nine months ended September 30, 2017, due to the factors discussed above.

Seasonality

Our net revenue and operating results normally fluctuate as a result of seasonal variations in our business, principally due to changes in our client, GCU’s enrollment. GCU’s enrollment varies as a result of new enrollments, graduations, and student attrition. The majority of GCU’s traditional ground students do not attend courses during the summer months (May through August), which historically has affected our results for our second and third fiscal quarters. Since a significant amount of GCU’s costs are fixed, the lower revenue resulting from the decreased ground student enrollment has historically contributed to lower operating margins during those periods. To the extent the relative proportion of GCU’s students that are ground traditional students increases, we expect this summer effect as it relates to GCU to become more pronounced in future years. Partially offsetting this summer effect on GCU in the third quarter has been the sequential quarterly increase in enrollments that has occurred as a result of the traditional fall school start. This increase in enrollments also has occurred in the first quarter, corresponding to calendar year matriculation. In addition, GCU has historically experienced higher net revenue in the fourth quarter due to its overlap with the semester encompassing the traditional fall school start and in the first quarter due to its overlap with the first semester of the calendar year. A portion of our expenses do not vary proportionately with these fluctuations in net revenue, resulting in higher operating income in the first and fourth quarters relative to other quarters. We expect quarterly fluctuation in operating results to continue as a result of these seasonal patterns at GCU. However, given that fixed costs to operate the university such as depreciation and occupancy expenses will no longer be included in our operating results, the seasonality effect will not be as significant going forward.

Liquidity and Capital Resources

Liquidity. We financed our operating activities and capital expenditures during the nine months ended September 30, 2018 and 2017 primarily through cash provided by operating activities. Our unrestricted cash and cash equivalents and investments were $113.6 million and $242.7 million at September 30, 2018 and December 31, 2017, respectively. Our restricted cash and cash equivalents at September 30, 2018 were $61.7 million. On July 1, 2018, we amended our credit agreement, which resulted in no change to our term loan maturity date of December 2019. Indebtedness under the term loan is now secured by our remaining assets after giving effect to the Transaction, as well as cash collateral until such time as the Transaction has been approved by the Department of Education, and we agreed to collaterally assign our rights under the Asset Purchase Agreement, the Secured Note and the Master Services Agreement. Our lenders released their lien on the real estate collateral previously securing our obligations under the credit agreement in order to enable us to consummate the Asset Purchase Agreement.

On July 1, 2018, in conjunction with the Asset Purchase Agreement, we received a Secured Note from GCU for the purchase of the Transferred Assets for $870.1 million. The Secured Note contains customary commercial credit terms, including affirmative and negative covenants applicable to GCU, and provides that the Secured Note bears interest at an annual rate of 6.0%, has a maturity date of June 30, 2025, and is secured by all of the assets of GCU. The Secured Note provides for GCU to make interest only payments during the term, with all principal and accrued and unpaid interest due at maturity and also provides that we will loan additional amounts to GCU to fund approved capital expenditures during the first three years of the term. Funding expectations for future capital expenditures for GCU are $30 million for the three months ended December 31, 2018, and $100 million for the year ended December 31, 2019.

Based on our current level of operations and anticipated growth, we believe that our cash flow from operations and other sources of liquidity, including cash and cash equivalents and our revolving line of credit, will provide adequate funds for ongoing operations, planned capital expenditures, and working capital requirements for at least the next 24 months.

Share Repurchase Program

Our Board of Directors has authorized the Company to repurchase up to an aggregate of $175.0 million of our common stock, from time to time, depending on market conditions and other considerations. The current expiration date on the repurchase authorization by our Board of Directors is December 31, 2019. Repurchases occur at the Company’s discretion.

Under our share purchase authorization, we may purchase shares in the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant.

Since the inception of our share repurchase program, the Company has purchased 3.5 million shares of common stock at an aggregate cost of $81.4 million. During the nine months ended September 30, 2018, 38,518 shares of common stock were repurchased by the University. At September 30, 2018, there remains $93.6 million available under our share repurchase authorization.

 

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Cash Flows

Operating Activities. Net cash provided by operating activities for the nine months ended September 30, 2018 was $96.5 million as compared to $269.9 million for the nine months ended September 30, 2017. The decrease in cash generated from operating activities between the nine months ended September 30, 2017 and the nine months ended September 30, 2018 is primarily due to the timing of income tax related payments as well as changes in other working capital such as receivables from our client, GCU, partially offset by increased net income. Previously, when we operated the University we experienced significant positive operating cash flows in the third quarter due to the funds received at the start of the ground traditional academic year. Now as a service provider, we receive our monthly service fee approximately fifteen days into each subsequent month.

Investing Activities. Net cash used in investing activities was $215.7 million and $112.1 million for the nine months ended September 30, 2018 and 2017, respectively. Cash used in investing activities for the nine months ended September 30, 2018 was primarily related to the Transaction, the purchase of short-term investments and capital expenditures. The disposition for the working capital adjustment and for restricted cash held at the transaction date of $131.6 million represents cash transferred to GCU related to the Transaction on July 1, 2018. Funding to GCU for capital expenditures during the third quarter of 2018 totaled $12.8 million. Proceeds from investment, net of purchases of short term investments was $19.1 million for the nine months ended September 30, 2018. Purchases of short-term investments net of proceeds of these investments was $27.0 million during the nine months ended September 30, 2017. Capital expenditures were $90.2 million and $75.6 million for the nine months ended September 30, 2018 and 2017, respectively. During the nine-month period for 2018, capital expenditures primarily consisted of ground campus building projects incurred through the transaction date such as the construction of two additional residence halls, an additional classroom building and parking garage to support our growing traditional student enrollment, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. Included in off-site development for 2018 is $0.3 million we spent on the student services building that is in close proximity to GCU’s ground traditional campus. The increase in capital expenditures between June 30, 2018 and September 30, 2018 is primarily due to the payment of amounts that were accrued for construction services provided prior to June 30, 2018 but were not paid until the third quarter of 2018. Approximately $5.1 million was Company-related capital expenditures incurred in the third quarter of 2018. During the nine-month period for 2017, capital expenditures primarily consisted of ground campus building projects such as the construction of an additional dormitory to support our growing traditional student enrollment, land acquisitions adjacent to our campus, as well as purchases of computer equipment, other internal use software projects and furniture and equipment to support our increasing employee headcount. Included in off-site development for 2017 is $10.2 million the Company spent to finish the building and parking garage in close proximity to our ground traditional campus.

Financing Activities. Net cash used in financing activities was $22.3 million and $33.0 million for the nine months ended September 30, 2018 and 2017, respectively. During the nine-month period for 2018, $15.2 million was used to purchase common shares withheld in lieu of income taxes resulting from the vesting of restricted share awards and $4.1 million was used to purchase treasury stock in accordance with the Company’s share repurchase program. Principal payments on notes payable and capital leases totaled $5.1 million, partially offset by proceeds from the exercise of stock options of $2.1 million. During the nine-month period for 2017, $25.0 million was used to repay a revolving line of credit, $9.7 million was used to purchase common shares withheld in lieu of income taxes resulting from restricted share awards and principal payments on notes payable and capital leases totaled $5.1 million, which amounts were partially offset by proceeds from the exercise of stock options of $6.8 million.

Contractual Obligations

The following table sets forth, as of September 30, 2018, the aggregate amounts of GCE’s significant contractual obligations and commitments with definitive payment terms due in each of the periods presented (in millions). Contractual obligations assumed by GCU in connection with the Asset Purchase Agreement were excluded from the following table.

 

            Payments Due by Period  
     Total      Less than
1 Year (1)
     2-3 Years      4-5 Years      More than
5 Years
 

Long term notes payable

   $  61.5      $  1.6      $  59.9      $  0.0      $  0.0  

Purchase obligations (2)

     12.2        2.8        8.8        0.6        0.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 73.7      $ 4.4      $ 68.7      $ 0.6      $ 0.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Payments due in less than one year represent expected expenditures for GCE from October 1, 2018 through December 31, 2018.

(2)

The purchase obligation amounts include expected spending by period under contracts for GCE that were in effect at September 30, 2018.

 

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have had or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Impact of inflation. We believe that inflation has not had a material impact on our results of operations for the nine months ended September 30, 2018 or 2017. There can be no assurance that future inflation will not have an adverse impact on our operating results and financial condition.

Market risk. On February 27, 2013, we entered into an interest rate corridor to manage our 30 Day LIBOR interest exposure from the variable rate debt, which debt matures in December 2019. The corridor instrument, which hedges variable interest rate risk starting March 1, 2013 through December 20, 2019 with a notional amount of $61.7 million as of September 30, 2018, permits us to hedge our interest rate risk at several thresholds. Under this arrangement, in addition to the credit spread we will pay variable interest rates based on the 30 Day LIBOR rates monthly until that index reaches 1.5%. If 30 Day LIBOR is equal to 1.5% through 3.0%, we will continue to pay 1.5%. If 30 Day LIBOR exceeds 3.0%, we will pay actual 30 Day LIBOR less 1.5%.

Except with respect to the foregoing, we have no derivative financial instruments or derivative commodity instruments. We invest cash in excess of current operating requirements in short-term certificates of deposit and money market instruments in multiple financial institutions.

Interest rate risk. We manage interest rate risk through the instruments noted above and by investing excess funds in cash equivalents, such as municipal mutual funds tied to various market indices, commercial paper rated at A1 or higher, certificates of deposit, and municipal bonds with a BBB rating or higher bearing variable interest rates, or individual bond coupon rates. Our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have declined in market value due to changes in interest rates. At September 30, 2018, a 10% increase or decrease in interest rates would not have a material impact on our future earnings, fair values, or cash flows. For information regarding our variable rate debt, see “Market risk” above.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our 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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective, as of September 30, 2018, in ensuring that material information relating to us required to be disclosed by us in reports that we file or submit 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 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.

Based on an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is our principal executive officer) and our Chief Financial Officer (who is our principal financial officer), there were no changes in our 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

 

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Item 1A. Risk Factors

Through June 30, 2018, we were the owner and operator of a for-profit university and the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2017 set forth the risks associated with that business. Upon the consummation of the Transaction with GCU on July 1, 2018 (as discussed in “Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Change in the Structure of our Operations”), we became a third party provider of education services to GCU, our only university client. Accordingly, we updated our risks disclosed in the “Risk Factors” section of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 to reflect those factors now applicable to our new business operations. There have been no other material changes to the risk factors disclosed above.

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

Our Board of Directors has authorized the Company to repurchase up to an aggregate of $175.0 million of common stock, from time to time, depending on market conditions and other considerations. The current expiration date on the repurchase authorization is December 31, 2019. Repurchases occur at the Company’s discretion. Repurchases may be made in the open market or in privately negotiated transactions, pursuant to the applicable Securities and Exchange Commission rules. The amount and timing of future share repurchases, if any, will be made as market and business conditions warrant. During the three months ended September 30, 2018, we repurchased 23,139 shares of common stock. At September 30, 2018, there remains $93.6 million available under our share repurchase authorization.

The following table sets forth our share repurchases of common stock and our share repurchases in lieu of taxes, which are not included in the repurchase plan totals as they were approved in conjunction with the restricted share awards, during each period in the third quarter of fiscal 2018:

 

Period

   Total Number of
Shares Purchased
     Average
Price Paid
Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced
Program
     Maximum Dollar
Value of Shares
That May Yet Be
Purchased Under
the Program
 

Share Repurchases

           

July 1, 2018 – July 31, 2018

     200      $ 117.06        200      $  96,100,000  

August 1, 2018 – August 31, 2018

     5,000      $ 114.47        5,000      $ 95,600,000  

September 1, 2018 – September 30, 2018

     17,939      $ 111.49        17,939      $ 93,600,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     23,139      $  112.18        23,139      $ 93,600,000  
  

 

 

    

 

 

    

 

 

    

 

 

 

Tax Withholdings

           

July 1, 2018 – July 31, 2018

     32,513      $ 111.61        —        $ —    

August 1, 2018 – August 31, 2018

     —        $ —          —        $ —    

September 1, 2018 – September 30, 2018

     —        $ —          —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     32,513      $ 111.61        —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

 

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Table of Contents

Item 5. Other Information

We have a policy governing transaction in our securities by directors, officers, employees and others which permits these individuals to enter into trading plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. We have been advised that Brian Mueller, our Chief Executive Officer and Chairman; Dr. W. Stan Meyer, our Chief Operating Officer; Dan Bachus, our Chief Financial Officer and Principal Accounting Officer; and Joseph Mildenhall, our Chief Information Officer, each entered into trading plans on September 10, 2018, each of which was in accordance with Rule 10b5-1 and our policy governing transactions in our securities. Generally, under these trading plans, the individual relinquishes control over the transactions once the trading plan is put into place. Accordingly, sales under these plans may occur at any time, including possibly before, simultaneously with, or immediately after significant events involving our company.

We anticipate that, as permitted by Rule 10b5-1 and our policy governing transactions in our securities, some or all of our directors, officers and employees may establish or terminate trading plans in the future. We intend to disclose the names of executive officers and directors who establish or terminate a trading plan in compliance with Rule 10b5-1 and the requirements of our policy governing transactions in our securities in our future quarterly and annual reports on Form 10-Q and 10-K filed with the Securities and Exchange Commission. We undertake no obligation, however, to update or review the information provided herein, including for revision or termination of an established trading plan, other than in such quarterly and annual reports.

Item 6. Exhibits

(a) Exhibits

 

Number

  

Description

  

Method of Filing

  2.1    Asset Purchase Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Grand Canyon University (formerly known as Gazelle University)#    Filed herewith.
  3.1    Amended and Restated Certificate of Incorporation.    Incorporated by reference to Exhibit 3.1 to Amendment No. 6 to the University’s Registration Statement on Form S-1 filed with the SEC on November 12, 2008.
  3.1.1    Certificate of Amendment of Amended and Restated Certificate of Incorporation.    Incorporated by reference to Appendix A to the University’s Proxy Statement for its 2016 Annual Meeting of Stockholders, filed with the SEC on April 29, 2016.
  3.2    Third Amended and Restated Bylaws.    Incorporated by reference to Exhibit 3.1 to the University’s Current Report on Form 8-K filed with the SEC on October 29, 2014.
  4.1    Specimen of Stock Certificate.    Incorporated by reference to Exhibit 4.1 to Amendment No. 2 to the University’s Registration Statement on Form S-1 filed with the SEC on September 29, 2008.
10.1    Second Amended and Restated Executive Employment Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Brian E. Mueller†    Filed herewith.
10.2    Second Amended and Restated Executive Employment Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and W. Stan Meyer†    Filed herewith.
10.3    Second Amended and Restated Executive Employment Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Daniel E. Bachus†    Filed herewith.
10.4    Second Amended and Restated Executive Employment Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Joseph N. Mildenhall†    Filed herewith.

 

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Table of Contents
  10.5    First Amended and Restated Executive Employment Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Dilek Marsh†    Filed herewith.
  10.6    Second Amendment dated July 1, 2018, to Credit Agreement, dated December 21, 2012, by and among Grand Canyon Education, Inc., Bank of America, N.A., and the other parties named therein.†    Filed herewith.
  10.7    Credit Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Grand Canyon University (formerly known as Gazelle University)    Filed herewith.
  10.8    Master Services Agreement, dated July 1, 2018, by and between Grand Canyon Education, Inc. and Grand Canyon University (formerly known as Gazelle University)##    Filed herewith.
  31.1    Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.    Filed herewith.
  31.2    Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.    Filed herewith.
  32.1    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ††    Filed herewith.
  32.2    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ††    Filed herewith.
101.INS    XBRL Instance Document    Filed herewith.
101.SCH    XBRL Taxonomy Extension Schema    Filed herewith.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase    Filed herewith.
101.DEF    XBRL Taxonomy Extension Definition Linkbase    Filed herewith.
101.LAB    XBRL Taxonomy Extension Label Linkbase    Filed herewith.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase    Filed herewith.

 

Indicates a management contract or any compensatory plan, contract or arrangement.

#

Schedules and similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish supplementally a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

##

Portions of this exhibit, as indicated by asterisks, have been omitted pursuant to a request for confidential treatment and have been filed separately with the Securities and Exchange Commission.

††

This certification is being furnished solely to accompany this report pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Exchange Act, and is not to be incorporated by reference into any filings of the University, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

35


Table of Contents

SIGNATURES

Pursuant to the requirements 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.

 

  GRAND CANYON EDUCATION, INC.
Date: November 8, 2018     By:  

/s/ Daniel E. Bachus

      Daniel E. Bachus
      Chief Financial Officer
      (Principal Financial Officer and Principal Accounting Officer)

 

 

36

EX-2.1

Exhibit 2.1

Execution Version

ASSET PURCHASE AGREEMENT

BY AND BETWEEN

GAZELLE UNIVERSITY (to be renamed GRAND CANYON UNIVERSITY)

an Arizona nonprofit corporation (“Buyer”)

and

GRAND CANYON EDUCATION, INC.,

a Delaware corporation (“Seller”)


TABLE OF CONTENTS

 

              Page  
1.   DEFINITIONS      1  
  1.1    Definitions      1  
  1.2    Other Definitional Provisions      10  
2.   PURCHASE OF SCHOOL ASSETS; SERVICES ASSETS; ASSUMPTION OF LIABILITIES      11  
  2.1    Purchase of the School Assets      11  
  2.2    Services Assets      12  
  2.3    Liabilities Assumed by Buyer      13  
  2.4    Liabilities Not Assumed      13  
3.   PURCHASE PRICE; PAYMENT; PRORATIONS; ALLOCATIONS      14  
  3.1    Purchase Price      14  
  3.2    Payment of Purchase Price; Loan      14  
  3.3    Prorations and Apportionments      14  
  3.4    Post-Closing Adjustment to Purchase Price and Note Balance      15  
  3.5    Allocations      16  
4.   CLOSING; CLOSING DELIVERIES      16  
  4.1    Closing      16  
  4.2    Closing Deliveries of Seller      16  
  4.3    Closing Deliveries of Buyer      18  
  4.4    Title and Escrow      19  
5.   REPRESENTATIONS AND WARRANTIES      20  
  5.1    Seller’s Representations and Warranties      20  
  5.2    Buyer’s Representations and Warranties      33  
6.   POST-CLOSING COVENANTS      35  
  6.1    Access to Business and Records; Inspection      35  
  6.2    Post-Closing Regulatory Matters and Approvals      35  
  6.3    Transferred Employees      36  
  6.4    Accounts Receivable      38  
  6.5    Further Assurances      38  
  6.6    Insurance Matters      39  

 

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TABLE OF CONTENTS

(continued)

 

               Page  
   6.7    Third Party Assignments      39  
   6.8    Public Announcements      40  
7.    SURVIVAL AND INDEMNIFICATION      40  
   7.1    Survival      40  
   7.2    Indemnification By Seller      40  
   7.3    Indemnification By Buyer      41  
   7.4    Certain Limitations      41  
   7.5    Indemnification Procedures      42  
   7.6    Effect of Investigation      44  
   7.7    Exclusive Remedies      44  
8.    MISCELLANEOUS      44  
   8.1    No Waiver      44  
   8.2    Severability      44  
   8.3    Entire Agreement; Amendment; Severability      44  
   8.4    Applicable Law      45  
   8.5    Time is of the Essence      45  
   8.6    Binding Agreement, Assignment      45  
   8.7    Expenses      45  
   8.8    Notices      45  
   8.9    Counterparts      46  
   8.10    Confidentiality      46  
   8.11    Arm’s Length Negotiations      46  
   8.12    Consent to Jurisdiction      46  

 

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TABLE OF CONTENTS

ANNEXES, SCHEDULES AND EXHIBITS:

 

Annex I    Legal Description of Campus Property
Exhibit A    Master Services Agreement
Exhibit B    Credit Agreement
Exhibit C    Special Warranty Deed
Exhibit D    Bill of Sale and Assignment
Exhibit E    Assignment and Assumption Agreement
Exhibit F    Affidavit of Property Value
Exhibit G    Closing Statement
Exhibit H    FIRPTA Affidavit

 

i


ASSET PURCHASE AGREEMENT

THIS ASSET PURCHASE AGREEMENT (this “Agreement”) is made and entered into as of July 1, 2018 (the “Effective Date”), by and between GAZELLE UNIVERSITY (to be renamed GRAND CANYON UNIVERSITY), an Arizona nonprofit corporation (“Buyer”), and GRAND CANYON EDUCATION, INC., a Delaware corporation (“Seller”). Buyer and Seller may each be individually referred to herein as a “Party” or collectively as the “Parties.”

RECITALS

A. Seller, directly and through the Acquired Subsidiaries, owns and operates Grand Canyon University, a regionally accredited institution of higher education located at 3300 West Camelback Road, Phoenix, Arizona 85017 and with the OPE ID number 001074 00 (the “University”), and, related thereto, provides various services that support the educational operations of the University (such services, the “Services” and the business of providing such Services, the “Services Business”).

B. Buyer desires to buy from Seller, and Seller desires to sell to Buyer, those tangible and intangible assets that relate to, or are otherwise required to be owned for accreditation purposes in connection with, the operations of the University as a regionally accredited institution of higher learning, which assets are defined in Section 2.1 below (as so defined, “School Assets”).

C. Contemporaneously with this Agreement, Buyer and Seller will execute and deliver a master services agreement in substantially the form attached hereto as Exhibit A (the “Master Services Agreement”), pursuant to which, following the closing of the transactions described above, Seller will provide the Services to Buyer.

D. Following the purchase and sale of the School Assets, Buyer would own the School Assets and operate the University and Seller will continue to own those tangible and intangible assets that relate to the Services, which assets are defined in Section 2.2 below (as so defined, the “Services Assets”), and continue to operate the Services Business.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

1. DEFINITIONS.

1.1 Definitions. Certain terms in this Agreement are defined in this Agreement where first used. The following terms in this Agreement have the meanings set forth in this Section 1.1: “Accrediting Body” means any governmental or non-governmental entity, including, without limitation, any institutional and/or specialized accrediting agency, that engages in the granting or withholding of accreditation of postsecondary educational institutions or programs in accordance with standards relating to the performance, operations, financial condition or academic standards of such institutions, including the Higher Learning Commission.


Acquired Subsidiaries” means each of the subsidiaries of Seller listed on Schedule 2.1(o).

Acquired Subsidiary Assets” means all assets and rights owned or held by an Acquired Subsidiary in which any Acquired Subsidiary has any interest, tangible or intangible.

Action” means any claim, action, cause of action, demand, lawsuit, arbitration, inquiry, audit, notice of violation, proceeding, litigation, citation, summons, subpoena or investigation of any nature, civil, criminal, administrative, regulatory or otherwise, whether at law or in equity.

Additional Cash Amount” means an amount in cash equal to $9,576,808.

Affiliate” means a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Person specified. For the foregoing purposes, “control” means the ownership of more than 50% of the securities entitled to elect the board of directors or other managing or governing body of such Person.

Agreement” has the meaning set forth for such term in the Preamble to this Agreement.

Appurtenances” mean the rights, privileges and easements appurtenant to the Real Property, including, without limitation, all minerals, oil, gas and other hydrocarbon substances on and under the Real Property, as well as all development rights, air rights, water, water rights, riparian rights and water stock relating to the Real Property and any rights-of-way or other appurtenances used in connection with the beneficial use and enjoyment of the Real Property and all of Seller’s right, title and interest in and to all roads and alleys adjoining or servicing the Real Property.

Base Purchase Price” means an amount equal to (a) $853,068,386.00, plus (b) $1.00.

Business Day” means each day of the week except Saturdays, Sundays and days on which banks in Phoenix, Arizona are authorized by Law to close.

Buyer” has the meaning set forth for such term in the Preamble to this Agreement.

Buyer Expenses” means the premium for the Owner’s Title Policy obtained by Buyer in connection with the transactions contemplated hereby.

Campus Intangible Property” means any intangible personal property that is (a) owned by Seller directly, or indirectly through an Acquired Subsidiary, and (b) used or useful in or necessary for the operation of the University as currently conducted, including, without limitation, any and all contracts, agreements (including, without limitation, any agreements relating to the occupancy of the residential facilities located on the Real Property), guaranties, certificates, warranties, indemnities, licenses, permits, plans, specifications, architectural proposals and renderings, certificates of occupancy, development rights and approvals, engineering, soils, pest control and any other reports, and similar documents and rights to the extent assignable, but excluding any intangible personal property specifically identified as a Services Asset.

 

2


Campus Property” means the Real Property, the Appurtenances and the Improvements (but not the Campus Intangible Property or the Retained Property), including without limitation, all as listed or described on Schedule 5.1(o)(i).

CERCLA” means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C. §§ 9601 et seq.

Closing” has the meaning set forth for such term in Section 4.1 hereof.

Code” has the Internal Revenue Code of 1986, as amended.

Compliance Datemeans January 1, 2015.

Consents” means all consents, permits, or approvals of, or notices to, Governmental Authorities, Educational Agencies, and other third parties necessary to permit the transactions contemplated by this Agreement and the Related Agreements to be consummated lawfully in accordance with this Agreement, without forfeiture or impairment of any Contract or any Educational Approval or other Permit.

Contract” means any written agreement, contract, instrument, commitment, lease, purchase order, guaranty, indenture, license, sublicense, covenant or other enforceable arrangement or understanding (and all amendments, side letters, modifications and supplements thereto).

Credit Agreement” means that certain Credit Agreement in substantially the form attached as Exhibit B, to be executed and delivered contemporaneously with this Agreement by Buyer, as borrower, and Seller, as lender, at Closing, as the same may be amended, restated, supplemented or otherwise modified from time to time.

Current Assets” means (a) accounts receivable and prepaid expenses of Seller as of the Closing relating to the operation of the University and that either are reflected on Seller’s most recent Financial Statements or arose in the ordinary course of business consistent with past practice since the date of the most recent Financial Statements, plus (b) cash and cash equivalents of Seller in an amount necessary such that Current Assets less Current Liabilities is equal to $1.00.

Current Liabilities” means student deposits, deferred revenue and certain other current Liabilities of Seller as of the Closing relating to the operation of the University and that either are reflected on Seller’s most recent Financial Statements or arose in the ordinary course of business consistent with past practice since the date of the most recent Financial Statements.

Deed” means a special warranty deed with respect to the Campus Property substantially in the form of Exhibit C;

Deed of Trust” means that certain Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing in substantially the form attached to the Credit Agreement, executed and delivered by Buyer contemporaneously with this Agreement in favor

 

3


of Seller as security for the Loan and encumbering the Campus Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

DOE means the United States Department of Education and any successor agency administering student financial assistance under Title IV.

Educational Agency” means any entity or organization, whether governmental, government chartered, tribal, private, or quasi-private, that engages in granting or withholding Educational Approvals for institutions for postsecondary educational purposes in accordance with standards relating to the performance, operation, financial condition, or academic standards of such institutions, including the DOE, any Accrediting Body, or any State Educational Agency.

Educational Approval” means, with respect to any Person, any license, permit, authorization, certification, accreditation, or similar approval, issued or required to be issued by an Educational Agency to such Person, or with respect to its locations, courses or programs, including any such approval for such Person to participate in any Student Financial Assistance Program offered by an Educational Agency pursuant to which student financial assistance, grants, or loans are provided to or on behalf of such Person’s students by such Educational Agency.

Educational Law” means any federal, state, municipal, foreign or other law, regulation, order, Accrediting Body standard or other requirement applicable thereto, including, without limitation, the provisions of Title IV of the HEA and any regulations or written guidance implementing or relating thereto, issued or administered by, or related to, any Educational Agency.

Effective Date” has the meaning set forth for such term in the Preamble to this Agreement.

Environmental Claim” means any Action, Governmental Order, lien, fine, penalty, or, as to each, any settlement or judgment arising therefrom, by or from any Person alleging liability of whatever kind or nature (including liability or responsibility for the costs of enforcement proceedings, investigations, cleanup, governmental response, removal or remediation, natural resources damages, property damages, personal injuries, medical monitoring, penalties, contribution, indemnification and injunctive relief) arising out of, based on or resulting from: (a) the presence, Release of, or exposure to, any Hazardous Materials; or (b) any actual or alleged non-compliance with any Environmental Law or term or condition of any Environmental Permit.

Environmental Law” means any applicable Law, and any Governmental Order or binding agreement with any Governmental Entity: (a) relating to pollution (or the cleanup thereof) or the protection of natural resources, endangered or threatened species, human health or safety, or the environment (including ambient air, soil, surface water or groundwater, or subsurface strata); or (b) concerning the presence of, exposure to, or the management, manufacture, use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, production, disposal or remediation of any Hazardous Materials. The term “Environmental Law” includes, without limitation, the following (including their implementing regulations and any state analogs): CERCLA; the Solid Waste Disposal Act,

 

4


as amended by the Resource Conservation and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments of 1984, 42 U.S.C. §§ 6901 et seq.; the Federal Water Pollution Control Act of 1972, as amended by the Clean Water Act of 1977, 33 U.S.C. §§ 1251 et seq.; the Toxic Substances Control Act of 1976, as amended, 15 U.S.C. §§ 2601 et seq.; the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C. §§ 11001 et seq.; the Clean Air Act of 1966, as amended by the Clean Air Act Amendments of 1990, 42 U.S.C. §§ 7401 et seq.; and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. §§ 651 et seq.

Environmental Notice” means any written directive, notice of violation or infraction, or notice respecting any Environmental Claim relating to actual or alleged non-compliance with any Environmental Law or any term or condition of any Environmental Permit.

Environmental Permit” means any Permit, letter, clearance, consent, waiver, closure, exemption, decision or other action required under or issued, granted, given, authorized by or made pursuant to Environmental Law.

ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations promulgated thereunder.

ERISA Affiliate” means all employers (whether or not incorporated) that would be treated together with the Seller or any of its Affiliates as a “single employer” within the meaning of Section 414 of the Code.

GAAP” means accounting principles generally accepted in the United States, as in effect on the Effective Date.

Governmental Entity” means any governmental authority or entity, including any agency, branch, board, bureau, commission, court, department, subdivision or instrumentality thereof, or any arbitrator or arbitration panel, including any Educational Agency.

Governmental Order” means any order, writ, judgment, injunction, decree, stipulation, determination or award entered by or with any Governmental Entity.

Hazardous Materials” means: (a) any material, substance, chemical, waste, product, derivative, compound, mixture, solid, liquid, mineral or gas, in each case, whether naturally occurring or manmade, that is hazardous, acutely hazardous, toxic, or words of similar import or regulatory effect under Environmental Laws; and (b) any petroleum or petroleum-derived products, radon, radioactive materials or wastes, asbestos in any form, lead or lead-containing materials, urea formaldehyde foam insulation and polychlorinated biphenyls.

HEA” means the Higher Education Act of 1965, 20 U.S.C. § 1001 et seq., as amended, or successor statutes thereto.

HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the rules and regulations promulgated thereunder, as amended.

Improvements” means all improvements and fixtures located on the Real Property, including, without limitation, all buildings and structures presently located on the Real Property,

 

5


all apparatus, affixed equipment and appliances used in connection with the operation or occupancy of the Real Property, such as heating and air conditioning systems and facilities used to provide any utility, refrigeration, ventilation, garbage disposal, or other services on the Real Property, and all on-site parking.

Intellectual Property” means any and all technology, inventions, processes, know-how, designs, works of authorship, and any other technical subject matter related thereto. The term “Intellectual Property” also includes all intellectual property rights or similar proprietary rights related to or protecting the foregoing, including (a) all inventions, all improvements thereto and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations in part, revisions, extensions, and reexaminations thereof, (b) all registered and unregistered trademarks, service marks, trade dress, logos, trade names, domain names, and corporate names, including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith, including all rights in curricula, program materials, and compilations, (d) all trade secrets, customer lists, supplier lists, pricing and cost information, business and marketing plans and other confidential business information (including, without limitation, ideas, formulas, compositions, know-how, techniques, research and development information, drawings, specifications, designs, plans, proposals, and technical data), (e) all computer programs and related software, including source code and object code thereof, data, data tapes, databases and related manuals, notes, and documentation and (f) all copies and tangible embodiments thereof;

Intellectual Property Agreements means all written licenses, sublicenses, consent to use agreements, settlements, coexistence agreements, covenants not to sue, waivers, releases, permissions and other Contracts relating to any Intellectual Property that is used or useful in or necessary for the conduct of the University as currently conducted to which the Seller is a party, beneficiary or otherwise bound.

Intellectual Property Assets means all Intellectual Property that is (a) owned by Seller directly, or indirectly through an Acquired Subsidiary, and (b) used in or necessary for the operation of the University as currently conducted, excluding, however, any Intellectual Property specifically identified as a Services Asset.

Intellectual Property Registrations” means all Intellectual Property Assets that are subject to any issuance, registration, application or other filing by, to or with any Governmental Entity or authorized private registrar in any jurisdiction, including registered trademarks, domain names and copyrights, issued and reissued patents and pending applications for any of the foregoing.

Invested Amount” means the lesser of (a) the amount invested by Seller in property, plant and equipment associated with the Campus Property (other than the Retained Property) from May 1, 2018 through the Closing, or (b) the fair market value of such property, plant and equipment.

Law” means any requirement arising under any constitution, law, statute, code, treaty, decree, rule, ordinance or regulation of any Governmental Entity, including any Educational

 

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Law, any Environmental Law and any of the foregoing that relate to data use, privacy or protection.

Liabilities means liabilities, obligations or commitments of any nature whatsoever, asserted or unasserted, known or unknown, absolute or contingent, accrued or unaccrued, matured or unmatured or otherwise.

Loan” means the loan made by Seller to Buyer as contemplated in Section 3.2 of this Agreement and as further described in the Credit Agreement.

Loan Documents” means, collectively, those certain instruments and documents executed in connection with, and which evidence, secure or govern, as applicable, the Loan, including the Credit Agreement, the Senior Secured Note, the Deed of Trust, and any and all other documents, agreements or certificates executed and/or delivered in connection with the Loan, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Losses” means losses, damages, liabilities, deficiencies, Actions, judgments, interest, awards, penalties, fines, costs or expenses of whatever kind, including reasonable attorneys’ fees and the cost of enforcing any right to indemnification hereunder and the cost of pursuing any insurance providers.

Material Adverse Effect” means any event, occurrence, fact, condition or change that is, or could reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, results of operations, condition (financial or otherwise) or assets of the University, (b) the value of the School Assets, or (c) the ability of the applicable Party to consummate the transactions contemplated hereby on a timely basis; provided, however, that “Material Adverse Effect” shall not include any event, occurrence, fact, condition or change, directly or indirectly, arising out of or attributable to: (i) general economic or political conditions; (ii) conditions generally affecting the industries in which the University operates; (iii) any changes in financial or securities markets in general; (iv) acts of war (whether or not declared), armed hostilities or terrorism, or the escalation or worsening thereof; (v) any action required or permitted by this Agreement; (vi) any changes in applicable Laws or accounting rules; or (vii) the public announcement, pendency or completion of the transactions contemplated by this Agreement; provided further, however, that any event, occurrence, fact, condition or change referred to in clauses (i) through (iv) immediately above shall be taken into account in determining whether a Material Adverse Effect has occurred or could reasonably be expected to occur to the extent that such event, occurrence, fact, condition or change has a disproportionate effect on the University compared to other participants in the industries in which the University operates.

Party” and “Parties” have the meaning set forth for such term in the Preamble to this Agreement.

Permitted Encumbrances” means (a) liens for Taxes and other governmental charges and assessments which are not yet delinquent or are being contested in good faith and by appropriate proceedings, (b) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen

 

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and other like liens arising in the ordinary course of business for sums not yet due and payable, (c) any exceptions to the Deed approved in writing by Buyer and attached as an exhibit to the Deed, and (d) any liens, security interests, or other encumbrances arising as a result of the Closing.

Person” means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization or a Governmental Entity.

Personal Property” means any personal property that is (a) owned by Seller directly, or indirectly through an Acquired Subsidiary, and (b) used in or necessary for the operation of the University as currently conducted by Seller directly (or indirectly through any Acquired Subsidiary), including office supplies, machinery, office equipment, furniture, furnishings, fixtures, tools, instruments and other tangible personal property, including any personal property used solely in connection with the ownership, use, and operation of the Real Property and Improvements (but excluding any personal property specifically identified as a Services Asset), including without limitation, all as listed or described on Schedule 2.1(b);.

PPA” means a Program Participation Agreement issued to the University by the DOE, and countersigned by or on behalf of the Secretary of the DOE, evidencing the DOE’s certification of the University to participate in the Title IV Programs, but expressly excluding a TPPPA.

PPPA” means a Provisional PPA issued to the University by the DOE following the Closing and countersigned by or on behalf of the Secretary of the DOE, evidencing the DOE’s certification of the University to continue its Title IV Program participation following consummation of the transactions contemplated hereby, but expressly excluding a TPPPA.

Private Educational Loan means any student loan provided by a lender that is not made, insured or guaranteed under Title IV and is issued expressly for postsecondary educational expenses, including any loan made by the University, the Seller, or a private third-party lender whether on recourse or non-recourse basis.

Purchase Price” has the meaning set forth for such term in Section 3.1.

Real Property” means that certain real property commonly known as the Grand Canyon University campus located at 3300 West Camelback Road in the City of Phoenix, County of Maricopa, State of Arizona, and being more particularly described in Annex I attached hereto and incorporated herein by this reference.

Related Agreements” means, without limitation, the Loan Documents, the Master Services Agreement, and the other agreements, instruments, and documents required to be delivered at the Closing.

Release” means any actual or threatened release, spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping, abandonment, disposing or allowing to escape or migrate into or through the environment (including, without limitation, ambient air (indoor or outdoor), surface water, groundwater, land surface or subsurface strata or within any building, structure, facility or fixture).

 

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Representative” means, with respect to any Person, any and all directors, officers, employees, consultants, financial advisors, counsel, accountants and other agents of such Person.

Required Cash Amount” means the amount of cash and cash equivalents to be transferred by Seller to Buyer, which shall be equal to the sum of (a) the amount needed so that Current Assets less Current Liabilities is equal to $1.00, and (b) the Additional Cash Amount.

Retained Property” means the real property, improvements and appurtenances located at 2600 West Camelback Road, Phoenix, Arizona 85017 (assessor parcel number 153-27-003C) and 5115 North 27th Avenue, Phoenix, Arizona 85017 (assessor parcel number 153-27-012).

Schedules” means the schedules to this Agreement.

Seller” has the meaning set forth for such term in the Preamble to this Agreement.

Seller’s knowledge” means with respect to the persons listed on Schedule 1.1(a), the actual knowledge of any such person.

Senior Secured Note” means that certain Senior Secured Note in the form attached to the Credit Agreement, in the initial principal amount equal to the Base Purchase Price, to be made and delivered contemporaneously with this Agreement by Buyer, as borrower, to the order of Seller, as lender, as the same may be amended, restated, replaced, supplemented, extended or otherwise modified from time to time, including pursuant to Section 3.4 hereof.

Student Financial Assistance Programs” means the Title IV Programs and any other funding program authorized by the HEA and administered by the DOE, as well as any other student assistance grant or loan programs or other government-sponsored student assistance programs that provided more than $1,500,000 in assistance to University students in the fiscal year ended December 31, 2017, including, but not limited to, the tuition assistance programs provided by the U.S. Department of Veterans’ Affairs and the U.S. Department of Defense.

Subsidiary” means, which respect to any Person, any entity, whether incorporated or unincorporated, of which at least a majority of the securities or ownership interests having by their terms ordinary voting power to elect a majority of the board of directors or other persons performing similar functions is directly or indirectly owned or controlled by such Person or by one or more of such Person’s respective Subsidiaries.

Substantial Control” means the ability or power to direct or cause the direction of the management or policies of an institution of higher education, by contract, ownership interest or otherwise, or has the meaning ascribed to it in 34 C.F.R. § 668.174(c)(3).

Tax” or “Taxes” means (a) any and all Taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to Tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including income Tax and other Taxes and charges on or regarding franchises, windfall or other profits, escheat, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers’ compensation, unemployment compensation, or net worth, Taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains

 

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Taxes, license, registration and documentation fees, customs’ duties, tariffs, and similar charges, and (b) liability for the payment of any amounts of the type described in clause (a) as a result of being or having been a member of an affiliated, consolidated, combined or unitary group, as successor or transferee, by contract or otherwise.

Tax Return” means any return, information report or filing made with a Taxing Authority, including any schedules attached thereto and including any amendment thereof.

Taxing Authority” means a Governmental Entity responsible for the imposition of any Tax.

Title IV” means Title IV of the HEA, and any amendments or successor statutes thereto.

Title IV Program” means any program of student financial assistance administered pursuant to Title IV as set forth at 34 C.F.R. § 668.1(c).

Title Company” means Fidelity National Title Agency, having its office at 2720 E. Camelback Rd., Suite 100, Phoenix, AZ 85016.

TPPPA” means a Temporary Provisional Program Participation Agreement issued to the University by the DOE following the Closing and countersigned by or on behalf of the Secretary of the DOE continuing the University’s certification to participate in the Title IV Programs on an interim basis following consummation of the transactions contemplated hereby.

University” has the meaning set forth for such term in the Preamble to this Agreement.

1.2 Other Definitional Provisions. Where specific language is used to clarify by example a general statement contained herein (such as by using the word “including”), such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. Whenever required by the context, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa. The words “include” and “including,” and other words of similar import when used herein, shall not be deemed to be terms of limitation but rather shall be deemed to be followed in each case by the words “without limitation.” The word “if” and other words of similar import when used herein shall be deemed in each case to be followed by the phrase “and only if.” The words “herein,” “hereto” and “hereby,” and other words of similar import in this Agreement, shall be deemed in each case to refer to this Agreement as a whole and not to any particular Article, Section or other subdivision of this Agreement. Any reference herein to “dollars” or “$” shall mean United States dollars. The words “as of the date of this Agreement” and words of similar import shall be deemed in each case to refer to the date upon which this Agreement was first signed by all Parties hereto. The term “or” shall be deemed to mean “and/or.” Any reference to any particular Code section or any other Law will be interpreted to include any revision of or successor to that section regardless of how it is numbered or classified and any reference herein to a Governmental Entity shall be deemed to include reference to any successor thereto. As used in this Agreement, accounting terms not defined in this Agreement, and accounting terms partly defined to the extent not defined, will have the respective meanings

 

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given to them under the GAAP. Words of the masculine gender include the feminine or neuter genders, and vice versa, where applicable. Words of the singular number include the plural number, and vice versa, where applicable.

2. PURCHASE OF SCHOOL ASSETS; SERVICES ASSETS; ASSUMPTION OF LIABILITIES.

2.1 Purchase of the School Assets. On the terms and subject to the conditions of this Agreement and in reliance upon the representations, warranties and agreements contained herein, on the Effective Date, Seller shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase, acquire, accept and pay for, all of the right, title (marketable, insurable and fee simple in the case of the Real Property) and interest of Seller in and to the School Assets in each case free and clear of all liens, deeds of trusts, mortgages, or other encumbrances other than Permitted Encumbrances. The School Assets shall include:

(a) the Campus Property;

(b) the Personal Property;

(c) all rights of Seller directly, or indirectly through an Acquired Subsidiary, under the Contracts (including Intellectual Property Agreements) that are expressly listed on Schedule 2.1(c) (collectively, the “Assumed Contracts”);

(d) all syllabi and resource material and content for those academic courses offered as part of the graduate degree programs, undergraduate degree programs, certificate programs, professional studies programs or other educational programs offered by University from time to time, including concepts, materials, resources and text requirements, self-study materials, case studies, curricula and such other items or materials, in all forms and media, as has been developed by or for the University from time to time relating to the programs or as is otherwise used by the University in connection with the offering and delivery of the programs (collectively, the “Course Materials”);

(e) the Intellectual Property embodied in the Course Materials and the right to sue for or assert claims against and remedies against past, present or future infringements of any or all rights in or to the Intellectual Property embodied in the Course Materials and rights of priority and protection of interests therein and to retain any and all amounts therefrom;

(f) certain of the Intellectual Property of Seller used in the operation of and relating to the University, including (i) the name “Grand Canyon University”, (ii) the Intellectual Property Registrations, website domain names, URLs, and trade names used in the operation of the University, (iii) Seller’s rights, if any, to the telephone and facsimile numbers used by the University, and (iv) other Intellectual Property Assets, including software, that are not registered but that are material to the operation of the University, all as listed on Schedule 2.1(f) attached hereto;

(g) the Campus Intangible Property;

(h) all of Seller’s records pertaining to the School Assets, including all student records, ledgers, financial statements and records, operating data, correspondence, employment records, placement records, marketing materials, prospect lists, information and data, mailing

 

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lists and copies of all documents and other information and data filed by Seller with any Governmental Entity or any guaranty or accrediting agency, whether on computer disk, in paper form or otherwise;

(i) Current Assets;

(j) rights of recovery, rights of set-off, rights of recoupment, deposits, charges, sums and fees relating to the School Assets and not otherwise included in Current Assets;

(k) all rights of the University in and to the permits, franchises, licenses, certifications, permits, approvals and other authorizations by or of Governmental Entities, Educational Agencies or other third parties which are held by Seller and required for the operation of the University as currently operated or for the ownership or use of the School Assets, to the extent transferable, all as listed on Schedule 2.1(k) (collectively, the “Permits”);

(l) all Actions of every kind and character solely pertaining to the School Assets;

(m) all insurance, warranty, condemnation and indemnification claim proceeds received after the Effective Date with respect to damage, destruction or loss of or to any School Assets;

(n) all advertising, marketing and promotional materials, and all other printed, written or electronic materials used by the University;

(o) all equity interests in the Acquired Subsidiaries; and

(p) the Additional Cash Amount.

2.2 Services Assets. The School Assets do not include the Services Assets, which are the following assets of Seller:

(a) the assets of Seller not listed or described in Section 2.1 or the related Schedules thereto;

(b) the Retained Property;

(c) all cash and cash equivalents of Seller, except as set forth in Section 2.1(p);

(d) all Contracts other than the Assumed Contracts;

(e) the corporate seals, organizational documents, minute books, stock books, Tax Returns, books of account or other records having to do with the corporate organization of Seller;

(f) the Old Plans (as defined hereinafter) and assets attributable thereto;

 

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(g) all rights of Seller arising under this Agreement and the Related Agreements; and

(h) the assets of Seller specifically listed or described on Schedule 2.2(h).

2.3 Liabilities Assumed by Buyer. Subject to the terms and conditions set forth herein, Buyer agrees, effective at the time of the Closing, to assume and to pay, perform and discharge when due, only the following Liabilities of Seller (collectively, the “Assumed Liabilities”) and no others:

(a) all Liabilities of Seller under the Assumed Contracts from and after the Closing to the extent, and only to the extent, such obligations first accrue and are required to be performed subsequent to the Closing (provided that such obligations did not arise as a result of a breach by Seller of any Assumed Contract prior to the Closing or a breach of Seller’s representations, warranties, covenants and agreements under this Agreement);

(b) all Liabilities of Seller with respect to the Campus Property (including any Permitted Encumbrances) from and after the Closing to the extent, and only to the extent, such obligations first accrue and are required to be performed subsequent to the Closing (provided that such obligations did not arise as a result of a breach of Seller’s representations, warranties, covenants and agreements under this Agreement);

(c) Current Liabilities; and

(d) all other Liabilities specifically listed on Schedule 2.3.

2.4 Liabilities Not Assumed. Anything in this Agreement to the contrary notwithstanding, it is expressly agreed that, except for the Assumed Liabilities, Buyer shall not assume any Liabilities of Seller of any kind, character or description (whether known, unknown, accrued, absolute, contingent or otherwise) (collectively, the “Excluded Liabilities”). The Excluded Liabilities include, without limitation, the following:

(a) any Liabilities relating to or arising out of the Services Assets;

(b) any Liabilities, including Liabilities arising under Educational Laws, related to or based on the operation of the University prior to the Closing, except to the extent specifically assumed as Assumed Liabilities under Section 2.3;

(c) subject to the terms of Section 6.3 below, any Liabilities of Seller with respect to current or former employees, officers, directors, retirees, independent contractors, or consultants of Seller relating to or arising out of their employment or engagement by Seller prior to the Closing or the cessation or termination thereof, including, without limitation, any Liabilities associated with any claims for wages or other benefits, bonuses, accrued vacation, workers’ compensation, severance, retention, termination, or other payments;

(d) any indebtedness of Seller for borrowed money;

 

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(e) any Liabilities for (i) Taxes relating to the School Assets or the Assumed Liabilities for any taxable period ending prior to the Closing, (ii) any other Taxes of Seller for any taxable period, and (iii) any Liabilities of Seller for the unpaid Taxes of any Person, whether as a joint and several liability with another Person, as a transferee or successor, by contract, or otherwise;

(f) any Liabilities of Seller arising under or in connection with any Old Plan providing benefits to any present or former employee of Seller;

(g) any Liabilities of Seller with respect to Actions that are pending or threatened as of the Closing and that relate to the operations of the University prior to the Closing; and

(h) any Liabilities of Seller arising or incurred in connection with the negotiation, preparation, investigation and performance of this Agreement, the other Related Agreements and the transactions contemplated hereby and thereby, including, without limitation, fees and expenses of counsel, accountants, consultants, advisers and others.

3. PURCHASE PRICE; PAYMENT; PRORATIONS; ALLOCATIONS.

3.1 Purchase Price. In full consideration of the sale and transfer of the School Assets, Buyer shall assume the Assumed Liabilities and pay and deliver to Seller an amount equal to (a) the Base Purchase Price, plus (b) the Invested Amount. The Base Purchase Price, adjusted as provided above and in accordance with the procedures set forth in Section 3.4 below, is referred to herein as the “Purchase Price.”

3.2 Payment of Purchase Price; Loan. At the Closing, Buyer shall pay to Seller the Base Purchase Price by delivery of the duly executed and acknowledged Senior Secured Note and the Credit Agreement.

3.3 Prorations and Apportionments. In connection with the foregoing (and except to the extent otherwise provided in this Agreement):

(a) all sales Taxes, transaction privilege Taxes, personal property Taxes and assessments which are due or past due upon any of the School Assets as of the Effective Date, or which are due or past due in connection with the operation of the University on or before the Effective Date, will be paid by Seller at the Closing, together with any penalty or interest thereon.

(b) all transfer Taxes incurred in connection with transactions contemplated by this Agreement shall be borne by Seller, and Seller will file all necessary Tax Returns and other documentation with respect to all such transfer Taxes and fees, and the costs and expenses associated with the preparation and filing of such Tax Returns shall be borne by Seller. Buyer shall cooperate in good faith (i) in connection with the filing of any Tax Returns or other documentation with respect to such transfer Taxes, and (ii) to minimize transfer Taxes incurred in connection with transactions contemplated by this Agreement.

 

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(c) all sales Taxes, transaction privilege Taxes, personal property Taxes and assessments upon any of the School Assets or in connection with the operation of the University which become due solely by reason of the transactions contemplated by this Agreement and which relate to periods prior to the Closing shall be the responsibility of Seller.

(d) current personal property Taxes will be prorated and adjusted between Buyer and Seller as of the Effective Date on a due date basis, taking into account any exemption or reduction in personal property Taxes that might result from Buyer’s status as an organization described in Section 501(c)(3) of the Code that is qualified to operate an educational organization described in Code Section 170(b)(1)(A)(ii). If current Tax bills are unavailable at the Effective Date, the prior year’s Tax bills will be used for proration purposes and Taxes will be re-prorated between Buyer and Seller when the current year’s Tax bills are received. Any amounts owed by Seller, on the one hand, or Buyer, on the other hand, with respect to such re-proration will be paid to the other Party within ten (10) days after the determination of such re-proration.

(e) general real estate Taxes for all prior years, if any, shall be paid by Seller, and any general real estate Taxes, if any, for the tax year of the Closing shall be prorated by Seller and Buyer as of the Effective Date.

(f) any bonds or special assessments against the Campus Property, including interest payable therewith, including any bonds or special assessments (or any installment payments due in regard to such bonds or special assessments), that may be incurred after the Effective Date as a result of or in relation to the construction or operation of Improvements that took place prior to the Effective Date shall be borne by the Seller.

(g) Seller shall be responsible for all operating expenses of the University for the period prior to Closing, and Buyer shall be responsible for such expenses incurred on and after the Closing Date.

(h) Except as otherwise provided herein, any update to any surveys of the Campus Property delivered by Seller, the premium for the Owner’s and Lender’s Title Policy and any endorsements, and prepayment or satisfaction of any loan or bond secured by the Campus Property including, without limitation, any prepayment fees, penalties or charges, shall be paid by the Seller, and any escrow fees, recording fees and all other costs and charges of any escrow for the sale of the Campus Property not otherwise provided for in this Subparagraph 3.3(h) or elsewhere in the Agreement shared equally by Buyer and Seller.

3.4 Post-Closing Adjustment to Purchase Price and Note Balance. As soon as reasonably practicable following the Closing Date, but in no event later than sixty (60) days thereafter, Seller and Buyer shall jointly prepare a certificate signed by a financial officer of each Party setting forth Seller’s calculations of (a) the final Purchase Price (computed as the Base Purchase Price paid at Closing plus the Invested Amount, provided that the final Purchase Price shall not exceed the fair market value of the School Assets as of June 30, 2018), and (b) the amount, if any, by which the cash and cash equivalents transferred by Seller to Buyer at Closing exceeded, or was less than, as applicable, the Required Cash Amount, together with such schedules and data as may be appropriate to support such calculation. Within ten (10) days

 

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following the execution of such certificate, (i) Buyer shall execute and deliver to Seller an amended Senior Secured Note (effective as of the Closing Date) reflecting a principal amount equal to the final Purchase Price plus the Buyer Expenses, and (ii) Buyer and Seller shall pay to or receive from the other, as applicable, cash in an amount necessary such that the amount of cash and cash equivalents transferred by Seller to Buyer at Closing is equal to the Required Cash Amount.

3.5 Allocations. The Purchase Price and any Assumed Liabilities, costs and other items included in “consideration” for purposes of Code Section 1060 (the “Section 1060 Consideration”) shall be allocated among the School Assets, the Assumed Liabilities and any other items of consideration based on the fair market values thereof as of the Effective Date determined and allocated in accordance with Code Section 1060 and the Treasury Regulations thereunder (provided, that only $1.00 shall be attributable to the purchase of the intangible School Assets). Within ninety (90) days after the Closing Date, Buyer shall prepare (or cause to be prepared) and submit for Seller’s review a schedule allocating the Section 1060 Consideration (the “Allocation”). Seller shall timely deliver all such documents and other information as Buyer may reasonably request in preparing the Allocation. If within thirty (30) days following receipt of the Allocation, Seller has not notified the Purchaser in writing of its disagreement with such allocation, such allocation shall be final and binding. If within such 30-day period Seller so notifies Buyer, the parties shall endeavor to resolve such disagreement and, upon doing so, shall make such revisions to the Allocation to reflect such resolution, which shall be final and binding. Thereafter, Buyer shall prepare, or cause to be prepared and delivered to Seller Form 8594 and any required exhibits thereto, and any similar forms required under applicable state, local or foreign Tax law, which shall conform to the Allocation, and Buyer and Seller shall each timely file (a) the applicable Form(s) 8594 with the Internal Revenue Service in accordance with the requirements of Code Section 1060; and (b) such other forms with the applicable Governmental Entities in accordance with the requirements of the applicable Tax law. The Parties agree that they will not take, nor will they permit any of their respective Affiliates to take, for Tax purposes, any position (whether in audits, Tax Returns or otherwise) that is inconsistent with such allocations unless required to do so by applicable Law.

4. CLOSING; CLOSING DELIVERIES.

4.1 Closing. Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated by this Agreement and the Related Agreements, (the “Closing”), will occur at the offices of DLA Piper LLP, 2525 East Camelback Road, Suite 1000, Phoenix, Arizona 85016 at 9:00 a.m., Arizona time, on the Effective Date. The Closing shall be deemed to have occurred as of 12:01 a.m. on the Effective Date, and possession of the Campus Property shall be delivered to Buyer as of the Closing.

4.2 Closing Deliveries of Seller. At the Closing, Seller shall deliver, or cause to be delivered, to Buyer or Title Company (in its capacity as escrow holder with respect to the transfer of the Campus Property), all duly executed and acknowledged (where applicable):

(a) an executed counterpart signature page and acknowledgement (as applicable) with respect to each Loan Document to be executed by Seller, including without limitation the following:

 

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(i) Credit Agreement;

(ii) Senior Secured Note;

(iii) Deed of Trust; and

(iv) Assignment of Rents and Leases.

(b) the Deed, executed and acknowledged;

(c) a bill of sale and assignment transferring to Buyer good and marketable title in and to the School Assets other than the Campus Property in the form of the bill of sale and assignment attached hereto as Exhibit D (the “Bill of Sale”);

(d) an assignment and assumption agreement in the form of the assignment and assumption agreement attached hereto as Exhibit E (the “Assignment and Assumption Agreement”);

(e) an intellectual property assignment agreement or agreements assigning Seller’s entire right, title and interest in the Intellectual Property Registrations to Buyer, duly executed by Seller;

(f) counterpart signature pages to the Master Services Agreement and any other Related Agreement to be entered into at the Closing;

(g) a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Seller certifying that attached thereto are true and complete copies of all resolutions adopted by the board of directors of Seller authorizing the execution, delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby;

(h) a good standing certificate for Seller from the State of Delaware;

(i) a counterpart signature page to an Affidavit of Property Value in the form of Exhibit F attached hereto and incorporated herein by this reference (the “Affidavit of Property Value”);

(j) an executed counterpart of the closing statement with respect to the Campus Property in the form attached hereto as Exhibit G (the “Closing Statement”);

(k) assignments of Seller’s Permits in forms reasonably acceptable to Buyer;

(l) the Consents listed on Schedule 4.2(l) (the “Required Consents”), which shall include all Permits of any Educational Agency or Accrediting Body which must be obtained prior to the Closing in order for the University to operate as it is currently operated and for the University to participate in all of the Student Financial Assistance Programs, including

 

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the Title IV Programs, under the ownership of Buyer (collectively, the “Pre-Acquisition Education Consents”, identified as such in Schedule 4.2(l));

(m) written evidence, in form satisfactory to Buyer, that all liens, claims and encumbrances relating to the School Assets have been released in full, other than Permitted Encumbrances;

(n) evidence of the termination or expiration of the requisite waiting period under the HSR Act.

(o) an affidavit pursuant to Section 1445(b)(2) of the Code, and on which Buyer is entitled to rely, that Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Code, in the form of Exhibit H attached hereto and incorporated herein by this reference;

(p) instruments assigning equity of Acquired Subsidiaries to Buyer;

(q) an executed counterpart signature page to a waiver of potential conflicts involving certain Transferred Employees involved in the legal function of Seller prior to Closing, as mutually agreed between parties; and

(r) such other documents or instruments as Buyer or Title Company may reasonably request.

4.3 Closing Deliveries of Buyer. At the Closing, Buyer shall deliver, or cause to be delivered, to Seller, all duly executed and acknowledged (where applicable):

(a) an executed counterpart signature page and acknowledgement (as applicable) with respect to each Loan Document to be executed by Buyer, including without limitation the following:

(i) Credit Agreement;

(ii) Senior Secured Note;

(iii) Deed of Trust; and

(iv) Assignment of Rents and Leases.

(b) a counterpart signature page to the Bill of Sale;

(c) a counterpart signature page to the Assignment and Assumption Agreement;

(d) a counterpart signature pages to the Master Services Agreement and any other Related Agreement to be signed at the Closing;

(e) a certificate of the Secretary or an Assistant Secretary (or equivalent officer) of Buyer certifying that attached thereto are true and complete copies of all resolutions

 

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adopted by the board of directors of Buyer authorizing the execution, delivery and performance of this Agreement and the Related Agreements and the consummation of the transactions contemplated hereby and thereby, and that all such resolutions are in full force and effect and are all the resolutions adopted in connection with the transactions contemplated hereby and thereby;

(f) a good standing certificate for Buyer from the State of Arizona;

(g) a counterpart signature page to the Affidavit of Property Value;

(h) an executed counterpart of the Closing Statement;

(i) an executed counterpart signature page to a waiver of potential conflicts involving certain Transferred Employees involved in the legal function of Seller prior to Closing, as mutually agreed between parties; and

(j) such other documents or instruments as Seller or Title Company may reasonably request.

4.4 Title and Escrow.

(a) Contemporaneously with the execution of this Agreement, the parties hereto shall deposit an executed counterpart of this Agreement with Title Company and this Agreement shall serve as instructions to Title Company as the escrow holder for consummation of the purchase and sale of the Campus Property contemplated hereby. Seller and Buyer agree to execute such additional escrow instructions as may be appropriate to enable the Title Company, as escrow holder, to comply with the terms of this Agreement; provided, however, that in the event of any conflict between the provisions of this Agreement and any supplementary escrow instructions, the terms of this Agreement shall control.

(b) Title Company has prepared the Closing Statement with respect to the Campus Property and Buyer and Seller have had sufficient opportunity to review the Closing Statement prior to the Effective Date.

(c) Title Company agrees be bound by the terms of this Agreement as they relate to the duties of Title Company. However, such agreement does not constitute Title Company as a party to this Agreement and no consent or approval from Title Company shall be required to amend, extend, supplement, cancel or otherwise modify this Agreement except to the extent any such action increases the duties of Title Company or exposes Title Company to increased liability, in which such action shall not be binding on Title Company unless Title Company has consented to the same in writing.

(d) Title Company agrees to be the designated “reporting person” under §6045(e) of the U.S. Internal Revenue Code of 1986 as amended (with respect to the real estate transaction described in this Agreement) and to prepare, file and deliver such information, returns and statements as the U.S. Treasury Department may require by regulations or forms in connection with such requirements, including Form 1099-B.

 

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5. REPRESENTATIONS AND WARRANTIES.

5.1 Sellers Representations and Warranties. For purposes of Sections 5.1(i), (k), (l), (m), (n), (p), (q), and (r), “Seller” shall mean Seller and all of the Acquired Subsidiaries, as may be applicable. Seller represents and warrants to Buyer as of the Effective Date as follows:

(a) Organization. Seller and each Acquired Subsidiary is a corporation or limited liability company, as applicable, duly organized, validly existing, and in good standing under the laws of its respective state of incorporation or formation. Seller and each Acquired Subsidiary has full power and lawful authority to (i) own and operate its assets, properties and business, (ii) carry on its businesses as currently being conducted, and (iii) in the case of Seller only, enter into this Agreement and all Related Agreements, and consummate the transactions contemplated hereby and thereby. Seller and each Acquired Subsidiary is duly licensed or qualified to do business and is in good standing in each jurisdiction in which its ownership of School Assets or the operation of the University as currently conducted makes such licensing or qualification necessary, except where the failure to be so licensed, qualified or in good standing would not have a Material Adverse Effect. No party other than Seller has any right, title or interest in any Acquired Subsidiary. Each Acquired Subsidiary is governed by that certain Operating Agreement as set forth on Schedule 2.1(o).

(b) Due Authorization; Enforceability; No Conflicts. The execution, delivery and performance of this Agreement and the Related Agreements have each been duly authorized by all necessary corporate or other action on the part of Seller. This Agreement and each Related Agreement (i) have been duly executed and delivered by the Seller, (ii) constitute the legal, valid and binding obligation of Seller, enforceable against it in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance or other similar Laws affecting creditors generally, and (iii) are sufficient to convey title (if they purport to do so). Except as set forth on Schedule 5.1(b), Seller’s execution, delivery and performance of this Agreement and each Related Agreement to which it is party do not (i) constitute a breach or violation of Seller’s certificate of incorporation or bylaws, (ii) constitute a breach or violation of any Law, or a violation of any Governmental Order by which Seller or any of the School Assets are bound or affected, (iii) result in the creation of any lien, claim or charge on the School Assets (other than Permitted Encumbrances), (iv) result in the acceleration of any material debt owed by Seller; or (v) result in a violation or breach of, conflict with, or constitute a default under any of the terms, conditions or provisions of, any agreement, instrument or obligation to which Seller or any Acquired Subsidiary is a party, or by which it or any of the School Assets are bound; except in the case of clauses (ii), (iv) and (v) for any such breach or violation that would not have a Material Adverse Effect.

(c) Title; Ownership. Except as set forth on Schedule 5.1(c), Seller has good and marketable title to the School Assets, with full right to convey the same, and at the Closing Buyer will receive, good and marketable title to the School Assets, free and clear of all liens and encumbrances other than the Permitted Encumbrances. Except as set forth on Schedule 5.1(c), each Acquired Subsidiary has good and marketable title to its respective Acquired Subsidiary Assets, free and clear of all liens and encumbrances other than the Permitted Encumbrances. The tangible School Assets and the Acquired Subsidiary Assets are in a good state of repair and

 

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operating condition, ordinary wear and tear excepted. Following the Closing, Seller will not have any continuing right, title or interest in such School Assets.

(d) Litigation; Orders. Except as set forth on Schedule 5.1(d), there are no Actions pending or, to Seller’s knowledge, threatened in writing against or by Seller or any Affiliate of Seller that (i) challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement, or (ii) if determined adversely to Seller or any such Affiliate, would impact Buyer or the operation of the University following the Closing. There are no outstanding Governmental Orders and no unsatisfied judgments, penalties or awards against, relating to or affecting the University.

(e) Assumed Contracts; Acquired Subsidiary Contracts. A correct and complete copy of each Assumed Contract (including all material amendments, modifications, extensions, renewals, schedules, exhibits or ancillary agreements with respect thereto) has been provided or made available to Buyer. Each Assumed Contract is in full force and effect and is valid, binding and enforceable against the Seller, and, to Seller’s knowledge, each other party thereto in accordance with its terms, except to the extent that any failure to be in full force and effect or to be valid, binding and enforceable would not have a Material Adverse Effect. Neither the Seller, nor, to the Seller’s knowledge, any other party thereto, is in breach or violation of, or default under, any Assumed Contract, and no event has occurred that with notice or lapse of time or both would constitute a violation, breach or default under any Assumed Contract. A correct and complete copy of each Contract (each, an “Acquired Subsidiary Contract”) to which an Acquired Subsidiary is a party (including all material amendments, modifications, extensions, renewals, schedules, exhibits or ancillary agreements with respect thereto) has been provided or made available to Buyer. Each Acquired Subsidiary Contract is in full force and effect and is valid, binding and enforceable against the applicable Acquired Subsidiary, and, to Seller’s knowledge, each other party thereto in accordance with its terms, except to the extent that any failure to be in full force and effect or to be valid, binding and enforceable would not have a Material Adverse Effect. Neither the Seller, nor, to the Seller’s knowledge, any other party thereto, is in breach or violation of, or default under, any Acquired Subsidiary Contract, and no event has occurred that with notice or lapse of time or both would constitute a violation, breach or default under any Acquired Subsidiary Contract.

(f) Employees. Except as set forth on Schedule 5.1(f), none of the Transferred Employees or any employee of any Acquired Subsidiary (each, an “Acquired Subsidiary Employee”) has any employment or similar Contract (written or otherwise) with Seller or any Acquired Subsidiary. None of Seller or any Acquired Subsidiary has any collective bargaining or union Contracts and there is no union campaign presently being conducted to solicit employees to authorize a union to request a National Labor Relations Board certification election with respect to any of the Transferred Employees. Each of Seller and the Acquired Subsidiaries is in compliance, in all material respects, with all applicable Laws relating to labor, employment, termination of employment or similar matters, including laws relating to disability, labor relations, discrimination, hours of work, payment of wages and overtime wages, employee classification, pay equity, immigration, workers compensation, working conditions, employee scheduling, occupational safety and health, family and medical leave, and employee terminations, and has not engaged in any unfair labor practices or similar prohibited practices, and there are no pending, or to the Seller’s knowledge threatened, charges or complaints by any

 

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current or former employees of Seller or the Acquired Subsidiaries or any Governmental Entity alleging a violation of any such law.

(g) Financial Statements. Seller has made available to Buyer true and complete copies of the audited balance sheets of Seller at December 31, 2017 and 2016 and the related audited statements of earnings, stockholders’ equity and cash flows for the years ended December 31, 2017, 2016 and 2015, with a report thereon from an independent auditor (the “Financial Statements”). Such Financial Statements were included in Seller’s annual report on Form 10-K, as filed with the Securities and Exchange Commission on February 21, 2018 (the “2017 Form 10-K”) The Financial Statements have been prepared in accordance with GAAP consistently applied and maintained throughout the periods indicated and present fairly, in all material respects, the financial condition and results of operations of Seller reflected therein as of the indicated dates and for the indicated periods and are consistent with the books and records of Seller. The books and accounts of Seller as they relate to the University and the School Assets are complete and correct in all material respects and fairly reflect all of the transactions, items of income and expense and all assets and Liabilities of the University as they relate to the School Assets. Seller has made available to Buyer the audited balance sheets and related statements of earnings, stockholders’ equity and cash flows of Seller as filed with the DOE for each of the periods referenced above.

(h) Intellectual Property Rights. For the purposes of this Section 5.1(h), “School Assets” shall be deemed to also include the Acquired Subsidiary Assets of the Acquired Subsidiary.

(i) Schedule 2.1(f) lists all (A) Intellectual Property Registrations included within the School Assets, and (B) Intellectual Property Assets, including software, that are not registered but that are included within the School Assets and are material to the operation of the University. All required filings and fees related to the Intellectual Property Registrations have been timely filed with and paid to the relevant Governmental Entities and authorized registrars, and all Intellectual Property Registrations are otherwise in good standing.

(ii) Seller, or, as applicable, an Acquired Subsidiary, is the sole and exclusive legal and beneficial, and with respect to the Intellectual Property Registrations, record, owner of all right, title and interest in and to the Intellectual Property Assets, and has the valid right to use all other Intellectual Property used in or necessary for the operation of the University as currently operated, in each case, free and clear of all liens, claims, and encumbrances other than Permitted Encumbrances. Without limiting the generality of the foregoing, Seller, or, as applicable, an Acquired Subsidiary, has taken reasonable measures to cause current and former employees and independent contractors of Seller or such Acquired Subsidiary, to assign to Seller or such Acquired Subsidiary, any ownership interest and right they may have in the Intellectual Property Assets and acknowledge Seller’s, or such Acquired Subsidiary’s, exclusive ownership of all Intellectual Property Assets.

(iii) The Intellectual Property Assets and Intellectual Property licensed under the Intellectual Property Agreements that are included within the School Assets, together with the Intellectual Property owned or licensed by Seller and any Acquired Subsidiaries and included within the Services Assets, are all of the Intellectual Property necessary to operate the

 

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University as presently operated. Except as set forth on Schedule 5.1(h)(iii), the consummation of the transactions contemplated hereunder will not result in the loss or impairment of or payment of any additional amounts with respect to, nor require the consent of any other Person in respect of, the Buyer’s right to own, use or hold for use any Intellectual Property being acquired by Buyer hereunder. Without limiting the generality of the foregoing, following the consummation of the transactions contemplated hereunder, Buyer will either own directly (or indirectly through an Acquired Subsidiary) or, pursuant to the Master Services Agreement, receive the benefit of all Intellectual Property Assets currently used in the operation of the University without necessitating payment of any royalties, license fees, or other amounts other than the Services Fees as defined in the Master Services Agreement.

(iv) Seller’s and the Acquired Subsidiaries’ rights in the Intellectual Property Assets are valid, subsisting and enforceable. Seller and the Acquired Subsidiaries have taken reasonable measures to protect the confidentiality of trade secrets related to the University that are owned or used by Seller and the Acquired Subsidiaries, and to Seller’s knowledge, such trade secrets have not been used or disclosed by any Person except pursuant to a nondisclosure and/or license agreement that has not been breached.

(v) Except as otherwise indicated on Schedule 5.1(h)(v), since the Compliance Date, to Seller’s knowledge, (A) the operation of the University as currently and formerly conducted, and the Intellectual Property Assets and Intellectual Property licensed under the Intellectual Property Agreements as currently or formerly owned, licensed or used by Seller or the Acquired Subsidiaries, do not infringe, misappropriate, dilute or otherwise violate, and have not infringed, misappropriated, diluted or otherwise violated, the Intellectual Property or other rights of any Person; and (B) no Person has infringed, misappropriated, diluted or otherwise violated, or is currently infringing, misappropriating, diluting or otherwise violating, any Intellectual Property Assets.

(vi) There are no legal proceedings (including any oppositions, interferences or re-examinations) pending or, to the knowledge of Seller, threatened (including in the form of offers to obtain a license): (A) alleging any infringement, misappropriation, dilution or violation of the Intellectual Property of any Person by Seller or any Acquired Subsidiary in connection with the operation of the University; (B) challenging the validity, enforceability, registrability or ownership of any Intellectual Property Assets or Seller’s or an Acquired Subsidiaries’ rights with respect to any Intellectual Property Assets; or (C) by Seller or any other Person alleging any infringement, misappropriation, dilution or violation by any Person of any Intellectual Property Assets. None of Seller or any Acquired Subsidiary is subject to any outstanding or prospective Governmental Order (including any motion or petition therefor) that does or would restrict or impair the use of any Intellectual Property Assets.

(i) Tax Matters. Except as set forth on Schedule 5.1(i):

(i) Seller has timely filed all Tax Returns required to be filed by Seller and such Tax Returns were correct and complete in all material respects and prepared in compliance, in all material respects, with applicable Law. Seller has timely paid all Taxes shown on such Tax Returns as due and owing (taking into account any and all extensions granted by any applicable Taxing Authority for the making of such filings and payments). Seller is not

 

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currently the beneficiary of any extension of time within which to file any material Tax Return other than extensions of time to file Tax Returns obtained in the ordinary course of business. Seller is not a “foreign person” as that term is used in Treasury Regulations Section 1.1445-2.

(ii) Seller has withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party, and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed.

(iii) No material Actions, disputes, claims, or issues have been raised or are currently pending by any Taxing Authority in connection with any of the Tax Returns with respect to the School Assets or the Assumed Liabilities. No waivers of statutes of limitation with respect to the Tax Returns have been given by or requested from Seller with respect to the School Assets or the Assumed Liabilities. There are no agreements or arrangements (whether or not written) existing at any time at or before the Closing, binding Seller, that provides for the allocation, apportionment, sharing or assignment of any Tax Liability or benefit, for the principal purpose of determining any other Person’s Tax Liability in effect with respect to the School Assets or the Assumed Liabilities. None of the School Assets is “tax exempt use property” (within the meaning of Section 168(h) of the Code). None of the School Assets is a lease made pursuant to Section 168(f)(8) of the Code. Except as set forth on Schedule 5.1(i), the School Assets do not include any shares of corporate stock, partnership or limited liability company interests or any other equity interests in any Person.

(iv) Seller has timely paid, or caused to be paid, prior to the Effective Date, all Taxes required to be paid prior to the Closing, the non-payment of which would result in a lien or encumbrance on any School Asset. Seller has established, or caused to be established, in accordance with GAAP applied on a basis consistent with that of preceding periods, adequate reserves for the payment of all Taxes which arise from or with respect to the School Assets and are incurred in or attributable to any period prior to the Closing (irrespective of whether such period ends prior to the Effective Date or straddles the Effective Date), the non-payment of which would result in a lien or encumbrance on any School Asset.

(v) No jurisdiction in which Seller has not filed Tax Returns has asserted in writing that Seller is liable for income or franchise Taxes related to the School Assets due to a “nexus” with such jurisdiction.

(vi) None of Seller’s Tax Returns are currently the subject of audit.

(vii) Seller is not a party to any agreement, contract, arrangement or plan that, as a result of or in connection with the transactions contemplated hereby, could result, separately or in the aggregate, in the payment of (A) any “excess parachute payment” within the meaning of Section 280G of the Code (or any corresponding provision of state, local or non-U.S. Tax law) or (B) any amount that will not be fully deductible as a result of Section 162(m) of the Code (or any corresponding provision of state, local or non-U.S. Tax Law).

(viii) Seller has not been a member of an affiliated group filing a consolidated federal income Tax Return (other than a group the common parent of which was

 

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Seller) nor does Seller have any liability for the Taxes of any Person under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local or non-U.S. law), as a transferee or successor, by contract or otherwise.

(ix) Seller will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing as a result of any of the following: (A) a change in a method of accounting for a taxable period ending prior to the Effective Date under Section 481(c) of the Code (or any corresponding or similar provision of state, local or non-U.S. income Tax law); (B) the use of an improper method of accounting for a taxable period ending prior to the Effective Date; (C) a “closing agreement,” as described in Section 7121 of the Code (or any corresponding or similar provision of state, local or non-U.S. income Tax law) executed prior to the Effective Date; (D) intercompany transactions or an excess loss account described in Treasury Regulations under Section 1502 of the Code (or any corresponding or similar provision of state, local or Non-U.S .income Tax law); (E) an installment sale or open transaction disposition made prior to the Effective Date; (F) prepaid amounts received prior to the Effective Date; or (G) an election under Section108(i) of the Code.

(x) Within the past three years, Seller has not distributed the stock of another Person, or has had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Section 355 or Section 361 of the Code.

(xi) Seller is not or has not been a party to any “listed transaction,” as defined in Section 6707A(c)(2) of the Code and Treasury Regulations Section 1.6011-4(b)(2).

(j) Insurance. Seller maintains for itself and the Acquired Subsidiaries insurance policies that are customary for companies of similar size in the industries in which it operates, and all material and currently effective insurance policies maintained by Seller are with reputable insurance carriers and provide adequate coverage for all normal risks incidental to Seller’s business and its respective properties and assets. With respect to the Improvements, Seller maintains or causes to be maintained a policy or policies of insurance in amounts equal to the full replacement value of the Improvements, insuring against all insurable risks, including, without limitation, fire, vandalism, malicious mischief, lightning, windstorm, water, earthquake and other perils customarily covered by casualty insurance and the costs of demolition and debris removal. Complete and correct copies of each such insurance policy have been made available to Buyer. With respect to each such insurance policy, (i) such insurance policy is in full force and effect and premiums due thereon have been paid, (ii) none of Seller and any Acquired Subsidiary is in breach or default under, or has taken any action or failed to take any action that would constitute a breach or default (or an action or inaction that with notice or lapse of time or both would become a default) under, any such insurance policy that would result in a Material Adverse Effect, (iii) to Seller’s knowledge, no insurer on any such insurance policy has been declared insolvent or placed in receivership, conservatorship or liquidation and (iv) no notice of cancellation or termination has been received by Seller or any Acquired Subsidiary with respect to any such insurance policy.

 

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(k) Compliance with Laws and Educational Laws.

(i) Since the Compliance Date, Seller and the University have qualified for and maintained all Permits, including all Educational Approvals from Educational Agencies, necessary to the conduct of the business and operations of the University, including to own or lease its property and offer all of its educational programs and operate all of its campus locations. Without limiting the forgoing, the University is a party to, and is in compliance in all material respects with, a valid and effective PPA with DOE and the University has a current and materially accurate Eligibility and Certification Approval Report (“ECAR”) issued by DOE. Schedule 5.1(k) contains a complete listing of all Educational Approvals (including Educational Approvals pertinent to distance education programs) currently in effect.

(ii) Since the Compliance Date, the University has maintained all state authorizations and other forms of Educational Approvals material to the conduct of its distance education programs and has complied, in all material respects with all requirements of 34 C.F.R. § 600.9 with regard to its physical locations.

(iii) Since the Compliance Date, Seller has conducted the operations of the University in compliance, in all material respects, with all applicable Laws, including Educational Laws.

(iv) The University is, and since the Compliance Date has been, duly qualified as, and in compliance in all material respects with, with the DOE definition of, a “proprietary institution of higher education” as defined in 34 C.F.R. § 600.5.

(v) Neither Seller nor the University has received written notice that any of its Educational Approvals will not be renewed. To the knowledge of the Seller, there are no proceedings pending to revoke, withdraw, suspend, limit, condition, restrict, place on reporting or place on probation any Educational Approval, or to require the University to show cause why any Educational Approval should not be revoked; and, to the knowledge of Seller, there are no facts, circumstances or omissions concerning Seller or the University that could reasonably result in any such proceeding.

(vi) In addition, and without limiting the foregoing:

(A) Since the Compliance Date, the University has not received greater than ninety percent (90%) of its revenues from the Title IV Program during any completed fiscal year or for the ten month period ended October 31, 2017, as such percentage is required to be calculated under 34 C.F.R. §§ 668.14 and 668.28. Schedule 5.1(k)(vi)(A) sets forth the audited percentages of revenue that the University received from Title IV Programs for the fiscal years ended December 31, 2016 and 2015, as such percentages are required to be calculated under 34 C.F.R. §§ 668.14 and 668.28.

(B) Since the Compliance Date, each educational program offered by the University is, and since the Compliance Date has been, an eligible program in compliance with the requirements of 34 C.F.R. § 668.8.

 

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(C) Schedule 5.1(k)(vi)(C) contains a listing of all Student Financial Assistance Programs offered by the University since the Compliance Date, including a notation to identify those Student Financial Assistance Programs that are currently available to students of the University.

(D) Since the Compliance Date, Seller and the University have been in compliance, in all material respects, with all applicable rules, regulations and requirements pertaining to the University’s participation in any Student Financial Assistance Program.

(E) Since the Compliance Date, Seller and the University have complied, with the requirements set forth at 20 U.S.C. § 1094(a)(20) and 34 C.F.R. § 668.14(b)(22) regarding the payment of commissions, bonuses, or other payments based directly or indirectly on success in securing enrollments or awarding Title IV Program funds to any Person responsible for any student recruiting or admission activities or engaged in or responsible for decisions regarding the awarding of Title IV Program funds for or on behalf of Seller or the University.

(F) Since the Compliance Date, the University has calculated and paid refunds and calculated dates of withdrawal and leaves of absence in compliance, in all material respects, with all applicable Educational Laws.

(G) To the knowledge of Seller, since the Compliance Date, the University has not provided any portion of an education program by correspondence, or admitted students who were incarcerated or had neither a high school diploma nor the recognized equivalent of a high school diploma.

(H) Since the Compliance Date, the University has had a financial responsibility “composite score” of at least 1.5 for each completed fiscal year, as calculated in accordance with the DOE’s formula at 34 C.F.R. § 668.172.

(I) Schedule 5.1(k)(vi)(I) sets forth a list of the University’s official cohort default rates for loans administered under the Title IV Programs, as calculated by DOE pursuant to 34 C.F.R. Part 668 Subparts M and N, for the three most recently completed federal fiscal years for which such official rates have been published.

(J) Since the Compliance Date, no Educational Agency has required the University to post a letter of credit or bond or other form of surety for any reason, including any request for a letter of credit based on late refunds pursuant to 34 C.F.R. § 668.173, or required or requested that the University process its Title IV Program funding under the reimbursement or heightened cash monitoring-level 2 procedures set forth at 34 C.F.R. § 668.162(d) or (e)(2).

(K) Since the Compliance Date, the University has in all material respects timely applied for and received the necessary Educational Approvals for the addition of any new educational programs or locations.

 

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(L) Since the Compliance Date, the University has complied, in all material respects, with the disclosure, reporting and certification requirements related to gainful employment, as set forth at 34 C.F.R. § 668.6 or 34 C.F.R. § 668.401, et. seq., as applicable to the University for the relevant periods. Except as set forth on Schedule 5.1(k)(vi)(L), no University program has received a final debt-to-earnings rate that is failing or in the “zone.”

(M) Since the Compliance Date, the University has complied, in all material respects, with all Law applicable to the recruitment of students. Since the Compliance Date, neither Seller nor the University has contracted with any outside organization to provide marketing or student recruiting services to the University.

(N) Schedule 5.1(k)(vi)(N) sets forth a list of all compliance audits (including site visits or other compliance reviews) conducted by any Educational Agency since the Compliance Date, including any entity that administers any Student Financial Assistance Program, with respect to Seller or the University (each, a “Compliance Review”). The University has complied with, and resolved all of the findings and conditions arising from, any Compliance Review.

(O) Neither Seller nor the University has provided any educational instruction on behalf of any other institution or organization, and no other institution or organization has provided any educational instruction on behalf of the University.

(P) Since the Compliance Date, Seller and the University have complied, in all material respects, with Educational Law regarding misrepresentations, including 34 C.F.R. Part 668 Subpart F.

(Q) Since the Compliance Date, the University has complied, in all material respects, with Laws and Educational Laws governing preferred lender relationships and Private Educational Loans, including, but not limited to, the Truth in Lending Act, the Equal Credit Opportunity Act, and Fair Credit Reporting Act.

(R) With respect to any location or facility that has closed or at which the University has ceased operating educational programs since the Compliance Date, or any program that it has ceased offering since the Compliance Date, the University has complied, in all material respects, with all Educational Laws related to the closure or cessation of instruction at such location or facility, or with respect to any discontinued program, including, without limitation, requirements for teaching out students from such location, facility, or program.

(S) Since the Compliance Date, the Seller and the University have been in compliance, in all material respects, with all Laws, as well as their own policies, relating to privacy, data security and the management and use of personal information.

(vii) Neither Seller, nor any Person that exercises Substantial Control over Seller or the University (as the term “Substantial Control” is used in 34 C.F.R. §668.174(b)

 

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and (c)) (“Substantial Control”), nor any member of such Person’s family (as the term “family” is defined in 34 C.F.R. §600.21(f)), either alone or together, (A) exercises or exercised Substantial Control over an institution other than the University or over a third-party servicer (as that term is defined in 34 C.F.R. §668.2) that owes a liability for a violation of a Title IV Program or other HEA program requirement, or (B) owes a liability for a Title IV Program or other HEA program violation.

(viii) At no time has Seller or the University, nor any Person that exercises Substantial Control over any of them, filed for relief in bankruptcy or had entered against it an order for relief in bankruptcy. None of Seller or the University, nor any Person that exercises Substantial Control over any of them, has pled guilty to, has pled nolo contendere to, or has been found guilty of a crime involving the acquisition, use, or expenditure of funds under the Title IV Programs or has been judicially determined to have committed fraud involving funds under the Title IV Programs.

(ix) To Seller’s knowledge, neither Seller nor the University currently employs, or since the Compliance Date has employed, any individual or entity in a capacity that involves the administration or receipt of funds under the Title IV Programs, or contracted with any institution or third-party servicer, which has been terminated under the Title IV Programs for a reason involving the acquisition, use, or expenditure of federal, state or local government funds, or has been convicted of, or has pled nolo contendere or guilty to, a crime involving the acquisition, use or expenditure of federal, state, or local government funds, or has been administratively or judicially determined to have committed fraud or any other material violation of law involving federal, state, or local government funds.

(l) Conduct in the Ordinary Course of Business. Since the ending date of the Financial Statements, Seller has operated its business in the ordinary course consistent with past practices.

(m) Suppliers. Seller has provided to Buyer a complete and accurate list of the names and addresses of suppliers of items related to the University or the School Assets as of the date hereof. Since the date of the Financial Statements, there has not been any material change in the terms and conditions of sale of, supplies or other products or services supplied to Seller by any Significant Suppliers, and Seller has no knowledge that there will be such a change. To Seller’s knowledge, there is no dispute with any Significant Supplier that would reasonably be expected to jeopardize Seller’s relationship or, following the Closing, Buyer’s relationship with that Significant Supplier, as the case may be. For the purposes of this Agreement, “Significant Supplier” shall mean the top 20 suppliers, by dollar volume of Seller for each of the two most recent fiscal years.

(n) Undisclosed Liabilities. Seller has no Liabilities with respect to the University, except (a) those which are adequately reflected or reserved against in the Financial Statements to the extent required by GAAP, and (b) those which have been incurred in the ordinary course of business consistent with past practice since the date of the most recent Financial Statements and which are not, individually or in the aggregate, material in amount.

 

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(o) Campus Property.

(i) Schedule 5.1(o)(i) sets forth each parcel of Real Property that is (i) owned by Seller or any Acquired Subsidiary (whether directly or indirectly), and (ii) not specifically identified as a Services Asset, including with respect to each property, the legal description, the address location (if applicable) and use. Seller or such Acquired Subsidiary has delivered to Buyer copies of the deeds and other instruments (as recorded) by which Seller or such Acquired Subsidiary acquired such parcel of Real Property, and copies of all title insurance policies, opinions, abstracts and surveys in the possession of Seller with respect to such parcel. With respect to the Campus Property, except as set forth on Schedule 5.1(o)(i):

(A) Seller or the applicable Acquired Subsidiary has good and marketable fee simple title, free and clear of all liens, claims, and encumbrances, except Permitted Encumbrances;

(B) neither Seller nor the applicable Acquired Subsidiary has leased or otherwise granted to any Person the right to use or occupy its Campus Property or any portion thereof; and

(C) there are no unrecorded outstanding options, rights of first offer or rights of first refusal to purchase the Campus Property or any portion thereof or interest therein.

(ii) Except as set forth on Schedule 5.1(o)(ii):

(A) neither Seller nor any Acquired Subsidiary leases any Campus Property from any Person; and,

(B) to Seller’s knowledge, there are no written or oral leases or rights of occupancy in force relating to the Campus Property, and no person has any right of possession or occupancy in any part of the Campus Property.

(iii) Neither Seller nor any Acquired Subsidiary has received any written notice of (i) material violations of building codes and/or zoning ordinances or other governmental or regulatory Laws affecting the Campus Property, (ii) existing, pending or threatened condemnation proceedings affecting the Campus Property, or (iii) existing, pending or threatened zoning, building code or other moratorium proceedings, or similar matters which could reasonably be expected to materially and adversely affect the ability to operate the Campus Property as currently operated. Neither the whole nor any material portion of any Campus Property has been damaged or destroyed by fire or other casualty.

(iv) To Seller’s knowledge, water, sewer, and electrical lines are presently installed to the property line of the Campus Property, are available and adequate for intended use at the Campus Property, and are in good working order.

(v) The Campus Property is sufficient for the continued operation of the University after the Closing in the manner contemplated by the transactions contemplated hereby.

 

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(p) Accounts Receivable. The accounts receivable included among the School Assets (i) have arisen from bona fide transactions entered into by Seller involving the sale of goods or the rendering of services in the ordinary course of business consistent with past practice; and (ii) subject to Seller’s reserve for doubtful accounts, constitute valid claims of Seller not subject to known claims of set-off or other defenses or counterclaims other than normal cash discounts accrued in the ordinary course of business consistent with past practice.

(q) Environmental Matters.

(i) Except as would not have a Material Adverse Effect:

(A) The operations of Seller with respect to the University and the School Assets, and the University and the School Assets themselves, are currently and have been in compliance with all Environmental Laws. Seller has not received from any Person, with respect to the University or the School Assets, any: (A) Environmental Notice or Environmental Claim; or (B) written request for information pursuant to Environmental Law, which, in each case, either remains pending or unresolved, or is the source of ongoing obligations or requirements as of the Effective Date.

(B) Seller has obtained and is in compliance with all Environmental Permits (each of which is disclosed in Schedule 5.1(q)(i)) necessary for the operation of the University as currently conducted or the ownership, lease, operation or use of the School Assets and all such Environmental Permits are in full force and effect in accordance with Environmental Law

(C) Neither the University nor the School Assets is listed on, or has been proposed for listing on, the National Priorities List (or CERCLIS) under CERCLA, or any similar state list.

(D) There has been no Release of Hazardous Materials in contravention of Environmental Law with respect to the University or the School Assets, and Seller has not received an Environmental Notice that either the University or any of the School Assets (including soils, groundwater, surface water, buildings and other structure located thereon) has been contaminated with any Hazardous Material which could reasonably be expected to result in an Environmental Claim against, or a violation of Environmental Law or term of any Environmental Permit by, Seller.

(E) Seller has not retained or assumed, by contract or operation of Law, any Liabilities or obligations of third parties under Environmental Law.

(F) Neither the University nor the School Assets contains, or has previously contained, any Hazardous Materials at, on or under such property in amounts or concentrations that constitute or constituted a violation of, or could give rise to liability under, Environmental Laws.

(G) Seller has not received any written notice of, or inquiry from any Governmental Authority regarding, any violation, alleged violation, non-compliance, liability or potential liability arising under Environmental Laws with regard

 

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to the University or the School Assets, nor does Seller have knowledge or reason to believe that any such notice will be received or is being threatened.

(H) Hazardous Materials have not been transported or disposed of from the University or the School Assets, or generated, treated, stored or disposed of at, on or under any portion of the University or the School Assets or any other location, in each case by or on behalf of the Seller or any Subsidiary in violation of, or in a manner that would be reasonably likely to give rise to liability under, any applicable Environmental Laws.

(I) No judicial proceeding or governmental or administrative action is pending or, to Seller’s knowledge, threatened in writing, under any Environmental Laws to which the Seller or any Subsidiary is or, to Seller’s knowledge, will be named as a party, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Laws with respect to the Seller, any Subsidiary, or the University or the School Assets.

(ii) Seller has provided or otherwise made available to Buyer any and all environmental reports, studies, audits, records, sampling data, site assessments, risk assessments, economic models and other similar documents with respect to the University or the School Assets which are in the possession or control of Seller related to compliance with Environmental Laws, Environmental Claims or an Environmental Notice or the Release of Hazardous Materials.

(r) Employee Benefits.

(i) Seller has made available to Buyer a true and correct list of each benefit, retirement, compensation, employment, consulting, incentive, bonus, performance award, stock or stock-based, change in control, retention, severance, vacation, paid time off, welfare, fringe-benefit and/or other similar agreements, plans, policies, program or arrangements (and any amendments thereto) which is or has been maintained, sponsored, contributed to, or required to be contributed to by Seller for the benefit of any current or former employee, officer, director, retiree, independent contractor or consultant or any spouse or dependent of such individual, or under which Seller or any of its ERISA Affiliates has or may have any Liability (each, a “Benefit Plan”).

(ii) Seller has established, administered and maintained its Benefit Plans in accordance with their terms and in compliance, in all material respects, with all applicable Laws (including ERISA and the Code).

(iii) No Benefit Plan: (A) is subject to the minimum funding standards of Section 302 of ERISA or Section 412 of the Code; or (B) is a “multi-employer plan” (as defined in Section 3(37) of ERISA). Except as would not have a Material Adverse Effect, Seller has not: (x) withdrawn from any pension plan under circumstances resulting (or expected to result) in liability; or (y) engaged in any transaction which would give rise to a liability under Section 4069 or Section 4212(c) of ERISA.

 

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(iv) No facts or circumstances exist with respect to the Benefit Plans that, with or without notice or lapse of time or both, would impose upon Buyer any Liability for any Benefit Plan or otherwise have a Material Adverse Effect.

(s) Broker. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission payable by Buyer in connection with the transactions contemplated by this Agreement or any of the Related Agreements based upon arrangements made by or on behalf of, or executed by, Seller.

(t) Not a Foreign Person. Seller is not a “foreign person” within the meaning of Section 1445(f)(3) of the Federal Code.

(u) No Other Representations or Warranties. Except for the representations and warranties contained in Section 5.2 or any Related Agreement, Seller acknowledges that (i) neither Buyer nor any other Person on behalf of Buyer makes any other express or implied representation or warranty with respect to Buyer or with respect to any other information provided to Seller in connection with the transactions contemplated by this Agreement or the Related Agreements, and (ii) except in the case of fraud or intentional misrepresentation, neither Buyer nor any other Person will have or be subject to any Liability or indemnification obligation to Seller or any other Person resulting from the distribution to Seller, or Seller’s use of, any such information, including any information, documents, projections, forecasts or other material made available to Seller in certain “data rooms” or management presentations or in any other form in expectation of, or in connection with, the transactions contemplated by this Agreement, including in management presentations, “data rooms” or via any Representative or other Person.

(v) Scope of Representations and Warranties. EXCEPT AS SPECIFICALLY PROVIDED IN THIS AGREEMENT OR THE RELATED AGREEMENTS, SELLER IS NOT MAKING ANY REPRESENTATION, WARRANTY OR COVENANT OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY.

5.2 Buyers Representations and Warranties. Buyer represents and warrants to Seller as of the Effective Date as follows:

(a) Organization. Buyer is a nonprofit corporation duly organized, validly existing and in good standing under the laws of the State of Arizona and has the power and authority to (i) enter into this Agreement and the Related Agreements, and (ii) consummate the transaction contemplated by this Agreement and the Related Agreements.

(b) Due Authorization; Enforceability; No Conflicts. The execution, delivery and performance of this Agreement and each Related Agreement by Buyer have each been duly authorized by all necessary action on the part of Buyer; provided that Buyer is a nonprofit corporation and does not have outstanding capital stock and, accordingly, no vote or consent of the holders of any class or series of capital stock of Buyer is necessary to approve this Agreement or the Related Agreements or the transactions contemplated hereby. This Agreement and each Related Agreement (i) have been duly executed and delivered by Buyer and (ii) constitute the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with their terms, subject to the effect of bankruptcy, insolvency, reorganization,

 

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arrangement, moratorium, fraudulent conveyance or other similar laws affecting creditors generally. Buyer’s execution, delivery and performance of this Agreement and the Related Agreements do not (i) constitute a breach or violation of Buyer’s articles of incorporation or bylaws, (ii) constitute a breach or violation of any law, rule, regulation, material agreement, indenture, deed of trust, mortgage, loan agreement or any material instrument to which Buyer is a party or by which Buyer is bound or affected, or (iii) constitute a violation of any order, judgment or decree by which Buyer is bound or affected, except in each case for any such breach or violation that would not impair Buyer’s ability to timely perform its obligations under this Agreement or the Related Agreements or to consummate the transactions contemplated hereby or thereby.

(c) Legal Proceedings. There are no Actions pending or, to Buyer’s knowledge, threatened against or by Buyer or any Affiliate of Buyer that challenge or seek to prevent, enjoin or otherwise delay the transactions contemplated by this Agreement.

(d) Broker. No broker, finder or investment banker is entitled to any brokerage, finder’s or other fee or commission payable by Seller in connection with the transactions contemplated by this Agreement or any of the Related Agreements based upon arrangements made by or on behalf of, or executed by, Buyer.

(e) No Other Representations or Warranties. Except for the representations and warranties contained in Section 5.1, Buyer acknowledges that (i) Buyer accepts the Campus Property “as is where is” with no representation or warranty of Seller as to the condition thereof, (ii) neither Seller nor any other Person on behalf of Seller makes any other express or implied representation or warranty with respect to Seller, the University or the School Assets or with respect to any other information provided to Buyer in connection with the transactions contemplated by this Agreement or the Related Agreements, and (iii) except in the case of fraud or intentional misrepresentation, neither Seller nor any other Person will have or be subject to any liability or indemnification obligation to Buyer or any other Person resulting from the distribution to Buyer, or Buyer’s use of, any such information, including any information, documents, projections, forecasts or other material made available to Buyer in certain “data rooms” or management presentations or in any other form in expectation of, or in connection with, the transactions contemplated by this Agreement, including in management presentations, “data rooms” or via any Representative or other Person.

(f) Tax Matters. Buyer is an organization described in Section 501(c)(3) of the Code and is qualified to operate an educational organization described in Code Section 170(b)(1)(A)(ii). Buyer has provided a determination letter from the Internal Revenue Service confirming the same.

(g) Compliance with Laws; Education Consents. None of Buyer, any Person that exercises Substantial Control over Buyer, or member of such Person’s family (as the term “family” is defined in 34 C.F.R. §600.21(f)), alone or together, (i) exercises or exercised Substantial Control over any institution or over a third-party servicer (as that term is defined in 34 C.F.R. §668.2) that owes a liability for a violation of a Title IV Program or other HEA program requirement, or (ii) owes a liability for a Title IV Program or other HEA program violation. At no time has Buyer, or any Affiliate of Buyer, or any Person that exercises

 

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Substantial Control over any of them, filed for relief in bankruptcy or had entered against it an order for relief in bankruptcy. Neither Buyer, nor any Person that exercises Substantial Control over Buyer, has pled guilty to, has pled nolo contendere to, or has been found guilty of a crime involving the acquisition, use, or expenditure of funds under the Title IV Programs or has been judicially determined to have committed fraud involving funds under the Title IV Programs. To Buyer’s knowledge, Buyer does not currently employ any individual or entity in a capacity that involves the administration or receipt of funds under the Title IV Programs, or contracted with any institution or third-party servicer, which has been terminated under the Title IV Programs for a reason involving the acquisition, use, or expenditure of federal, state or local government funds, or has been convicted of, or has pled nolo contendere or guilty to, a crime involving the acquisition, use or expenditure of federal, state, or local government funds, or has been administratively or judicially determined to have committed fraud or any other material violation of law involving federal, state, or local government funds.

(h) Scope of Representations and Warranties. EXCEPT AS SPECIFICALLY PROVIDED IN THIS AGREEMENT OR THE RELATED AGREEMENTS, BUYER IS NOT MAKING ANY REPRESENTATION, WARRANTY OR COVENANT OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY.

6. POST-CLOSING COVENANTS.

6.1 Access to Business and Records; Inspection.

(a) Upon Seller’s request, Buyer will provide to Seller, at no cost to Seller, copies of all final feasibility studies, reports and surveys prepared by third-party consultants on behalf of Buyer in connection with its investigations, inspections, and reviews of the Campus Property (the “Buyer Materials”) with respect to the transactions contemplated by this Agreement. Buyer does not warrant or represent to Seller the accuracy, sufficiency or completeness of the matters contained or depicted in any Buyer Materials. To the extent Buyer has or will engage any third party preparer of Buyer Materials, Buyer has obtained, or will obtain, the consent of each such third party preparer to enable Buyer to supply such Buyer Materials to Seller and enable Seller to rely on such Buyer Materials (or have such Buyer Materials issued jointly to Seller and Buyer); Buyer shall not, however, be obligated to incur any additional cost to obtain such consents or joint issuance.

(b) On and after the Effective Date, Seller will afford promptly to Buyer and its representatives reasonable access to Seller’s books of account, financial and other records, information, employees and auditors in connection with any audit, investigation, dispute or litigation or any other reasonable business purpose relating to the University, the School Assets or the Assumed Liabilities.

6.2 Post-Closing Regulatory Matters and Approvals.

(a) Buyer and Seller will cooperate with each other and will take all commercially reasonable steps, and proceed diligently and in good faith, jointly and promptly, to submit and make all applications, notices and submissions (or amendments to any of the foregoing previously submitted) with the DOE and other Educational Agencies in order for

 

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Buyer to obtain all Permits of any Educational Agency which must be obtained after the Closing, as required, in order for the University to operate as it is currently operated and for the University to participate in all of the Student Financial Assistance Programs, including the Title IV Programs, under the ownership of Buyer (collectively, the “Post-Acquisition Education Consents”, identified as such in Schedule 6.2(a)); provided, however, that Buyer shall not file any application, notice or other submission to the DOE, any Educational Agency or any Accrediting Body without providing Seller a reasonable opportunity to review such application, notice or other submission and without obtaining the consent of Seller (which consent shall not be unreasonably withheld or delayed).

(b) Each Party shall (and shall cause its Affiliates to) use commercially reasonable best efforts to take or cause to be taken all actions reasonably necessary consistent with this Section 6.2, including to comply promptly and fully with any inquiries or requests for information from Governmental Entities and to obtain any post-Closing clearance, waiver, approval or authorization required with respect to the DOE, any Educational Agency and any Accrediting Body, and any other applicable Laws after the Closing.

(c) Each Party shall, subject to applicable Law, (i) promptly notify the other Parties of any communication to that Party from any Governmental Entity and any Educational Agency with respect to this Agreement and the Related Agreements and the transactions contemplated hereby and permit the other Parties to review in advance any proposed written communication to any such Governmental Entity, (ii) not agree to participate in any meeting (whether in-person or by telephone or similar means) with any such Governmental Entity in respect of any filings, investigation or other inquiry with respect to this Agreement, the Related Agreements, and the transactions contemplated hereby unless it consults with the other Party in advance and, to the extent permitted by such Governmental Entity, gives the other Party the reasonable opportunity to attend and participate thereat, (iii) furnish the other Party with copies of all correspondence, filings and communications (and memoranda setting forth the substance thereof) between it and its Affiliates and representatives, on the one hand, and any such Governmental Entity or members of its staff on the other hand, with respect to this Agreement, the Related Agreements and the transactions contemplated hereby and thereby (excluding documents and communications which are subject to preexisting confidentiality agreements and to the attorney-client privilege or work product doctrine, provided, that the Parties shall use reasonable best efforts to minimize the scope of this parenthetical by entering into reasonable joint defense arrangements) and (iv) furnish the other Party with such information and assistance as the other Party and its Affiliates may reasonably request in connection with their preparation of necessary filings, registrations, or submissions of information to any such Governmental Entity in connection with this Agreement and the transactions contemplated hereby.

6.3 Transferred Employees.

(a) Schedule 6.3(a)-1 identifies all of the current employees of Seller to whom Buyer will make offers of employment at Closing (the “Transferred Employees”), Schedule 6.3(a)-2 identifies all of the current employees of Seller who will remain as employees of Seller following the Closing, and Schedule 6.3(a)-3 identifies each of the current employees of Seller who will be jointly employed by Seller and Buyer following the Closing, in each case noting the applicable employee’s name, title and organizational department. Effective as of the Closing,

 

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Buyer agrees to offer employment to, all Transferred Employees. For at least the first year following the Effective Date (the “Benefit Continuation Period”), and except as otherwise required by Applicable Law, Buyer shall provide for each Transferred Employee who is employed by Buyer compensation and benefits that are no less favorable in the aggregate than those provided immediately prior to the Effective Date by Seller to such Transferred Employees pursuant to Seller’s employee compensation and benefit plans. In addition, with respect to any Transferred Employees who, prior to the Effective Date, had received equity incentives granted by Seller as part of their overall compensation, Buyer shall provide such additional non-equity incentives as may be necessary, as reasonably determined by Buyer, to compensate for the loss of eligibility to receive equity incentives from Seller following the Effective Date. Without limiting the generality of the foregoing, for all Transferred Employees, Buyer shall recognize all service of such employees with Seller for purposes of Buyer’s applicable employee benefit plans.

(b) For purposes of determining eligibility to participate, vesting and entitlement to benefits, where length of service is relevant under any benefit plan or arrangement of Buyer providing benefits to any Transferred Employee after the Effective Date (collectively, the “New Plans”), the Transferred Employees shall receive service credit for service with Seller to the same extent such service credit was granted under Seller’s employee benefit plans, except to the extent any such service credit would result in the duplication of benefits. In addition and without limiting the generality of the foregoing: (i) each Transferred Employee shall be immediately eligible to participate, without any waiting time or satisfaction of any other eligibility requirements, in any and all New Plans to the extent that (A) coverage under such New Plan replaces coverage under an employee benefit plan of Seller in which such Transferred Employee participated immediately before the Effective Date (collectively, the “Old Plans”) and (B) such Transferred Employee has satisfied all waiting time and other eligibility requirements under the Old Plan being replaced by the New Plan and (ii) for purposes of each New Plan providing medical, dental, pharmaceutical and/or vision benefits to any Transferred Employee, Buyer shall cause (A) all pre-existing condition exclusions and actively-at-work requirements of such New Plan to be waived for such Transferred Employee and his or her covered dependents to the extent such conditions were inapplicable or waived under the comparable Old Plan and (B) any expenses incurred by any Transferred Employee and his or her covered dependents during the portion of the plan year of the Old Plan ending on the date such Transferred Employee’s participation in the corresponding New Plan begins to be taken into account under such New Plan for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements applicable to such Transferred Employee and his or her covered dependents for the applicable plan year as if such amounts had been paid in accordance with such New Plan.

(c) Nothing contained in this Agreement is intended (i) to require Buyer to employ any employee who cannot establish legal eligibility to work in the United States, who does not provide routine intake records and forms, or who otherwise does not satisfactorily pass a screening protocol substantially similar to that customarily used by Seller, (ii) to prevent Buyer from, in its sole and absolute discretion, terminating any employee at any time, with or without cause, (iii) to require Buyer or Seller or any of their respective Affiliates to establish or maintain any specific employee benefit plan or arrangement for any length of time except as specifically set forth in this Section 6.3, or (iv) to create or amend any employee benefit plan or arrangement except as specifically contemplated in this Section 6.3. This Section 6.3 is included for the sole benefit of the Parties and their respective transferees and permitted assigns and does not and

 

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shall not create any right in any Person, including any Transferred Employee or any other participant in any employee benefit plan or arrangement that may be established or maintained by Buyer or Seller or any of their respective Affiliates following Effective Date, or any beneficiary or trustee thereof. Furthermore, nothing contained in this Agreement, express or implied, is intended to confer upon any Person, any right to employment or continued employment for any period of time, or any right to a particular term or condition of employment.

(d) Notwithstanding anything to the contrary contained in this Agreement:

(i) Seller shall be solely responsible, and Buyer shall have no obligations whatsoever for, any compensation or other amounts payable to any Transferred Employee or other current or former employee, officer, director, independent contractor or consultant of Seller, including, without limitation, hourly pay, commission, bonus, salary, accrued vacation, fringe, pension or profit sharing benefits or severance pay, for any period relating to their service with Seller at any time prior to the Effective Date, and Seller shall pay all such amounts to all entitled persons as and when due;

(ii) Seller shall remain solely responsible for the satisfaction of all claims for medical, dental, life insurance, health accident or disability benefits brought by or in respect of any Transferred Employee or other current or former employee, officer, director, independent contractor or consultant of Seller or any spouse, dependent or beneficiary thereof, which claims relate to events occurring prior to the Effective Date, and Seller shall pay, or cause to be paid, all such amounts to the appropriate persons as and when due; and

(iii) Seller also shall remain solely responsible for all worker’s compensation claims of any Transferred Employee and any current or former employee, officers, director, independent contractor or consultant of Seller which relate to events occurring prior to the Effective Date, and Seller shall pay, or cause to be paid, all such amounts to the appropriate persons as and when due.

(e) Seller and Buyer agree to utilize, or cause their respective Affiliates to utilize, the alternate procedure set forth in Revenue Procedure 2004-53 with respect to wage reporting.

6.4 Accounts Receivable. Effective at the Effective Date, Seller hereby constitutes and appoints Buyer, and Buyer’s successors and assigns, its true and lawful attorney at Buyer’s sole cost and expense (subject to the terms of this Agreement), in the name of Seller to institute and prosecute all reasonable proceedings which Buyer may deem proper in order to collect, assert or enforce any claim, right or title the accounts receivable related to the University and included within the School Assets.

6.5 Further Assurances. Each Party will execute and deliver any further instruments or documents, and cooperate with and take all further action reasonably requested by the other Party to carry out the transactions contemplated by this Agreement and the Related Agreements. In particular, following the Closing, Seller will take all reasonable steps to transfer to Buyer, without additional consideration, any Seller assets not otherwise transferred to Buyer under this Agreement that are either intended by the Parties to be included among the School Assets or

 

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required by any applicable Educational Agency to be owned by Buyer for accreditation purposes in connection with the operation of the University as a regionally accredited institution of higher education.

6.6 Insurance Matters. Seller and Buyer agree that (a) all claims with respect to insured events relating to Seller, the University or the School Assets occurring prior to the Closing will be administered in accordance with the terms of Seller’s policies and coverage applicable to such claims (the “Pre-Closing Insurance”), (b) Buyer will receive the benefit of such policies and an assignment of all proceeds with respect to such claims to the extent losses occurring prior to the Closing are related to the University or the School Assets and are covered notwithstanding the consummation of the transactions contemplated by this Agreement, (c) Buyer may make claims under such policies and programs to the extent such policies and programs are related to the University and the School Assets and are available and Seller shall cooperate with Buyer and shall take such actions as may reasonably be requested by Buyer in connection with the tendering of such claims to the applicable insurers under such Pre-Closing Insurance and to provide Buyer with the net proceeds it realizes with respect to such claims and (d) Seller shall not take any action or omit to take any action for the purpose of limiting Buyer’s ability to make all claims and recover proceeds in respect hereof.

6.7 Third Party Assignments. To the extent that any Assumed Contract or Permit that this Agreement contemplates is to be assigned to Buyer is not assignable without the consent or approval of a third party (for purposes of this Section 6.7, collectively, the “Special Agreements and Rights”), then neither this Agreement nor any agreement, document or instrument delivered pursuant to this Agreement shall constitute an assignment or an attempted assignment of any such Special Agreement and Right if such consent or approval is not obtained. If such consent or approval has not been obtained prior to Closing, the Buyer, on the one hand, and Seller, on the other hand, shall use all commercially reasonable efforts to obtain any such consent or approval after the Closing until either such consent or approval has been obtained or the Parties determine in good faith that such consent or approval cannot reasonably be obtained. To the extent that any Assumed Contract or Permit may not be assigned without the consent or approval of any third party, and such consent or approval is not obtained prior to the Closing, Seller shall use all commercially reasonable efforts to provide Buyer with the same benefits (and Buyer shall be responsible for all corresponding obligations) arising under such Assumed Contract or Permit, including performance by Seller (or Buyer, if applicable) as agent, if legally permissible and commercially feasible; provided, however, that Buyer (or Seller, if applicable) shall provide the Seller (or Buyer, if applicable) with such access to the premises, books and records and personnel as is reasonably necessary to enable Seller (or Buyer, if applicable) to perform its obligations under such Assumed Contracts or Permits and Buyer shall pay or satisfy the corresponding liabilities for the enjoyment of such benefits to the extent Buyer would have been responsible therefor if such consent or approval had been obtained. Seller shall not be in default of this Agreement for failure to obtain such necessary consent to assignment of any Special Agreements and Rights so long as Seller has used commercially reasonable efforts to obtain such consent. For the avoidance of doubt, and unless expressly waived in writing by Buyer, nothing in this Section 6.7 shall be construed to waive Seller’s delivery at Closing of all Required Consents as required by Section 4.2(l), including, without limitation, Required Consents relating to Special Agreements and Rights.

 

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6.8 Public Announcements. Unless otherwise required by applicable Law or stock exchange requirements (based upon the reasonable advice of counsel), no Party to this Agreement shall make any public announcements in respect of this Agreement or the transactions contemplated hereby or otherwise communicate with any news media without the prior written consent of the other Party (which consent shall not be unreasonably withheld or delayed), and the Parties shall cooperate as to the timing and contents of any such announcement.

7. SURVIVAL AND INDEMNIFICATION.

7.1 Survival. Subject to the limitations and other provisions of this Agreement, the representations and warranties contained herein shall survive the Closing and shall remain in full force and effect until the date that is 12 months after from the Effective Date; provided, that the representations and warranties in (i) Section 5.1(a) (Organization), Section 5.1(b) (Due Authorization; Enforceability; No Conflicts), Section 5.1(c) (Title; Ownership), Section 5.1(s) (Broker), Section 5.2(a) (Organization), Section 5.2(b) (Due Authorization; Enforceability; No Conflicts), and Section 5.1(d) (Broker) shall survive indefinitely, (ii) Section 5.1(k) (Compliance with Laws and Educational Laws) shall survive for a period of 24 months after the Closing, and (iii) Section 5.1(i) (Tax Matters), Section 5.1(q) (Environmental Matters), and Section 5.1(r) (Employee Benefits) shall survive for the full period of all applicable statutes of limitations (giving effect to any waiver, mitigation or extension thereof) plus 60 days (the representations and warranties in the sections enumerated in the foregoing sentence are referred to below as the “Fundamental Representations”). All covenants and agreements of the parties contained herein shall survive the Closing indefinitely or for the period explicitly specified therein. Notwithstanding the foregoing, any claims asserted in good faith with reasonable specificity (to the extent known at such time) and in writing by notice from the non-breaching party to the breaching party prior to the expiration date of the applicable survival period shall not thereafter be barred by the expiration of the relevant representation or warranty and such claims shall survive until finally resolved.

7.2 Indemnification By Seller. Subject to the other terms and conditions of this Section 7, Seller shall indemnify and defend each of Buyer, and Buyer’s trustees, officers and employees (collectively, the “Buyer Indemnitees”) against, and shall hold each of them harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained by, or imposed upon, the Buyer Indemnitees based upon, arising out of, with respect to or by reason of:

(a) any inaccuracy in or breach of any of the representations or warranties of Seller contained in this Agreement, the Related Agreements or in any certificate or instrument delivered by or on behalf of Seller pursuant to this Agreement or the Related Agreements (provided, that for representations and warranties that expressly relate to a specified date, the inaccuracy in or breach of which will be determined with reference to such specified date);

(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Seller pursuant to this Agreement, the Related Agreements or any certificate or instrument delivered by or on behalf of Seller pursuant to this Agreement;

 

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(c) any Services Assets; or

(d) any Excluded Liability.

7.3 Indemnification By Buyer. Subject to the other terms and conditions of this Section 7, Buyer shall indemnify and defend each of Seller, and Seller’s directors, officers and employees (collectively, the “Seller Indemnitees”) against, and shall hold each of them harmless from and against, and shall pay and reimburse each of them for, any and all Losses incurred or sustained by, or imposed upon, the Seller Indemnitees based upon, arising out of, with respect to or by reason of:

(a) any inaccuracy in or breach of any of the representations or warranties of Buyer contained in this Agreement, the Related Agreements or in any certificate or instrument delivered by or on behalf of Buyer pursuant to this Agreement or the Related Agreements (provided that for representations and warranties that expressly relate to a specified date, the inaccuracy in or breach of which will be determined with reference to such specified date);

(b) any breach or non-fulfillment of any covenant, agreement or obligation to be performed by Buyer pursuant to this Agreement, the Related Agreements or any certificate or instrument delivered by or on behalf of Seller pursuant to this Agreement; or

(c) any Assumed Liability.

7.4 Certain Limitations. The party making a claim under this Section 7 is referred to as the “Indemnified Party”, and the party against whom such claims are asserted under this Section 7 is referred to as the “Indemnifying Party”. The indemnification provided for in Section 7.2 and Section 7.3 shall be subject to the following limitations:

(a) No Indemnifying Parties, individually or collectively, shall be obligated to indemnify any Indemnified Parties, individually or collectively, under Section 7.2(a) or Section 7.3(a) with respect to any claim which is not brought prior to the expiration of the corresponding survival period set forth in Section 7.1. In addition, the aggregate amount of all Losses for which an Indemnifying Party shall be liable pursuant to Section 7.2(a) or Section 7.3(a), as the case may be, shall not exceed ten percent (10%) of the Purchase Price. Notwithstanding the foregoing, the limitations set forth in this Section 7.4(a) shall not apply to indemnification claims under Section 7.2(a) or Section 7.3(a) arising out of any inaccuracy in or breach of any of the Fundamental Representations or as a result of fraud or intentional misrepresentation by the Indemnifying Party.

(b) Payments by an Indemnifying Party pursuant to Section 7.2 or Section 7.3 in respect of any Loss shall be limited to the amount of any Loss that remains after deducting therefrom any insurance proceeds and any indemnity, contribution or other similar payment received or reasonably expected to be received by the Indemnified Party in respect of any such claim. The Indemnified Party shall use its commercially reasonable efforts to recover under insurance policies or indemnity, contribution or other similar agreements for any Losses prior to seeking indemnification under this Agreement.

 

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(c) In no event shall any Indemnifying Party be liable to any Indemnified Party for any punitive, incidental, consequential, special or indirect damages, including loss of future revenue or income, loss of business reputation or opportunity relating to the breach or alleged breach of this Agreement, or diminution of value or any damages based on any type of multiple.

(d) Each Indemnified Party shall take, and cause its Affiliates to take, all reasonable steps to mitigate any Loss upon becoming aware of any event or circumstance that would be reasonably expected to, or does, give rise thereto, including incurring costs only to the minimum extent necessary to remedy the breach that gives rise to such Loss.

7.5 Indemnification Procedures.

(a) Third Party Claims. If any Indemnified Party receives notice of the assertion or commencement of any Action made or brought by any Person who is not a party to this Agreement or an Affiliate of a party to this Agreement or a Representative of the foregoing (a “Third Party Claim”) against such Indemnified Party with respect to which the Indemnifying Party is obligated to provide indemnification under this Agreement, the Indemnified Party shall give the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) calendar days after receipt of such notice of such Third Party Claim (or not later than ten (10) days after the receipt of any such written notice in the event such written notice is in the form of a formal complaint filed with a court of competent jurisdiction and served on the Indemnified Party). The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses, or otherwise suffers any material prejudice or material harm, with respect to such claim by reason of such failure. Such notice by the Indemnified Party shall describe the Third Party Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have the right to participate in, or by giving written notice to the Indemnified Party, to assume the defense of any Third Party Claim at the Indemnifying Party’s expense and by the Indemnifying Party’s own counsel, and the Indemnified Party shall cooperate in good faith in such defense. In the event that the Indemnifying Party assumes the defense of any Third Party Claim, subject to Section 7.5(b), it shall have the right to take such action as it deems necessary to avoid, dispute, defend, appeal or make counterclaims pertaining to any such Third Party Claim in the name and on behalf of the Indemnified Party. The Indemnified Party shall have the right to participate in the defense of any Third Party Claim at its own cost and expense and with counsel selected by it subject to the Indemnifying Party’s right to control the defense thereof; provided, that if in the reasonable opinion of counsel to the Indemnified Party, (A) there are legal defenses available to an Indemnified Party that are different from or additional to those available to the Indemnifying Party; or (B) there exists a conflict of interest between the Indemnifying Party and the Indemnified Party that cannot be waived, the Indemnifying Party shall be liable for the reasonable fees and expenses of a single counsel to the Indemnified Party in each jurisdiction for which the Indemnified Party determines counsel is required. If the Indemnifying Party elects not to compromise or defend such Third Party Claim, fails to promptly notify the Indemnified Party in writing of its election to defend as provided in this Agreement, or fails to diligently prosecute the defense of such Third Party Claim, the

 

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Indemnified Party may, subject to Section 7.5(b), pay, compromise, or defend such Third Party Claim using its reasonable business judgment and seek indemnification for any and all Losses based upon, arising from or relating to such Third Party Claim. Seller and Buyer shall cooperate with each other in all reasonable respects in connection with the defense of any Third Party Claim, including making available (subject to the provisions of Section 8.10) records relating to such Third Party Claim and furnishing, without expense (other than reimbursement of actual out-of-pocket expenses) to the defending party, management employees of the non-defending party as may be reasonably necessary for the preparation of the defense of such Third Party Claim.

(b) Settlement of Third Party Claims. Notwithstanding any other provision of this Agreement, the Indemnifying Party shall not enter into settlement of any Third Party Claim without the prior written consent of the Indemnified Party, except as provided in this Section 7.5(b). If a firm offer is made to settle a Third Party Claim without leading to Liability or the creation of a financial or other obligation on the part of the Indemnified Party and provides, in customary form, for the unconditional release of each Indemnified Party from all liabilities and obligations in connection with such Third Party Claim and the Indemnifying Party desires to accept and agree to such offer, the Indemnifying Party shall give written notice to that effect to the Indemnified Party. If the Indemnified Party fails to consent to such firm offer within ten (10) days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third Party Claim and in such event, the maximum liability of the Indemnifying Party as to such Third Party Claim shall not exceed the amount of such settlement offer. If the Indemnified Party fails to consent to such firm offer and also fails to assume defense of such Third Party Claim, the Indemnifying Party may settle the Third Party Claim upon the terms set forth in such firm offer to settle such Third Party Claim. If the Indemnified Party has assumed the defense pursuant to Section 7.5(a), it shall not agree to any settlement without the written consent of the Indemnifying Party (which consent shall not be unreasonably withheld or delayed).

(c) Direct Claims. Any Action by an Indemnified Party on account of a Loss which does not result from a Third Party Claim (a “Direct Claim”) shall be asserted by the Indemnified Party giving the Indemnifying Party reasonably prompt written notice thereof, but in any event not later than thirty (30) days after the Indemnified Party becomes aware of such Direct Claim. The failure to give such prompt written notice shall not, however, relieve the Indemnifying Party of its indemnification obligations, except and only to the extent that the Indemnifying Party forfeits rights or defenses, or otherwise suffers any material prejudice or material harm, with respect to such claim by reason of such failure. Such notice by the Indemnified Party shall describe the Direct Claim in reasonable detail, shall include copies of all material written evidence thereof and shall indicate the estimated amount, if reasonably practicable, of the Loss that has been or may be sustained by the Indemnified Party. The Indemnifying Party shall have thirty (30) days after its receipt of such notice to respond in writing to such Direct Claim. The Indemnified Party shall allow the Indemnifying Party and its professional advisors to investigate the matter or circumstance alleged to give rise to the Direct Claim, and whether and to what extent any amount is payable in respect of the Direct Claim and the Indemnified Party shall assist the Indemnifying Party’s investigation by giving such information and assistance (including access to the Indemnified Party’s premises and personnel and the right to examine and copy any accounts, documents or records) as the Indemnifying Party or any of its professional advisors may reasonably request. If the Indemnifying Party does not so respond within such thirty (30) day period, the Indemnifying Party shall be deemed to

 

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have rejected such claim, in which case the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party on the terms and subject to the provisions of this Agreement.

7.6 Effect of Investigation. The representations, warranties and covenants of the Indemnifying Party, and the Indemnified Party’s right to indemnification with respect thereto, shall not be affected or deemed waived by reason of any investigation made by or on behalf of the Indemnified Party (including by any of its Representatives) or by reason of the fact that the Indemnified Party or any of its Representatives knew or should have known that any such representation or warranty is, was or might be inaccurate or by reason of the Indemnified Party’s waiver of any closing delivery set forth in Section 4.

7.7 Exclusive Remedies. Except as otherwise expressly provided in this Agreement, the Parties acknowledge and agree that, following the Closing, their sole and exclusive remedy with respect to any and all claims (other than claims arising from fraud, criminal activity or willful misconduct on the part of a Party hereto in connection with the transactions contemplated by this Agreement) for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement, shall be pursuant to the indemnification provisions set forth in this Section 7. In furtherance of the foregoing, each party hereby waives, to the fullest extent permitted under Law, any and all rights, claims and causes of action for any breach of any representation, warranty, covenant, agreement or obligation set forth herein or otherwise relating to the subject matter of this Agreement it may have against the other parties hereto and their Affiliates and each of their respective Representatives arising under or based upon any Law, except pursuant to the indemnification provisions set forth in this Section 7. Nothing in this Section 7.7 shall limit any Person’s right to seek and obtain any equitable relief to which any Person shall be entitled or to seek any remedy in connection with the Master Services Agreement (subject to the provisions thereof) or on account of any party’s fraudulent, criminal or intentional misconduct.

8. MISCELLANEOUS.

8.1 No Waiver. No waiver of any breach of any provision of this Agreement will be deemed a waiver of any other breach of this Agreement. No extension of time for performance of any act will be deemed an extension of the time for performance of any other act.

8.2 Severability. The provisions of this Agreement will be deemed severable, and if any provision of this Agreement is held illegal, void or invalid under applicable Law, such provision may be changed to the extent reasonably necessary to make the provision legal, valid and binding. If any provision of this Agreement is held illegal, void or invalid in its entirety, the remaining provisions of this Agreement will not be affected but will remain binding in accordance with their terms.

8.3 Entire Agreement; Amendment; Severability. This Agreement, the Related Agreements and any schedules, exhibits or attachments to such agreements (subject to Section 8.10), contain the entire agreement of the Parties with respect to the purchase and sale of the School Assets and the other transactions contemplated by such agreements. This Agreement may be amended only by an instrument in writing signed by the Parties. The headings in this

 

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Agreement are solely for convenience of reference and will not affect the interpretation of any provision of this Agreement.

8.4 Applicable Law. This Agreement will be construed in accordance with and governed by the laws of the State of Delaware.

8.5 Time is of the Essence. The Parties acknowledge and agree that time is of the essence with respect to the consummation of the transaction contemplated by this Agreement and each Related Agreement.

8.6 Binding Agreement, Assignment. The terms and provisions of this Agreement will bind the Parties and their respective permitted successors and assigns. Seller may collaterally assign its rights under this Agreement and any Related Agreement to a lender to Seller without the consent of Buyer. Except as set forth in the preceding sentence, however, Seller may not assign this Agreement nor any Related Agreement without the prior written consent of Buyer, which consent shall not be unreasonably withheld, conditioned or delayed. Any such assignment or transfer without such consent shall be absolutely null and void. Buyer may collaterally assign its rights under this Agreement and any Related Agreement to a lender to Buyer without the consent of Seller. Except as set forth in the preceding sentence, however, Buyer may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of Seller, which consent shall not be unreasonably withheld, conditioned or delayed. Any such assignment or transfer without such consent shall be absolutely null and void.

8.7 Expenses. Except as otherwise agreed among the parties, each Party will pay all of its expenses, including attorneys’ and accountants’ fees, in connection with the negotiation of this Agreement or any Related Agreement, the performance of its obligations hereunder or thereunder, and the consummation of the transaction contemplated by this Agreement or any Related Agreement.

8.8 Notices. All notices, demands or other communications shall be in writing and shall be deemed to have been received (a) when personally delivered, delivered by facsimile or delivered by other telecommunication mechanism, including electronic mail (provided there is no error or failure in transmission), (b) the next day, if sent by recognized overnight courier, or (c) five (5) days after deposit in the United States mail, postage prepaid, properly addressed and return receipt requested, in each case to the applicable address set forth below:

 

To Seller:

   Grand Canyon Education, Inc.
   2600 West Camelback Road
   Phoenix, Arizona 85017
   Attn: Daniel E. Bachus, Chief Financial Officer
   Email: dan.bachus@gce.com

With copy to:

   DLA Piper LLP (US)
   Attn: David P. Lewis, Esq.
   2525 East Camelback Road, Suite 1100
   Phoenix, AZ 85016
   Email: david.lewis@dlapiper.com

 

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To Buyer:

  

Gazelle University

  

(to be renamed Grand Canyon University)

  

3300 West Camelback Road

  

Phoenix, Arizona 85017

  

Attn: Brian M. Roberts, Chief Administrative Officer

  

Email: brian.roberts@gcu.edu

With copy to:

  

Gallagher & Kennedy, P.A.

  

Attn: Terence W. Thompson, Esq.

  

2575 East Camelback Road, Suite 1100

  

Phoenix, Arizona 85016

  

Email: twt@gknet.com

or such other address as either Party may from time to time specify in writing to the other.

8.9 Counterparts. This Agreement may be executed by facsimile or other electronic signature, in counterparts, which, when taken together, shall constitute one and the same original. The electronic facsimile transmission of any signed original counterpart of this Agreement shall be deemed to be the delivery of an original counterpart of this Agreement.

8.10 Confidentiality. Seller and Buyer will, prior to and after the Closing, keep all non-public information regarding the financial terms of this transaction strictly confidential, except as may be required by applicable Law or otherwise permitted under Section 6.8.

8.11 Arm’s Length Negotiations. Buyer, on the one hand, and Seller, on the other hand expressly represent and warrant to the other that (a) before executing this Agreement, such Party has fully informed itself of the terms, contents, conditions and effects of this Agreement; (b) such Party has relied solely and completely upon its own judgment in executing this Agreement; (c) such Party has had the opportunity to seek and has obtained the advice of counsel before executing this Agreement; (d) such Party has acted voluntarily and of its own free will in executing this Agreement; (e) such Party is not acting under duress, whether economic or physical, in executing this Agreement; and (f) this Agreement is the result of arm’s length negotiations conducted by and among the Parties and their respective counsel.

8.12 Consent to Jurisdiction. Each Party hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of any Arizona state court, or federal court of the United States of America, sitting in the District of Arizona, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement and any Related Agreements or the transactions contemplated hereby or thereby or for recognition or enforcement of any judgment relating thereto, and each Party hereto hereby irrevocably and unconditionally (a) agrees not to commence any such action or proceeding except in such courts; (b) agrees that any claim in respect of any such action or proceeding may be heard and determined in such Arizona state court or, to the extent permitted by law, in such federal court; (c) waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any such action or proceeding in any such Arizona state or federal court; and (d) waives, to the fullest extent permitted by Law,

 

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the defense of an inconvenient forum to the maintenance of such action or proceeding in any such Arizona state or federal court. Both Parties agree that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Both Parties irrevocably consent to service of process in the manner provided for notices in Section 8.8. Nothing in this Agreement will affect the right of either Party to serve process in any other manner permitted by Law.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first written above.

 

BUYER:
GAZELLE UNIVERSITY (to be renamed GRAND CANYON UNIVERSITY), an Arizona nonprofit corporation
By:    /s/ Will Gonzalez
  Name: Will Gonzalez
  Title: Chairman of the Board of Trustees
SELLER:
GRAND CANYON EDUCATION, INC., a Delaware corporation
By:    /s/ Daniel E. Bachus
  Name: Daniel E. Bachus
  Title: Chief Financial Officer

[Signature Page to Asset Purchase Agreement]

EX-10.1

Exhibit 10.1

SECOND AMENDED AND RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

(Chief Executive Officer)

This Second Amended and Restated Executive Employment Agreement (the “Agreement”) is entered into on July 1, 2018 and is effective as of July 1, 2018 (the “Effective Date”), by and between Grand Canyon Education, Inc., a Delaware corporation (the “Company”), and Brian E. Mueller (“Executive”).

WHEREAS, the Company and Executive are parties to an amended and restated employment agreement dated July 30, 2012 and effective July 1, 2012 (as amended, the “Original Agreement”);

WHEREAS, Executive has agreed to become the President of Grand Canyon University, an Arizona nonprofit corporation formerly known as Gazelle University (the “University”), and the Company has consented to such employment; and

WHEREAS, the Company and Executive desire to amend and restate the Original Agreement through the execution and delivery of this Agreement to reflect Executive’s simultaneous employment by both the Company and the University;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment. The Company desires to continue to employ Executive, and Executive desires to continue such employment, upon the terms and conditions set forth herein.

2. Duties.

2.1 Position. Executive is employed as Chief Executive Officer and shall have the duties and responsibilities reasonably assigned to Executive from time to time by the Company’s Board of Directors (the “Board”). Executive shall perform faithfully and diligently all duties assigned to Executive. The Company reserves the right to modify Executive’s position and duties at any time in its sole and absolute discretion, except that any material diminution in Executive’s duties shall be subject to Section 7.3(ii).

2.2 Best Efforts/Dual Employment.

(a) Executive will expend Executive’s best efforts on behalf of the Company in the performance of duties assigned to Executive under this Agreement, and will abide by all policies and decisions made by the Company, as well as all applicable federal, state and local laws, regulations or ordinances. Executive will act in the best interest of the Company at all times in the performance of duties assigned to Executive under this Agreement.

(b) The parties acknowledge that Executive, with the Company’s consent, is or will be employed in an executive capacity by the University. The parties anticipate that Executive will be able to satisfactorily perform the duties assigned to Executive under this Agreement notwithstanding Executive’s simultaneous employment by the University. Executive represents and warrants that Executive shall devote not less than fifty percent (50%) of Executive’s business time and efforts over the course of any reasonably representative time

 

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period (but not less than one week) to the performance of duties assigned to Executive under this Agreement. Executive shall not engage in any other paid work, other than his simultaneous employment by the University, unless Executive notifies the Board or its designee in advance of Executive’s intent to engage in other paid work and receives the express written consent of the Board or its designee to do so.

(c) Notwithstanding the foregoing, Executive will be permitted to serve as an outside director on the board of directors for corporate, civic, nonprofit or charitable entities, so long as Executive obtains the consent of the Board and provided such entities are not competitive with the Company and subject to the provisions of Section 9.

2.3 Work Location. Executive’s principal place of work shall be located in Phoenix, Arizona, or such other location as the Company may direct from time to time.

3. Term.

3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for an initial term commencing on the Effective Date and continuing for a period of five (5) years following such date (the “Initial Term”), unless sooner terminated in accordance with Section 7.

3.2 Renewal. Upon expiration of the Initial Term and each Renewal Term, this Agreement will automatically renew for subsequent one (1) year terms (each a “Renewal Term”) unless either party provides ninety (90) days’ advance written notice to the other that the Company or Executive does not wish to renew the Agreement for a subsequent Renewal Term. In the event either party gives notice of nonrenewal pursuant to this Section 3.2, this Agreement will expire at the end of the then current term. The Initial Term and each subsequent Renewal Term are referred to collectively as the “Term”.

4. Compensation.

4.1 Base Salary. As compensation for Executive’s performance of Executive’s duties hereunder, effective beginning on the Effective Date the Company shall pay to Executive an initial Base Salary at the rate of Three-Hundred Twenty-One Thousand Dollars ($321,000.00) per year, payable in accordance with the normal payroll practices of the Company, less required deductions for state and federal withholding tax, social security and all other employment taxes and payroll deductions. Executive’s Base Salary will be reviewed annually by the Compensation Committee of the Board (the “Compensation Committee”) and adjustments, if any, will be made at that time. In the event Executive’s employment under this Agreement is terminated by either party, for any reason, Executive will earn the Base Salary prorated to the date of termination, except as otherwise set forth herein.

4.2 Incentive Compensation. Executive will be eligible to earn incentive compensation in the form of an annual bonus for each fiscal year of the Company, to be awarded under the Company’s annual cash incentive plan as then in effect, with a target amount equal to one hundred percent (100%) of Executive’s Base Salary (the “Target Bonus”). Executive’s Target Bonus will be reviewed annually by the Compensation Committee and adjustments, if any, will be made at that time. The Compensation Committee will determine the actual amount of the bonus earned by Executive for any year, which may be more or less than the Target Bonus, and will base such determination upon both the Company’s achievement of overall performance metrics for the year and Executive’s achievement of individual performance metrics as agreed upon by

 

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the Compensation Committee and Executive. Earned bonus amounts, if any, shall be paid within two and one-half months following the end of the applicable Company fiscal year.

4.3 Equity Awards. Executive will be eligible to receive stock, option or other equity awards (each, an “Equity Award”) under the Company’s applicable equity incentive plan as then in effect (the “Plan”), as determined by the Compensation Committee. Any such Equity Award will be subject to the terms and conditions of the Plan and an applicable form of agreement for such Equity Award specified by the Compensation Committee, which Executive will be required to sign as a condition of retaining the Equity Award.

5. Customary Fringe Benefits. Executive will be eligible for all customary and usual fringe benefits generally available to senior management of the Company, subject to the terms and conditions of the Company’s benefit plan documents. The Company reserves the right to change or eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.

6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket business expenses incurred in the performance of Executive’s duties on behalf of the Company. To obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation and will be reimbursed in accordance with the Company’s policies. Any reimbursement Executive is entitled to receive shall (a) be paid no later than the last day of Executive’s tax year following the tax year in which the expense was incurred, (b) not affect or be affected by any other expenses that are eligible for reimbursement in any other tax year of Executive, and (c) not be subject to liquidation or exchange for another benefit.

7. Termination of Executives Employment.

7.1 Termination for Cause by Company. Although the Company anticipates the continuation of a mutually rewarding employment relationship with Executive, the Company may terminate Executive’s employment immediately at any time for Cause. For purposes of this Agreement, “Cause” is defined as: (a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations or otherwise relating to the business of the Company; (b) Executive’s material breach of this Agreement, including, without limitation, any breach of Section 8, Section 9 or Section 11; (c) Executive’s breach of the Company’s Employee Nondisclosure and Assignment Agreement (a signed copy of which was delivered to the Company with the Original Agreement) (the “Nondisclosure Agreement”); (d) Executive’s conviction or entry of a plea of nolo contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude; (e) Executive’s inability to perform the essential functions of Executive’s position, with or without reasonable accommodation, due to a mental or physical disability; (f) Executive’s willful neglect of duties as determined in the sole and exclusive discretion of the Board, provided that Executive has received written notice of the action or omission giving rise to such determination and has failed to remedy such situation to the satisfaction of the Board within thirty (30) days following receipt of such written notice, unless Executive’s action or omission is not subject to cure, in which case no such notice shall be required, or (g) Executive’s death. In the event Executive’s employment is terminated in accordance with this Section 7.1, Executive shall be entitled to receive only Executive’s Base Salary then in effect, prorated to the date of Executive’s termination of employment with the Company (the “Termination Date”), and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions

 

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of this Agreement set forth in Section 14.8. Executive will not be entitled to receive the Severance Package described in Section 7.2. Any termination pursuant to this Section 7.1 shall be evidenced by a resolution or written consent of the Board, and the Company shall provide Executive with a copy of such resolution or written consent, certified by the Secretary of the Company, upon Executive’s written request.

7.2 Termination Without Cause by Company. The Company may terminate Executive’s employment under this Agreement without Cause at any time upon written notice to Executive. In the event of such termination, Executive will receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive a “Severance Package” that shall consist of:

(a) severance in an amount equal to the sum of (i) twelve (12) months of Executive’s Base Salary then in effect on the Termination Date, and (ii) 100% of Executive’s Target Bonus for the fiscal year in which the Termination Date occurs, with the total of such amounts to be payable over twelve (12) months in equal installments in accordance with the Company’s regular payroll cycle, commencing with the first payroll date occurring on or after the 60th day following the Termination Date;

(b) payment by the Company of the premiums required to continue Executive’s group health care coverage under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period (the “COBRA Payment Period”) ending on the earlier of (i) twelve (12) months following the Termination Date or (ii) the date on which Executive becomes eligible for health coverage through another employer, provided in any event that Executive timely elects to continue and remains eligible for these benefits under COBRA; and

(c) acceleration of the vesting of any outstanding time-based Equity Awards to the extent that such Equity Awards would have vested in accordance with their terms had Executive’s employment with the Company continued uninterrupted until the first anniversary of the Termination Date.

Notwithstanding Section 7.2(b), if the Company determines, in its sole discretion, that the payment of the COBRA premiums would result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), or any statute or regulation of similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of providing the COBRA premiums, the Company, in its sole discretion, may elect to instead pay Executive on the first day of each month of the COBRA Payment Period, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “Special Severance Payment,” which shall be treated as part of the Severance Package), for the remainder of the COBRA Payment Period. Executive may, but is not obligated to, use such Special Severance Payment toward the cost of COBRA premiums. All other Company obligations to Executive will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.3 Voluntary Resignation by Executive for Good Reason. Executive may voluntarily resign Executive’s position with the Company for Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation for

 

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Good Reason, Executive will be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive the Severance Package described in Section 7.2. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will be deemed to have resigned for Good Reason if Executive voluntarily terminates Executive’s employment with the Company within ninety (90) days following the first occurrence of a condition constituting Good Reason. “Good Reason” means the occurrence of any of the following conditions without Executive’s written consent, which condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the Company of such condition(s): (i) a material reduction in Executive’s Base Salary as then in effect prior to such reduction, other than as part of a salary reduction program among similar management employees, (ii) a material diminution in Executive’s authority, duties or responsibilities as an employee of the Company as they existed prior to such change, or (iii) a relocation of Executive’s principal place of work which increases Executive’s one-way commute distance by more than fifty (50) miles. Executive will be deemed to have given consent to any condition(s) described in this Section 7.3 if Executive does not provide written notice to the Company of Executive’s intent to exercise Executive’s rights pursuant to this Section within thirty (30) days following the first occurrence of such condition(s).

7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily resign Executive’s position with the Company without Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation without Good Reason, Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.5 Termination After a Change in Control.

(a) Severance Payment; Equity Award Acceleration. If, upon or within twelve (12) months after a Change in Control (as that term is defined below), Executive’s employment is terminated by the Company other than for Cause (as defined in Section 7.1) or Executive resigns for Good Reason (as defined in Section 7.3), then Executive shall be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive (i) the Severance Package described in Section 7.2 and (ii) to the extent not yet vested, but subject to the terms of any agreement governing any such Equity Award, any outstanding Equity Awards granted to Executive by the Company shall vest in full as of the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

(b) Parachute Payments.

(i) Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit Executive would receive pursuant to this Agreement or

 

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otherwise (collectively, the “Payments”) would constitute a “parachute payment” within the meaning of Section 280G of the Code, and, but for this sentence, would be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the aggregate amount of the Payments will be either (i) the largest portion of the Payments that would result in no portion of the Payments (after reduction) being subject to the Excise Tax or (ii) the entire Payments, whichever amount after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments. Any reduction in the Payments required by this Section will be made in the following order: (A) reduction of cash payments; (B) reduction of accelerated vesting of Equity Awards other than stock options; (C) reduction of accelerated vesting of stock options; and (D) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of Equity Awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant of such Equity Awards. If two or more Equity Awards are granted on the same date, the accelerated vesting of each award will be reduced on a pro-rata basis.

(ii) The professional firm engaged by the Company for general tax purposes as of the day prior to the date of the event that might reasonably be anticipated to result in Payments that would otherwise be subject to the Excise Tax will perform the foregoing calculations. If the tax firm so engaged by the Company is serving as accountant or auditor for the acquiring company, the Company will appoint a nationally recognized tax firm to make the determinations required by this Section. The Company will bear all expenses with respect to the determinations by the tax firm required to be made by this Section. The Company and Executive shall furnish the tax firm such information and documents as the tax firm may reasonably request in order to make its required determination. The tax firm will provide its calculations, together with detailed supporting documentation, to the Company and Executive as soon as practicable following its engagement. Any good faith determinations of the tax firm made hereunder will be final, binding and conclusive upon the Company and Executive.

(c) Change in Control. A Change in Control is defined as any one of the following occurrences:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), becomes the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total fair market value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition of securities by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition of securities by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

 

6


(ii) the sale or disposition of all or substantially all of the Company’s assets (other than a sale or disposition to one or more subsidiaries of the Company), or any transaction having similar effect is consummated; or

(iii) the Company is party to a merger or consolidation that results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(iv) the dissolution or liquidation of the Company.

7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not to renew this Agreement for a subsequent term in accordance with Section 3.2, this Agreement will expire automatically upon completion of the then effective Term, and Executive’s employment with the Company will thereupon terminate. Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement as set forth in Section 14.8.

7.7 Conditions to Severance Package. Executive will only be entitled to receive the Severance Package if, on or before the 60th day following the Termination Date, Executive executes a full general release, releasing all claims, known or unknown, that Executive may have against the Company and its officers, directors, employees and affiliated companies arising out of or any way related to Executive’s employment or termination of employment with the Company, and the period for revocation, if any, of such release has lapsed without the release having been revoked. In the event that Executive breaches any of the covenants contained in Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”) or 11 (“Non-Competition; Nonsolicitation of Company Employees”), the Company shall have the right to (a) terminate further provision of any portion of the Severance Package not yet paid or provided, (b) seek reimbursement from Executive for any and all portions of the Severance Package previously paid or provided to Executive, (c) recover from Executive all shares of Company stock acquired by Executive pursuant to Equity Awards the vesting of which was accelerated by reason of the Severance Package (or the proceeds therefrom, reduced by any exercise or pursuant price paid to acquire such shares), and (d) immediately cancel all portions of Equity Awards the vesting of which was accelerated by reason of the Severance Package.

7.8 Resignation of Board or Other Positions. Executive agrees that should Executive’s employment terminate for any reason, Executive will immediately resign all other positions (including board membership) Executive may hold on behalf of the Company.

7.9 Application of Section 409A.

(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable pursuant to this Agreement on account of Executive’s termination of employment with the Company which constitutes a “deferral of compensation” within the meaning of the Treasury Regulations issued pursuant to Section 409A of the Code (the “Section 409A

 

7


Regulations”) shall be paid unless and until Executive has incurred a “separation from service” within the meaning of the Section 409A Regulations. Furthermore, if Executive is a “specified employee” within the meaning of the Section 409A Regulations as of the date of Executive’s separation from service, no amount that constitutes a deferral of compensation which is payable on account of Executive’s separation from service shall be paid to Executive before the date (the “Delayed Payment Date”) which is first day of the seventh month after the date of Executive’s separation from service or, if earlier, the date of Executive’s death following such separation from service. All such amounts that would, but for this Section 7.9(a), become payable prior to the Delayed Payment Date will be accumulated and paid on the Delayed Payment Date.

(b) It is the intent of the Company and Executive that any right of Executive to receive installment payments hereunder shall, for all purposes of Section 409A of the Code, be treated as a right to a series of separate payments.

(c) The Company intends that income provided to Executive pursuant to this Agreement will not be subject to taxation under Section 409A of the Code. The provisions of this Agreement shall be interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the Code. However, the Company does not guarantee any particular tax effect for income provided to Executive pursuant to this Agreement. In any event, except for the Company’s responsibility to withhold applicable income and employment taxes from compensation paid or provided to Executive, the Company shall not be responsible for the payment of any applicable taxes incurred by Executive on compensation paid or provided to Executive pursuant to this Agreement.

8. No Violation of Rights of Third Parties. Executive represents and warrants to the Company that Executive is not currently a party, and will not become a party, to any other agreement that is in conflict with, or will prevent Executive from complying with, this Agreement. Executive further represents and warrants to the Company that Executive’s performance of all of the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence any proprietary information, knowledge, or data acquired by Executive in confidence or trust prior to Executive’s employment with the Company. Executive acknowledges and agrees that the representations and warranties in this Section 8 are a material part of this Agreement.

9. Other Covenants. Executive hereby makes the following covenants, each of which Executive acknowledges and agrees are a material part of this Agreement:

9.1 During the Term, Executive will not (a) breach any agreement to keep in confidence any confidential or proprietary information, knowledge or data acquired by Executive prior to Executive’s employment with Company, or (b) disclose to the Company, or use or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or any other third party, including University. Executive acknowledges that the Company has specifically instructed Executive not to breach any such agreement or make any such disclosures to the Company.

9.2 During the Term, Executive will not engage in any work or activity, paid or unpaid, that creates an actual conflict of interest with the Company. Such work shall include, but is not limited to, directly or indirectly competing with the Company in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer, lender, or agent of any business enterprise of the same nature as, or which is in direct competition with, the business in which the Company is now engaged or in which the Company becomes engaged during the Term, as may

 

8


be determined by the Company in its sole discretion. If the Company believes such a conflict exists during the Term, the Company may ask Executive to choose to discontinue the other work or activity or resign employment with the Company. The parties acknowledge and agree that Executive’s simultaneous employment by University shall not be deemed to be a conflict of interest for purposes of this Section 9.2.

9.3 During the Term and after the termination thereof, neither Executive nor the Company will disparage each other, or the Company’s products, services, agents or employees.

9.4 During the Term and after the termination thereof, at the Company’s expense and upon its reasonable request, Executive will cooperate and assist the Company in its defense or prosecution of any disputes, differences, grievances, claims, charges, or complaints between the Company and any third party, which assistance will include testifying on the Company’s behalf in connection with any such matter or performing any other task reasonably requested by the Company in connection therewith.

10. Confidentiality and Proprietary Rights. Executive agrees to continue to abide by the Nondisclosure Agreement, which is incorporated herein by reference.

11. Non-Competition; Nonsolicitation of Companys Employees. Executive acknowledges that in the course of his employment with the Company he will serve as a member of the Company’s senior management and will become familiar with the Company’s trade secrets and with other confidential and proprietary information and that his services will be of special, unique and extraordinary value to the Company. Executive further acknowledges that the Company’s business is national in scope and that the Company, in the course of such business, and competes with other companies located throughout the United States. Therefore, in consideration of the foregoing, Executive agrees that, during the Term, and during the twelve-month (12) month period following the Term, Executive shall not directly or indirectly anywhere within the United States of America (a) own (except ownership of less than 2% of any class of securities which are listed for trading on any securities exchange or which are traded in the over-the-counter market), manage, control, participate in, consult with, render services for, be employed by, or in any manner engage in the operation of (i) a post-secondary education institution (other than the University), (ii) any business that develops or administers services to degree-granting institutions of higher education, or (iii) any other business of the Company in which Executive had significant involvement prior to Executive’s separation; (b) solicit funds on behalf of, or for the benefit of, any post-secondary education institution (other than the University) or any other entity that competes with the Company; (c) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof, or (d) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company to cease doing business with, or modify its business relationship with, the Company, or in any way interfere with or hinder the relationship between any such customer, supplier, licensee or business relation and the Company; provided, however, that Company acknowledges that Executive will serve simultaneously as the President of the University, and that this section of this Agreement shall not apply to or restrict Executive’s performance of any of Executive’s duties in that role with the University.

12. Injunctive Relief. Executive acknowledges that Executive’s breach of the covenants contained in Sections 9, 10 and 11 hereof (collectively “Covenants”) would cause irreparable injury to the Company and agrees that in the event of any such breach, the Company

 

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shall be entitled to seek temporary, preliminary and permanent injunctive relief without the necessity of proving actual damages or posting any bond or other security in addition to any other relief to which the Company may be entitled and other remedies Company may exercise under this Agreement or otherwise.

13. Insurance; Indemnification.

13.1 During the Term, Executive will be covered by the Company’s director and officer insurance policy to the same extent as all other directors and senior executive officers of the Company.

13.2 Following the execution of this Agreement, the director and officer indemnification agreement executed by the Company and Executive will continue in effect in accordance with its terms.

14. General Provisions.

14.1 Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement.

14.2 Waiver. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

14.3 Attorneys’ Fees. In the event of a dispute involving the interpretation or enforcement of this Agreement, a court shall award attorneys’ fees and costs to the prevailing party.

14.4 Severability. In the event any provision of this Agreement is found to be unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

14.5 Interpretation; Construction. The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

14.6 Governing Law; Forum. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of Arizona. Each party consents to the jurisdiction and venue of the state or federal courts in Phoenix, Arizona, if applicable, in any action, suit, or proceeding arising out of or relating to this Agreement, and agrees that the state

 

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or federal courts in Phoenix, Arizona shall have exclusive jurisdiction over any dispute arising between the parties related to this Agreement or Executive’s employment with the Company.

14.7 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth under the signatures below, or such other address as either party may specify in writing.

14.8 Survival. Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”), 11 (“Non-Competition; Nonsolicitation of Company’s Employees”), 12 (“Injunctive Relief”), 14 (“General Provisions”) and 15 (“Entire Agreement”) of this Agreement shall survive termination of Executive’s employment with the Company.

15. Entire Agreement. This Agreement, including the Nondisclosure Agreement incorporated herein by reference, constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral. This Agreement may be amended or modified only with the written consent of Executive and the Board. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

   

EXECUTIVE

Dated: July 1, 2018

   

By:

 

/s/ Brian E. Mueller

   

Name:

 

Brian E. Mueller

   

Address: 

   
       
   

COMPANY

   

Grand Canyon Education, Inc.

Dated: July 1, 2018

   

By:

 

/s/ Daniel E. Bachus

   

Name:

 

Daniel E. Bachus

   

Title:

 

Chief Financial Officer

   

Address:

 

2600 West Camelback Road

Phoenix, Arizona 85017

 

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EX-10.2

Exhibit 10.2

SECOND AMENDED AND RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

(Chief Operating Officer)

This Second Amended and Restated Executive Employment Agreement (the “Agreement”) is entered into on July 1, 2018 and is effective as of July 1, 2018 (the “Effective Date”), by and between Grand Canyon Education, Inc., a Delaware corporation (the “Company”), and W. Stan Meyer (“Executive”).

WHEREAS, the Company and Executive are parties to an amended and restated employment agreement dated July 30, 2012 and effective July 1, 2012 (as amended, the “Original Agreement”), and Executive has been employed with the Company since that time; and

WHEREAS, the Company and Executive desire to amend and restate the Original Agreement through the execution and delivery of this Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment. The Company desires to continue to employ Executive, and Executive desires to continue such employment, upon the terms and conditions set forth herein.

2. Duties.

2.1 Position. Executive is employed as Chief Operating Officer and shall have the duties and responsibilities reasonably assigned to Executive from time to time by the Company’s Chief Executive Officer (“CEO”) or Board of Directors (the “Board”). Executive shall perform faithfully and diligently all duties assigned to Executive. The Company reserves the right to modify Executive’s position and duties at any time in its sole and absolute discretion, except that any material diminution in Executive’s duties shall be subject to Section 7.3(ii).

2.2 Best Efforts/Full-time. Executive will expend Executive’s best efforts on behalf of the Company in the performance of duties assigned to Executive under this Agreement, and will abide by all policies and decisions made by the Company, as well as all applicable federal, state and local laws, regulations or ordinances. Executive will act in the best interest of the Company at all times in the performance of duties assigned to Executive under this Agreement. Executive shall devote Executive’s full business time and efforts to the performance of Executive’s assigned duties for the Company, unless Executive notifies the Board and CEO in advance of Executive’s intent to engage in other paid work and receives the Board’s and CEO’s express written consent to do so. Notwithstanding the foregoing, Executive will be permitted to serve as an outside director on the board of directors for corporate, civic, nonprofit or charitable entities, so long as Executive obtains the consent of the Board and provided such entities are not competitive with the Company and subject to the provisions of Section 9.

2.3 Work Location. Executive’s principal place of work shall be located in Phoenix, Arizona, or such other location as the Company may direct from time to time.

 

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3. Term.

3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for an initial term commencing on the Effective Date and continuing for a period of five (5) years following such date (the “Initial Term”), unless sooner terminated in accordance with Section 7.

3.2 Renewal. Upon expiration of the Initial Term and each Renewal Term, this Agreement will automatically renew for subsequent one (1) year terms (each a “Renewal Term”) unless either party provides ninety (90) days’ advance written notice to the other that the Company or Executive does not wish to renew the Agreement for a subsequent Renewal Term. In the event either party gives notice of nonrenewal pursuant to this Section 3.2, this Agreement will expire at the end of the then current term. The Initial Term and each subsequent Renewal Term are referred to collectively as the “Term”.

4. Compensation.

4.1 Base Salary. As compensation for Executive’s performance of Executive’s duties hereunder, effective beginning on the Effective Date the Company shall pay to Executive an initial Base Salary at the rate of Three-Hundred Ninety Thousand Dollars ($390,000.00) per year, payable in accordance with the normal payroll practices of the Company, less required deductions for state and federal withholding tax, social security and all other employment taxes and payroll deductions. Executive’s Base Salary shall be reviewed annually by the Compensation Committee of the Board (the “Compensation Committee”) and adjustments, if any, will be made at that time. In the event Executive’s employment under this Agreement is terminated by either party, for any reason, Executive will earn the Base Salary prorated to the date of termination, except as otherwise set forth herein.

4.2 Incentive Compensation. Executive will be eligible to earn incentive compensation in the form of an annual bonus for each fiscal year of the Company, to be awarded under the Company’s annual cash incentive plan as then in effect, with a target amount equal to seventy-five percent (75%) of Executive’s Base Salary (the “Target Bonus”). Executive’s Target Bonus shall be reviewed annually by the Compensation Committee and adjustments, if any, will be made at that time The Compensation Committee will determine the actual amount of the bonus earned by Executive for any year, which may be more or less than the Target Bonus, and will base such determination upon both the Company’s achievement of overall performance metrics for the year and Executive’s achievement of individual performance metrics as agreed upon by the Compensation Committee and Executive. Earned bonus amounts, if any, shall be paid within two and one-half months following the end of the applicable Company fiscal year.

4.3 Equity Awards. Executive will be eligible to receive stock, option or other equity awards (each, an “Equity Award”) under the Company’s applicable equity incentive plan as then in effect (the “Plan”), as determined by the Compensation Committee. Any such Equity Award will be subject to the terms and conditions of the Plan and an applicable form of agreement for such Equity Award specified by the Compensation Committee, which Executive will be required to sign as a condition of retaining the Equity Award.

5. Customary Fringe Benefits. Executive will be eligible for all customary and usual fringe benefits generally available to senior management of the Company, subject to the terms and conditions of the Company’s benefit plan documents. The Company reserves the right to change or eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.

 

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6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket business expenses incurred in the performance of Executive’s duties on behalf of the Company. To obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation and will be reimbursed in accordance with the Company’s policies. Any reimbursement Executive is entitled to receive shall (a) be paid no later than the last day of Executive’s tax year following the tax year in which the expense was incurred, (b) not affect or be affected by any other expenses that are eligible for reimbursement in any other tax year of Executive, and (c) not be subject to liquidation or exchange for another benefit.

7. Termination of Executives Employment.

7.1 Termination for Cause by Company. Although the Company anticipates the continuation of a mutually rewarding employment relationship with Executive, the Company may terminate Executive’s employment immediately at any time for Cause. For purposes of this Agreement, “Cause” is defined as: (a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations or otherwise relating to the business of the Company; (b) Executive’s material breach of this Agreement, including, without limitation, any breach of Section 8, Section 9 or Section 11; (c) Executive’s breach of the Company’s Employee Nondisclosure and Assignment Agreement (a signed copy of which was delivered to the Company with the Original Agreement) (the “Nondisclosure Agreement”); (d) Executive’s conviction or entry of a plea of nolo contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude; (e) Executive’s inability to perform the essential functions of Executive’s position, with or without reasonable accommodation, due to a mental or physical disability; (f) Executive’s willful neglect of duties as determined in the sole and exclusive discretion of the Board, provided that Executive has received written notice of the action or omission giving rise to such determination and has failed to remedy such situation to the satisfaction of the Board within thirty (30) days following receipt of such written notice, unless Executive’s action or omission is not subject to cure, in which case no such notice shall be required, or (g) Executive’s death. In the event Executive’s employment is terminated in accordance with this Section 7.1, Executive shall be entitled to receive only Executive’s Base Salary then in effect, prorated to the date of Executive’s termination of employment with the Company (the “Termination Date”), and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will not be entitled to receive the Severance Package described in Section 7.2. Any termination pursuant to this Section 7.1 shall be evidenced by a resolution or written consent of the Board, and the Company shall provide Executive with a copy of such resolution or written consent, certified by the Secretary of the Company, upon Executive’s written request.

7.2 Termination Without Cause by Company. The Company may terminate Executive’s employment under this Agreement without Cause at any time upon written notice to Executive. In the event of such termination, Executive will receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive a “Severance Package” that shall consist of:

(a) severance in an amount equal to the sum of (i) twelve (12) months of Executive’s Base Salary then in effect on the Termination Date, and (ii) 100% of Executive’s Target Bonus for the fiscal year in which the Termination Date occurs, with the total of such

 

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amounts to be payable over twelve (12) months in equal installments in accordance with the Company’s regular payroll cycle, commencing with the first payroll date occurring on or after the 60th day following the Termination Date;

(b) payment by the Company of the premiums required to continue Executive’s group health care coverage under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period (the “COBRA Payment Period”) ending on the earlier of (i) twelve (12) months following the Termination Date or (ii) the date on which Executive becomes eligible for health coverage through another employer, provided in any event that Executive timely elects to continue and remains eligible for these benefits under COBRA; and

(c) acceleration of the vesting of any outstanding time-based Equity Awards to the extent that such Equity Awards would have vested in accordance with their terms had Executive’s employment with the Company continued uninterrupted until the first anniversary of the Termination Date.

Notwithstanding Section 7.2(b), if the Company determines, in its sole discretion, that the payment of the COBRA premiums would result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), or any statute or regulation of similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of providing the COBRA premiums, the Company, in its sole discretion, may elect to instead pay Executive on the first day of each month of the COBRA Payment Period, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “Special Severance Payment,” which shall be treated as part of the Severance Package), for the remainder of the COBRA Payment Period. Executive may, but is not obligated to, use such Special Severance Payment toward the cost of COBRA premiums. All other Company obligations to Executive will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.3 Voluntary Resignation by Executive for Good Reason. Executive may voluntarily resign Executive’s position with the Company for Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation for Good Reason, Executive will be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive the Severance Package described in Section 7.2. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will be deemed to have resigned for Good Reason if Executive voluntarily terminates Executive’s employment with the Company within ninety (90) days following the first occurrence of a condition constituting Good Reason. “Good Reason” means the occurrence of any of the following conditions without Executive’s written consent, which condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the Company of such condition(s): (i) a material reduction in Executive’s Base Salary as then in effect prior to such reduction, other than as part of a salary reduction program among similar management employees, (ii) a material diminution in Executive’s authority, duties or responsibilities as an employee of the Company as they existed prior to such change, or (iii) a relocation of Executive’s principal place of work which increases Executive’s one-way commute

 

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distance by more than fifty (50) miles. Executive will be deemed to have given consent to any condition(s) described in this Section 7.3 if Executive does not provide written notice to the Company of Executive’s intent to exercise Executive’s rights pursuant to this Section within thirty (30) days following the first occurrence of such condition(s).

7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily resign Executive’s position with the Company without Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation without Good Reason, Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.5 Termination After a Change in Control.

(a) Severance Payment; Equity Award Acceleration. If, upon or within twelve (12) months after a Change in Control (as that term is defined below), Executive’s employment is terminated by the Company other than for Cause (as defined in Section 7.1) or Executive resigns for Good Reason (as defined in Section 7.3), then Executive shall be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive (i) the Severance Package described in Section 7.2 and (ii) to the extent not yet vested, but subject to the terms of any agreement governing any such Equity Award, any outstanding Equity Awards granted to Executive by the Company shall vest in full as of the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

(b) Parachute Payments.

(i) Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit Executive would receive pursuant to this Agreement or otherwise (collectively, the “Payments”) would constitute a “parachute payment” within the meaning of Section 280G of the Code, and, but for this sentence, would be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the aggregate amount of the Payments will be either (i) the largest portion of the Payments that would result in no portion of the Payments (after reduction) being subject to the Excise Tax or (ii) the entire Payments, whichever amount after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments. Any reduction in the Payments required by this Section will be made in the following order: (A) reduction of cash payments; (B) reduction of accelerated vesting of Equity Awards other than stock options; (C) reduction of accelerated vesting of stock options; and (D) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of Equity Awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant of such Equity Awards. If two or more

 

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Equity Awards are granted on the same date, the accelerated vesting of each award will be reduced on a pro-rata basis.

(ii) The professional firm engaged by the Company for general tax purposes as of the day prior to the date of the event that might reasonably be anticipated to result in Payments that would otherwise be subject to the Excise Tax will perform the foregoing calculations. If the tax firm so engaged by the Company is serving as accountant or auditor for the acquiring company, the Company will appoint a nationally recognized tax firm to make the determinations required by this Section. The Company will bear all expenses with respect to the determinations by the tax firm required to be made by this Section. The Company and Executive shall furnish the tax firm such information and documents as the tax firm may reasonably request in order to make its required determination. The tax firm will provide its calculations, together with detailed supporting documentation, to the Company and Executive as soon as practicable following its engagement. Any good faith determinations of the tax firm made hereunder will be final, binding and conclusive upon the Company and Executive.

(c) Change in Control. A Change in Control is defined as any one of the following occurrences:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), becomes the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total fair market value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition of securities by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition of securities by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

(ii) the sale or disposition of all or substantially all of the Company’s assets (other than a sale or disposition to one or more subsidiaries of the Company), or any transaction having similar effect is consummated; or

(iii) the Company is party to a merger or consolidation that results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(iv) the dissolution or liquidation of the Company.

7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not to renew this Agreement for a subsequent term in accordance with Section 3.2, this Agreement will expire automatically upon completion of the then effective Term, and Executive’s

 

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employment with the Company will thereupon terminate. Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement as set forth in Section 14.8.

7.7 Conditions to Severance Package. Executive will only be entitled to receive the Severance Package if, on or before the 60th day following the Termination Date, Executive executes a full general release, releasing all claims, known or unknown, that Executive may have against the Company and its officers, directors, employees and affiliated companies arising out of or any way related to Executive’s employment or termination of employment with the Company, and the period for revocation, if any, of such release has lapsed without the release having been revoked. In the event that Executive breaches any of the covenants contained in Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”) or 11 (“Non-Competition; Nonsolicitation of Company Employees”), the Company shall have the right to (a) terminate further provision of any portion of the Severance Package not yet paid or provided, (b) seek reimbursement from Executive for any and all portions of the Severance Package previously paid or provided to Executive, (c) recover from Executive all shares of Company stock acquired by Executive pursuant to Equity Awards the vesting of which was accelerated by reason of the Severance Package (or the proceeds therefrom, reduced by any exercise or pursuant price paid to acquire such shares), and (d) immediately cancel all portions of Equity Awards the vesting of which was accelerated by reason of the Severance Package.

7.8 Resignation of Board or Other Positions. Executive agrees that should Executive’s employment terminate for any reason, Executive will immediately resign all other positions (including board membership) Executive may hold on behalf of the Company.

7.9 Application of Section 409A.

(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable pursuant to this Agreement on account of Executive’s termination of employment with the Company which constitutes a “deferral of compensation” within the meaning of the Treasury Regulations issued pursuant to Section 409A of the Code (the “Section 409A Regulations”) shall be paid unless and until Executive has incurred a “separation from service” within the meaning of the Section 409A Regulations. Furthermore, if Executive is a “specified employee” within the meaning of the Section 409A Regulations as of the date of Executive’s separation from service, no amount that constitutes a deferral of compensation which is payable on account of Executive’s separation from service shall be paid to Executive before the date (the “Delayed Payment Date”) which is first day of the seventh month after the date of Executive’s separation from service or, if earlier, the date of Executive’s death following such separation from service. All such amounts that would, but for this Section 7.9(a), become payable prior to the Delayed Payment Date will be accumulated and paid on the Delayed Payment Date.

(b) It is the intent of the Company and Executive that any right of Executive to receive installment payments hereunder shall, for all purposes of Section 409A of the Code, be treated as a right to a series of separate payments.

(c) The Company intends that income provided to Executive pursuant to this Agreement will not be subject to taxation under Section 409A of the Code. The provisions

 

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of this Agreement shall be interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the Code. However, the Company does not guarantee any particular tax effect for income provided to Executive pursuant to this Agreement. In any event, except for the Company’s responsibility to withhold applicable income and employment taxes from compensation paid or provided to Executive, the Company shall not be responsible for the payment of any applicable taxes incurred by Executive on compensation paid or provided to Executive pursuant to this Agreement.

8. No Violation of Rights of Third Parties. Executive represents and warrants to the Company that Executive is not currently a party, and will not become a party, to any other agreement that is in conflict with, or will prevent Executive from complying with, this Agreement. Executive further represents and warrants to the Company that Executive’s performance of all of the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence any proprietary information, knowledge, or data acquired by Executive in confidence or trust prior to Executive’s employment with the Company. Executive acknowledges and agrees that the representations and warranties in this Section 8 are a material part of this Agreement.

9. Other Covenants. Executive hereby makes the following covenants, each of which Executive acknowledges and agrees are a material part of this Agreement:

9.1 During the Term, Executive will not (a) breach any agreement to keep in confidence any confidential or proprietary information, knowledge or data acquired by Executive prior to Executive’s employment with Company, or (b) disclose to the Company, or use or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or any other third party. Executive acknowledges that the Company has specifically instructed Executive not to breach any such agreement or make any such disclosures to the Company.

9.2 During the Term, Executive will not engage in any work or activity, paid or unpaid, that creates an actual conflict of interest with the Company. Such work shall include, but is not limited to, directly or indirectly competing with the Company in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer, lender, or agent of any business enterprise of the same nature as, or which is in direct competition with, the business in which the Company is now engaged or in which the Company becomes engaged during the Term, as may be determined by the Company in its sole discretion. If the Company believes such a conflict exists during the Term, the Company may ask Executive to choose to discontinue the other work or activity or resign employment with the Company.

9.3 During the Term and after the termination thereof, neither Executive nor the Company will disparage each other, or the Company’s products, services, agents or employees.

9.4 During the Term and after the termination thereof, at the Company’s expense and upon its reasonable request, Executive will cooperate and assist the Company in its defense or prosecution of any disputes, differences, grievances, claims, charges, or complaints between the Company and any third party, which assistance will include testifying on the Company’s behalf in connection with any such matter or performing any other task reasonably requested by the Company in connection therewith.

 

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10. Confidentiality and Proprietary Rights. Executive agrees to continue to abide by the Nondisclosure Agreement, which is incorporated herein by reference.

11. Non-Competition; Nonsolicitation of Companys Employees. Executive acknowledges that in the course of his employment with the Company he will serve as a member of the Company’s senior management and will become familiar with the Company’s trade secrets and with other confidential and proprietary information and that his services will be of special, unique and extraordinary value to the Company. Executive further acknowledges that the Company’s business is national in scope and that the Company, in the course of such business competes with other companies located throughout the United States. Therefore, in consideration of the foregoing, Executive agrees that, during the Term, and during the twelve-month (12) month period following the Term, Executive shall not directly or indirectly anywhere within the United States of America (a) own (except ownership of less than 1% of any class of securities which are listed for trading on any securities exchange or which are traded in the over-the-counter market), manage, control, participate in, consult with, render services for, be employed by, or in any manner engage in the operation of (i) a post-secondary education institution, (ii) any business that develops or administers services to degree-granting institutions of higher education, or (iii) any other business of the Company in which Executive had significant involvement prior to Executive’s separation; (b) solicit funds on behalf of, or for the benefit of, any for-profit, post-secondary education institution (other than the Company) or any other entity that competes with the Company; (c) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof, or (d) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company to cease doing business with, or modify its business relationship with, the Company, or in any way interfere with or hinder the relationship between any such student, customer, supplier, licensee or business relation and the Company.

12. Injunctive Relief. Executive acknowledges that Executive’s breach of the covenants contained in Sections 9, 10 and 11 hereof (collectively “Covenants”) would cause irreparable injury to the Company and agrees that in the event of any such breach, the Company shall be entitled to seek temporary, preliminary and permanent injunctive relief without the necessity of proving actual damages or posting any bond or other security in addition to any other relief to which the Company may be entitled and other remedies Company may exercise under this Agreement or otherwise.

13. Insurance; Indemnification.

13.1 During the Term, Executive will be covered by the Company’s director and officer insurance policy to the same extent as all other senior executive officers of the Company.

13.2 Following the execution of this Agreement, the director and officer indemnification agreement executed by the Company and Executive will continue in effect in accordance with its terms.

14. General Provisions.

14.1 Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement.

 

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14.2 Waiver. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

14.3 Attorneys’ Fees. In the event of a dispute involving the interpretation or enforcement of this Agreement, a court shall award attorneys’ fees and costs to the prevailing party.

14.4 Severability. In the event any provision of this Agreement is found to be unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

14.5 Interpretation; Construction. The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

14.6 Governing Law; Forum. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of Arizona. Each party consents to the jurisdiction and venue of the state or federal courts in Phoenix, Arizona, if applicable, in any action, suit, or proceeding arising out of or relating to this Agreement, and agrees that the state or federal courts in Phoenix, Arizona shall have exclusive jurisdiction over any dispute arising between the parties related to this Agreement or Executive’s employment with the Company.

14.7 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth under the signatures below, or such other address as either party may specify in writing.

14.8 Survival. Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”), 11 (“Non-Competition; Nonsolicitation of Company’s Employees”), 12 (“Injunctive Relief”), 14 (“General Provisions”) and 15 (“Entire Agreement”) of this Agreement shall survive termination of Executive’s employment with the Company.

15. Entire Agreement. This Agreement, including the Nondisclosure Agreement incorporated herein by reference, constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral. This Agreement may be amended or modified only with the written consent of Executive and the Board. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

   

EXECUTIVE

Dated: July 1, 2018

   

By:

 

/s/ W. Stan Meyer

   

Name:

 

W. Stan Meyer

   

Address:

   
       

 

   

GRAND CANYON EDUCATION, INC.

Dated: July 1, 2018

   

By:

 

/s/ Brian E. Mueller

   

Name:

 

Brian E. Mueller

   

Title:

 

Chairman and CEO

   

Address:

 

2600 West Camelback Road

Phoenix, Arizona 85017

 

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EX-10.3

Exhibit 10.3

SECOND AMENDED AND RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

(Chief Financial Officer)

This Second Amended and Restated Executive Employment Agreement (the “Agreement”) is entered into on July 1, 2018 and is effective as of July 1, 2018 (the “Effective Date”), by and between Grand Canyon Education, Inc., a Delaware corporation (the “Company”), and Daniel E. Bachus (“Executive”).

WHEREAS, the Company and Executive are parties to an amended and restated employment agreement dated July 30, 2012 and effective July 1, 2012 (as amended, the “Original Agreement”), and Executive has been employed with the Company since that time; and

WHEREAS, the Company and Executive desire to amend and restate the Original Agreement through the execution and delivery of this Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment. The Company desires to continue to employ Executive, and Executive desires to continue such employment, upon the terms and conditions set forth herein.

2. Duties.

2.1 Position. Executive is employed as Chief Financial Officer and shall have the duties and responsibilities reasonably assigned to Executive from time to time by the Company’s Chief Executive Officer (“CEO”) or Board of Directors (the “Board”). Executive shall perform faithfully and diligently all duties assigned to Executive. The Company reserves the right to modify Executive’s position and duties at any time in its sole and absolute discretion, except that any material diminution in Executive’s duties shall be subject to Section 7.3(ii).

2.2 Best Efforts/Full-time. Executive will expend Executive’s best efforts on behalf of the Company in the performance of duties assigned to Executive under this Agreement, and will abide by all policies and decisions made by the Company, as well as all applicable federal, state and local laws, regulations or ordinances. Executive will act in the best interest of the Company at all times in the performance of duties assigned to Executive under this Agreement. Executive shall devote Executive’s full business time and efforts to the performance of Executive’s assigned duties for the Company, unless Executive notifies the Board and CEO in advance of Executive’s intent to engage in other paid work and receives the Board’s and CEO’s express written consent to do so. Notwithstanding the foregoing, Executive will be permitted to serve as an outside director on the board of directors for corporate, civic, nonprofit or charitable entities, so long as Executive obtains the consent of the Board and provided such entities are not competitive with the Company and subject to the provisions of Section 9.

2.3 Work Location. Executive’s principal place of work shall be located in Phoenix, Arizona, or such other location as the Company may direct from time to time.

 

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3. Term.

3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for an initial term commencing on the Effective Date and continuing for a period of five (5) years following such date (the “Initial Term”), unless sooner terminated in accordance with Section 7.

3.2 Renewal. Upon expiration of the Initial Term and each Renewal Term, this Agreement will automatically renew for subsequent one (1) year terms (each a “Renewal Term”) unless either party provides ninety (90) days’ advance written notice to the other that the Company or Executive does not wish to renew the Agreement for a subsequent Renewal Term. In the event either party gives notice of nonrenewal pursuant to this Section 3.2, this Agreement will expire at the end of the then current term. The Initial Term and each subsequent Renewal Term are referred to collectively as the “Term”.

4. Compensation.

4.1 Base Salary. As compensation for Executive’s performance of Executive’s duties hereunder, effective beginning on the Effective Date the Company shall pay to Executive an initial Base Salary at the rate of Three-Hundred Ninety Thousand Dollars ($390,000.00) per year, payable in accordance with the normal payroll practices of the Company, less required deductions for state and federal withholding tax, social security and all other employment taxes and payroll deductions. Executive’s Base Salary shall be reviewed annually by the Compensation Committee of the Board (the “Compensation Committee”) and adjustments, if any, will be made at that time. In the event Executive’s employment under this Agreement is terminated by either party, for any reason, Executive will earn the Base Salary prorated to the date of termination, except as otherwise set forth herein.

4.2 Incentive Compensation. Executive will be eligible to earn incentive compensation in the form of an annual bonus for each fiscal year of the Company, to be awarded under the Company’s annual cash incentive plan as then in effect, with a target amount equal to seventy-five percent (75%) of Executive’s Base Salary (the “Target Bonus”). Executive’s Target Bonus shall be reviewed annually by the Compensation Committee and adjustments, if any, will be made at that time The Compensation Committee will determine the actual amount of the bonus earned by Executive for any year, which may be more or less than the Target Bonus, and will base such determination upon both the Company’s achievement of overall performance metrics for the year and Executive’s achievement of individual performance metrics as agreed upon by the Compensation Committee and Executive. Earned bonus amounts, if any, shall be paid within two and one-half months following the end of the applicable Company fiscal year.

4.3 Equity Awards. Executive will be eligible to receive stock, option or other equity awards (each, an “Equity Award”) under the Company’s applicable equity incentive plan as then in effect (the “Plan”), as determined by the Compensation Committee. Any such Equity Award will be subject to the terms and conditions of the Plan and an applicable form of agreement for such Equity Award specified by the Compensation Committee, which Executive will be required to sign as a condition of retaining the Equity Award.

5. Customary Fringe Benefits. Executive will be eligible for all customary and usual fringe benefits generally available to senior management of the Company, subject to the terms and conditions of the Company’s benefit plan documents. The Company reserves the right to change or eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.

 

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6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket business expenses incurred in the performance of Executive’s duties on behalf of the Company. To obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation and will be reimbursed in accordance with the Company’s policies. Any reimbursement Executive is entitled to receive shall (a) be paid no later than the last day of Executive’s tax year following the tax year in which the expense was incurred, (b) not affect or be affected by any other expenses that are eligible for reimbursement in any other tax year of Executive, and (c) not be subject to liquidation or exchange for another benefit.

7. Termination of Executives Employment.

7.1 Termination for Cause by Company. Although the Company anticipates the continuation of a mutually rewarding employment relationship with Executive, the Company may terminate Executive’s employment immediately at any time for Cause. For purposes of this Agreement, “Cause” is defined as: (a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations or otherwise relating to the business of the Company; (b) Executive’s material breach of this Agreement, including, without limitation, any breach of Section 8, Section 9 or Section 11; (c) Executive’s breach of the Company’s Employee Nondisclosure and Assignment Agreement (a signed copy of which was delivered to the Company with the Original Agreement) (the “Nondisclosure Agreement”); (d) Executive’s conviction or entry of a plea of nolo contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude; (e) Executive’s inability to perform the essential functions of Executive’s position, with or without reasonable accommodation, due to a mental or physical disability; (f) Executive’s willful neglect of duties as determined in the sole and exclusive discretion of the Board, provided that Executive has received written notice of the action or omission giving rise to such determination and has failed to remedy such situation to the satisfaction of the Board within thirty (30) days following receipt of such written notice, unless Executive’s action or omission is not subject to cure, in which case no such notice shall be required, or (g) Executive’s death. In the event Executive’s employment is terminated in accordance with this Section 7.1, Executive shall be entitled to receive only Executive’s Base Salary then in effect, prorated to the date of Executive’s termination of employment with the Company (the “Termination Date”), and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will not be entitled to receive the Severance Package described in Section 7.2. Any termination pursuant to this Section 7.1 shall be evidenced by a resolution or written consent of the Board, and the Company shall provide Executive with a copy of such resolution or written consent, certified by the Secretary of the Company, upon Executive’s written request.

7.2 Termination Without Cause by Company. The Company may terminate Executive’s employment under this Agreement without Cause at any time upon written notice to Executive. In the event of such termination, Executive will receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive a “Severance Package” that shall consist of:

(a) severance in an amount equal to the sum of (i) twelve (12) months of Executive’s Base Salary then in effect on the Termination Date, and (ii) 100% of Executive’s Target Bonus for the fiscal year in which the Termination Date occurs, with the total of such

 

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amounts to be payable over twelve (12) months in equal installments in accordance with the Company’s regular payroll cycle, commencing with the first payroll date occurring on or after the 60th day following the Termination Date;

(b) payment by the Company of the premiums required to continue Executive’s group health care coverage under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period (the “COBRA Payment Period”) ending on the earlier of (i) twelve (12) months following the Termination Date or (ii) the date on which Executive becomes eligible for health coverage through another employer, provided in any event that Executive timely elects to continue and remains eligible for these benefits under COBRA; and

(c) acceleration of the vesting of any outstanding time-based Equity Awards to the extent that such Equity Awards would have vested in accordance with their terms had Executive’s employment with the Company continued uninterrupted until the first anniversary of the Termination Date.

Notwithstanding Section 7.2(b), if the Company determines, in its sole discretion, that the payment of the COBRA premiums would result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), or any statute or regulation of similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of providing the COBRA premiums, the Company, in its sole discretion, may elect to instead pay Executive on the first day of each month of the COBRA Payment Period, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “Special Severance Payment,” which shall be treated as part of the Severance Package), for the remainder of the COBRA Payment Period. Executive may, but is not obligated to, use such Special Severance Payment toward the cost of COBRA premiums. All other Company obligations to Executive will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.3 Voluntary Resignation by Executive for Good Reason. Executive may voluntarily resign Executive’s position with the Company for Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation for Good Reason, Executive will be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive the Severance Package described in Section 7.2. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will be deemed to have resigned for Good Reason if Executive voluntarily terminates Executive’s employment with the Company within ninety (90) days following the first occurrence of a condition constituting Good Reason. “Good Reason” means the occurrence of any of the following conditions without Executive’s written consent, which condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the Company of such condition(s): (i) a material reduction in Executive’s Base Salary as then in effect prior to such reduction, other than as part of a salary reduction program among similar management employees, (ii) a material diminution in Executive’s authority, duties or responsibilities as an employee of the Company as they existed prior to such change, or (iii) a relocation of Executive’s principal place of work which increases Executive’s one-way commute

 

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distance by more than fifty (50) miles. Executive will be deemed to have given consent to any condition(s) described in this Section 7.3 if Executive does not provide written notice to the Company of Executive’s intent to exercise Executive’s rights pursuant to this Section within thirty (30) days following the first occurrence of such condition(s).

7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily resign Executive’s position with the Company without Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation without Good Reason, Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.5 Termination After a Change in Control.

(a) Severance Payment; Equity Award Acceleration. If, upon or within twelve (12) months after a Change in Control (as that term is defined below), Executive’s employment is terminated by the Company other than for Cause (as defined in Section 7.1) or Executive resigns for Good Reason (as defined in Section 7.3), then Executive shall be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive (i) the Severance Package described in Section 7.2 and (ii) to the extent not yet vested, but subject to the terms of any agreement governing any such Equity Award, any outstanding Equity Awards granted to Executive by the Company shall vest in full as of the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

(b) Parachute Payments.

(i) Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit Executive would receive pursuant to this Agreement or otherwise (collectively, the “Payments”) would constitute a “parachute payment” within the meaning of Section 280G of the Code, and, but for this sentence, would be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the aggregate amount of the Payments will be either (i) the largest portion of the Payments that would result in no portion of the Payments (after reduction) being subject to the Excise Tax or (ii) the entire Payments, whichever amount after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments. Any reduction in the Payments required by this Section will be made in the following order: (A) reduction of cash payments; (B) reduction of accelerated vesting of Equity Awards other than stock options; (C) reduction of accelerated vesting of stock options; and (D) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of Equity Awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant of such Equity Awards. If two or more

 

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Equity Awards are granted on the same date, the accelerated vesting of each award will be reduced on a pro-rata basis.

(ii) The professional firm engaged by the Company for general tax purposes as of the day prior to the date of the event that might reasonably be anticipated to result in Payments that would otherwise be subject to the Excise Tax will perform the foregoing calculations. If the tax firm so engaged by the Company is serving as accountant or auditor for the acquiring company, the Company will appoint a nationally recognized tax firm to make the determinations required by this Section. The Company will bear all expenses with respect to the determinations by the tax firm required to be made by this Section. The Company and Executive shall furnish the tax firm such information and documents as the tax firm may reasonably request in order to make its required determination. The tax firm will provide its calculations, together with detailed supporting documentation, to the Company and Executive as soon as practicable following its engagement. Any good faith determinations of the tax firm made hereunder will be final, binding and conclusive upon the Company and Executive.

(c) Change in Control. A Change in Control is defined as any one of the following occurrences:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), becomes the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total fair market value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition of securities by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition of securities by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

(ii) the sale or disposition of all or substantially all of the Company’s assets (other than a sale or disposition to one or more subsidiaries of the Company), or any transaction having similar effect is consummated; or

(iii) the Company is party to a merger or consolidation that results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(iv) the dissolution or liquidation of the Company.

7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not to renew this Agreement for a subsequent term in accordance with Section 3.2, this Agreement will expire automatically upon completion of the then effective Term, and Executive’s

 

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employment with the Company will thereupon terminate. Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement as set forth in Section 14.8.

7.7 Conditions to Severance Package. Executive will only be entitled to receive the Severance Package if, on or before the 60th day following the Termination Date, Executive executes a full general release, releasing all claims, known or unknown, that Executive may have against the Company and its officers, directors, employees and affiliated companies arising out of or any way related to Executive’s employment or termination of employment with the Company, and the period for revocation, if any, of such release has lapsed without the release having been revoked. In the event that Executive breaches any of the covenants contained in Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”) or 11 (“Non-Competition; Nonsolicitation of Company Employees”), the Company shall have the right to (a) terminate further provision of any portion of the Severance Package not yet paid or provided, (b) seek reimbursement from Executive for any and all portions of the Severance Package previously paid or provided to Executive, (c) recover from Executive all shares of Company stock acquired by Executive pursuant to Equity Awards the vesting of which was accelerated by reason of the Severance Package (or the proceeds therefrom, reduced by any exercise or pursuant price paid to acquire such shares), and (d) immediately cancel all portions of Equity Awards the vesting of which was accelerated by reason of the Severance Package.

7.8 Resignation of Board or Other Positions. Executive agrees that should Executive’s employment terminate for any reason, Executive will immediately resign all other positions (including board membership) Executive may hold on behalf of the Company.

7.9 Application of Section 409A.

(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable pursuant to this Agreement on account of Executive’s termination of employment with the Company which constitutes a “deferral of compensation” within the meaning of the Treasury Regulations issued pursuant to Section 409A of the Code (the “Section 409A Regulations”) shall be paid unless and until Executive has incurred a “separation from service” within the meaning of the Section 409A Regulations. Furthermore, if Executive is a “specified employee” within the meaning of the Section 409A Regulations as of the date of Executive’s separation from service, no amount that constitutes a deferral of compensation which is payable on account of Executive’s separation from service shall be paid to Executive before the date (the “Delayed Payment Date”) which is first day of the seventh month after the date of Executive’s separation from service or, if earlier, the date of Executive’s death following such separation from service. All such amounts that would, but for this Section 7.9(a), become payable prior to the Delayed Payment Date will be accumulated and paid on the Delayed Payment Date.

(b) It is the intent of the Company and Executive that any right of Executive to receive installment payments hereunder shall, for all purposes of Section 409A of the Code, be treated as a right to a series of separate payments.

(c) The Company intends that income provided to Executive pursuant to this Agreement will not be subject to taxation under Section 409A of the Code. The provisions

 

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of this Agreement shall be interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the Code. However, the Company does not guarantee any particular tax effect for income provided to Executive pursuant to this Agreement. In any event, except for the Company’s responsibility to withhold applicable income and employment taxes from compensation paid or provided to Executive, the Company shall not be responsible for the payment of any applicable taxes incurred by Executive on compensation paid or provided to Executive pursuant to this Agreement.

8. No Violation of Rights of Third Parties. Executive represents and warrants to the Company that Executive is not currently a party, and will not become a party, to any other agreement that is in conflict with, or will prevent Executive from complying with, this Agreement. Executive further represents and warrants to the Company that Executive’s performance of all of the terms of this Agreement as an employee of the Company does not and will not breach any agreement to keep in confidence any proprietary information, knowledge, or data acquired by Executive in confidence or trust prior to Executive’s employment with the Company. Executive acknowledges and agrees that the representations and warranties in this Section 8 are a material part of this Agreement.

9. Other Covenants. Executive hereby makes the following covenants, each of which Executive acknowledges and agrees are a material part of this Agreement:

9.1 During the Term, Executive will not (a) breach any agreement to keep in confidence any confidential or proprietary information, knowledge or data acquired by Executive prior to Executive’s employment with Company, or (b) disclose to the Company, or use or induce the Company to use, any confidential or proprietary information or material belonging to any previous employer or any other third party. Executive acknowledges that the Company has specifically instructed Executive not to breach any such agreement or make any such disclosures to the Company.

9.2 During the Term, Executive will not engage in any work or activity, paid or unpaid, that creates an actual conflict of interest with the Company. Such work shall include, but is not limited to, directly or indirectly competing with the Company in any way, or acting as an officer, director, employee, consultant, stockholder, volunteer, lender, or agent of any business enterprise of the same nature as, or which is in direct competition with, the business in which the Company is now engaged or in which the Company becomes engaged during the Term, as may be determined by the Company in its sole discretion. If the Company believes such a conflict exists during the Term, the Company may ask Executive to choose to discontinue the other work or activity or resign employment with the Company.

9.3 During the Term and after the termination thereof, neither Executive nor the Company will disparage each other, or the Company’s products, services, agents or employees.

9.4 During the Term and after the termination thereof, at the Company’s expense and upon its reasonable request, Executive will cooperate and assist the Company in its defense or prosecution of any disputes, differences, grievances, claims, charges, or complaints between the Company and any third party, which assistance will include testifying on the Company’s behalf in connection with any such matter or performing any other task reasonably requested by the Company in connection therewith.

 

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10. Confidentiality and Proprietary Rights. Executive agrees to continue to abide by the Nondisclosure Agreement, which is incorporated herein by reference.

11. Non-Competition; Nonsolicitation of Companys Employees. Executive acknowledges that in the course of his employment with the Company he will serve as a member of the Company’s senior management and will become familiar with the Company’s trade secrets and with other confidential and proprietary information and that his services will be of special, unique and extraordinary value to the Company. Executive further acknowledges that the Company’s business is national in scope and that the Company, in the course of such business competes with other companies located throughout the United States. Therefore, in consideration of the foregoing, Executive agrees that, during the Term, and during the twelve-month (12) month period following the Term, Executive shall not directly or indirectly anywhere within the United States of America (a) own (except ownership of less than 1% of any class of securities which are listed for trading on any securities exchange or which are traded in the over-the-counter market), manage, control, participate in, consult with, render services for, be employed by, or in any manner engage in the operation of (i) a post-secondary education institution, (ii) any business that develops or administers services to degree-granting institutions of higher education, or (iii) any other business of the Company in which Executive had significant involvement prior to Executive’s separation; (b) solicit funds on behalf of, or for the benefit of, any for-profit, post-secondary education institution (other than the Company) or any other entity that competes with the Company; (c) induce or attempt to induce any employee of the Company to leave the employ of the Company, or in any way interfere with the relationship between the Company and any employee thereof, or (d) induce or attempt to induce any customer, supplier, licensee or other business relation of the Company to cease doing business with, or modify its business relationship with, the Company, or in any way interfere with or hinder the relationship between any such student, customer, supplier, licensee or business relation and the Company.

12. Injunctive Relief. Executive acknowledges that Executive’s breach of the covenants contained in Sections 9, 10 and 11 hereof (collectively “Covenants”) would cause irreparable injury to the Company and agrees that in the event of any such breach, the Company shall be entitled to seek temporary, preliminary and permanent injunctive relief without the necessity of proving actual damages or posting any bond or other security in addition to any other relief to which the Company may be entitled and other remedies Company may exercise under this Agreement or otherwise.

13. Insurance; Indemnification.

13.1 During the Term, Executive will be covered by the Company’s director and officer insurance policy to the same extent as all other senior executive officers of the Company.

13.2 Following the execution of this Agreement, the director and officer indemnification agreement executed by the Company and Executive will continue in effect in accordance with its terms.

14. General Provisions.

14.1 Successors and Assigns. The rights and obligations of the Company under this Agreement shall inure to the benefit of and shall be binding upon the successors and assigns of the Company. Executive shall not be entitled to assign any of Executive’s rights or obligations under this Agreement.

 

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14.2 Waiver. Either party’s failure to enforce any provision of this Agreement shall not in any way be construed as a waiver of any such provision, or prevent that party thereafter from enforcing each and every other provision of this Agreement.

14.3 Attorneys’ Fees. In the event of a dispute involving the interpretation or enforcement of this Agreement, a court shall award attorneys’ fees and costs to the prevailing party.

14.4 Severability. In the event any provision of this Agreement is found to be unenforceable by a court of competent jurisdiction, such provision shall be deemed modified to the extent necessary to allow enforceability of the provision as so limited, it being intended that the parties shall receive the benefit contemplated herein to the fullest extent permitted by law. If a deemed modification is not satisfactory in the judgment of such court, the unenforceable provision shall be deemed deleted, and the validity and enforceability of the remaining provisions shall not be affected thereby.

14.5 Interpretation; Construction. The headings set forth in this Agreement are for convenience only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has participated in the negotiation of its terms. Furthermore, Executive acknowledges that Executive has had an opportunity to review and revise the Agreement and have it reviewed by legal counsel, if desired, and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

14.6 Governing Law; Forum. This Agreement will be governed by and construed in accordance with the laws of the United States and the State of Arizona. Each party consents to the jurisdiction and venue of the state or federal courts in Phoenix, Arizona, if applicable, in any action, suit, or proceeding arising out of or relating to this Agreement, and agrees that the state or federal courts in Phoenix, Arizona shall have exclusive jurisdiction over any dispute arising between the parties related to this Agreement or Executive’s employment with the Company.

14.7 Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows with notice deemed given as indicated: (a) by personal delivery when delivered personally; (b) by overnight courier upon written verification of receipt; (c) by telecopy or facsimile transmission upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notice shall be sent to the addresses set forth under the signatures below, or such other address as either party may specify in writing.

14.8 Survival. Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”), 11 (“Non-Competition; Nonsolicitation of Company’s Employees”), 12 (“Injunctive Relief”), 14 (“General Provisions”) and 15 (“Entire Agreement”) of this Agreement shall survive termination of Executive’s employment with the Company.

15. Entire Agreement. This Agreement, including the Nondisclosure Agreement incorporated herein by reference, constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior or simultaneous representations, discussions, negotiations, and agreements, whether written or oral. This Agreement may be amended or modified only with the written consent of Executive and the Board. No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

 

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THE PARTIES TO THIS AGREEMENT HAVE READ THE FOREGOING AGREEMENT AND FULLY UNDERSTAND EACH AND EVERY PROVISION CONTAINED HEREIN. WHEREFORE, THE PARTIES HAVE EXECUTED THIS AGREEMENT ON THE DATES SHOWN BELOW.

 

   

EXECUTIVE

Dated: July 1, 2018

   

By:

 

/s/ Daniel E. Bachus

   

Name:

 

Daniel E. Bachus

   

Address:

   
       

 

   

GRAND CANYON EDUCATION, INC.

Dated: July 1, 2018

   

By:

 

/s/ Brian E. Mueller

   

Name:

 

Brian E. Mueller

   

Title:

 

Chairman and CEO

   

Address:

 

2600 West Camelback Road

Phoenix, Arizona 85017

 

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EX-10.4

Exhibit 10.4

SECOND AMENDED AND RESTATED

EXECUTIVE EMPLOYMENT AGREEMENT

(Chief Information Officer)

This Second Amended and Restated Executive Employment Agreement (the “Agreement”) is entered into on July 1, 2018 and is effective as of July 1, 2018 (the “Effective Date”), by and between Grand Canyon Education, Inc., a Delaware corporation (the “Company”), and Joseph N. Mildenhall (“Executive”).

WHEREAS, the Company and Executive are parties to an amended and restated employment agreement dated July 30, 2012 and effective July 1, 2012 (as amended, the “Original Agreement”), and Executive has been employed with the Company since that time; and

WHEREAS, the Company and Executive desire to amend and restate the Original Agreement through the execution and delivery of this Agreement;

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

1. Employment. The Company desires to continue to employ Executive, and Executive desires to continue such employment, upon the terms and conditions set forth herein.

2. Duties.

2.1 Position. Executive is employed as Chief Information Officer and shall have the duties and responsibilities reasonably assigned to Executive from time to time by the Company’s Chief Executive Officer (“CEO”) or Board of Directors (the “Board”). Executive shall perform faithfully and diligently all duties assigned to Executive. The Company reserves the right to modify Executive’s position and duties at any time in its sole and absolute discretion, except that any material diminution in Executive’s duties shall be subject to Section 7.3(ii).

2.2 Best Efforts/Full-time. Executive will expend Executive’s best efforts on behalf of the Company in the performance of duties assigned to Executive under this Agreement, and will abide by all policies and decisions made by the Company, as well as all applicable federal, state and local laws, regulations or ordinances. Executive will act in the best interest of the Company at all times in the performance of duties assigned to Executive under this Agreement. Executive shall devote Executive’s full business time and efforts to the performance of Executive’s assigned duties for the Company, unless Executive notifies the Board and CEO in advance of Executive’s intent to engage in other paid work and receives the Board’s and CEO’s express written consent to do so. Notwithstanding the foregoing, Executive will be permitted to serve as an outside director on the board of directors for corporate, civic, nonprofit or charitable entities, so long as Executive obtains the consent of the Board and provided such entities are not competitive with the Company and subject to the provisions of Section 9.

2.3 Work Location. Executive’s principal place of work shall be located in Phoenix, Arizona, or such other location as the Company may direct from time to time.

 

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3. Term.

3.1 Initial Term. The employment relationship pursuant to this Agreement shall be for an initial term commencing on the Effective Date and continuing for a period of five (5) years following such date (the “Initial Term”), unless sooner terminated in accordance with Section 7.

3.2 Renewal. Upon expiration of the Initial Term and each Renewal Term, this Agreement will automatically renew for subsequent one (1) year terms (each a “Renewal Term”) unless either party provides ninety (90) days’ advance written notice to the other that the Company or Executive does not wish to renew the Agreement for a subsequent Renewal Term. In the event either party gives notice of nonrenewal pursuant to this Section 3.2, this Agreement will expire at the end of the then current term. The Initial Term and each subsequent Renewal Term are referred to collectively as the “Term”.

4. Compensation.

4.1 Base Salary. As compensation for Executive’s performance of Executive’s duties hereunder, effective beginning on the Effective Date the Company shall pay to Executive an initial Base Salary at the rate of Three-Hundred Forty Thousand Dollars ($340,000.00) per year, payable in accordance with the normal payroll practices of the Company, less required deductions for state and federal withholding tax, social security and all other employment taxes and payroll deductions. Executive’s Base Salary shall be reviewed annually by the Compensation Committee of the Board (the “Compensation Committee”) and adjustments, if any, will be made at that time. In the event Executive’s employment under this Agreement is terminated by either party, for any reason, Executive will earn the Base Salary prorated to the date of termination, except as otherwise set forth herein.

4.2 Incentive Compensation. Executive will be eligible to earn incentive compensation in the form of an annual bonus for each fiscal year of the Company, to be awarded under the Company’s annual cash incentive plan as then in effect, with a target amount equal to fifty percent (50%) of Executive’s Base Salary (the “Target Bonus”). Executive’s Target Bonus shall be reviewed annually by the Compensation Committee and adjustments, if any, will be made at that time The Compensation Committee will determine the actual amount of the bonus earned by Executive for any year, which may be more or less than the Target Bonus, and will base such determination upon both the Company’s achievement of overall performance metrics for the year and Executive’s achievement of individual performance metrics as agreed upon by the Compensation Committee and Executive. Earned bonus amounts, if any, shall be paid within two and one-half months following the end of the applicable Company fiscal year.

4.3 Equity Awards. Executive will be eligible to receive stock, option or other equity awards (each, an “Equity Award”) under the Company’s applicable equity incentive plan as then in effect (the “Plan”), as determined by the Compensation Committee. Any such Equity Award will be subject to the terms and conditions of the Plan and an applicable form of agreement for such Equity Award specified by the Compensation Committee, which Executive will be required to sign as a condition of retaining the Equity Award.

5. Customary Fringe Benefits. Executive will be eligible for all customary and usual fringe benefits generally available to senior management of the Company, subject to the terms and conditions of the Company’s benefit plan documents. The Company reserves the right to change or eliminate fringe benefits on a prospective basis, at any time, effective upon notice to Executive.

 

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6. Business Expenses. Executive will be reimbursed for all reasonable, out-of-pocket business expenses incurred in the performance of Executive’s duties on behalf of the Company. To obtain reimbursement, expenses must be submitted promptly with appropriate supporting documentation and will be reimbursed in accordance with the Company’s policies. Any reimbursement Executive is entitled to receive shall (a) be paid no later than the last day of Executive’s tax year following the tax year in which the expense was incurred, (b) not affect or be affected by any other expenses that are eligible for reimbursement in any other tax year of Executive, and (c) not be subject to liquidation or exchange for another benefit.

7. Termination of Executives Employment.

7.1 Termination for Cause by Company. Although the Company anticipates the continuation of a mutually rewarding employment relationship with Executive, the Company may terminate Executive’s employment immediately at any time for Cause. For purposes of this Agreement, “Cause” is defined as: (a) acts or omissions constituting gross negligence, recklessness or willful misconduct on the part of Executive with respect to Executive’s obligations or otherwise relating to the business of the Company; (b) Executive’s material breach of this Agreement, including, without limitation, any breach of Section 8, Section 9 or Section 11; (c) Executive’s breach of the Company’s Employee Nondisclosure and Assignment Agreement (a signed copy of which was delivered to the Company with the Original Agreement) (the “Nondisclosure Agreement”); (d) Executive’s conviction or entry of a plea of nolo contendere for fraud, misappropriation or embezzlement, or any felony or crime of moral turpitude; (e) Executive’s inability to perform the essential functions of Executive’s position, with or without reasonable accommodation, due to a mental or physical disability; (f) Executive’s willful neglect of duties as determined in the sole and exclusive discretion of the Board, provided that Executive has received written notice of the action or omission giving rise to such determination and has failed to remedy such situation to the satisfaction of the Board within thirty (30) days following receipt of such written notice, unless Executive’s action or omission is not subject to cure, in which case no such notice shall be required, or (g) Executive’s death. In the event Executive’s employment is terminated in accordance with this Section 7.1, Executive shall be entitled to receive only Executive’s Base Salary then in effect, prorated to the date of Executive’s termination of employment with the Company (the “Termination Date”), and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will not be entitled to receive the Severance Package described in Section 7.2. Any termination pursuant to this Section 7.1 shall be evidenced by a resolution or written consent of the Board, and the Company shall provide Executive with a copy of such resolution or written consent, certified by the Secretary of the Company, upon Executive’s written request.

7.2 Termination Without Cause by Company. The Company may terminate Executive’s employment under this Agreement without Cause at any time upon written notice to Executive. In the event of such termination, Executive will receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive a “Severance Package” that shall consist of:

(a) severance in an amount equal to the sum of (i) twelve (12) months of Executive’s Base Salary then in effect on the Termination Date, and (ii) 100% of Executive’s Target Bonus for the fiscal year in which the Termination Date occurs, with the total of such

 

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amounts to be payable over twelve (12) months in equal installments in accordance with the Company’s regular payroll cycle, commencing with the first payroll date occurring on or after the 60th day following the Termination Date;

(b) payment by the Company of the premiums required to continue Executive’s group health care coverage under the applicable provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985 (“COBRA”) for a period (the “COBRA Payment Period”) ending on the earlier of (i) twelve (12) months following the Termination Date or (ii) the date on which Executive becomes eligible for health coverage through another employer, provided in any event that Executive timely elects to continue and remains eligible for these benefits under COBRA; and

(c) acceleration of the vesting of any outstanding time-based Equity Awards to the extent that such Equity Awards would have vested in accordance with their terms had Executive’s employment with the Company continued uninterrupted until the first anniversary of the Termination Date.

Notwithstanding Section 7.2(b), if the Company determines, in its sole discretion, that the payment of the COBRA premiums would result in a violation of the nondiscrimination rules of Section 105(h)(2) of the Internal Revenue Code of 1986, as amended (the “Code”), or any statute or regulation of similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then in lieu of providing the COBRA premiums, the Company, in its sole discretion, may elect to instead pay Executive on the first day of each month of the COBRA Payment Period, a fully taxable cash payment equal to the COBRA premiums for that month, subject to applicable tax withholdings (such amount, the “Special Severance Payment,” which shall be treated as part of the Severance Package), for the remainder of the COBRA Payment Period. Executive may, but is not obligated to, use such Special Severance Payment toward the cost of COBRA premiums. All other Company obligations to Executive will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.3 Voluntary Resignation by Executive for Good Reason. Executive may voluntarily resign Executive’s position with the Company for Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation for Good Reason, Executive will be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive the Severance Package described in Section 7.2. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8. Executive will be deemed to have resigned for Good Reason if Executive voluntarily terminates Executive’s employment with the Company within ninety (90) days following the first occurrence of a condition constituting Good Reason. “Good Reason” means the occurrence of any of the following conditions without Executive’s written consent, which condition(s) remain(s) in effect thirty (30) days after Executive provides written notice to the Company of such condition(s): (i) a material reduction in Executive’s Base Salary as then in effect prior to such reduction, other than as part of a salary reduction program among similar management employees, (ii) a material diminution in Executive’s authority, duties or responsibilities as an employee of the Company as they existed prior to such change, or (iii) a relocation of Executive’s principal place of work which increases Executive’s one-way commute

 

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distance by more than fifty (50) miles. Executive will be deemed to have given consent to any condition(s) described in this Section 7.3 if Executive does not provide written notice to the Company of Executive’s intent to exercise Executive’s rights pursuant to this Section within thirty (30) days following the first occurrence of such condition(s).

7.4 Voluntary Resignation by Executive Without Good Reason. Executive may voluntarily resign Executive’s position with the Company without Good Reason at any time on thirty (30) days’ advance written notice to the Company. In the event of Executive’s resignation without Good Reason, Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

7.5 Termination After a Change in Control.

(a) Severance Payment; Equity Award Acceleration. If, upon or within twelve (12) months after a Change in Control (as that term is defined below), Executive’s employment is terminated by the Company other than for Cause (as defined in Section 7.1) or Executive resigns for Good Reason (as defined in Section 7.3), then Executive shall be entitled to receive Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. In addition, subject to Sections 7.7 and 7.9, Executive will be entitled to receive (i) the Severance Package described in Section 7.2 and (ii) to the extent not yet vested, but subject to the terms of any agreement governing any such Equity Award, any outstanding Equity Awards granted to Executive by the Company shall vest in full as of the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished as of the Termination Date, but will be subject to the surviving provisions of this Agreement set forth in Section 14.8.

(b) Parachute Payments.

(i) Notwithstanding any provision of this Agreement to the contrary, if any payment or benefit Executive would receive pursuant to this Agreement or otherwise (collectively, the “Payments”) would constitute a “parachute payment” within the meaning of Section 280G of the Code, and, but for this sentence, would be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision (the “Excise Tax”), then the aggregate amount of the Payments will be either (i) the largest portion of the Payments that would result in no portion of the Payments (after reduction) being subject to the Excise Tax or (ii) the entire Payments, whichever amount after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate, net of the maximum reduction in federal income taxes which could be obtained from a deduction of such state and local taxes), results in Executive’s receipt, on an after-tax basis, of the greatest amount of the Payments. Any reduction in the Payments required by this Section will be made in the following order: (A) reduction of cash payments; (B) reduction of accelerated vesting of Equity Awards other than stock options; (C) reduction of accelerated vesting of stock options; and (D) reduction of other benefits paid or provided to Executive. In the event that acceleration of vesting of Equity Awards is to be reduced, such acceleration of vesting will be cancelled in the reverse order of the date of grant of such Equity Awards. If two or more

 

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Equity Awards are granted on the same date, the accelerated vesting of each award will be reduced on a pro-rata basis.

(ii) The professional firm engaged by the Company for general tax purposes as of the day prior to the date of the event that might reasonably be anticipated to result in Payments that would otherwise be subject to the Excise Tax will perform the foregoing calculations. If the tax firm so engaged by the Company is serving as accountant or auditor for the acquiring company, the Company will appoint a nationally recognized tax firm to make the determinations required by this Section. The Company will bear all expenses with respect to the determinations by the tax firm required to be made by this Section. The Company and Executive shall furnish the tax firm such information and documents as the tax firm may reasonably request in order to make its required determination. The tax firm will provide its calculations, together with detailed supporting documentation, to the Company and Executive as soon as practicable following its engagement. Any good faith determinations of the tax firm made hereunder will be final, binding and conclusive upon the Company and Executive.

(c) Change in Control. A Change in Control is defined as any one of the following occurrences:

(i) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the “Exchange Act”)), becomes the “beneficial owner” (as such term is defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total fair market value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition of securities by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition of securities directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition of securities by the Company, (D) any acquisition of securities by a trustee or other fiduciary under an employee benefit plan of the Company, or (E) any acquisition of securities by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

(ii) the sale or disposition of all or substantially all of the Company’s assets (other than a sale or disposition to one or more subsidiaries of the Company), or any transaction having similar effect is consummated; or

(iii) the Company is party to a merger or consolidation that results in the holders of voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or

(iv) the dissolution or liquidation of the Company.

7.6 Termination of Employment Upon Nonrenewal. In the event either party decides not to renew this Agreement for a subsequent term in accordance with Section 3.2, this Agreement will expire automatically upon completion of the then effective Term, and Executive’s

 

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employment with the Company will thereupon terminate. Executive will be entitled to receive only Executive’s Base Salary then in effect, prorated to the Termination Date, and all amounts and benefits earned or incurred pursuant to Sections 5 and 6 through the Termination Date. All other Company obligations to Executive pursuant to this Agreement will be automatically terminated and completely extinguished. Executive will not be entitled to receive the Severance Package described in Section 7.2, but will be subject to the surviving provisions of this Agreement as set forth in Section 14.8.

7.7 Conditions to Severance Package. Executive will only be entitled to receive the Severance Package if, on or before the 60th day following the Termination Date, Executive executes a full general release, releasing all claims, known or unknown, that Executive may have against the Company and its officers, directors, employees and affiliated companies arising out of or any way related to Executive’s employment or termination of employment with the Company, and the period for revocation, if any, of such release has lapsed without the release having been revoked. In the event that Executive breaches any of the covenants contained in Sections 9 (“Other Covenants”), 10 (“Confidentiality and Proprietary Rights”) or 11 (“Non-Competition; Nonsolicitation of Company Employees”), the Company shall have the right to (a) terminate further provision of any portion of the Severance Package not yet paid or provided, (b) seek reimbursement from Executive for any and all portions of the Severance Package previously paid or provided to Executive, (c) recover from Executive all shares of Company stock acquired by Executive pursuant to Equity Awards the vesting of which was accelerated by reason of the Severance Package (or the proceeds therefrom, reduced by any exercise or pursuant price paid to acquire such shares), and (d) immediately cancel all portions of Equity Awards the vesting of which was accelerated by reason of the Severance Package.

7.8 Resignation of Board or Other Positions. Executive agrees that should Executive’s employment terminate for any reason, Executive will immediately resign all other positions (including board membership) Executive may hold on behalf of the Company.

7.9 Application of Section 409A.

(a) Notwithstanding anything set forth in this Agreement to the contrary, no amount payable pursuant to this Agreement on account of Executive’s termination of employment with the Company which constitutes a “deferral of compensation” within the meaning of the Treasury Regulations issued pursuant to Section 409A of the Code (the “Section 409A Regulations”) shall be paid unless and until Executive has incurred a “separation from service” within the meaning of the Section 409A Regulations. Furthermore, if Executive is a “specified employee” within the meaning of the Section 409A Regulations as of the date of Executive’s separation from service, no amount that constitutes a deferral of compensation which is payable on account of Executive’s separation from service shall be paid to Executive before the date (the “Delayed Payment Date”) which is first day of the seventh month after the date of Executive’s separation from service or, if earlier, the date of Executive’s death following such separation from service. All such amounts that would, but for this Section 7.9(a), become payable prior to the Delayed Payment Date will be accumulated and paid on the Delayed Payment Date.

(b) It is the intent of the Company and Executive that any right of Executive to receive installment payments hereunder shall, for all purposes of Section 409A of the Code, be treated as a right to a series of separate payments.

(c) The Company intends that income provided to Executive pursuant to this Agreement will not be subject to taxation under Section 409A of the Code. The provisions

 

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of this Agreement shall be interpreted and construed in favor of satisfying any applicable requirements of Section 409A of the Code. However, the Company does not guarantee any particular tax effect for income provided to Executive pursuant to this Agreement. In any event, except for the Company’s responsibility to withhold applicable income and employment taxes from compensation paid or provided to Executive, the Company shall not be responsible for the payment of any applicable taxes incurred by Executi