sv1za
As filed with the Securities and Exchange Commission on
September 4, 2009
Registration No. 333-161571
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
THE SECURITIES ACT OF
1933
Grand Canyon Education,
Inc.
(Exact Name of Registrant as
Specified in Its Charter)
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Delaware
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8221
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20-3356009
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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3300 W. Camelback Road
Phoenix, Arizona 85017
(602) 639-7500
(Address, Including Zip Code,
and Telephone Number, Including Area Code, of Registrants
Principal Executive Offices)
Christopher C. Richardson
General Counsel
Grand Canyon Education, Inc.
3300 W. Camelback Road
Phoenix, Arizona 85017
(602) 639-7500
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent For
Service)
Copies to:
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David P. Lewis, Esq.
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Mark A. Stegemoeller, Esq.
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DLA Piper LLP (US)
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Latham & Watkins LLP
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2525 East Camelback Road, Suite 1000
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355 South Grand Avenue
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Phoenix, Arizona 85016
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Los Angeles, California 90071
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(480) 606-5100
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(213) 485-1234
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
CALCULATION
OF REGISTRATION FEE
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Proposed Maximum
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Proposed Maximum
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Amount of
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Title of Each Class of
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Offering
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Aggregate
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Registration
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Security to be Registered
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Amount to be Registered
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Price per
Share(1)
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Offering
Price(1)
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Fee(2)
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Common Stock, par value $0.01 per share
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8,000,000
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$18.91
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$151,280,000
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$8,442
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(1) |
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Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act on the
basis of the average of the high and low prices of Grand Canyon
Education, Inc.s common stock as reported on The Nasdaq
Global Market on August 25, 2009. |
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant
to said Section 8(a), shall determine.
The
information in this prospectus is not complete and may be
changed. We and the selling stockholders may not sell these
securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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Subject
to Completion
Preliminary
Prospectus Dated September 4, 2009
6,000,000 Shares
Grand Canyon Education, Inc.
Common Stock
We are offering 1,000,000 shares of our common stock and
the selling stockholders identified in this prospectus are
offering 5,000,000 shares of our common stock. We will not
receive any of the proceeds from the sale of the shares being
sold by the selling stockholders.
Our common stock is listed on The Nasdaq Global Market under the
symbol LOPE. The last reported sale price of our
common stock on September 2, 2009 was $17.56 per share.
Investing in our common stock involves risks. See Risk
Factors beginning on page 10.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the selling stockholders
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$
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$
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The selling stockholders have granted the underwriters a
30-day
option to purchase a maximum of 900,000 additional shares on the
same terms and conditions as set forth above, to cover
over-allotments of shares, if any.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Delivery of the shares of common stock will be made on or
about ,
2009.
Joint Book-Running Managers
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Credit
Suisse |
BofA Merrill Lynch |
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BMO
Capital Markets |
William Blair & Company |
Piper Jaffray |
Barrington Research |
The date of this prospectus
is ,
2009.
TABLE OF
CONTENTS
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Page
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10
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EX-23.1 |
ABOUT
THIS PROSPECTUS
You should rely only on the information contained in, or
incorporated by reference in, this prospectus or in any
free-writing prospectus that we specifically authorize to be
delivered or made available to you. We have not, the selling
stockholders have not, and the underwriters have not authorized
anyone to provide you with additional or different information.
We and the selling stockholders are offering to sell, and
seeking offers to buy, shares of common stock only in
jurisdictions where offers and sales are permitted. You should
assume that the information contained in, or incorporated by
reference in, this prospectus or in any free-writing prospectus
that we specifically authorize to be delivered or made available
to you is accurate only as of the date of this prospectus,
regardless of its time of delivery or of any sale of shares of
our common stock. Our business, financial condition, results of
operations and prospects may have changed since that date.
For investors outside the United States: We have not, the
selling stockholders have not and the underwriters have not done
anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action
for that purpose is required, other than in the United States.
Persons outside the United States who come into possession of
this prospectus must inform themselves about, and observe any
restrictions relating to, the offering of the shares of common
stock and the distribution of this prospectus outside of the
United States.
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in or
incorporated by reference into this prospectus. This summary
sets forth the material terms of the offering, but does not
contain all of the information that you should consider before
investing in our common stock. You should read the entire
prospectus and the documents that are incorporated by reference
into this prospectus carefully before making an investment
decision, especially the risks of investing in our common stock
described under Risk Factors. Unless the context
otherwise requires, the terms we, us,
our, Grand Canyon, and Grand
Canyon Education refer to Grand Canyon Education, Inc. and
our predecessor as the context requires, and references to
Grand Canyon University refer to the postsecondary
education institution operated by Grand Canyon Education,
Inc.
Overview
We are a regionally accredited provider of online postsecondary
education services focused on offering graduate and
undergraduate degree programs in our core disciplines of
education, business, and healthcare. In addition to our online
programs, we offer ground programs at our traditional campus in
Phoenix, Arizona and onsite at the facilities of employers. We
are committed to providing an academically rigorous educational
experience with a focus on career-oriented programs that meet
the objectives of our students. We utilize an integrated,
innovative approach to marketing, recruiting, and retaining
students, which has enabled us to increase enrollment from
approximately 3,000 students at the end of 2003 to approximately
27,600 students at June 30, 2009, representing a compound
annual growth rate of approximately 50% over that period and an
increase of 67% over the approximately 16,500 students we had at
June 30, 2008. At December 31, 2008, 89.1% of our
students were enrolled in our online programs, and 52.9% of our
students were pursuing masters or doctoral degrees.
Our three core disciplines of education, business, and
healthcare represent large markets with attractive employment
opportunities. According to a March 2009 report from the
U.S. Department of Education, National Center for Education
Statistics, or NCES, these disciplines ranked as three of the
four most popular fields of postsecondary education, based on
degrees conferred in the
2006-07
school year. The U.S. Department of Labor, Bureau of Labor
Statistics, or BLS, estimated in its
2008-09
Career Guide that these fields comprised over 40 million
jobs in 2006, many of which require postsecondary education
credentials.
We primarily focus on recruiting and educating working adults,
whom we define as students age 25 or older who are pursuing
a degree while employed. As of June 30, 2009, approximately
90% of our online students were age 25 or older. We believe
that working adults are attracted to the convenience and
flexibility of our online programs because they can study and
interact with faculty and classmates during times that suit
their schedules. We also believe that working adults represent
an attractive student population because they are better able to
finance their education, more readily recognize the benefits of
a postsecondary degree, and have higher persistence and
completion rates than students generally.
We have experienced significant growth in enrollment, net
revenue, and operating income over the last several years. Our
enrollment at December 31, 2008 was approximately 24,600,
representing an increase of approximately 67% over our
enrollment at December 31, 2007. Our net revenue and
operating income for the year ended December 31, 2008 were
$161.3 million and $12.8 million, respectively,
representing increases of 62.4% and 194.5%, respectively, over
the year ended December 31, 2007. Our enrollment at
June 30, 2009 was approximately 27,600, representing an
increase of approximately 67% over our enrollment at
June 30, 2008. Our net revenue and operating income for the
six months ended June 30, 2009 were $118.4 million and
$22.0 million, respectively, representing increases of
68.4% and 248.0%, respectively, over the six months ended
June 30, 2008. We seek to achieve continued growth in a
manner that reinforces our reputation for providing academically
rigorous, career-oriented educational programs that advance the
careers of our students.
1
We have been regionally accredited by the Higher Learning
Commission of the North Central Association of Colleges and
Schools, or the Higher Learning Commission, and its predecessor
since 1968, and we were reaccredited by the Higher Learning
Commission in 2007 for the maximum term of ten years. In
addition, we have specialized accreditations for certain
programs from the Association of Collegiate Business Schools and
Programs, the Commission on Collegiate Nursing Education, and
the Commission on Accreditation of Athletic Training Education.
We believe that our regional accreditation, together with these
specialized accreditations, reflect the quality of our programs,
enhance their marketability, and improve the employability of
our graduates.
We were founded as Grand Canyon College, a traditional, private,
non-profit college, in 1949 and moved to our existing campus in
Phoenix, Arizona in 1951. In February 2004, several of our
current stockholders acquired Grand Canyon University and
converted it to a for-profit institution. Since then, we have
enhanced our senior management team, expanded our online
platform and programs, and initiated an infrastructure and
technology improvement plan and a marketing and branding effort
to further differentiate us in the markets in which we operate
and support our continued growth. We have also maintained our
non-denominational
Christian identity, with many of our ground programs including
Christian study requirements and our online programs including
ethics requirements and electives in religion.
Industry
The United States market for postsecondary education represents
a large and growing opportunity. According to the March 2009
NCES report, total revenue for all degree-granting postsecondary
institutions was over $411 billion for the
2005-06
school year. In addition, according to a March 2009 NCES
report, approximately 18.2 million students were projected
to be enrolled in postsecondary institutions in 2008 and the
number was projected to grow to 20.1 million by 2017. We
believe that future growth in this market will be driven, in
part, by the increasing number of job openings in occupations
that require bachelors or masters degrees, which a
November 2007 report based on BLS data has projected will grow
approximately 17% and 19%, respectively, between 2006 and 2016,
or nearly double the growth rate the BLS projected for
occupations that do not require postsecondary degrees. Moreover,
according to U.S. Census Bureau data, individuals with a
postsecondary degree are able to obtain a significant
compensation premium relative to individuals without a degree.
The market for online postsecondary education has grown more
rapidly than the overall postsecondary market. A 2008 study by
Eduventures, LLC, an education consulting and research firm,
projected that from 2002 to 2008 enrollment in online
postsecondary programs increased from approximately
0.4 million to approximately 1.9 million, representing
a compound annual growth rate of approximately 28.6%. In
comparison, in March 2009 the NCES projected a compound annual
growth rate of 1.5% in enrollment in postsecondary programs
overall during the same period. We believe this growth has been
driven by a number of factors, including the greater convenience
and flexibility of online programs as compared to ground-based
programs and the increased acceptance of online programs among
academics and employers. According to a 2006 survey by the Sloan
Consortium, a trade group focused on online education, 79.1% of
chief academic officers surveyed at institutions with 15,000 or
more students, most of which offer online programs, and 61.9% of
all chief academic officers surveyed, believe that online
learning outcomes are equal or superior to traditional
face-to-face
instruction.
Competitive
Strengths
We believe we have the following competitive strengths:
Established presence in targeted, high demand
disciplines. We have an established presence
within our three core disciplines of education, business, and
healthcare. We believe our focused approach enables us to
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develop our academic reputation and brand identity within our
core disciplines, recruit and retain quality faculty and staff
members, and meet the educational and career objectives of our
students.
Focus on graduate degrees for working
adults. We have designed our program offerings
and our online delivery platform to meet the needs of working
adults, particularly those seeking graduate degrees to obtain
pay increases or job promotions that are directly tied to higher
educational attainment.
Campus-based tradition that complements online
capabilities. We believe that our
60-year
heritage as a traditional campus-based university complements
our online capabilities, attracts students who seek to affiliate
with a traditional university, enhances the reputation of our
degree programs among prospective students and employers, and
differentiates us in the for-profit postsecondary market.
Commitment to offering academically rigorous, career-oriented
programs. We are committed to offering
academically rigorous educational programs that are designed to
help our students achieve their career objectives. Our programs
are taught by qualified faculty, substantially all of whom hold
at least a masters degree and often have practical
experience in their respective fields.
Innovative marketing, recruiting, and retention
strategy. We have developed an integrated,
innovative approach to student marketing, recruitment, and
retention to reach our targeted students. We also proactively
provide support to students at key points during their
consideration of, and enrollment at, Grand Canyon University to
enhance the probability of student enrollment and retention.
Experienced executive management team with strong operating
track-record. Our executive management team
possesses extensive experience in the management and operation
of publicly-traded for-profit, postsecondary education
companies, as well as other educational services businesses,
including in the areas of marketing to, recruiting, and
retaining students pursuing online and other distance education
degree offerings, and in online content development.
Growth
Strategies
We intend to pursue the following growth strategies:
Increase enrollment in existing programs. We
intend to increase enrollment in existing programs within our
three core disciplines, which we believe offer ample opportunity
for growth. We also intend to increase the number of our
enrollment counselors and marketing and student services
personnel and introduce mid-term starts to drive enrollment
growth and enhance student retention.
Expand online program and degree offerings consistent with
student and employment demand trends. We develop
and offer new programs that we believe have attractive demand
characteristics and that are consistent with employment trends
in the country. In this regard, we seek to develop additional
programs in healthcare, education, business and liberal arts
that are relevant to employers in these fields.
Continue to enhance the profile and reputation of our
traditional ground campus. We intend to continue
to enhance the profile and reputation of our traditional ground
campus by leveraging the capabilities of our full-time ground
faculty, attracting additional faculty with strong academic
credentials, expanding upon and modernizing our campus
infrastructure and technological capabilities, and strengthening
our athletic programs. We believe these activities will continue
to sustain and enhance the reputation of our programs and help
drive, and support, increased ground and online enrollments.
Further enhance our brand recognition. We
continue to enhance our brand recognition by pursuing online and
offline marketing campaigns, developing our ground campus and
traditional university programs to increase awareness of the
university, establishing strategic branding relationships with
recognized industry leaders, and developing complementary
resources in our core disciplines that increase the overall
awareness of our offerings.
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Leverage infrastructure and drive earnings
growth. We have made and will continue to make
significant investments in our people, processes, and technology
infrastructure. We believe that these investments have prepared
us to deliver our academic programs to a much larger student
population with only modest incremental investment, and have
also enabled us to increase the effectiveness of our academic,
administrative and student services in ways that will assist in
our efforts to increase student success and retention levels. We
intend to continue leveraging our historical investments over
our increasing enrollment, which we believe will allow us to
increase our operating margins over time.
Expand relationships with private sector and government
employers and military personnel. We seek
additional relationships with health care systems, school
districts, emergency services providers, the military and other
employers through which we market our offerings to their
employees. These relationships provide leads for our programs,
build our recognition among employers in our core disciplines,
and enable us to identify new programs and degrees that are in
demand by students and employers.
Risks
Affecting Us
Our business is subject to numerous risks, as discussed more
fully in the section entitled Risk Factors
immediately following this Prospectus Summary. In particular,
our business would be adversely affected if:
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we are unable to attract and retain students as a result of the
highly competitive markets in which we operate;
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we are unable to comply with the constantly evolving and
extensive regulatory requirements to which our business is
subject, including requirements governing the Title IV
federal student financial aid programs, state laws and
regulations, and accrediting commission requirements;
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we experience any student, regulatory, reputational, or other
events that adversely affect our degree offerings;
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we experience a change in control under applicable regulatory or
accrediting standards, and we are unable to obtain appropriate
approvals for such an event in a timely manner, or at all;
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we experience damage to our reputation or other adverse effects
in connection with any compliance audit; regulatory action;
investigation, including the investigation of Grand Canyon
University currently being conducted by the Office of Inspector
General of the U.S. Department of Education; or litigation,
including the pending qui tam action regarding the manner
in which we have compensated our enrollment personnel;
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we experience damage to our reputation or other adverse effects
as a result of negative publicity in the media, in industry or
governmental reports, or otherwise, affecting us or other
companies in the for-profit postsecondary education sector;
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we are unable to attract and retain key personnel needed to
sustain and grow our business;
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our students are unable to obtain student loans on affordable
terms, or at all;
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adverse economic or other developments affect demand in our core
disciplines; or
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we are unable to develop new programs or expand our existing
programs in a timely and cost-effective manner.
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Corporate
Information
We were formed in Delaware in November 2003 for the purpose of
acquiring the assets of Grand Canyon University. Our principal
executive offices are located at 3300 West Camelback Road,
Phoenix, Arizona 85017, and our telephone number is
(602) 639-7500.
Our website is located at www.gcu.edu. The information
on, or accessible through, our website does not constitute part
of, and is not incorporated into, this prospectus.
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Accreditation
We are accredited by the Higher Learning Commission of the North
Central Association of Colleges and Schools,
30 N. LaSalle Street, Suite 2400, Chicago,
Illinois
60602-2504;
telephone
(312) 263-0456;
website www.ncahlc.org. The information on, or accessible
through, the website of the Higher Learning Commission does not
constitute part of, and is not incorporated into, this
prospectus.
Industry
Data
We use market data and industry forecasts and projections
throughout this prospectus, which we have obtained from market
research, publicly-available information and private industry
publications. These sources generally state that the information
they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of the
information are not guaranteed. The forecasts and projections
are based on industry surveys and the preparers experience
in the industry as of the time they were prepared, which in some
cases preceded the current economic downturn, and there is no
assurance that any of the projected numbers will be reached.
Similarly, we believe that the surveys and market research
others have completed are reliable, but we have not
independently verified their findings.
5
OFFERING
SUMMARY
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Common stock offered by us |
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1,000,000 shares |
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Common stock offering by the selling stockholders |
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5,000,000 shares |
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Total common stock offered |
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6,000,000 shares |
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Total common stock outstanding after this offering |
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45,576,417 shares |
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Use of proceeds |
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We estimate that the proceeds to us from this offering will be
approximately $16.0 million, based on an assumed offering
price of $17.56 per share, which is the closing price of our
common stock as reported on The Nasdaq Global Market on
September 2, 2009 and after deducting the underwriting
discounts and commissions and estimated offering expenses
payable by us. We intend to use the proceeds to us from this
offering to pay the fees and expenses of this offering that are
payable by us, and for working capital and other general
corporate purposes. See Use of Proceeds. We will not
receive any proceeds from the shares sold by the selling
stockholders. |
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Risk factors |
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You should carefully read and consider the information set forth
under the section titled Risk Factors and all other
information set forth in or incorporated by reference into this
prospectus before deciding to invest in shares of our common
stock. |
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Nasdaq Global Market symbol |
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LOPE |
The number of shares of our common stock to be outstanding
following this offering is based on 44,576,417 shares of
our common stock outstanding as of June 30, 2009. This
number does not include:
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3,310,532 shares of common stock issuable upon the exercise
of stock options outstanding as of June 30, 2009 under our
equity incentive plan, with a weighted average exercise price of
$12.11 per share;
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37,377 shares of common stock that were issued upon the
exercise of stock options subsequent to June 30,
2009; and
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1,956,107 shares of common stock reserved for future
issuance under our equity incentive plan as of June 30,
2009.
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Unless otherwise indicated, the information in this prospectus
reflects and assumes no exercise by the underwriters of their
option to purchase up to an additional 900,000 shares of
our common stock from the selling stockholders to cover
over-allotments, if any.
6
SUMMARY
FINANCIAL AND OTHER DATA
The following table sets forth our summary financial and other
data as of the dates and for the periods indicated. The
statement of operations and other data, excluding period end
enrollment, for each of the years in the three-year period ended
December 31, 2008, have been derived from our audited
financial statements, which are included with our Annual Report
on
Form 10-K
for the year ended December 31, 2008, which is incorporated
by reference into this prospectus. The statement of operations
and other data, excluding period end enrollment, for each of the
six month periods ended June 30, 2008 and 2009, and the
balance sheet data as of June 30, 2009, have been derived
from our unaudited financial statements, which are included with
our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009, which is incorporated
by reference into this prospectus. In the opinion of management,
our unaudited financial statements include all adjustments,
consisting of normal, recurring adjustments, necessary for a
fair presentation of such data. Our historical results are not
necessarily indicative of our results for any future period.
You should read the following summary financial and other data
in conjunction with Selected Financial and Other
Data, Managements Discussion and Analysis of
Financial Condition and Results of Operations, and our
financial statements and related notes, all of which are
incorporated by reference into this prospectus.
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Year Ended December 31,
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Six Months Ended June 30,
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2006
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2007
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|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except enrollment
|
|
|
|
and per share data)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
72,111
|
|
|
$
|
99,326
|
|
|
$
|
161,309
|
|
|
$
|
70,275
|
|
|
$
|
118,364
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
31,287
|
|
|
|
39,050
|
|
|
|
54,450
|
|
|
|
24,028
|
|
|
|
38,379
|
|
Selling and promotional
|
|
|
20,093
|
|
|
|
35,148
|
|
|
|
65,551
|
|
|
|
27,473
|
|
|
|
40,301
|
|
General and administrative
|
|
|
15,011
|
|
|
|
17,001
|
|
|
|
26,825
|
|
|
|
10,960
|
|
|
|
17,521
|
|
Royalty to former owner
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,686
|
|
|
|
1,488
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
69,069
|
|
|
|
94,981
|
|
|
|
148,512
|
|
|
|
63,949
|
|
|
|
96,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,042
|
|
|
|
4,345
|
|
|
|
12,797
|
|
|
|
6,326
|
|
|
|
22,015
|
|
Interest expense
|
|
|
(2,827
|
)
|
|
|
(2,975
|
)
|
|
|
(2,897
|
)
|
|
|
(1,507
|
)
|
|
|
(1,087
|
)
|
Interest income
|
|
|
912
|
|
|
|
1,172
|
|
|
|
640
|
|
|
|
432
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,127
|
|
|
|
2,542
|
|
|
|
10,540
|
|
|
|
5,251
|
|
|
|
21,157
|
|
Income tax expense
|
|
|
529
|
|
|
|
1,016
|
|
|
|
3,855
|
|
|
|
2,027
|
|
|
|
8,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
598
|
|
|
|
1,526
|
|
|
|
6,685
|
|
|
|
3,224
|
|
|
|
12,718
|
|
Preferred dividends
|
|
|
(527
|
)
|
|
|
(349
|
)
|
|
|
(938
|
)
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
71
|
|
|
$
|
1,177
|
|
|
$
|
5,747
|
|
|
$
|
2,703
|
|
|
$
|
12,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.00
|
|
|
$
|
0.06
|
|
|
$
|
0.26
|
|
|
$
|
0.14
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.00
|
|
|
$
|
0.03
|
|
|
$
|
0.17
|
|
|
$
|
0.08
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing earnings per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
18,853
|
|
|
|
18,923
|
|
|
|
22,185
|
|
|
|
19,089
|
|
|
|
45,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
36,858
|
|
|
|
35,143
|
|
|
|
33,430
|
|
|
|
32,623
|
|
|
|
45,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
2,387
|
|
|
$
|
7,406
|
|
|
$
|
8,374
|
|
|
$
|
3,504
|
|
|
$
|
11,111
|
|
Purchase of campus land and buildings
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,505
|
|
Depreciation and amortization
|
|
$
|
2,396
|
|
|
$
|
3,300
|
|
|
$
|
5,095
|
|
|
$
|
2,269
|
|
|
$
|
3,386
|
|
Adjusted
EBITDA(1)
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
25,675
|
|
|
$
|
10,294
|
|
|
$
|
26,978
|
|
Period end enrollment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online
|
|
|
8,406
|
|
|
|
12,497
|
|
|
|
21,955
|
|
|
|
14,847
|
|
|
|
26,234
|
|
Ground
|
|
|
2,256
|
|
|
|
2,257
|
|
|
|
2,681
|
|
|
|
1,663
|
|
|
|
1,388
|
|
7
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009
|
|
|
|
Actual
|
|
|
As
Adjusted(2)
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and investments unrestricted
|
|
$
|
25,225
|
|
|
$
|
41,261
|
|
Cash and cash equivalents restricted
|
|
|
6,230
|
|
|
|
6,230
|
|
Total assets
|
|
|
126,506
|
|
|
|
142,489
|
|
Capital lease obligations (including short-term)
|
|
|
2,013
|
|
|
|
2,013
|
|
Other indebtedness (including short-term indebtedness)
|
|
|
27,681
|
|
|
|
27,681
|
|
Total stockholders equity
|
|
|
53,965
|
|
|
|
69,948
|
|
|
|
|
(1) |
|
Adjusted EBITDA is defined as net income (loss) plus interest
expense net of interest income, plus income tax expense
(benefit), and plus depreciation and amortization (EBITDA), as
adjusted for (i) royalty payments incurred pursuant to an
agreement with our former owner that has been terminated as of
April 15, 2008, as discussed in Managements
Discussion and Analysis of Financial Condition and Results of
Operations Factors affecting
comparability Settlement with former owner
included with our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009, which is incorporated
by reference into this prospectus; (ii) management fees and
expenses that are no longer paid; (iii) contributions made
to Arizona school tuition organizations in lieu of the payment
of state income taxes; and (iv) share-based compensation. |
|
|
|
We present Adjusted EBITDA because we consider it to be an
important supplemental measure of our operating performance. We
also make certain compensation decisions based, in part, on our
operating performance, as measured by Adjusted EBITDA, and our
loan agreement requires us to comply with covenants that include
performance metrics substantially similar to Adjusted EBITDA.
All of the adjustments made in our calculation of Adjusted
EBITDA are adjustments to items that management does not
consider to be reflective of our core operating performance.
Management considers our core operating performance to be that
which can be affected by our managers in any particular period
through their management of the resources that affect our
underlying revenue and profit generating operations during that
period. Management fees and expenses, royalty expenses paid to
our former owner, financing arrangements, and share-based
compensation are not considered reflective of our core operating
performance. |
Our management uses Adjusted EBITDA:
|
|
|
|
|
in developing our internal budgets and strategic plan;
|
|
|
|
as a measurement of operating performance;
|
|
|
|
as a factor in evaluating the performance of our management for
compensation purposes;
|
|
|
|
to, in part, assess compliance with our loan agreement; and
|
|
|
|
in presentations to the members of our Board of Directors to
enable our board to have the same measurement basis of operating
performance as are used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
However, Adjusted EBITDA is not a recognized measurement under
GAAP, and when analyzing our operating performance, investors
should use Adjusted EBITDA in addition to, and not as an
alternative for, net income, operating income, or any other
performance measure presented in accordance with GAAP, or as an
alternative to cash flow from operating activities or as a
measure of our liquidity. Because not all companies use
identical calculations, our presentation of Adjusted EBITDA may
not be comparable to similarly titled measures of other
companies. Adjusted EBITDA has limitations as an analytical
tool, as discussed under Managements Discussion and
Analysis of Financial Condition and
8
Results of Operations Non-GAAP Discussion
included with our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009, which is incorporated
by reference into this prospectus.
The following table presents data relating to Adjusted EBITDA,
which is a non-GAAP measure, for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Six Months Ended June 30,
|
|
|
2006
|
|
2007
|
|
2008
|
|
2008
|
|
2009
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
|
Net income
|
|
$
|
598
|
|
|
$
|
1,526
|
|
|
$
|
6,685
|
|
|
$
|
3,224
|
|
|
$
|
12,718
|
|
Plus: interest expense net of interest income
|
|
|
1,915
|
|
|
|
1,803
|
|
|
|
2,257
|
|
|
|
1,075
|
|
|
|
858
|
|
Plus: income tax expense
|
|
|
529
|
|
|
|
1,016
|
|
|
|
3,855
|
|
|
|
2,027
|
|
|
|
8,439
|
|
Plus: depreciation and amortization
|
|
|
2,396
|
|
|
|
3,300
|
|
|
|
5,095
|
|
|
|
2,269
|
|
|
|
3,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
|
5,438
|
|
|
|
7,645
|
|
|
|
17,892
|
|
|
|
8,595
|
|
|
|
25,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plus: royalty to former
owner(a)
|
|
|
2,678
|
|
|
|
3,782
|
|
|
|
1,686
|
|
|
|
1,488
|
|
|
|
148
|
|
Plus: management fees and
expenses(b)
|
|
|
958
|
|
|
|
296
|
|
|
|
356
|
|
|
|
211
|
|
|
|
|
|
Plus: contributions made in lieu of state income
taxes(c)
|
|
|
|
|
|
|
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
Plus: share-based
compensation(d)
|
|
|
|
|
|
|
|
|
|
|
4,991
|
|
|
|
|
|
|
|
1,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
9,074
|
|
|
$
|
11,723
|
|
|
$
|
25,675
|
|
|
$
|
10,294
|
|
|
$
|
26,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the royalty fee arrangement with the former owner of
Grand Canyon University in which we agreed to pay a stated
percentage of cash revenue generated by our online programs. As
a result of the settlement of a dispute with the former owner,
we are no longer obligated to pay this royalty, although the
settlement includes a prepayment of future royalties that will
be amortized in 2008 and future periods. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Factors
affecting comparability Settlement with former
owner included with our Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2009, which is incorporated
by reference into this prospectus. |
|
(b) |
|
Reflects management fees and expenses of $0.3 million,
$0.3 million, and $0.4 million for the years ended
December 31, 2006, 2007, and 2008, respectively, and
$0.2 million for the six months ended June 30, 2008,
to the general partner of Endeavour Capital Fund IV, L.P.,
one of our significant stockholders, and an aggregate of
$0.7 million for the year ended December 31, 2006, to
an entity affiliated with a former director and another
affiliated with a significant stockholder, in each case
following their investment in us. The agreements relating to
these arrangements have all terminated. |
|
(c) |
|
Reflects contributions made in 2008 to various Arizona school
tuition organizations to assist with funding for education. In
connection with such contributions, we received a
dollar-for-dollar
state income tax credit, which resulted in a reduction in our
effective income tax rate to 36.6% for the year ended
December 31, 2008. Had this payment not been made, our
effective tax rate would have been 40.8%. Such contributions
were made in lieu of payments of state income taxes and are
therefore excluded from evaluation of our core operating
performance for the year ended December 31, 2008. |
|
(d) |
|
Reflects share-based compensation expense relating to stock and
option grants made to employees and directors in connection with
our initial public offering and thereafter. |
|
|
|
(2) |
|
As adjusted to give effect to the sale of 1,000,000 shares
of common stock by us in this offering at an assumed offering
price of $17.56 per share, which is the closing price of our
common stock as reported on The Nasdaq Global Market on
September 2, 2009, and the receipt by us of the estimated
net proceeds of that sale after deducting underwriting discounts
and commissions and estimated offering expenses payable by us. |
9
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
Before making an investment in our common stock, you should
carefully consider the following risks and the other information
contained in or incorporated by reference into this prospectus,
including our financial statements and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and
Regulation. See Where You Can Find More
Information and Incorporation By Reference.
The risks described below are those that we believe are the
material risks we face. Any of the risk factors described below,
and others that we did not anticipate, could significantly and
adversely affect our business, prospects, financial condition,
results of operations, and cash flows. As a result, the trading
price of our common stock could decline and you may lose all or
part of your investment.
Risks
Related to the Regulation of Our Industry
Our
failure to comply with the extensive regulatory requirements
governing our school could result in financial penalties,
restrictions on our operations or growth, or loss of external
financial aid funding for our students.
For our fiscal years ended December 31, 2007 and 2008, we
derived cash receipts equal to approximately 70.2% and 74.4%,
respectively, of our net revenue from tuition financed under
federal student financial aid programs authorized under
Title IV of the Higher Education Act of 1965, as amended,
referred to in this prospectus as the Title IV programs,
which are administered by the U.S. Department of Education,
or the Department of Education. To participate in the
Title IV programs, a school must be authorized by the
appropriate state education agency or agencies, be accredited by
an accrediting commission recognized by the Department of
Education, and be certified as an eligible institution by the
Department of Education. In addition, our operations and
programs are regulated by other state education agencies and
additional accrediting commissions. As a result of these
requirements, we are subject to extensive regulation by the
Arizona State Board for Private Postsecondary Education and
education agencies of other states, the Higher Learning
Commission, which is our primary accrediting commission,
specialized accrediting commissions, and the Department of
Education. These regulatory requirements cover the vast majority
of our operations, including our educational programs,
instructional and administrative staff, administrative
procedures, marketing, recruiting, financial operations, and
financial condition. These regulatory requirements also affect
our ability to open additional schools and locations, add new
educational programs, change existing educational programs, and
change our corporate or ownership structure. The agencies that
regulate our operations periodically revise their requirements
and modify their interpretations of existing requirements.
Regulatory requirements are not always precise and clear, and
regulatory agencies may sometimes disagree with the way we have
interpreted or applied these requirements. Any misinterpretation
by us of regulatory requirements could materially adversely
affect us.
If we fail to comply with any of these regulatory requirements,
we could suffer financial penalties, limitations on our
operations, loss of accreditation, termination of or limitations
on our ability to grant degrees and certificates, or limitations
on or termination of our eligibility to participate in the
Title IV programs, each of which could materially adversely
affect us. In addition, if we are charged with regulatory
violations, our reputation could be damaged, which could have a
negative impact on our stock price and our enrollments. We
cannot predict with certainty how all of these regulatory
requirements will be applied, or whether we will be able to
comply with all of the applicable requirements in the future.
If the
Department of Education does not recertify us to continue
participating in the Title IV programs, our students would
lose their access to Title IV program funds, or we could be
recertified but required to accept significant limitations as a
condition of our continued participation in the Title IV
programs.
Department of Education certification to participate in the
Title IV programs lasts a maximum of six years, and
institutions are thus required to seek recertification from the
Department of Education on a regular basis in order to continue
their participation in the Title IV programs. An
institution must also apply for recertification by the
Department of Education if it undergoes a change in control, as
defined by Department
10
of Education regulations, and may be subject to similar review
if it expands its operations or educational programs in certain
ways.
Our most recent recertification, which was issued on a
provisional basis in May 2005 after an extended review by the
Department of Education following the change in control that
occurred in February 2004, contained a number of conditions on
our continued participation in the Title IV programs. At
that time we were required by the Department of Education to
post a letter of credit, accept restrictions on the growth of
our program offerings and enrollment, and receive certain
Title IV funds under the heightened cash monitoring system
of payment (pursuant to which an institution is required to
credit students with Title IV funds prior to obtaining
those funds from the Department of Education) rather than by
advance payment (pursuant to which an institution receives
Title IV funds from the Department of Education in advance
of disbursement to students). In 2006 and 2007, the Department
of Education eliminated the letter of credit requirement,
allowed the growth restrictions to expire, eliminated the
heightened cash monitoring restrictions and returned us to the
advance payment method. We submitted our application for
recertification to participate in the Title IV programs to
the Department of Education in March 2008 in anticipation of the
expiration of our provisional certification on June 30,
2008. The Department of Education did not make a decision on our
recertification application by June 30, 2008 and therefore
our provisional certification to participate in the
Title IV programs has been automatically extended on a
month-to-month
basis until the Department of Education makes its decision. See
Regulation Regulation of Federal Student
Financial Aid Programs Eligibility and certification
procedures. There can be no assurance that the Department
of Education will recertify us while the investigation by the
Office of Inspector General of the Department of Education is
being conducted, while the qui tam lawsuit is pending, or at
all, or that it will not impose restrictions as a condition to
approving our pending recertification application or with
respect to any future recertification. See The
Office of Inspector General of the Department of Education has
commenced an investigation of Grand Canyon University, which is
ongoing and which may result in fines, penalties, other
sanctions, and damage to our reputation in the industry
and A qui tam lawsuit has been filed against
us alleging, among other things, that we have improperly
compensated certain of our enrollment counselors, and we may
incur liability, be subject to sanctions, or experience damage
to our reputation as a result of this lawsuit. If the
Department of Education does not renew or withdraws our
certification to participate in the Title IV programs at
any time, our students would no longer be able to receive
Title IV program funds. Similarly, the Department of
Education could renew our certification, but restrict or delay
our students receipt of Title IV funds, limit the
number of students to whom we could disburse such funds, or
place other restrictions on us that could be similar to, or more
or less restrictive than, the restrictions that Department of
Education imposed on us in connection with our recertification
in 2005. Any of these outcomes would have a material adverse
effect on our enrollments and us.
The
Office of Inspector General of the Department of Education has
commenced an investigation of Grand Canyon University, which is
ongoing and which may result in fines, penalties, other
sanctions, and damage to our reputation in the
industry.
The Office of Inspector General of the Department of Education
is responsible for, among other things, promoting the
effectiveness and integrity of the Department of
Educations programs and operations, including compliance
with applicable statutes and regulations. The Office of
Inspector General performs investigations of alleged violations
of law, including cases of alleged fraud and abuse, or other
identified vulnerabilities, in programs administered or financed
by the Department of Education. On August 14, 2008, the
Office of Inspector General served an administrative subpoena on
Grand Canyon University requiring us to provide certain records
and information related to performance reviews and salary
adjustments for all of our enrollment counselors and managers
from January 1, 2004 to the present. The Office of
Inspector Generals investigation is focused on whether we
have compensated any of our enrollment counselors or managers in
a manner that violated the Title IV statutory requirements
or the related Department of Education regulations concerning
the payment of incentive compensation based on success in
securing enrollments or financial aid. See
Regulation Regulation of Federal Student
Financial Aid Programs Incentive compensation
rule.
We have been cooperating with the Office of Inspector General to
facilitate its investigation and have completed production of
all requested documents. We cannot presently predict the
ultimate outcome of the investigation or any liability or other
sanctions that may result. The outcome of the Office of
Inspector
11
General investigation may depend in part on information
contained in the materials we produced or information or
testimony provided by former employees or other third parties.
The Department of Education may impose fines and other monetary
penalties as a result of a violation of the incentive
compensation law and such fines and other monetary penalties may
be substantial. In addition, the Department of Education retains
the authority to impose other sanctions on an institution for
violations of the incentive compensation law. The possible
effects of a determination of a regulatory violation are
described more fully in Regulation Regulation
of Federal Student Financial Aid Programs Potential
effect of regulatory violations. Any such fine or other
sanction could damage our reputation and impose significant
costs on us, which could have a material adverse effect on our
business, prospects, financial condition, and results of
operations.
A qui
tam lawsuit has been filed against us alleging, among other
things, that we have improperly compensated certain of our
enrollment counselors, and we may incur liability, be subject to
sanctions, or experience damage to our reputation as a result of
this lawsuit.
On September 11, 2008, we were served with a qui tam
lawsuit that had been filed against us in August 2007, in
the United States District Court for the District of Arizona by
a then-current employee on behalf of the federal government. All
proceedings in the lawsuit had been under seal until
September 5, 2008, when the court unsealed the first
amended complaint, which had been filed on August 11, 2008.
A qui tam case is a civil lawsuit brought by one or more
individuals (a relator) on behalf of the federal
government for an alleged submission to the government of a
false claim for payment. The relator, often a current or former
employee, is entitled to a share of the governments
recovery in the case. A qui tam action is always filed
under seal and remains under seal until the government decides
whether to intervene in the case. If the government intervenes,
it takes over primary control of the litigation. If the
government declines to intervene in the case, the relator may
nonetheless elect to continue to pursue the litigation at his or
her own expense on behalf of the government. In our case, the
qui tam lawsuit was initially filed under seal in August
2007 and was unsealed and served on us following the
governments decision not to intervene at that time.
The qui tam lawsuit alleges, among other things, that we
violated the False Claims Act by knowingly making false
statements, and submitting false records or statements, from at
least 2001 to the present, to get false or fraudulent claims
paid or approved, and asserts that we have improperly
compensated certain of our enrollment counselors in violation of
the Title IV law governing compensation of such employees,
and as a result, improperly received Title IV program
funds. See Regulation Regulation of Federal
Student Financial Aid Programs Incentive
compensation rule. The complaint specifically alleges that
some of our compensation practices with respect to our
enrollment personnel, including providing non-cash awards, have
violated the Title IV law governing compensation. While we
believe that our compensation policies and practices at issue in
the complaint have not been based on success in enrolling
students in violation of applicable law, the Department of
Educations regulations and interpretations of the
incentive compensation law do not establish clear criteria for
compliance in all circumstances and some of our practices,
including in respect of non-cash awards, have not been within
the scope of any specific safe harbor provided in
the compensation regulations. The complaint seeks treble the
amount of unspecified damages sustained by the federal
government in connection with our receipt of Title IV
funding, a civil penalty for each violation of the False Claims
Act, attorneys fees, costs, and interest. We filed a
motion to dismiss this case in November 2008, which was denied
by the court in February 2009, and we have continued to
vigorously contest this lawsuit. If it were determined that any
of our compensation practices violated the incentive
compensation law, we could experience an adverse outcome in the
qui tam litigation and be subject to substantial monetary
liabilities, fines, and other sanctions, any of which could have
a material adverse effect on our business, prospects, financial
condition and results of operations and could adversely affect
our stock price. We cannot presently predict the ultimate
outcome of this qui tam case or any liability or other
sanctions that may result. It is possible that during the course
of the litigation or the related Office of Inspector General
investigation other information may be discovered that would
adversely affect the outcome of the litigation.
12
Pursuant to the courts mandatory scheduling order, we have
entered into settlement discussions with respect to the qui
tam matter with the relator. In connection with such
discussions, we are negotiating for a comprehensive settlement
that would include, among other things, the resolution by the
Office of Inspector General of its investigation. Accordingly,
any such settlement would need to be approved not only by the
relator, but by the U.S. Department of Justice (which has
authority to approve settlements of False Claims Act matters),
and the Department of Education. Based on publicly available
information, we believe that similar qui tam lawsuits
involving compensation practices of other post-secondary
education institutions have settled (or have resulted in
announced charges in anticipation of settlement) in the range of
$4.9 million to $7.0 million. While we cannot assure
you that this matter will be settled on terms acceptable to us
or at all, we do not believe that any potential settlement, if
in the amount (which is within the range of such other
settlements) and on the terms currently under discussion, will
materially adversely affect our business, operations, or
liquidity, although any charge taken in connection with such a
potential settlement would likely be material to our operating
results and cash flow for the periods affected by the charge. If
such settlement does not occur, we would continue to vigorously
defend this lawsuit.
Congress
may change the eligibility standards or reduce funding for the
Title IV programs, which could reduce our student
population, revenue, and profit margin.
Political and budgetary concerns significantly affect the
Title IV programs. The Higher Education Act, which is the
federal law that governs the Title IV programs, must be
periodically reauthorized by Congress, and was most recently
reauthorized in August 2008. The new law contains numerous
revisions to the requirements governing the Title IV
programs. See Regulation Regulation of Federal
Student Financial Aid Programs. In addition, Congress must
determine funding levels for the Title IV programs on an
annual basis, and can change the laws governing the
Title IV programs at any time. Because a significant
percentage of our revenue is derived from the Title IV
programs, any action by Congress that significantly reduces
Title IV program funding or our ability or the ability of
our students to participate in the Title IV programs, or
otherwise requires us to modify our practices with respect to
Title IV programs, could increase our costs of compliance,
reduce the ability of some students to finance their education
at our institution, require us to seek to arrange for other
sources of financial aid for our students, and materially
decrease our student enrollment, each of which could have a
material adverse effect on us.
If we
do not meet specific financial responsibility standards
established by the Department of Education, we may be required
to post a letter of credit or accept other limitations in order
to continue participating in the Title IV programs, or we
could lose our eligibility to participate in the Title IV
programs.
To participate in the Title IV programs, an institution
must either satisfy specific quantitative standards of financial
responsibility prescribed by the Department of Education, or
post a letter of credit in favor of the Department of Education
and possibly accept operating restrictions as well. These
financial responsibility tests are applied to each institution
on an annual basis based on the institutions audited
financial statements, and may be applied at other times, such as
if the institution undergoes a change in control. These tests
may also be applied to an institutions parent company or
other related entity. The operating restrictions that may be
placed on an institution that does not meet the quantitative
standards of financial responsibility include being transferred
from the advance payment method of receiving Title IV funds
to either the reimbursement or the heightened cash monitoring
system, which could result in a significant delay in the
institutions receipt of those funds. For example, when we
were recertified by the Department of Education to participate
in the Title IV programs in May 2005, the Department of
Education reviewed our fiscal year 2004 audited financial
statements and advised us that our composite score under the
Department of Educations financial responsibility formula
reflected financial weakness. As a result of this and other
concerns about our administrative capability, the Department of
Education required us to post a letter of credit, accept
restrictions on the growth of our program offerings and
enrollment, and receive Title IV funds under the heightened
cash monitoring system of payment rather than by advance
payment. In 2006 and 2007, the Department of Education
eliminated each of these requirements and restrictions. However,
if, in the future, we fail to satisfy the Department of
Educations financial responsibility standards, we could
experience increased regulatory compliance costs or delays in
our receipt of Title IV funds because we could be required
to post a letter of credit or be subjected to operating
restrictions, or both. Our failure to secure a letter of credit
in
13
these circumstances could cause us to lose our ability to
participate in the Title IV programs, which would
materially adversely affect us.
If we
do not comply with the Department of Educations
administrative capability standards, we could suffer financial
penalties, be required to accept other limitations in order to
continue participating in the Title IV programs, or lose
our eligibility to participate in the Title IV
programs.
To continue participating in the Title IV programs, an
institution must demonstrate to the Department of Education that
the institution is capable of adequately administering the
Title IV programs under specific standards prescribed by
the Department of Education. These administrative capability
criteria require, among other things, that the institution has
an adequate number of qualified personnel to administer the
Title IV programs, has adequate procedures for disbursing
and safeguarding Title IV funds and for maintaining
records, submits all required reports and financial statements
in a timely manner, and does not have significant problems that
affect the institutions ability to administer the
Title IV programs. If we fail to satisfy any of these
criteria, the Department of Education may assess financial
penalties against us, restrict the manner in which we receive
Title IV funds to us, require us to post a letter of
credit, place us on provisional certification status, or limit
or terminate our participation in the Title IV programs,
any of which could materially adversely affect us.
We
would lose our ability to participate in the Title IV
programs if we fail to maintain our institutional accreditation,
and our student enrollments could decline if we fail to maintain
any of our accreditations or approvals.
An institution must be accredited by an accrediting commission
recognized by the Department of Education in order to
participate in the Title IV programs. We have institutional
accreditation by the Higher Learning Commission, which is an
accrediting commission recognized by the Department of
Education. To remain accredited, we must continuously meet
accreditation standards relating to, among other things,
performance, governance, institutional integrity, educational
quality, faculty, administrative capability, resources, and
financial stability. We were reaccredited by the Higher Learning
Commission in 2007, and the next scheduled comprehensive
evaluation will be conducted in
2016-2017.
While, during the 2007 reaccreditation process, the Higher
Learning Commission concluded that we were in compliance with
its accreditation standards, it did note certain deficiencies to
be addressed by us. See Regulation
Accreditation. In February 2009, we filed a monitoring
report with the Higher Learning Commission addressing our
progress in resolving these deficiencies and in March 2009, we
received notification from the Higher Learning Commission that
our report was accepted and that no further reports are
required. The Higher Learning Commission is currently reviewing
our request to operate at nine additional off-campus sites. If
we fail to satisfy any of the Higher Learning Commissions
standards, we could lose our accreditation by the Higher
Learning Commission, which would cause us to lose our
eligibility to participate in the Title IV programs and
could cause a significant decline in our total student
enrollments and have a material adverse effect on us. In
addition, many of our individual educational programs are also
accredited by specialized accrediting commissions or approved by
specialized state agencies. If we fail to satisfy the standards
of any of those specialized accrediting commissions or state
agencies, we could lose the specialized accreditation or
approval for the affected programs, which could result in
materially reduced student enrollments in those programs and
have a material adverse effect on us.
If we
do not maintain our state authorization in Arizona, we may not
operate or participate in the Title IV
programs.
A school that grants degrees or certificates must be authorized
by the relevant education agency of the state in which it is
located. We are located in the state of Arizona and are
authorized by the Arizona State Board for Private Postsecondary
Education. State authorization is also required for our students
to be eligible to receive funding under the Title IV
programs. To maintain our state authorization, we must
continuously meet standards relating to, among other things,
educational programs, facilities, instructional and
administrative staff, marketing and recruitment, financial
operations, addition of new locations and educational programs,
and various operational and administrative procedures. If we
fail to satisfy any of these standards,
14
we could lose our authorization by the Arizona State Board for
Private Postsecondary Education to offer our educational
programs, which would also cause us to lose our eligibility to
participate in the Title IV programs and have a material
adverse effect on us.
If any
of the education regulatory agencies that regulate us do not
approve or delay their approval of any transaction involving us
that constitutes a change in control, our ability to
operate or participate in the Title IV programs may be
impaired.
If we experience a change in control under the standards of the
Department of Education, the Higher Learning Commission, the
Arizona State Board for Private Postsecondary Education, or any
other applicable state education agency or accrediting
commission, we must notify and/or seek the approval of each such
agency. These agencies do not have uniform criteria for what
constitutes a change in control. Transactions or events that
typically constitute a change in control include significant
acquisitions or dispositions of the voting stock of an
institution or its parent company, and significant changes in
the composition of the board of directors of an institution or
its parent company. Some of these transactions or events may be
beyond our control. Our failure to obtain, or a delay in
receiving, approval of any change in control from the Department
of Education, the Higher Learning Commission, or the Arizona
State Board for Private Postsecondary Education could impair our
ability to operate or participate in the Title IV programs,
which could have a material adverse effect on our business,
prospects, financial condition, and results of operations. Our
failure to obtain, or a delay in receiving, approval of any
change in control from any other state in which we are currently
licensed or authorized, or from any of our specialized
accrediting commissions, could require us to suspend our
activities in that state or suspend offering the applicable
programs until we receive the required approval, or could
otherwise impair our operations. The potential adverse effects
of a change in control could influence future decisions by us
and our stockholders regarding the sale, purchase, transfer,
issuance, or redemption of our stock, which could discourage
bids for your shares of our stock and could have an adverse
effect on the market price of your shares.
In connection with our initial public offering in November 2008,
we submitted a description of the offering to the Department of
Education, including a description of a proxy and voting
agreement that has been entered into by certain of our
stockholders. Pursuant to the agreement, Brent D. Richardson,
our Executive Chairman, and Christopher C. Richardson, our
General Counsel and a director (collectively, the
Richardson Voting Group), controlled the voting
power of approximately 42.9% of our total outstanding voting
stock after the initial public offering. See Certain
Relationships and Related Transactions Voting
Agreement. Based on this description, the Department of
Education concluded that the initial public offering did not
result in a change in control under the Department of
Educations regulations. The Higher Learning Commission did
consider our initial public offering to be a change in control
under its policies and, while it approved our consummation of
the offering, it informed us that it would conduct a site visit
to confirm the appropriateness of the approval and to evaluate
whether we continue to meet the Higher Learning
Commissions eligibility criteria. The Higher Learning
Commission conducted its site visit in March 2009 and
determined, among other things, that the initial public offering
was conducted in a manner that did not disrupt our ongoing
operations and that no further action would be required as a
result of the change in control. As a result, the Higher
Learning Commission formally approved the change in control in
June 2009. In addition, we notified the Arizona State Board for
Private Postsecondary Education of our initial public offering
and, based on our communications with that agency, we do not
believe that our initial public offering constituted a change in
control under Arizona law. We also notified other accrediting
commissions and state agencies, as we believed necessary, of our
initial public offering and the reasons why we believed the
offering did not constitute a change in control under their
respective standards, or to determine what was required if any
such commission or agency did consider the offering to
constitute a change in control. None of the other accrediting
commissions and state agencies that we notified of our initial
public offering has advised us that it concluded that the
offering constituted a change in control under its policies or
that it required us to take any further action.
With respect to publicly-traded corporations, like us,
Department of Education regulations provide that a change in
control occurs if either: (i) there is an event that would
obligate the corporation to file a Current
15
Report on
Form 8-K
with the Securities and Exchange Commission, or the SEC,
disclosing a change in control, or (ii) the corporation has
a stockholder that owns, or has voting control over, at least
25% of the total outstanding voting stock of the corporation and
is the largest stockholder of the corporation, and that
stockholder ceases to own, or have voting control over, at least
25% of such stock or ceases to be the largest stockholder. The
Higher Learning Commission adopted new policies and procedures
with respect to changes in control in June 2009, and one such
policy provides that an institution is considered to undergo a
change in control if a person or group increases or decreases
its control of shares to greater than or less than 25% of the
total outstanding shares of the stock of a parent corporation
that owns or controls the accredited institution and, in such
event, requires the institution to obtain its approval in
advance of the change. In addition, the standards of the Arizona
State Board for Private Postsecondary Education provide that an
institution that is owned by a publicly-traded corporation whose
control is vested in the voting members of the board of
directors, like us, undergoes a change in control if 50% or more
of the voting members of the board of directors change within a
12-month
period or the chief executive officer of the corporation
changes. Based on the number of shares of common stock expected
to be sold by us and the selling stockholders in this offering,
and the addition of the Endeavour Entities (as defined herein)
as parties to the proxy and voting agreement, we believe that
the Richardson Voting Group will continue to have voting power
over 25% or more of our total outstanding voting stock after the
completion of the offering and that this offering will not
constitute a change in control under the Department of
Educations regulations. In addition, we have been advised
by the Higher Learning Commission and the Arizona State Board
for Private Postsecondary Education that this offering will not
constitute a change in control under their respective rules and
policies, but we have not received any indication from the
Department of Education whether it will consider this offering
to constitute a change in control under its regulations.
Even if this offering will not constitute a change of control
under the Department of Educations regulations or the
Higher Learning Commissions policies, under the terms of
the voting agreement with the Richardson Voting Group, if any
person party to the voting agreement transfers shares covered by
the proxy in registered or open-market sales, the proxy is no
longer effective as to such shares. Accordingly, the number of
shares over which the Richardson Voting Group will continue to
hold voting power pursuant to the voting agreement will decrease
over time as shares held by other parties to the voting
agreement are sold, and we may not be aware of these sales since
many of the shares subject to the voting agreement are held in
street name. If at any time in the future, as a
result of such future registered or open-market sales, the
number of shares over which the Richardson Voting Group holds
voting power falls below 25%, a change in control will occur. At
that point, with respect to the Department of Education, we will
lose our eligibility to participate in the Title IV
programs and must apply to the Department of Education in order
to reestablish such eligibility. If we file the required
application and follow other procedures, the Department of
Education may temporarily certify us on a provisional basis
following the change in control, so that our students retain
access to Title IV program funds until the Department of
Education completes its full review. In addition, the Department
of Education will extend such temporary provisional
certification if we timely file other required materials. While
we expect to file all such applications and other materials
within applicable deadlines, there is no assurance that we will
be able to do so because we cannot be certain of the percentage
of stock that is subject to the Richardson Voting Group at any
given time in order to be certain if and when the Richardson
Voting Group falls below the applicable 25% threshold. If we
fail to meet any of these application and other deadlines, our
certification will expire and our students will not be eligible
to receive Title IV program funds until the Department of
Education completes its full review, which commonly takes
several months and may take longer. If the Department of
Education approves our application after a change in control, it
will certify us on a provisional basis for a period of up to
approximately three years, although we cannot predict how the
Department of Education will process this provisional
recertification or what restrictions may be imposed if such
change in control occurs while we remain on
month-to-month
status and subject to the ongoing investigation by the Office of
Inspector General of the Department of Education or the qui
tam lawsuit. See Regulation Regulatory
Standards that May Restrict Institutional Expansion or Other
Changes Change in ownership resulting in a change in
control.
With respect to the Higher Learning Commission, if we anticipate
that the number of shares over which the Richardson Voting Group
holds voting power will fall below 25% at any time in the
future, we would be required to obtain the approval of the
Higher Learning Commission before such event occurs. However,
16
because we may be unaware when such event occurs, we would seek
the cooperation of the Higher Learning Commission to allow us to
arrange an appropriate review procedure at that time since there
may not be an opportunity to obtain the Higher Learning
Commissions advance review and approval, as is typically
required by its policies. In that circumstance, we cannot
predict whether the Higher Learning Commission would impose any
limitations or conditions on us, or identify any compliance
issues related to us in the context of the change in control
process, that could result in our loss of accreditation by the
Higher Learning Commission. Any such loss of accreditation would
result in our loss of eligibility to participate in the
Title IV programs and cause a significant decline in our
student enrollments.
If a
substantial number of our students cannot secure Title IV
loans as a result of decreased lender participation in the
Title IV programs or if lenders increase the costs or
reduce the benefits associated with the Title IV loans they
provide, we could be materially adversely
affected.
The cumulative impact of recent regulatory and market
developments and conditions, including the widespread disruption
in the credit and financial markets, has caused some lenders to
cease providing Title IV loans to students, including some
lenders that previously provided our students with Title IV
loans, also known as Federal Family Education program loans, or
FFEL loans. Other lenders have reduced the benefits and
increased the fees associated with the Title IV loans they
provide. We and other schools have had to modify student loan
practices in ways that result in higher administrative costs. If
the cost of Title IV loans increases or availability
decreases, some students may not be able to take out loans and
may not enroll in a postsecondary institution. In May 2008, new
federal legislation was enacted to attempt to ensure that all
eligible students would be able to obtain Title IV loans in
the future and that a sufficient number of lenders would
continue to provide Title IV loans. Among other things,
that legislation:
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authorized the Department of Education to purchase Title IV
loans from lenders, thereby providing capital to the lenders to
enable them to continue making Title IV loans to
students; and
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permitted the Department of Education to designate institutions
eligible to participate in a lender of last resort
program, under which federally recognized student loan guaranty
agencies would be required to make Title IV loans to all
otherwise eligible students at those institutions.
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While this legislation appears to have provided some stability
to the marketplace for Title IV loans, it is not yet clear
if it ultimately will be effective in ensuring students
access to Title IV loans. The environment surrounding
access to and cost of student loans remains in a state of flux.
The Department of Education proposed new regulations regarding
student loans in July 2009, which could go into effect on
July 1, 2010, and Congress is in the process of considering
legislation to eliminate the FFEL loan program and move all
federal student lending into the Federal Direct Loan Program,
known as the FDL program. The uncertainty surrounding these
issues, and any resolution of these issues that increases loan
costs or reduces students access to Title IV loans,
may adversely affect our student enrollments. Although we are
approved to participate in the FDL program, because a
significant percentage of our revenue is derived from the
Title IV programs, any action by Congress that
significantly reduces Title IV program funding or our
ability or the ability of our students to participate in the
Title IV programs could increase our costs of compliance,
reduce the ability of some students to finance their education
at our institution, require us to seek to arrange for other
sources of financial aid for our students and materially
decrease our student enrollment, each of which could have a
material adverse effect on us. In addition, a transition to the
FDL program could cause disruptions in the administration of
Title IV program loans to our students if we or the
Department of Education encounter difficulties with the systems
or processes necessary for increased FDL program loans.
Our
failure to comply with new regulations promulgated by the
Department of Education could result in financial penalties, or
the limitation, suspension, or termination of our continued
participation in the Title IV programs.
The Department of Education has been working since December 2008
to develop regulations through a negotiated rulemaking process
to carry out the numerous revisions to the Title IV program
regulations required by the reauthorization of the Higher
Education Act in August 2008. Negotiated rulemaking is a process
whereby the Department of Education consults with members of the
postsecondary education community to
17
identify issues of concern and attempts to agree on proposed
regulatory revisions to address those issues before the
Department of Education formally proposes any regulations.
Following the conclusion of such negotiated rulemaking, in July
and August 2009, the Department of Education proposed
regulations relating to, among other things, the relationships
between schools and lenders of both private and Title IV
loans, the approval and oversight of accrediting agencies, and
general programmatic requirements applicable to the
Title IV programs, including the 90/10 Rule.
The Department of Education is expected to publish new final
regulations by November 1, 2009, which is the required
deadline in order for such regulations to take effect on
July 1, 2010. In addition, in May 2009, the Department of
Education announced its intent to establish new negotiated
rulemaking committees that are expected to begin their
discussions as soon as the fall of 2009, and to address a number
of significant issues, including: compensation paid by
institutions to persons or entities engaged in student
recruiting or admission activities; the determination of
satisfactory academic progress under different academic
calendars; state authorization as a component of institutional
eligibility; the definition of a credit hour for purposes of
determining program eligibility status, particularly in the
context of awarding Pell Grants; verification of information on
student financial aid applications; and the definition of a high
school diploma as a condition of a students eligibility
for Title IV aid.
The issues addressed in the regulations that have been or are
expected to be proposed by the Department of Education, as well
as the issues to be addressed in the upcoming negotiated
rulemaking process, are broad and complex and concern a number
of significant aspects of the Title IV programs, including
eligibility and certification, administrative capability,
school-lender relationships, the 90/10 Rule,
incentive compensation, and student loan default rates. See
Regulation Regulation of Student Financial Aid
Programs The 90/10 Rule. At this time, we
cannot be certain whether and to what extent any changes may
affect our ability to remain eligible to participate in the
Title IV programs or require us to incur additional costs
in connection with our administration of the Title IV
programs. Any future changes that jeopardize our eligibility to
participate in some or all of the Title IV programs could
materially adversely affect us.
An
increase in interest rates could adversely affect our ability to
attract and retain students.
For our fiscal years ended December 31, 2007 and 2008, we
derived cash receipts equal to approximately 70.2% and 74.4%,
respectively, of our net revenue from tuition financed under the
Title IV programs, which include student loans with
interest rates subsidized by the federal government.
Additionally, some of our students finance their education
through private loans that are not subsidized. If our
students employment circumstances are adversely affected
by regional or national economic downturns, they may be more
heavily dependent on student loans. Interest rates have reached
relatively low levels in recent years, creating a favorable
borrowing environment for students. However, in the event
interest rates increase or Congress decreases the amount
available for federal student aid, our students may have to pay
higher interest rates on their loans. Any future increase in
interest rates will result in a corresponding increase in
educational costs to our existing and prospective students,
which could result in a significant reduction in our student
population and revenues. Higher interest rates could also
contribute to higher default rates with respect to our
students repayment of their education loans. Higher
default rates may in turn adversely impact our eligibility to
participate in some or all of the Title IV programs, which
could result in a significant reduction in our student
population and our profitability. See We may lose our
eligibility to participate in the Title IV programs if our
student loan default rates are too high located elsewhere
in Risk Factors for further information.
Our
failure to comply with the regulatory requirements of states
other than Arizona could result in actions taken by those states
that could have a material adverse effect on our
enrollments.
Almost every state imposes regulatory requirements on
educational institutions that have physical facilities located
within the states boundaries. These regulatory
requirements establish standards in areas such as educational
programs, facilities, instructional and administrative staff,
marketing and recruitment, financial operations, addition of new
locations and educational programs, and various operational and
administrative procedures, some of which are different than the
standards prescribed by the Department of Education or the
Arizona State Board for Private Postsecondary Education. In
addition, several states have sought to assert jurisdiction over
educational institutions offering online degree programs that
have no physical location in the
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state but that have some activity in the state, such as
enrolling or offering educational services to students who
reside in the state, employing faculty who reside in the state,
or advertising to or recruiting prospective students in the
state. State regulatory requirements for online education vary
among the states, are not well developed in many states, are
imprecise or unclear in some states, and can change frequently.
In the future, states could coordinate their efforts in order to
more aggressively attempt to regulate or restrict schools
offering of online education.
In addition to Arizona, we have determined that our activities
in certain states constitute a presence requiring licensure or
authorization under the requirements of the state education
agency in those states. In certain other states, we have
obtained approvals to operate as we have determined necessary in
connection with our marketing and recruiting activities. If we
fail to comply with state licensing or authorization
requirements for a state, or fail to obtain licenses or
authorizations when required, we could lose our state licensure
or authorization by that state or be subject to other sanctions,
including restrictions on our activities in that state, fines,
and penalties. The loss of licensure or authorization in a state
other than Arizona could prohibit us from recruiting prospective
students or offering educational services to current students in
that state, which could significantly reduce our enrollments and
revenues and materially adversely effect us.
State laws and regulations are not always precise or clear, and
regulatory agencies may sometimes disagree with the way we have
interpreted or applied these requirements. Any misinterpretation
by us of these regulatory requirements or adverse changes in
regulations or interpretations thereof by regulators could
materially adversely affect us.
The
inability of our graduates to obtain a professional license or
certification in their chosen field of study could reduce our
enrollments and revenues, and potentially lead to student claims
against us that could be costly to us.
Many of our students, particularly those in our education and
healthcare programs, seek a professional license or
certification in their chosen fields following graduation. A
students ability to obtain a professional license or
certification depends on several factors, including whether the
institution and the students program were accredited by a
particular accrediting commission or approved by a professional
association or by the state in which the student seeks
employment. Additional factors are outside the control of the
institution, such as the individual students own
background and qualifications. If one or more states refuse to
recognize a significant number of our students for professional
licensing or certification based on factors relating to our
institution or programs, the potential growth of those programs
would be negatively impacted and we could be exposed to claims
or litigation by students or graduates based on their inability
to obtain their desired professional license or certification,
each of which could materially adversely affect us.
Increased
scrutiny and regulation by various governmental agencies of
relationships between student loan providers and educational
institutions and their employees have produced significant
uncertainty concerning restrictions applicable to the
administration of both Title IV and private student loan
programs and the funding for those programs which, if not
satisfactorily or timely resolved, could result in increased
regulatory burdens and costs for us and could adversely affect
our student enrollments.
During 2007 and 2008, both Title IV and private student
loan programs came under increased scrutiny by the Department of
Education, Congress, state attorneys general, and other parties.
Issues that received extensive attention included allegations of
conflicts of interest between some institutions and lenders that
provide student loans, questionable incentives given by lenders
to some schools and school employees, allegations of deceptive
practices in the marketing of student loans, and schools leading
students to use certain lenders. Several institutions and
lenders were cited for these problems and paid several million
dollars in the aggregate to settle those claims. The practices
of numerous other schools and lenders were, and in some cases
continue to be, examined by government agencies at the federal
and state level. The Attorney General of the State of Arizona
requested extensive documentation from us and other institutions
in Arizona concerning student loan practices, and we provided
testimony in response to a subpoena from the Attorney General of
the State of Arizona about such practices. In 2008, without
admitting any wrongdoing, we agreed with the Attorney General of
the State of Arizona to conclude its investigation of us by
executing a Letter of
19
Assurance, whereby we agreed to conduct referrals of students to
lenders in accordance with our existing policies or any new
policies promulgated by the State of Arizona in the future and
to reimburse the state for the costs of its investigation in the
amount of approximately $20,000.
As a result of the increased scrutiny of student loan programs,
Congress has passed new laws, the Department of Education and
the Board of Governors of the Federal Reserve System have
promulgated or proposed new and stricter regulations, and
several states have adopted codes of conduct or enacted state
laws that further regulate the conduct of lenders, schools, and
school personnel. These new laws and regulations, among other
things, limit schools relationships with lenders, restrict
the types of services that schools may receive from lenders,
prohibit lenders from providing other types of loans to students
in exchange for Title IV loan volume from schools, and
require schools and lenders to provide additional information to
students concerning institutionally preferred lenders and the
terms of available student loans. The environment surrounding
access to and cost of student loans remains in a state of flux,
with additional legislation and regulatory changes being
considered at the state and federal levels. The Department of
Education proposed new regulations regarding student loans in
July 2009, which could go into effect on July 1, 2010, and
Congress is considering legislation to eliminate the FFEL loan
program and move all federal student lending into the FDL
program. This uncertainty, and any resolution of these issues
that increases loan costs or reduces students access to
student loans, may adversely affect our student enrollments,
which could have an adverse effect on us.
Government
agencies, regulatory agencies, and third parties may conduct
compliance reviews, bring claims, or initiate litigation against
us based on alleged violations of the extensive regulatory
requirements applicable to us, which could cause us to pay
monetary damages, be sanctioned or limited in our operations,
and expend significant resources to defend against those
claims.
Because we operate in a highly regulated industry, we are
subject to program reviews, audits, investigations, claims of
non-compliance, and lawsuits by government agencies, regulatory
agencies, students, employees, stockholders, and other third
parties alleging non-compliance with applicable legal
requirements, many of which are imprecise and subject to
interpretation. As we grow larger, this scrutiny of our business
may increase. If the result of any such proceeding is
unfavorable to us, we may lose or have limitations imposed on
our state licensing, accreditation, or Title IV program
participation; be required to pay monetary damages (including
triple damages in certain whistleblower suits); or be subject to
fines, injunctions, or other penalties, any of which could have
a material adverse effect on our business, prospects, financial
condition, and results of operations. In this regard, we are
currently subject to an investigation by the Department of
Educations Office of Inspector General, which is focused
on the manner in which we have compensated our enrollment
counselors and managers, and a qui tam lawsuit brought by
a former employee alleging violations in the same area. See
Risk Factors The Office of Inspector General
of the Department of Education has commenced an investigation of
Grand Canyon University, which is ongoing and which may result
in fines, penalties, other sanctions, and damage to our
reputation in the industry, Risk Factors
A qui tam lawsuit has been filed against us alleging,
among other things, that we have improperly compensated certain
of our enrollment counselors, and we may incur liability, be
subject to sanctions, or experience damage to our reputation as
a result of this lawsuit, and Regulation
Regulation of Federal Student Financial Aid Programs
Incentive compensation rule. Claims and lawsuits brought
against us, even if they are without merit, may also result in
adverse publicity, damage our reputation, negatively affect the
market price of our stock, adversely affect our student
enrollments, and reduce the willingness of third parties to do
business with us. Even if we adequately address the issues
raised by any such proceeding and successfully defend against
it, we may have to devote significant financial and management
resources to address these issues, which could harm our business.
A
decline in the overall growth of enrollment in postsecondary
institutions, or in the number of students seeking degrees
online or in our core disciplines, could cause us to experience
lower enrollment at our schools, which could negatively impact
our future growth.
According to a March 2009 report from the NCES, enrollment in
degree-granting, postsecondary institutions is projected to grow
10.0% over the ten-year period ending fall 2017 to approximately
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20.1 million. This growth is slower than the 25.8% increase
reported in the prior ten-year period ended in fall 2007, when
enrollment increased from 14.5 million in 1997 to
18.2 million in 2007. Similarly, a 2008 study by
Eduventures, LLC, projects a compound annual growth rate of
12.5% in online postsecondary education enrollment over the
five-year period ending fall 2013, which represents an aggregate
increase in online enrollment of 1.5 million. This growth
is slower than the 25.3% compound annual growth rate in the
prior five-year period ending fall 2008, which represented an
aggregate increase in online enrollment of 1.3 million. In
addition, according to a March 2008 report from the Western
Interstate Commission for Higher Education, the number of high
school graduates that are eligible to enroll in degree-granting,
postsecondary institutions is expected to peak at approximately
3.3 million for the class of 2008, falling in the period
between
2007-08 and
2013-14 by
about 150,000 in total before resuming a growth pattern for the
foreseeable future thereafter. In order to maintain current
growth rates, we will need to attract a larger percentage of
students in existing markets and expand our markets by creating
new academic programs. In addition, if job growth in the fields
related to our core disciplines is weaker than expected, as a
result of any regional or national economic downturn or
otherwise, fewer students may seek the types of degrees that we
offer. Our failure to attract new students, or the decisions by
prospective students to seek degrees in other disciplines, would
have an adverse impact on our future growth.
If our
students were unable to obtain private loans from third-party
lenders, our business could be adversely affected given our
students reliance on such loans to satisfy their
educational expenses.
During the fiscal year ended December 31, 2008, private
loans to students at our school represented approximately 2.9%
of our revenue (calculated on a cash basis) as compared to 5.1%
of revenue in fiscal 2007. These loans were provided pursuant to
private loan programs and were made available to eligible
students to fund a portion of the students costs of
education not covered by the Title IV programs and state
financial aid sources. Private loans are made to our students by
lending institutions and are non-recourse to us. The 2008
reauthorization of the Higher Education Act and related proposed
and final regulations place significant new restrictions on the
relationships between institutions and the providers of private
loans, and require that certain specific terms and disclosures
accompany such loans. This increased regulatory burden, coupled
with recent adverse market conditions for consumer and federally
guaranteed student loans (including lenders difficulties
in reselling or syndicating student loan portfolios) have
resulted, and could continue to result, in providers of private
loans reducing the availability of or increasing the costs
associated with providing private loans to postsecondary
students. In particular, loans to students with low credit
scores who would not otherwise be eligible for credit-based
private loans have become increasingly difficult to obtain.
Prospective students may find that these increased financing
costs make borrowing prohibitively expensive and abandon or
delay enrollment in postsecondary education programs. If any of
these scenarios were to occur, our students ability to
finance their education could be adversely affected and our
student population could decrease, which could have a material
adverse effect on our business, prospects, financial condition,
and results of operations.
We are
subject to sanctions if we pay impermissible commissions,
bonuses, or other incentive payments to persons involved in
certain recruiting, admissions, or financial aid
activities.
A school participating in the Title IV programs may not
provide, or contract with a third party that provides, any
commission, bonus, or other incentive payment based on success
in enrolling students or securing financial aid to any person
involved in student recruiting or admission activities or in
making decisions regarding the awarding of Title IV program
funds. The Department of Educations regulations set forth
12 safe harbors which describe payments and
arrangements that do not violate the incentive compensation
rule. The Department of Educations regulations make clear
that the safe harbors are not a complete list of permissible
practices under this law. One of these safe harbors permits
adjustments to fixed salary for enrollment personnel provided
that such adjustments are not made more than twice during any
twelve month period, and that any adjustment is not based solely
on the number of students recruited, admitted, enrolled, or
awarded financial aid. In addition, such safe harbors do not
address non-cash awards to enrollment personnel.
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As described in Risk Factors The Office of
Inspector General of the Department of Education has commenced
an investigation of Grand Canyon University, which is ongoing
and which may result in fines, penalties, other sanctions, and
damage to our reputation in the industry, and in
Regulation Regulation of Federal Student
Financial Aid Programs Incentive compensation
rule, we are currently subject to an investigation by the
Department of Educations Office of Inspector General,
which is focused on the manner in which we have compensated our
enrollment counselors and managers. In addition, in recent years
several for-profit education companies, including us, have been
faced with whistleblower lawsuits, known as qui
tam cases, by current or former employees alleging
violations of this prohibition. See Risk
Factors A qui tam lawsuit has been filed against us
alleging, among other things, that we have improperly
compensated certain of our enrollment counselors, and we may
incur liability, be subject to sanctions, or experience damage
to our reputation as a result of this lawsuit. While we
believe that our compensation policies and practices at issue in
the complaint have not been based on success in enrolling
students in violation of applicable law, the Department of
Educations regulations and interpretations of the
incentive compensation law do not establish clear criteria for
compliance in all circumstances and some of our practices,
including in respect of non-cash awards, have not been within
the scope of any specific safe harbor provided in
the compensation regulations. If the Department of Education
determines as a result of the pending investigation that we have
violated this law, if we are found to be liable in the pending
qui tam action, or if we or any third parties we have
engaged otherwise violate this law, we could be fined or
sanctioned by the Department of Education, or subjected to other
monetary liability or penalties that could be substantial, any
of which could harm our reputation, impose significant costs on
us, and have a material adverse effect on our business,
prospects, financial condition, and results of operations.
Our
reputation and our stock price may be negatively affected by
adverse publicity or by the actions of other postsecondary
educational institutions.
In recent years, regulatory proceedings and litigation have been
commenced against various postsecondary educational institutions
relating to, among other things, deceptive trade practices,
false claims against the government, and non-compliance with
Department of Education requirements, state education laws, and
state consumer protection laws. These proceedings have been
brought by the Department of Education, the U.S. Department
of Justice, the SEC, and state governmental agencies, among
others. These allegations have attracted adverse media coverage
and have been the subject of legislative hearings and regulatory
actions at both the federal and state levels, focusing not only
on the individual schools but in some cases on the for-profit
postsecondary education sector as a whole. Adverse media
coverage regarding other for-profit education companies or other
educational institutions could damage our reputation, result in
lower enrollments, revenues, and operating profit, and have a
negative impact on our stock price. Such coverage could also
result in increased scrutiny and regulation by the Department of
Education, Congress, accrediting commissions, state
legislatures, state attorneys general, or other governmental
authorities of all educational institutions, including us.
If the
percentage of our revenue that is derived from the Title IV
programs is too high, we may lose our eligibility to participate
in those programs.
A for-profit institution loses its eligibility to participate in
the Title IV programs if, under a formula that requires
cash basis accounting and other adjustments to the calculation
of revenue, it derives more than 90% of its revenues from those
programs in two consecutive fiscal years. The period of
ineligibility covers at least the next two succeeding fiscal
years and any Title IV funds already received by the
institution and its students during the period of ineligibility
would have to be returned to the applicable lender or the
Department of Education. An institution whose rate exceeds 90%
for any single year will be placed on provisional certification
for at least two fiscal years. The August 2008 reauthorization
of the Higher Education Act made significant changes to this
revenue requirement, including certain changes to the formula
used to calculate a schools ratio. Using the Department of
Educations formula that was in effect prior to the August
2008 reauthorization of the Higher Education Act, we have
calculated that, for our 2007 and 2008 fiscal years, we derived
approximately 74.0% and 78.6%, respectively, of our revenue from
the Title IV programs. We are currently assessing what
impact, if any, the revised formula and other changes in federal
law will have on our 90/10 calculation. As a result of recent
changes in federal law that increased Title IV grant and
loan limits, as
22
well as the current economic downturn, which has adversely
affected the employment circumstances of our students and their
parents and increased their reliance on Title IV programs,
we expect the percentage of our revenue that we receive from the
Title IV programs to continue to increase in the future,
making it more difficult for us to satisfy this requirement.
Exceeding the 90% threshold such that we lost our eligibility to
participate in the Title IV programs would have a material
adverse effect on our business, prospects, financial condition,
and results of operations.
We may
lose our eligibility to participate in the Title IV
programs if our student loan default rates are too
high.
An institution may lose its eligibility to participate in some
or all of the Title IV programs if, for three consecutive
years, 25% or more of its students who were required to begin
repayment on their student loans in one year default on their
payment by the end of the following year. In addition, an
institution may lose its eligibility to participate in some or
all of the Title IV programs if the default rate of its
students exceeds 40% for any single year. The August 2008
reauthorization of the Higher Education Act extends by one year
the period for which students defaults on their loans will
be included in the calculation of an institutions default
rate, a change that is expected to increase our cohort default
rates. The new law also increases the threshold for an
institution to lose its eligibility to participate in the
relevant Title IV programs from 25% to 30% over three
consecutive years, while leaving the threshold at 40% for a
single year. These changes to the law take effect for
institutions cohort default rates for federal fiscal year
2009, which are expected to be calculated and issued by the
Department of Education in 2012. While our cohort default rates
have historically been significantly below these levels, we
cannot assure you that this will continue to be the case. For
example, we expect our cohort default rate for the 2008 federal
fiscal year to increase (but remain well below the Department of
Educations thresholds) due primarily to the impact of
current economic conditions on our students and former students.
In addition, increases in interest rates or declines in income
or job losses for our students could contribute to higher
default rates on student loans. Exceeding the student loan
default rate thresholds and losing our eligibility to
participate in the Title IV programs would have a material
adverse effect on our business, prospects, financial condition,
and results of operations. Any future changes in the formula for
calculating student loan default rates, economic conditions, or
other factors that cause our default rates to increase, could
place us in danger of losing our eligibility to participate in
some or all of the Title IV programs and materially
adversely affect us.
We are
subject to sanctions if we fail to correctly calculate and
timely return Title IV program funds for students who
withdraw before completing their educational
program.
A school participating in the Title IV programs must
calculate the amount of unearned Title IV program funds
that it has disbursed to students who withdraw from their
educational programs before completing such programs and must
return those unearned funds to the appropriate lender or the
Department of Education in a timely manner, generally within
45 days of the date the school determines that the student
has withdrawn. If the unearned funds are not properly calculated
and timely returned for a sufficient percentage of students, we
may have to post a letter of credit in favor of the Department
of Education equal to 25% of the Title IV funds that should
have been returned for such students in the prior fiscal year,
we may be liable for repayment of Title IV funds and
related interest and we could be fined or otherwise sanctioned
by the Department of Education, which could increase our cost of
regulatory compliance and materially adversely affect us.
Further, a failure to comply with these regulatory requirements
could result in termination of our ability to participate in the
Title IV programs, which would materially affect us.
We
cannot offer new programs, expand our operations into certain
states, or acquire additional schools if such actions are not
timely approved by the applicable regulatory agencies, and we
may have to repay Title IV funds disbursed to students
enrolled in any such programs, schools, or states if we do not
obtain prior approval.
Our expansion efforts include offering new educational programs.
In addition, we may increase our operations in additional states
and seek to acquire existing schools from other companies. If we
are unable to
23
obtain the necessary approvals for such new programs,
operations, or acquisitions from the Department of Education,
the Higher Learning Commission, the Arizona State Board for
Private Postsecondary Education, or any other applicable state
education agency or accrediting commission, or if we are unable
to obtain such approvals in a timely manner, our ability to
consummate the planned actions and provide Title IV funds
to any affected students would be impaired, which could have a
material adverse effect on our expansion plans. If we were to
determine erroneously that any such action did not need approval
or that we had all required approvals, we could be liable for
repayment of the Title IV program funds provided to
students in that program or at that location.
Risks
Related to Our Business
Our
success depends, in part, on the effectiveness of our marketing
and advertising programs in recruiting new
students.
Building awareness of Grand Canyon University and the programs
we offer is critical to our ability to attract prospective
students. It is also critical to our success that we convert
prospective students to enrolled students in a cost-effective
manner and that these enrolled students remain active in our
programs. Some of the factors that could prevent us from
successfully recruiting, enrolling, and retaining students in
our programs include:
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the reduced availability of, or higher interest rates and other
costs associated with, Title IV loan funds or other sources
of financial aid;
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the emergence of more successful competitors;
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factors related to our marketing, including the costs and
effectiveness of Internet advertising and broad-based branding
campaigns and recruiting efforts;
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performance problems with our online systems;
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failure to maintain institutional and specialized accreditations;
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the requirements of the education agencies that regulate us
which restrict schools initiation of new programs and
modification of existing programs;
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the requirements of the education agencies that regulate us
which restrict the ways schools can compensate their recruitment
personnel;
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increased regulation of online education, including in states in
which we do not have a physical presence;
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restrictions that may be imposed on graduates of online programs
that seek certification or licensure in certain states;
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student dissatisfaction with our services and programs;
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the results of the ongoing investigation by the Department of
Educations Office of Inspector General and the pending
qui tam action regarding the manner in which we have
compensated our enrollment personnel, and possible remedial
actions or other liability resulting therefrom;
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damage to our reputation or other adverse effects as a result of
negative publicity in the media, in industry or governmental
reports, or otherwise, affecting us or other companies in the
for-profit postsecondary education sector;
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price reductions by competitors that we are unwilling or unable
to match;
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a decline in the acceptance of online education;
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an adverse economic or other development that affects job
prospects in our core disciplines; and
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a decrease in the perceived or actual economic benefits that
students derive from our programs.
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If we are unable to continue to develop awareness of Grand
Canyon University and the programs we offer, and to recruit,
enroll, and retain students, our enrollments would suffer and
our ability to increase revenues and maintain profitability
would be significantly impaired.
If we
are unable to hire and train new and existing employees
responsible for student recruitment, the effectiveness of our
student recruiting efforts would be adversely
affected.
In order to support our planned revenue growth we intend to
hire, develop, and train a significant number of additional
employees responsible for student recruitment and retain and
continue to develop and train our current student recruitment
personnel. Our ability to develop and maintain a strong student
recruiting function may be affected by a number of factors,
including our ability to integrate and motivate our enrollment
counselors, our ability to effectively train our enrollment
counselors, the length of time it takes new enrollment
counselors to become productive, regulatory restrictions on the
method of compensating enrollment counselors, and the
competition in hiring and retaining enrollment counselors. If we
are unable to hire, develop, and retain a sufficient number of
qualified enrollment counselors, our ability to increase
enrollments would be adversely affected.
We
operate in a highly competitive industry, and competitors with
greater resources could harm our business.
The postsecondary education market is highly fragmented and
competitive. We compete for students with traditional public and
private two-year and four-year colleges and universities and
other for-profit schools, including those that offer online
learning programs. Many public and private schools, colleges,
and universities, including most major colleges and
universities, offer online programs. We expect to experience
additional competition in the future as more colleges,
universities, and for-profit schools offer an increasing number
of online programs. Each of these competitors may develop
platforms or other technologies, including technologies such as
streaming video, that allow for greater levels of interactivity
between faculty and students and that are superior to the
platform and technology we use, and these differences may affect
our ability to recruit and retain students. Public institutions
receive substantial government subsidies, and public and private
non-profit institutions have access to government and foundation
grants, tax-deductible contributions, and other financial
resources generally not available to for-profit schools.
Accordingly, public and private non-profit institutions may have
instructional and support resources superior to those in the
for-profit sector, and public institutions can offer
substantially lower tuition prices. Some of our competitors in
both the public and private sectors also have substantially
greater financial and other resources than we do. We may not be
able to compete successfully against current or future
competitors, including with respect to our ability to acquire or
compete with technologies being developed by our competitors,
and may face competitive pressures that could adversely affect
our business, prospects, financial condition, and results of
operations. These competitive factors could cause our
enrollments, revenues, and profitability to significantly
decrease and could render our online delivery format less
competitive or obsolete.
Capacity
constraints, system disruptions, or security breaches in our
online computer networks could have a material adverse effect on
our ability to attract and retain students.
The performance and reliability of the infrastructure of our
online operations are critical to our reputation and to our
ability to attract and retain students. Any computer system
disruption or failure, or a sudden and significant increase in
traffic on the servers that host our online operations, may
result in our online courses and programs being unavailable for
a period of time. In addition, any significant failure of our
computer networks or servers, whether as a result of third-party
actions or in connection with planned upgrades and conversions,
could disrupt our on-campus operations. Individual, sustained,
or repeated occurrences could significantly damage the
reputation of our online operations and result in a loss of
potential or existing students. Additionally, our online
operations are vulnerable to interruption or malfunction due to
events beyond our control, including natural disasters and
network and telecommunications failures. Our computer networks
may also be vulnerable to unauthorized access, computer hackers,
computer viruses, and other security problems. A user who
circumvents security measures could misappropriate proprietary
information or
25
cause interruptions to or malfunctions in operations. As a
result, we may be required to expend significant resources to
protect against the threat of these security breaches or to
alleviate problems caused by these incidents. Any interruption
to our online operations could have a material adverse effect on
our ability to attract students to our online programs and to
retain those students.
The
implementation of our new back office systems could impact our
ability to timely and accurately admit students to the
university and register them for classes, bill students, certify
and disburse financial aid, prepare financial reports, or impact
the effectiveness of our internal controls over financial
reporting.
We plan to transition our online programs from a
term-based financial aid system (where all students,
including online students, begin programs and are eligible to
receive financial aid at periodic start dates pursuant to a
calendar-based term system) to a borrower-based
financial aid system (where each student may begin a program and
be eligible to receive financial aid at any time throughout the
year). As part of this transition, we are converting our back
office system from Datatel, Inc. to a series of programs
developed by Campus Management Corp., including CampusVue and
CampusPortal, and also implementing Microsofts Great
Plains accounting system. These new systems are intended to
allow us to manage our non-traditional online students with
greater ease and flexibility by providing for rolling and
flexible start dates. While we intend to maintain redundancies
between our old and new systems for a period of time while we
complete the conversions and ensure the that the new systems
operate as intended, if we do not effectively transition our
student and financial aid data to these systems or if these
systems do not operate as intended, it could adversely impact
the effectiveness of our internal controls over financial
reporting, as well as our ability to timely and accurately admit
students to the university and register them for classes, bill
students, certify and disburse financial aid, and prepare
financial reports. This may in turn affect our ability to comply
with the Department of Educations administrative
capability standards, as discussed under Risk
Factors If we do not comply with the Department of
Educations administrative capability standards, we could
suffer financial penalties, be required to accept other
limitations in order to continue participating in the
Title IV programs, or lose our eligibility to participate
in the Title IV programs.
We may
not be able to successfully implement our growth strategy if we
are not able to improve the content of our existing academic
programs or to develop new programs on a timely basis and in a
cost-effective
manner, or at all.
We continually seek to improve the content of our existing
programs and develop new programs in order to meet changing
market needs. The success of any of our programs and courses,
both ground and online, depends in part on our ability to expand
the content of our existing programs, develop new programs in a
cost-effective manner, and meet the needs of existing and
prospective students and employers in a timely manner, as well
as on the acceptance of our actions by existing or prospective
students and employers. We developed many of our online programs
based on our existing ground programs. In the future, we may
develop programs solely, or initially, for online use, which may
pose new challenges, including the need to develop course
content without having an existing program on which such content
can be based. Even if we are able to develop acceptable new
programs, we may not be able to introduce these new programs in
a timely fashion or as quickly as our competitors are able to
introduce competing programs. If we do not respond adequately to
changes in market conditions, our ability to attract and retain
students could be impaired and our business, prospects,
financial condition, and results of operations could suffer.
The development and approval of new programs and courses, both
ground and online, are subject to requirements and limitations
imposed by the Department of Education, state licensing
agencies, and the relevant accrediting commissions, and in
certain cases, such as with our newly approved doctoral program
in education, involves a process that can take several years to
complete. The imposition of restrictions on the initiation of
new educational programs by any of our regulatory agencies, or
delays in obtaining approvals of such programs, may delay our
expansion plans. Establishing new academic programs or modifying
existing academic programs may also require us to make
investments in specialized personnel, increase marketing
efforts, and reallocate resources. We may have limited
experience with the subject matter of new programs.
26
If we are unable to expand our existing programs, offer new
programs on a timely basis or in a cost-effective manner, or
otherwise manage effectively the operations of newly established
programs, our business, prospects, financial condition, and
results of operations could be adversely affected.
Our
failure to keep pace with changing market needs and technology
could harm our ability to attract students.
Our success depends to a large extent on the willingness of
employers to employ, promote, or increase the pay of our
graduates. Increasingly, employers demand that their new
employees possess appropriate technical and analytical skills
and also appropriate interpersonal skills, such as
communication, and teamwork skills. These skills can evolve
rapidly in a changing economic and technological environment.
Accordingly, it is important that our educational programs
evolve in response to those economic and technological changes.
The expansion of existing academic programs and the development
of new programs may not be accepted by current or prospective
students or by the employers of our graduates. Even if we are
able to develop acceptable new programs, we may not be able to
begin offering those new programs in a timely fashion or as
quickly as our competitors offer similar programs. If we are
unable to adequately respond to changes in market requirements
due to regulatory or financial constraints, unusually rapid
technological changes, or other factors, the rates at which our
graduates obtain jobs in their fields of study could suffer, our
ability to attract and retain students could be impaired, and
our business, prospects, financial condition, and results of
operations could be adversely affected.
If we
do not maintain existing, and develop additional, relationships
with employers, our future growth may be impaired.
We currently have relationships with large school districts and
healthcare systems, primarily in Arizona, and also recently
began seeking relationships with national and international
employers, to provide their employees with the opportunity to
obtain degrees through us while continuing their employment.
These relationships are an important part of our strategy as
they provide us with a steady source of potential working adult
students for particular programs and also serve to increase our
reputation among high-profile employers. As a result of economic
conditions, a number of employers we work with have reduced the
extent to which they reimburse their employees for participating
in our programs. If we are unable to develop new relationships,
or if our existing relationships deteriorate or end as a result
of current or future economic conditions affecting employers or
otherwise, our efforts to seek these sources of potential
working adult students will be impaired, and this could
materially and adversely affect our business, prospects,
financial condition, and results of operations.
Our
failure to effectively manage our growth could harm our
business.
Our business recently has experienced rapid growth. Growth and
expansion of our operations may place a significant strain on
our resources and increase demands on our executive management
team, management information and reporting systems, financial
management controls and personnel, and regulatory compliance
systems and personnel. We may not be able to maintain or
accelerate our current growth rate, effectively manage our
expanding operations, or achieve planned growth on a timely or
profitable basis. If we are unable to manage our growth
effectively, we may experience operating inefficiencies and our
earnings may be materially adversely affected.
We may
be unable to finance our expansion activities, and interest and
other expenses may increase.
We intend to expand the size and enhance the profile and
reputation of our ground campus by, among other things, adding
faculty and expanding upon and modernizing our campus
infrastructure and technological capabilities over the next
several years. These activities may require significant capital
expenditures and may cause us to incur significant expenses, and
there can be no guarantee that we will be able, or that it will
be advantageous, to fund such expenditures or expenses with cash
flow from operations. If we do not fund such activities with
cash flow from operations, we will be required to finance such
activities. Financing may take the form of, among other things,
loans under a credit facility, sale-leaseback transactions, the
issuance of
27
equity securities, or a combination of the foregoing. There can
be no guarantee that any such financing will be available on
terms acceptable to us, or at all. Furthermore, our loan
agreement contains covenants that restrict our ability to incur
debt, and there can be no guarantee that we will be able to
secure the consent of our lender for any financing.
If we obtain financing, we may incur increased interest or lease
expenses, or other financing charges, that could have an adverse
effect on our cash flow. In addition, any financing accomplished
through the issuance of any additional equity securities could
be dilutive to holders of our common stock. If we are unable to
fund our expansion activities, our ability to implement our
business plan will be adversely affected.
If we
fail to maintain proper and effective disclosure controls and
procedures and internal controls over financial reporting, our
ability to produce accurate financial statements could be
impaired, which could adversely affect our stock price, our
ability to operate our business and investors views of
us.
Ensuring that we have adequate disclosure controls and
procedures, including internal controls over financial
reporting, in place so that we can produce accurate financial
statements on a timely basis is a costly and time- consuming
effort that needs to be re-evaluated frequently. We are
continuing the process of documenting, reviewing and, if
appropriate, improving our internal controls and procedures as
we will eventually be subject to the requirements of
Section 404 of the Sarbanes-Oxley Act of 2002, or the
Sarbanes-Oxley Act, which will require annual management
assessments of the effectiveness of our internal controls over
financial reporting and a report by our independent auditors
addressing these assessments. We will be required to comply with
the internal controls evaluation and certification requirements
of Section 404 of the Sarbanes-Oxley Act by no later than
the end of our 2009 fiscal year.
Our
success depends upon our ability to recruit and retain key
personnel.
Our success to date has largely depended on, and will continue
to depend on, the skills, efforts, and motivation of our
executive officers, who generally have significant experience
with our company and within the education industry. Our success
also largely depends on our ability to attract and retain highly
qualified faculty, school administrators, and additional
corporate management personnel. We may have difficulties in
locating and hiring qualified personnel and in retaining such
personnel once hired. In addition, because we operate in a
highly competitive industry, our hiring of qualified executives
or other personnel may cause us or such persons to be subject to
lawsuits alleging misappropriation of trade secrets, improper
solicitation of employees, or other claims. Other than
non-compete agreements of limited duration that we have with
certain executive officers, we have not historically sought
non-compete agreements with key personnel and they may leave and
subsequently compete against us. The loss of the services of any
of our key personnel, many of whom are not party to employment
agreements with us, or our failure to attract and retain other
qualified and experienced personnel on acceptable terms, could
cause our business to suffer.
The
protection of our operations through exclusive proprietary
rights and intellectual property is limited, and from time to
time we encounter disputes relating to our use of intellectual
property of third parties, any of which could harm our
operations and prospects.
In the ordinary course of our business we develop intellectual
property of many kinds that is or will be the subject of
copyright, trademark, service mark, patent, trade secret, or
other protections. This intellectual property includes but is
not limited to courseware materials and business know-how and
internal processes and procedures developed to respond to the
requirements of operating our business and to comply with the
rules and regulations of various education regulatory agencies.
We rely on a combination of copyrights, trademarks, service
marks, trade secrets, domain names, and agreements to protect
our intellectual property. We rely on service mark and trademark
protection in the United States to protect our rights to the
mark Grand Canyon University, as well as distinctive
logos and other marks associated with our services. We rely on
agreements under which we obtain rights to use course content
developed by faculty members and other third party content
experts, as well as license agreements pursuant to which we
license the right to brand certain of our program offerings. We
cannot assure you that the measures that we take will be
adequate or that we have secured, or will be able to secure,
appropriate protections for all of our proprietary rights in the
United States
28
or select foreign jurisdictions, or that third parties will not
infringe upon or violate our proprietary rights. Unauthorized
third parties may attempt to duplicate or copy the proprietary
aspects of our curricula, online resource material, and other
content, and offer competing programs to ours.
In particular, we license the right to utilize the name of Ken
Blanchard in connection with our business school and Executive
MBA programs and have spent significant resources in related
branding efforts. Nevertheless, our license agreement with
Blanchard Education, LLC has a fixed term and may not
necessarily be extended in the future. In addition, third
parties may attempt to develop competing programs or copy
aspects of our curriculum, online resource material, quality
management, and other proprietary content. The termination of
this license agreement, or attempts to compete with or duplicate
our programs, if successful, could adversely affect our
business. Protecting these types of intellectual property rights
can be difficult, particularly as it relates to the development
by our competitors of competing courses and programs.
We may from time to time encounter disputes over rights and
obligations concerning intellectual property, and we may not
prevail in these disputes. In certain instances, we may not have
obtained sufficient rights in the content of a course. Third
parties may raise a claim against us alleging an infringement or
violation of the intellectual property of that third party. Some
third-party intellectual property rights may be extremely broad,
and it may not be possible for us to conduct our operations in
such a way as to avoid those intellectual property rights. Any
such intellectual property claim could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether such
claim has merit, and we may be required to alter the content of
our classes or pay monetary damages, which may be significant.
We are
subject to laws and regulations as a result of our collection
and use of personal information, and any violations of such laws
or regulations, or any breach, theft, or loss of such
information, could adversely affect our reputation and
operations.
Possession and use of personal information in our operations
subjects us to risks and costs that could harm our business. We
collect, use, and retain large amounts of personal information
regarding our applicants, students, faculty, staff, and their
families, including social security numbers, tax return
information, personal and family financial data, and credit card
numbers. We also collect and maintain personal information of
our employees in the ordinary course of our business. Our
services can be accessed globally through the Internet.
Therefore, we may be subject to the application of national
privacy laws in countries outside the U.S. from which
applicants and students access our services. Such privacy laws
could impose conditions that limit the way we market and provide
our services.
Our computer networks and the networks of certain of our vendors
that hold and manage confidential information on our behalf may
be vulnerable to unauthorized access, employee theft or misuse,
computer hackers, computer viruses, and other security threats.
Confidential information may also inadvertently become available
to third parties when we integrate systems or migrate data to
our servers following an acquisition of a school or in
connection with periodic hardware or software upgrades.
Due to the sensitive nature of the personal information stored
on our servers, our networks may be targeted by hackers seeking
to access this data. A user who circumvents security measures
could misappropriate sensitive information or cause
interruptions or malfunctions in our operations. Although we use
security and business controls to limit access and use of
personal information, a third party may be able to circumvent
those security and business controls, which could result in a
breach of student or employee privacy. In addition, errors in
the storage, use, or transmission of personal information could
result in a breach of privacy for current or prospective
students or employees. Possession and use of personal
information in our operations also subjects us to legislative
and regulatory burdens that could require us to implement
certain policies and procedures, such as the procedures we
adopted to comply with the Red Flags Rule that was promulgated
by the Federal Trade Commission, or FTC, under the federal Fair
Credit Reporting Act and that requires the establishment of
guidelines and policies regarding identity theft related to
student credit accounts, and could require us to make certain
notifications of data breaches and restrict our use of personal
information. A violation of any laws or regulations relating to
the collection or use of personal information
29
could result in the imposition of fines against us. As a result,
we may be required to expend significant resources to protect
against the threat of these security breaches or to alleviate
problems caused by these breaches. A major breach, theft, or
loss of personal information regarding our students and their
families or our employees that is held by us or our vendors, or
a violation of laws or regulations relating to the same, could
have a material adverse effect on our reputation and result in
further regulation and oversight by federal and state
authorities and increased costs of compliance.
We are
incurring increased costs as a result of being a public company,
and the requirements of being a public company may divert
management attention from our business.
We have operated as a public company since November 19,
2008. As a public company, we incur significant legal,
accounting and other expenses that we did not incur as a private
company. In addition, we are subject to a number of additional
requirements, including the reporting requirements of the
Securities Exchange Act of 1934, as amended, or the Exchange
Act, the Sarbanes-Oxley Act, and the listing standards of
Nasdaq. These requirements have caused us to incur increased
costs and might place a strain on our systems and resources. The
Exchange Act requires, among other things, that we file annual,
quarterly, and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act requires, among
other things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting, and
also requires that our internal controls be assessed by
management and attested to by our auditors as of December 31 of
each fiscal year commencing with our fiscal year ending
December 31, 2009. In order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal control over financial reporting, significant resources
and management oversight is required. As a result, our
managements attention might be diverted from other
business concerns, which could have a material adverse effect on
our business, prospects, financial condition, and results of
operations.
At
present we derive a significant portion of our revenues and
operating income from our graduate programs.
As of December 31, 2008, 52.9% of our students were
graduate students, which includes masters and doctoral
students. This percentage has declined in recent periods, and we
anticipate that this percentage will continue to decline over
time, due to our recent growth emphasis in our undergraduate
business and liberal arts programs. If we were to experience any
event that adversely affected our graduate offerings or the
attractiveness of our programs to prospective graduate students,
our business, prospects, financial condition, and results of
operations could be significantly and adversely affected.
We may
incur liability for the unauthorized duplication or distribution
of class materials posted online for class
discussions.
In some instances, our faculty members or our students may post
various articles or other third-party content on class
discussion boards. Third parties may raise claims against us for
the unauthorized duplication of material posted online for class
discussions. Any such claims could subject us to costly
litigation and impose a significant strain on our financial
resources and management personnel regardless of whether the
claims have merit. Our general liability insurance may not cover
potential claims of this type adequately or at all, and we may
be required to alter the content of our courses or pay monetary
damages, which may be significant.
The
provider of third-party software for our online classroom has
been acquired by a competitor, and we may have difficulty
maintaining the software required for our online classroom or
updating it for future technological changes, which could
adversely affect our performance.
Our online classroom employs the ANGEL Learning Management Suite
pursuant to a license from ANGEL Learning, Inc. The ANGEL system
is a web-based portal that stores, manages, and delivers course
content; enables assignment uploading; provides interactive
communication between students and faculty; and supplies online
evaluation tools. In May 2009, ANGEL Learning, Inc. was acquired
by Blackboard, Inc., a competitor in the provision of online
educational software and tools. We now rely on Blackboard, Inc.
for
30
administrative support of the ANGEL system and, if Blackboard,
Inc. ceased to operate or was unable or unwilling to continue to
provide us with services or upgrades on a timely basis, we may
have difficulty maintaining the software required for our online
classroom or updating it for future technological changes. We
cannot predict what effect, if any, Blackboard, Inc.s
acquisition of ANGEL Learning, Inc. will have on our use of, or
the support for or the efficacy of, the ANGEL Learning
Management Suite. Any failure to maintain our online classroom
would have an adverse impact on our operations, damage our
reputation, and limit our ability to attract and retain students.
Seasonal
and other fluctuations in our results of operations could
adversely affect the trading price of our common
stock.
Our net revenue and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to changes in enrollment, and are typically lowest in our second
fiscal quarter and highest in our fourth fiscal quarter.
Accordingly, our results in any quarter may not indicate the
results we may achieve in any subsequent quarter or for the full
year. Student population varies as a result of new enrollments,
graduations, and student attrition. A significant portion of our
general and administrative expenses do not vary proportionately
with fluctuations in revenues. We expect quarterly fluctuations
in operating results to continue as a result of seasonal
enrollment patterns. Such patterns may change, however, as a
result of new program introductions, the timing of colloquia and
events, and increased enrollments of students. These
fluctuations may result in volatility or have an adverse effect
on the market price of our common stock.
Our
loan agreement may restrict our operations and our ability to
complete certain transactions.
Our loan agreement, which we entered into in connection with the
purchase of our campus in April 2009, imposes certain operating
and financial restrictions on us. Without the consent of our
lender, these restrictions generally limit our ability to, among
other things:
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incur additional indebtedness or liens;
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sell, assign, lease, transfer or otherwise dispose of any part
of our assets other than in the ordinary course of business;
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make investments or capital contributions to any individual or
entity;
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enter into any consolidation, merger, or other combination, or
become a partner in a partnership, a member of a joint venture,
or a member of a limited liability company;
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acquire or purchase a business or all or substantially all of
the assets of a business in an aggregate amount exceeding an
amount equal to 25% of our tangible net worth; and
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engage in any business activities substantially different from
our present business.
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In addition, the loan agreement requires us to maintain a
maximum funded debt to adjusted EBITDA ratio, a minimum basic
fixed charge coverage ratio and a minimum tangible net worth
ratio, in each case as such terms are defined in the loan
agreement. We cannot assure you that these covenants will not
adversely affect our ability to finance our future operations or
capital needs or to pursue available business opportunities. A
breach of any of these covenants or our inability to maintain
the required financial ratios could result in a default in
respect of the related indebtedness. If a default occurs, the
affected lenders could elect to declare the indebtedness,
together with accrued interest and other fees, to be immediately
due and payable.
Our
current success and future growth depend on the continued
acceptance of the Internet and the corresponding growth in users
seeking educational services on the Internet.
Our business relies in part on the Internet for its success. A
number of factors could inhibit the continued acceptance of the
Internet and adversely affect our profitability, including:
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inadequate Internet infrastructure;
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security and privacy concerns;
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the unavailability of cost-effective Internet service and other
technological factors; and
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changes in government regulation of Internet use.
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If Internet use decreases, or if the number of Internet users
seeking educational services on the Internet does not increase,
our business may not grow as planned.
Government
regulations relating to the Internet could increase our cost of
doing business, affect our ability to grow or otherwise have a
material adverse effect on our business.
The increasing popularity and use of the Internet and other
online services has led and may lead to the adoption of new laws
and regulatory practices in the United States or foreign
countries and to new interpretations of existing laws and
regulations. These new laws and interpretations may relate to
issues such as online privacy, copyrights, trademarks and
service marks, sales taxes, fair business practices, and the
requirement that online education institutions qualify to do
business as foreign corporations or be licensed in one or more
jurisdictions where they have no physical location or other
presence. New laws and regulations or interpretations thereof
related to doing business over the Internet could increase our
costs and materially and adversely affect our business,
prospects, financial condition, and results of operations.
We may
incur significant costs complying with the Americans with
Disabilities Act and similar laws.
Under the Americans with Disabilities Act of 1990, or the ADA,
all public accommodations must meet federal requirements related
to access and use by disabled persons. Additional federal,
state, and local laws also may require modifications to our
properties, or restrict our ability to renovate our properties.
For example, the Fair Housing Amendments Act of 1988, or FHAA,
requires apartment properties first occupied after
March 13, 1990 to be accessible to the handicapped. We have
not conducted an audit or investigation of all of our properties
to determine our compliance with present requirements.
Noncompliance with the ADA or FHAA could result in the
imposition of fines or an award or damages to private litigants
and also could result in an order to correct any non-complying
feature. We cannot predict the ultimate amount of the cost of
compliance with the ADA, FHAA, or other legislation. If we incur
substantial costs to comply with the ADA, FHAA, or any other
legislation, we could be materially and adversely affected.
Our
failure to comply with environmental laws and regulations
governing our activities could result in financial penalties and
other costs.
We use hazardous materials at our ground campus and generate
small quantities of waste, such as used oil, antifreeze, paint,
car batteries, and laboratory materials. As a result, we are
subject to a variety of environmental laws and regulations
governing, among other things, the use, storage, and disposal of
solid and hazardous substances and waste, and the
clean-up of
contamination at our facilities or off-site locations to which
we send or have sent waste for disposal. In the event we do not
maintain compliance with any of these laws and regulations, or
are responsible for a spill or release of hazardous materials,
we could incur significant costs for
clean-up,
damages, and fines, or penalties which could adversely impact
our business, prospects, financial condition, and results of
operations.
If we
expand in the future into new markets outside the United States,
we would be subject to risks inherent in non-domestic
operations.
If we acquire schools or establish programs in new markets
outside the United States, we will face risks that are inherent
in non-domestic operations, including the complexity of
operations across borders, new regulatory regimes, currency
exchange rate fluctuations, monetary policy risks, such as
inflation, hyperinflation and deflation, and potential political
and economic instability in the countries into which we expand.
Our
failure to obtain additional capital in the future could
adversely affect our ability to grow.
We believe that funds from operations, cash on hand, and
investments will be adequate to fund our current operating and
growth plans for the foreseeable future. However, we may need
additional financing in
32
order to finance our continued growth, particularly if we pursue
any acquisitions. The amount, timing, and terms of such
additional financing will vary principally depending on the
timing and size of new program offerings, the timing and size of
acquisitions we may seek to consummate, and the amount of cash
flows from our operations. To the extent that we require
additional financing in the future, such financing may not be
available on terms acceptable to us or at all, and,
consequently, we may not be able to fully implement our growth
strategy.
If we
are not able to integrate acquired schools, our business could
be harmed.
From time to time, we may pursue acquisitions of other schools.
Integrating acquired operations into our institution involves
significant risks and uncertainties, including:
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inability to maintain uniform standards, controls, policies, and
procedures;
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distraction of managements attention from normal business
operations during the integration process;
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inability to obtain, or delay in obtaining, approval of the
acquisition from the necessary regulatory agencies, or the
imposition of operating restrictions or a letter of credit
requirement on us or on the acquired school by any of those
regulatory agencies;
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expenses associated with the integration efforts; and
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unidentified issues not discovered in our due diligence process,
including legal contingencies.
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If we complete one or more acquisitions and are unable to
integrate acquired operations successfully, our business could
suffer.
Risks
Related to the Offering
Our
executive officers, directors, and principal existing
stockholders own a large percentage of our voting stock, which
may allow them to collectively control substantially all matters
requiring stockholder approval and, in the case of certain of
our principal stockholders, will have other unique rights that
may afford them access to our management.
Certain of our stockholders have entered into a proxy and voting
agreement, pursuant to which such persons granted to the
Richardson Voting Group a five-year irrevocable proxy to
exercise voting authority with respect to certain shares of our
common stock held by such persons, for so long as such shares
are held by such persons. Upon the completion of our initial
public offering, as a result of the proxy and voting agreement,
the Richardson Voting Group had the power to exercise voting
authority with respect to 42.9% of our common stock and we
believe that the Richardson Voting Group will continue to have
voting power over more than 25% of our common stock after the
completion of this offering. Under the terms of the proxy and
voting agreement, if any person party to the voting agreement
transfers shares covered by the proxy in registered or
open-market transactions, the proxy is no longer effective as to
such shares. Accordingly, the number of shares as to which the
Richardson Voting Group has voting power will decrease over time
as shares held by other parties to the proxy and voting
agreement are sold. See Beneficial Ownership of Common
Stock.
As a result of the proxy and voting agreement, the Richardson
Voting Group could significantly influence the outcome of any
actions requiring the vote or consent of stockholders, including
elections of directors, amendments to our certificate of
incorporation and bylaws, mergers, going private transactions,
and other extraordinary transactions, and any decisions
concerning the terms of any of these transactions. The ownership
and voting positions of these stockholders may have the effect
of delaying, deterring, or preventing a change in control or a
change in the composition of our Board of Directors. These
stockholders may also use their contractual rights, including
access to management, and their large ownership position to
address their own interests, which may be different from those
of our other stockholders.
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Your
percentage ownership in us may be diluted by future issuances of
capital stock, which could reduce your influence over matters on
which stockholders vote.
Our Board of Directors has the authority, without action or vote
of our stockholders, to issue all or any part of our authorized
but unissued shares of common stock, including shares issuable
upon the exercise of options, shares that may be issued to
satisfy our payment obligations under our incentive plans, or
shares of our authorized but unissued preferred stock. Issuances
of common stock or voting preferred stock would reduce your
influence over matters on which our stockholders vote, and, in
the case of issuances of preferred stock, likely would result in
your interest in us being subject to the prior rights of holders
of that preferred stock.
Provisions
in our charter documents and the Delaware General Corporation
Law could make it more difficult for a third party to acquire us
and could discourage a takeover and adversely affect existing
stockholders.
Anti-takeover provisions of our certificate of incorporation,
bylaws, the Delaware General Corporation Law, or DGCL, and
regulations of state and federal education agencies could
diminish the opportunity for stockholders to participate in
acquisition proposals at a price above the then-current market
price of our common stock. For example, while we have no present
plans to issue any preferred stock, our Board of Directors,
without further stockholder approval, may issue shares of
undesignated preferred stock and fix the powers, preferences,
rights, and limitations of such class or series, which could
adversely affect the voting power of your shares. In addition,
our bylaws provide for an advance notice procedure for
nomination of candidates to our Board of Directors that could
have the effect of delaying, deterring, or preventing a change
in control. Further, as a Delaware corporation, we are subject
to provisions of the DGCL regarding business
combinations, which can deter attempted takeovers in
certain situations. The approval requirements of the Department
of Education, our regional accrediting commission, and state
education agencies for a change in control transaction could
also delay, deter, or prevent a transaction that would result in
a change in control. We may, in the future, consider adopting
additional anti-takeover measures. The authority of our board to
issue undesignated preferred or other capital stock and the
anti-takeover provisions of the DGCL, as well as other current
and any future anti-takeover measures adopted by us, may, in
certain circumstances, delay, deter, or prevent takeover
attempts and other changes in control of the company not
approved by our Board of Directors.
The
price of our common stock may be volatile, and as a result
returns on an investment in our common stock may be
volatile.
We completed our initial public offering in November 2008. Given
the relatively limited public float since that time, trading in
our common stock has also been limited and, at times, volatile.
An active trading market for our common stock may not be
sustained, and the trading price of our common stock may
fluctuate substantially.
The market price of our common stock could fluctuate
significantly for various reasons, which include:
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our quarterly or annual earnings or earnings of other companies
in our industry;
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the publics reaction to our press releases, our other
public announcements, and our filings with the SEC;
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changes in earnings estimates or recommendations by research
analysts who track our common stock or the stocks of other
companies in our industry;
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changes in our number of enrolled students;
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new or proposed laws or regulations or new or proposed
interpretations of laws or regulations applicable to our
business;
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seasonal variations in our student population;
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34
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damage to our reputation or other adverse effects as a result of
negative publicity in the media, in industry or governmental
reports, or otherwise, affecting us or other companies in the
for-profit postsecondary education sector;
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the availability and cost of Title IV funds, other student
financial aid, and private loans;
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the failure to maintain or keep in good standing our regulatory
approvals and accreditations;
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changes in accounting standards, policies, guidance,
interpretations, or principles;
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changes in general conditions in the U.S. and global
economies or financial markets, including those resulting from
war, incidents of terrorism, or responses to such events;
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an adverse economic or other development that affects job
prospects in our core disciplines;
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litigation involving our company, or investigations or audits by
regulators into the operations of our company or our
competitors, including the investigation of Grand Canyon
University currently being conducted by the Office of Inspector
General of the Department of Education, and the pending qui
tam action regarding the manner in which we have compensated
our enrollment personnel; and
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sales of common stock by our directors, executive officers, and
significant stockholders.
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In addition, in recent years, the stock market has experienced
extreme price and volume fluctuations. This volatility has had a
significant impact on the market price of securities issued by
many companies, including companies in our industry. The changes
frequently appear to occur without regard to the operating
performance of these companies. The price of our common stock
could fluctuate based upon factors that have little or nothing
to do with our company, and these fluctuations could materially
reduce our stock price.
In the past, following periods of volatility in the market price
of a companys securities, securities class action
litigation has often been brought against that company. Because
of the potential volatility of our stock price, we may become
the target of securities litigation in the future. Securities
litigation could result in substantial costs and divert
managements attention and resources from our business.
If
securities analysts do not publish research or reports about our
business or if they downgrade their evaluations of our stock,
the price of our stock could decline.
The trading market for our common stock depends in part on the
research and reports that industry or financial analysts publish
about us or our business. If one or more of the analysts
covering us downgrade their estimates or evaluations of our
stock, the price of our stock could decline. If one or more of
these analysts cease coverage of our company, we could lose
visibility in the market for our stock, which in turn could
cause our stock price to decline.
We
currently do not intend to pay dividends on our common stock
and, consequently, your only opportunity to achieve a return on
your investment is if the price of our common stock
appreciates.
We do not expect to pay dividends on shares of our common stock
in the foreseeable future and intend to use cash to grow our
business. The payment of cash dividends in the future, if any,
will be at the discretion of our Board of Directors and will
depend upon such factors as earnings levels, capital
requirements, our overall financial condition, and any other
factors deemed relevant by our Board of Directors. Consequently,
your only opportunity to achieve a positive return on your
investment in us will be if the market price of our common stock
appreciates.
35
We
will have broad discretion in applying the net proceeds of this
offering and may not use those proceeds in ways that will
enhance the market value of our common stock.
We have significant flexibility in applying the net proceeds we
will receive in this offering. We will use the proceeds that we
receive from the sale of stock in this offering to pay the
expenses of this offering and for general corporate purposes. As
part of your investment decision, you will not be able to assess
or direct how we apply these net proceeds. If we do not apply
these funds effectively, we may lose significant business
opportunities. Furthermore, our stock price could decline if the
market does not view our use of the net proceeds from this
offering favorably.
36
FORWARD-LOOKING
STATEMENTS
This prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, or the Securities Act, and Section 21E of
the Exchange Act. Forward-looking statements include information
relating to future events, future financial performance,
strategies, expectations, competitive environment, regulation,
and availability of resources, and include, without limitation,
statements regarding: proposed new programs; expectations that
regulatory developments or other matters will not have a
material adverse effect or material impact 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
managements 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 managements 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:
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our failure to comply with the extensive regulatory framework
applicable to our industry, including Title IV of the
Higher Education Act and the regulations thereunder, state laws
and regulatory requirements, and accrediting commission
requirements;
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the results of the ongoing investigation by the Department of
Educations Office of Inspector General and the pending
qui tam action regarding the manner in which we have
compensated our enrollment personnel, and possible remedial
actions or other liability resulting therefrom;
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the ability of our students to obtain federal Title IV
funds, state financial aid, and private financing;
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risks associated with changes in applicable federal and state
laws and regulations and accrediting commission standards;
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we experience a change in control under applicable regulatory or
accrediting standards, and we are unable to obtain appropriate
approvals for such an event in a timely manner, or at all;
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our ability to hire and train new, and develop and train
existing, enrollment counselors;
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the pace of growth of our enrollment;
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our ability to convert prospective students to enrolled students
and to retain active students;
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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;
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industry competition, including competition for qualified
executives and other personnel;
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risks associated with the competitive environment for marketing
our programs;
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failure on our part to keep up with advances in technology that
could enhance the online experience for our students;
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the extent to which obligations under our loan agreement,
including the need to comply with restrictive and financial
covenants and to pay principal and interest payments, limits our
ability to conduct our operations or seek new business
opportunities;
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our ability to manage future growth effectively;
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general adverse economic conditions or other developments that
affect job prospects in our core disciplines; and
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other factors discussed under the headings Risk
Factors and Regulation in this prospectus, and
in the sections entitled Business, which is
incorporated by reference into this prospectus from our Annual
Report on
Form 10-K
for the fiscal year ended December 31, 2008, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which is incorporated
by reference into this prospectus from our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2008, and our
Quarterly Reports on
Form 10-Q
for our quarters ended March 31, 2009 and June 30,
2009, as applicable.
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Forward-looking statements speak only as of the date the
statements are made. You should not put undue reliance on any
forward-looking statements. 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.
38
USE OF
PROCEEDS
We estimate that the proceeds from the sale of
1,000,000 shares of common stock offered by us in this
offering will be approximately $16.0 million, based on an
assumed offering price of $17.56 per share, the last reported
sale price of our common stock on The Nasdaq Global Market on
September 2, 2009, and after deducting the underwriting
discounts and commissions and estimated offering expenses
payable by us. Each $1.00 increase or decrease in the assumed
public offering price of $17.56 per share would increase or
decrease, as applicable, the net proceeds to us by approximately
$1.0 million, assuming the number of shares offered by us
as set forth on the cover of this prospectus remains the same
and after deducting estimated underwriting discounts and
commissions payable by us. We will not receive any proceeds from
the sale of shares by the selling stockholders.
We intend to use the net proceeds we receive from this offering
to pay transaction fees and expenses of approximately
$0.6 million, and for working capital and general corporate
purposes. Our management will have broad discretion in the
application of such remaining net proceeds from this offering.
PRICE
RANGE OF COMMON STOCK
Our common stock has traded on the Nasdaq Global Market under
the symbol LOPE since it began trading on
November 20, 2008. Our initial public offering was priced
at $12.00 per share on November 19, 2008. The following
table sets forth, for the periods indicated, the high and low
sales prices for our common stock as reported on the Nasdaq
Global Market.
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High
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Low
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2008
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Fourth Quarter (from November 20, 2008)
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$
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19.12
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$
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9.49
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2009
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First Quarter
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$
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20.80
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$
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12.53
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Second Quarter
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$
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17.35
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$
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12.74
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Third Quarter (through September 2, 2009)
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$
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19.52
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$
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15.69
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On September 2, 2009, the last reported sale price of our
common stock on the Nasdaq Global Market was $17.56. As of such
date, we had approximately 34 holders of record of our common
stock.
DIVIDEND
POLICY
We do not anticipate declaring or paying any cash dividends on
our common stock in the foreseeable future. The payment of any
dividends in the future will be at the discretion of our Board
of Directors and will depend upon our financial condition,
results of operations, earnings, capital requirements,
contractual restrictions, outstanding indebtedness, and other
factors deemed relevant by our board. As a result, you will need
to sell your shares of common stock to realize a return on your
investment, and you may not be able to sell your shares at or
above the price you paid for them.
39
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of June 30, 2009:
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on an actual basis; and
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on an as adjusted basis to reflect the receipt of the estimated
net proceeds from the sale by us of 1,000,000 shares of
common stock in this offering at the assumed public offering
price of $17.56 per share (the last reported sale price of
our common stock on September 2, 2009), after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
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You should read this table together with Use of
Proceeds, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Description of Capital Stock and our consolidated
financial statements and related notes included elsewhere in or
incorporated by reference into this prospectus.
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As of June 30, 2009
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Actual
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As Adjusted
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(Unaudited)
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(In thousands, except share data)
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Cash and cash
equivalents(1)
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$
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24,742
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$
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40,778
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Capital lease obligations (including short-term)
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2,013
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2,013
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Other indebtedness (including short-term indebtedness)
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27,681
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27,681
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Stockholders equity:
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Preferred stock, $0.01 par value, 10,000,000 shares
authorized, no shares issued and outstanding, actual and as
adjusted
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Common stock, $0.01 par value, 100,000,000 shares
authorized, 44,576,417 shares issued and outstanding,
actual; 100,000,000 shares authorized,
45,576,417 shares issued and outstanding, as adjusted
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446
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456
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Additional paid-in
capital(1)
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52,469
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68,442
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Accumulated and other comprehensive income
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21
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21
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Accumulated earnings
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1,029
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1,029
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Total stockholders
equity(1)
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53,965
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69,948
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Total capitalization
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$
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83,659
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$
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99,642
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(1) |
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Each $1.00 increase or decrease in the assumed public offering
price of $17.56 per share (the last reported sale price of our
common stock on September 2, 2009) would increase or
decrease, respectively, the amount of cash and cash equivalents,
additional paid-in capital and total stockholders equity,
in each case by approximately $1.0 million, assuming the
number of shares offered by us, as set forth on the cover of
this prospectus, remains the same and after deducting the
estimated underwriting discounts and commissions payable to us. |
40
REGULATION
We are subject to extensive regulation by state education
agencies, accrediting commissions, and the federal government
through the Department of Education under the Higher Education
Act. The regulations, standards, and policies of these agencies
cover the vast majority of our operations, including our
educational programs, facilities, instructional and
administrative staff, administrative procedures, marketing,
recruiting, financial operations, and financial condition.
As an institution of higher education that grants degrees and
certificates, we are required to be authorized by appropriate
state education authorities. In addition, in order to
participate in the federal student financial aid programs, we
must be accredited by an accrediting commission recognized by
the Department of Education. Accreditation is a non-governmental
process through which an institution submits to qualitative
review by an organization of peer institutions, based on the
standards of the accrediting commission and the stated aims and
purposes of the institution. The Higher Education Act requires
accrediting commissions recognized by the Department of
Education to review and monitor many aspects of an
institutions operations and to take appropriate action if
the institution fails to meet the accrediting commissions
standards.
Our operations are also subject to regulation by the Department
of Education due to our participation in federal student
financial aid programs under Title IV of the Higher
Education Act. Those Title IV programs include educational
loans with below-market interest rates that are guaranteed by
the federal government in the event of a students default
on repaying the loan, and also grant programs for students with
demonstrated financial need. To participate in the Title IV
programs, a school must receive and maintain authorization by
the appropriate state education agency or agencies, be
accredited by an accrediting commission recognized by the
Department of Education, and be certified as an eligible
institution by the Department of Education.
Our business activities are planned and implemented to comply
with the standards of these regulatory agencies. We employ a
director of compliance who is knowledgeable about regulatory
matters relevant to student financial aid programs and our Chief
Financial Officer, Chief Risk Officer, and General Counsel also
provide oversight designed to ensure that we meet the
requirements of our regulated operating environment.
State
Education Licensure and Regulation
We are authorized to offer our educational programs by the
Arizona State Board for Private Postsecondary Education, the
regulatory agency governing private postsecondary educational
institutions in the State of Arizona, where we are located. We
do not presently have campuses in any states other than Arizona.
We are required by the Higher Education Act to maintain
authorization from the Arizona State Board for Private
Postsecondary Education in order to participate in the
Title IV programs. This authorization is very important to
us and our business. To maintain our state authorization, we
must continuously meet standards relating to, among other
things, educational programs, facilities, instructional and
administrative staff, marketing and recruitment, financial
operations, addition of new locations and educational programs,
and various operational and administrative procedures. Failure
to comply with the requirements of the Arizona State Board for
Private Postsecondary Education could result in us losing our
authorization to offer our educational programs, which would
cause us to lose our eligibility to participate in the
Title IV programs and which, in turn, could force us to
cease operations. Alternatively, the Arizona State Board for
Private Postsecondary Education could restrict our ability to
offer certain degree programs.
Most other states impose regulatory requirements on
out-of-state
educational institutions operating within their boundaries, such
as those having a physical facility or conducting certain
academic activities within the state. State laws establish
standards in areas such as instruction, qualifications of
faculty, administrative procedures, marketing, recruiting,
financial operations, and other operational matters, some of
which are different than the standards prescribed by the
Department of Education or the Arizona State Board for Private
Postsecondary Education. Laws in some states limit schools
ability to offer educational programs and award degrees to
residents of those states. Some states also prescribe financial
regulations that are different from those of the Department of
Education, and many require the posting of surety bonds.
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In addition, several states have sought to assert jurisdiction
over educational institutions offering online degree programs
that have no physical location or other presence in the state
but that have some activity in the state, such as enrolling or
offering educational services to students who reside in the
state, employing faculty who reside in the state, or advertising
to or recruiting prospective students in the state. State
regulatory requirements for online education vary among the
states, are not well developed in many states, are imprecise or
unclear in some states, and can change frequently. New laws,
regulations, or interpretations related to doing business over
the Internet could increase our cost of doing business and
affect our ability to recruit students in particular states,
which could, in turn, negatively affect enrollments and revenues
and have a material adverse effect on our business.
We have determined that our activities in certain states
constitute a presence requiring licensure or authorization under
the requirements of the state education agency in those states.
In other states, we have obtained approvals as we have
determined necessary in connection with our marketing and
recruiting activities or where we have determined that our
licensure or authorization can facilitate the teaching
certification process in a particular state for graduates of our
College of Education. We review the licensure requirements of
other states when appropriate to determine whether our
activities in those states constitute a presence or otherwise
require licensure or authorization by the respective state
education agencies. Because state regulatory requirements,
including agency interpretations, can change frequently, and
because we enroll students in all 50 states and the
District of Columbia, we expect that state regulatory
authorities in states where we are not currently licensed or
authorized will request that we seek licensure or authorization
in their states in the future. Although we believe that we will
be able to comply with additional state licensing or
authorization requirements that may arise or be asserted in the
future, if we fail to comply with state licensing or
authorization requirements for a state, or fail to obtain
licenses or authorizations when required, we could lose our
state licensure or authorization by that state or be subject to
other sanctions, including restrictions on our activities in
that state, fines, and penalties. While we do not believe that
any of the states in which we are currently licensed or
authorized, other than Arizona, are individually material to our
operations, the loss of licensure or authorization in any state
could prohibit us from recruiting prospective students or
offering services to current students in that state, which could
significantly reduce our enrollments.
State
Professional Licensure
Many states have specific requirements that an individual must
satisfy in order to be licensed as a professional in specified
fields, including fields such as education and healthcare. These
requirements vary by state and by field. A students
success in obtaining licensure following graduation typically
depends on several factors, including the background and
qualifications of the individual graduate, as well as the
following factors, among others:
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whether the institution and the program were approved by the
state in which the graduate seeks licensure, or by a
professional association;
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whether the program from which the student graduated meets all
requirements for professional licensure in that state;
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whether the institution and the program are accredited and, if
so, by what accrediting commissions; and
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whether the institutions degrees are recognized by other
states in which a student may seek to work.
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Many states also require that graduates pass a state test or
examination as a prerequisite to becoming certified in certain
fields, such as teaching and nursing. Many states will certify
individuals if they have already been certified in another state.
Our College of Education is approved by the Arizona State Board
of Education to offer Institutional Recommendations
(credentials) for the certification of elementary, secondary,
and special education teachers and school administrators. Our
College of Nursing and Health Services is approved by the
Arizona State Board of Nursing for the Bachelor of Science in
Nursing and Master of Science Nursing degrees. Due
to
42
varying requirements for professional licensure in each state,
we inform students of the risks associated with obtaining
professional licensure and that it is each students
responsibility to determine what state, local, or professional
licensure and certification requirements are necessary in his or
her individual state.
Accreditation
We have been continuously accredited since 1968 by the Higher
Learning Commission and its predecessor, each a regional
accrediting commission recognized by the Department of
Education. Our accreditation was reaffirmed in 2007, and the
next scheduled comprehensive evaluation will be conducted in
2016-2017.
Accreditation is a private, non-governmental process for
evaluating the quality of educational institutions and their
programs in areas including student performance, governance,
integrity, educational quality, faculty, physical resources,
administrative capability and resources, and financial
stability. To be recognized by the Department of Education,
accrediting commissions must adopt specific standards for their
review of educational institutions, conduct peer-review
evaluations of institutions, and publicly designate those
institutions that meet their criteria. An accredited school is
subject to periodic review by its accrediting commissions to
determine whether it continues to meet the performance,
integrity and quality required for accreditation.
There are six regional accrediting commissions recognized by the
Department of Education, each with a specified geographic scope
of coverage, which together cover the entire United States. Most
traditional, public and private non-profit, degree-granting
colleges and universities are accredited by one of these six
regional accrediting commissions. The Higher Learning
Commission, which accredits Grand Canyon University, is the same
regional accrediting commission that accredits such universities
as the University of Arizona, Arizona State University, and
other degree-granting public and private colleges and
universities in the states of Arizona, Arkansas, Colorado,
Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri,
Nebraska, New Mexico, North Dakota, Ohio, Oklahoma, South
Dakota, West Virginia, Wisconsin, and Wyoming.
Accreditation by the Higher Learning Commission is important to
us for several reasons, including the fact that it enables our
students to receive Title IV financial aid. Other colleges
and universities depend, in part, on an institutions
accreditation in evaluating transfers of credit and applications
to graduate schools. Employers rely on the accredited status of
institutions when evaluating candidates credentials, and
students and corporate and government sponsors under tuition
reimbursement programs look to accreditation for assurance that
an institution maintains quality educational standards. If we
fail to satisfy the standards of the Higher Learning Commission,
we could lose our accreditation by that agency, which would
cause us to lose our eligibility to participate in the
Title IV programs.
The reauthorization of the Higher Education Act in 2008, and
proposed regulations issued by the Department of Education,
require accreditors to monitor the growth of programs at
institutions that are experiencing significant enrollment
growth. The Higher Learning Commission requires all affiliated
institutions to complete an annual data report. If the
non-financial data, particularly enrollment information, and any
other information submitted by the institution indicate
problems, rapid change, or significant growth, the Higher
Learning Commission staff may require that the institution
address any concerns arising from the data report in the next
self-study and visit process. The Higher Learning Commission
staff may also recommend that its Institutional Actions Council
require additional monitoring. In addition, the Department of
Education has proposed regulations, which could take effect on
July 1, 2010, that would require the Higher Learning
Commission to notify the Department of Education if an
institution it accredits that offers distance learning programs
experiences an increase in its headcount enrollment of 50% or
more in any fiscal year, which could include us based on our
historical enrollment growth rates, and the Department of
Education may consider that information in connection with its
own regulatory oversight activities.
In addition to institutional accreditation by the Higher
Learning Commission, there are numerous specialized accrediting
commissions that accredit specific programs or schools within
their jurisdiction, many of which are in healthcare and
professional fields. Accreditation of specific programs by one
of these specialized accrediting commissions signifies that
those programs have met the additional standards of those
43
agencies. In addition to being accredited by the Higher Learning
Commission, we also have the following specialized
accreditations:
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The Association of Collegiate Business Schools and Programs
accredits our Master of Business Administration degree program
and our Bachelor of Science degree programs in Accounting,
Business Administration, and Marketing;
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The Commission on Collegiate Nursing Education accredits our
Bachelor of Science in Nursing and Master of Science
Nursing degree programs; and
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The Commission on Accreditation of Athletic Training Education
accredits our Athletic Training Program.
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If we fail to satisfy the standards of any of these specialized
accrediting commissions, we could lose the specialized
accreditation for the affected programs, which could result in
materially reduced student enrollments in those programs.
Regulation
of Federal Student Financial Aid Programs
To be eligible to participate in the Title IV programs, an
institution must comply with specific requirements contained in
the Higher Education Act and the regulations issued thereunder
by the Department of Education. An institution must, among other
things, be licensed or authorized to offer its educational
programs by the state in which it is physically located (in our
case, Arizona) and maintain institutional accreditation by an
accrediting commission recognized by the Department of
Education. We submitted our application for recertification to
participate in the Title IV programs to the Department of
Education in March 2008 in anticipation of the expiration of our
provisional certification on June 30, 2008. The Department
of Education did not make a decision on our recertification
application by June 30, 2008, and therefore our
participation in the Title IV programs has been
automatically extended on a
month-to-month
basis until the Department of Education makes its decision.
The substantial amount of federal funds disbursed to schools
through the Title IV programs, the large number of students
and institutions participating in these programs, and
allegations of fraud and abuse by certain for-profit educational
institutions have caused Congress to require the Department of
Education to exercise considerable regulatory oversight over
for-profit educational institutions. As a result, our
institution is subject to extensive oversight and review.
Because the Department of Education periodically revises its
regulations (as it will do in 2009 in connection with the August
2008 reauthorization of the Higher Education Act described
below) and changes its interpretations of existing laws and
regulations, we cannot predict with certainty how the
Title IV program requirements will be applied in all
circumstances.
Significant factors relating to the Title IV programs that
could adversely affect us include the following:
Congressional action. Congress must
reauthorize the Higher Education Act on a periodic basis,
usually every five to six years, and the most recent
reauthorization occurred in August 2008. The reauthorized Higher
Education Act reauthorized all of the Title IV programs in
which we participate, but made numerous revisions to the
requirements governing the Title IV programs, including
provisions relating to the relationships between institutions
and lenders that make student loans, student loan default rates,
and the formula for revenue that institutions are permitted to
derive from the Title IV programs. In addition, in 2007
Congress enacted legislation that reduces interest rates on
certain Title IV loans and government subsidies to lenders
that participate in the Title IV programs. In May 2008,
Congress enacted additional legislation to attempt to ensure
that all eligible students will be able to obtain Title IV
loans in the future, and that a sufficient number of lenders
will continue to provide Title IV loans. Additional
legislation is also pending in Congress. In addition, Congress
is currently considering the Student Aid and Fiscal
Responsibility Act which, among other things, could eliminate
the federally guaranteed student loan program and require all
future student loans to be made through the FDL program. We are
not in a position to predict with certainty whether any of the
pending legislation will be enacted. Although we are approved to
participate in the FDL program, because a significant percentage
of our revenue is derived from the Title IV programs, any
action by Congress that significantly reduces Title IV
program funding or our ability or the ability of our students to
participate in the Title IV
44
programs could increase our costs of compliance, reduce the
ability of some students to finance their education at our
institution, require us to seek to arrange for other sources of
financial aid for our students and materially decrease our
student enrollment. In addition, a transition to the FDL program
could cause disruptions in the administration of Title IV
program loans to our students if we or the Department of
Education encounter difficulties with the systems or processes
necessary for increased FDL program loans.
In addition, Congress must determine the funding levels for the
Title IV programs on an annual basis through the budget and
appropriations process, and may adjust those levels at other
times. A reduction in federal funding levels for the
Title IV programs could reduce the ability of some of our
students to finance their education. The loss of or a
significant reduction in Title IV program funds available
to our students could reduce our enrollments and revenue.
Pending regulatory changes. In connection with
the 2008 reauthorization of the Higher Education Act, Congress
directed the Department of Education to promulgate regulations
to clarify and carry out the numerous revisions made in such
reauthorization. In December 2008, the Department of Education
established five negotiated rulemaking committees to begin to
work on developing such regulations. Negotiated rulemaking is a
process whereby the Department of Education consults with
members of the postsecondary education community to identify
issues of concern and attempts to agree on proposed regulatory
revisions to address those issues before the Department of
Education formally proposes any regulations. If the Department
of Education and negotiators cannot reach consensus on their
entire package of draft regulations, the Department of Education
is authorized to propose regulations without being bound by any
agreements made in the negotiation process. The five negotiated
rulemaking committees established by the Department of Education
were divided as follows, based on the regulatory issues to be
covered by each committee:
Committee I Lender and General Loan Issues
Committee II School-Based Loan Issues
Committee III Accreditation
Committee IV Discretionary Grants
Committee V General and Non-Loan Programmatic Issues
In July and August 2009, the Department of Education proposed
and invited public comment on regulations relating to the issues
covered by Committees I, II, and III, each of which
reached consensus, and issues covered by Committee V, which did
not reach consensus. The Department of Education has yet to
propose regulations with regard to the topics covered by
Committee IV, but the Department of Education is expected to
issue such proposed regulations in the near future. Following
review and consideration of any public comments, the Department
of Education will publish final regulations relating to the
issues covered by the negotiated rulemaking committees. If such
final regulations are published by November 1, 2009, which
is expected, such new regulations will take effect on
July 1, 2010.
In May 2009, the Department of Education announced its intent to
initiate another round of negotiated rulemaking to address
regulations to improve the administration of the Title IV
programs. The Department of Education has not yet identified the
participants in this next round of negotiated rulemaking, but
the process is expected to begin as soon as the fall of 2009,
and is expected to address a number of significant issues,
including: compensation paid by institutions to persons or
entities engaged in student recruiting or admission activities;
the determination of satisfactory academic progress under
different academic calendars; state authorization as a component
of institutional eligibility; the definition of a credit hour
for purposes of determining program eligibility status,
particularly in the context of awarding Pell Grants;
verification of information included on student aid
applications; and the definition of a high school diploma as a
condition of a students receipt of Title IV aid. We
are still assessing the impact of these proposed regulations and
the upcoming negotiated rulemaking on our financial aid policies
and other plans and strategies.
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Eligibility and certification procedures. Each
institution must apply periodically to the Department of
Education for continued certification to participate in the
Title IV programs. Such recertification generally is
required every six years, but may be required earlier, including
when an institution undergoes a change in control. An
institution may also come under the Department of
Educations review when it expands its activities in
certain ways, such as opening an additional location, adding a
new educational program or modifying the academic credentials it
offers. The Department of Education may place an institution on
provisional certification status if it finds that the
institution does not fully satisfy all of the eligibility and
certification standards and in certain other circumstances, such
as when an institution is certified for the first time or
undergoes a change in control. During the period of provisional
certification, the institution must comply with any additional
conditions included in the schools program participation
agreement with the Department of Education. In addition, the
Department of Education may more closely review an institution
that is provisionally certified if it applies for
recertification or approval to open a new location, add an
educational program, acquire another school, or make any other
significant change. If the Department of Education determines
that a provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it
may seek to revoke the institutions certification to
participate in the Title IV programs without advance notice
or opportunity for the institution to challenge the action.
Students attending provisionally certified institutions remain
eligible to receive Title IV program funds.
Since May 2005 we have been certified to participate in
Title IV programs on a provisional basis. We submitted our
application for recertification in March 2008 in anticipation of
the expiration of our provisional certification on June 30,
2008. The Department of Education did not make a decision on our
recertification application by June 30, 2008, and therefore
our provisional certification to participate in the
Title IV programs has been automatically extended on a
month-to-month
basis until the Department of Education makes its decision.
Since June 2008, we have filed updates with the Department of
Education and communicated with Department of Education
personnel in order to update our pending recertification
application with relevant information, such as our status as a
publicly-traded corporation and the identity of the members of
our Board of Directors. Based on our provisional certification,
the Department of Education may more closely review any
application we may file for recertification, new locations, new
educational programs, acquisitions of other schools, or other
significant changes. For a school that is certified on a
provisional basis, the Department of Education may revoke the
institutions certification without advance notice or
advance opportunity for the institution to challenge that
action. For a school that is provisionally certified on a
month-to-month
basis, the Department of Education may allow the
institutions certification to expire at the end of any
month without advance notice, and without any formal procedure
for review of such action. To our knowledge, such action is very
rare and has only occurred upon a determination that an
institution is in substantial violation of material
Title IV requirements. For the foreseeable future, we do
not have plans to initiate new educational programs, acquire
other schools, or make other significant changes in our
operations that would require approval of the Department of
Education. Accordingly, we do not believe that our continued
provisional certification on a
month-to-month
basis has had or will have any material impact on our
day-to-day
operations. However, there can be no assurance that the
Department of Education will recertify us while the
investigation by the Office of Inspector General of the
Department of Education is being conducted, while the qui
tam lawsuit is pending, or at all, or that it will not
impose restrictions as a condition of approving our pending
recertification application or with respect to any future
recertification. If the Department of Education does not renew
or withdraws our certification to participate in the
Title IV programs at any time, our students would no longer
be able to receive Title IV program funds. Similarly, the
Department of Education could renew our certification, but
restrict or delay our students receipt of Title IV
funds, limit the number of students to whom we could disburse
such funds, or place other restrictions on us that could be
similar to, or more or less restrictive than, the restrictions
that the Department of Education imposed on us in connection
with our recertification in 2005. Any of these outcomes would
have a material adverse effect on our enrollments and us.
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Administrative capability. Department of
Education regulations specify extensive criteria by which an
institution must establish that it has the requisite
administrative capability to participate in the
Title IV programs. To meet the administrative capability
standards, an institution must, among other things:
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comply with all applicable Title IV program requirements;
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have an adequate number of qualified personnel to administer the
Title IV programs;
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have acceptable standards for measuring the satisfactory
academic progress of its students;
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not have student loan cohort default rates above specified
levels;
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have various procedures in place for awarding, disbursing and
safeguarding Title IV funds and for maintaining required
records;
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administer the Title IV programs with adequate checks and
balances in its system of internal controls;
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not be, and not have any principal or affiliate who is, debarred
or suspended from federal contracting or engaging in activity
that is cause for debarment or suspension;
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provide financial aid counseling to its students;
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refer to the Department of Educations Office of Inspector
General any credible information indicating that any student,
parent, employee, third-party servicer or other agent of the
institution has engaged in any fraud or other illegal conduct
involving the Title IV programs;
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submit all required reports and financial statements in a timely
manner; and
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not otherwise appear to lack administrative capability.
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If an institution fails to satisfy any of these criteria, the
Department of Education may:
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require the institution to repay Title IV funds its
students previously received;
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transfer the institution from the advance method of payment of
Title IV funds to heightened cash monitoring status or the
reimbursement system of payment;
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place the institution on provisional certification
status; or
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commence a proceeding to impose a fine or to limit, suspend or
terminate the institutions participation in the
Title IV programs.
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The Department of Education also recently published proposed
revisions to the administrative capability regulations. These
revisions include provisions related to (i) reporting to
the Department of Education any reasonable reimbursements paid
or provided by a lender to institutional employees with loan or
other financial aid responsibilities and
(ii) implementation of the new three year cohort default
rate rules. Following review of any comments, the Department of
Education will publish final regulations. If such final
regulations are published by November 1, 2009, which is
expected, such new regulations will be effective on July 1,
2010. We will have to make certain administrative and reporting
changes to adapt our systems and practices to meet the
requirements of these new regulations when they take effect, and
we are still assessing the other potential impacts, if any, of
these proposed regulations on our business. In addition, as part
of our transition from a term-based financial aid
system (where all students, including online students, begin
programs and are eligible to receive financial aid at periodic
start dates pursuant to a calendar-based term system) to a
borrower-based financial aid system (where each
student may begin a program and be eligible to receive financial
aid at any time throughout the year), we are converting our back
office system from Datatel to a series of programs developed by
Campus Management Corp., including CampusVue and CampusPortal.
This conversion is intended to allow us to manage our
non-traditional online students with greater ease and
flexibility by providing for rolling and flexible start dates.
If we do not effectively implement this system or if the system
does not operate as intended, it could affect our ability to
comply with the Department of Educations administrative
capability requirements. If we are found not to have satisfied
the Department of
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Educations administrative capability requirements, our
students could lose, or be limited in their access to,
Title IV program funding.
Financial responsibility. The Higher Education
Act and Department of Education regulations establish extensive
standards of financial responsibility that institutions such as
Grand Canyon University must satisfy in order to participate in
the Title IV programs. The Department of Education
evaluates institutions for compliance with these standards on an
annual basis, based on the institutions annual audited
financial statements, as well as when the institution applies to
the Department of Education to have its eligibility to
participate in the Title IV programs recertified. The most
significant financial responsibility standard is the
institutions composite score, which is derived from a
formula established by the Department of Education based on
three financial ratios:
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equity ratio, which measures the institutions capital
resources, financial viability and ability to borrow;
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primary reserve ratio, which measures the institutions
ability to support current operations from expendable
resources; and
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net income ratio, which measures the institutions ability
to operate at a profit or within its means.
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The Department of Education assigns a strength factor to the
results of each of these ratios on a scale from negative 1.0 to
positive 3.0, with negative 1.0 reflecting financial weakness
and positive 3.0 reflecting financial strength. The Department
of Education then assigns a weighting percentage to each ratio
and adds the weighted scores for the three ratios together to
produce a composite score for the institution. The composite
score for the institutions most recent fiscal year must be
at least 1.5 for the institution to be deemed financially
responsible without the need for further Department of Education
oversight. In addition to having an acceptable composite score,
an institution must, among other things, provide the
administrative resources necessary to comply with Title IV
program requirements, meet all of its financial obligations
including required refunds to students and any Title IV
liabilities and debts, be current in its debt payments, and not
receive an adverse, qualified, or disclaimed opinion by its
accountants in its audited financial statements.
When we were recertified by the Department of Education in 2005
to continue participating in the Title IV programs, the
Department of Education advised us that we did not satisfy its
standards of financial responsibility, based on our fiscal year
2004 financial statements, as submitted to the Department of
Education. As a result of this and other concerns about our
administrative capability, the Department of Education required
us to post a letter of credit, accept restrictions on the growth
of our program offerings and enrollment, and receive
Title IV funds under the heightened cash monitoring system
of payment rather than by advance payment. In October 2006, the
Department of Education eliminated the letter of credit
requirement and allowed the growth restrictions to expire, based
upon its review of our fiscal year 2005 financial statements. We
have subsequently submitted our fiscal year 2006, 2007, and 2008
financial statements to the Department of Education as required,
and we calculated that our composite score for each such fiscal
year exceeded 1.5. We therefore believe that we meet the
Department of Educations financial responsibility
standards for our most recently completed fiscal year.
If the Department of Education were to determine that we did not
meet the financial responsibility standards due to a failure to
meet the composite score or other factors, we would expect to be
able to establish financial responsibility on an alternative
basis permitted by the Department of Education, which could
include, in the Departments discretion, posting a letter
of credit, accepting provisional certification, complying with
additional Department of Education monitoring requirements,
agreeing to receive Title IV program funds under an
arrangement other than the Department of Educations
standard advance funding arrangement, such as the reimbursement
system of payment or heightened cash monitoring, and complying
with or accepting other limitations on our ability to increase
the number of programs we offer or the number of students we
enroll.
The requirement to post a letter of credit or other sanctions
imposed by the Department of Education could increase our cost
of regulatory compliance and adversely affect our cash flows. If
we are unable to meet the minimum composite score or comply with
the other standards of financial responsibility, and could not
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post a required letter of credit or comply with the alternative
bases for establishing financial responsibility, our students
could lose their access to Title IV program funding.
Return of Title IV funds for students who
withdraw. When a student who has received
Title IV funds withdraws from school, the institution must
determine the amount of Title IV program funds the student
has earned. If the student withdraws during the
first 60% of any period of enrollment or payment period, the
amount of Title IV program funds that the student has
earned is equal to a pro rata portion of the funds the student
received or for which the student would otherwise be eligible.
If the student withdraws after the 60% threshold, then the
student is deemed to have earned 100% of the Title IV
program funds he or she received. The institution must return
the unearned Title IV program funds to the appropriate
lender or the Department of Education in a timely manner, which
is generally no later than 45 days after the date the
institution determined that the student withdrew. If such
payments are not timely made, the institution will be required
to submit a letter of credit to the Department of Education
equal to 25% of the Title IV funds that the institution
should have returned for withdrawn students in its most recently
completed fiscal year. Under Department of Education
regulations, late returns of Title IV program funds for 5%
or more of the withdrawn students in the audit sample in the
institutions annual Title IV compliance audit for
either of the institutions two most recent fiscal years or
in a Department of Education program review triggers this letter
of credit requirement. We did not exceed this 5% threshold in
our annual Title IV compliance audit in our 2006, 2007, or
2008 fiscal years.
The 90/10 Rule. A requirement of
the Higher Education Act, commonly referred to as the
90/10 Rule, that is applicable only to for-profit,
postsecondary educational institutions like us, provides that an
institution loses its eligibility to participate in the
Title IV programs, if, under a complex regulatory formula
that requires cash basis accounting and other adjustments to the
calculation of revenue, the institution derives more than 90% of
its revenues for each of two consecutive fiscal years from
Title IV program funds. This rule provides that an
institution that violates this revenue limit becomes ineligible
to participate in the Title IV programs as of the first day
of the fiscal year following the second consecutive fiscal year
in which it exceeds the 90% threshold, and its period of
ineligibility extends for at least two consecutive fiscal years.
If an institution exceeds the 90% threshold for two consecutive
fiscal years and it and its students have received Title IV
funds during the period of ineligibility, the institution will
be required to return those funds to the applicable lender or
the Department of Education. If an institutions rate
exceeds 90% for any single fiscal year, it will be placed on
provisional certification for at least two fiscal years. The
August 2008 reauthorization of the Higher Education Act included
significant revisions to the 90/10 Rule that became
effective upon the date of the laws enactment.
Recent changes in federal law that increased Title IV grant
and loan limits, and any additional increases in the future, may
result in an increase in the revenues we receive from the
Title IV programs, which could make it more difficult for
us to satisfy the 90/10 Rule. In addition, economic
downturns that adversely affect the employment circumstances of
our students or their parents, or that reduce the availability
of private loans for our students, could also increase their
reliance on Title IV programs. However, such effects may be
mitigated by other provisions of the 2008 Higher Education Act
reauthorization that allow institutions, when calculating their
compliance with this revenue test, to exclude from their
Title IV revenues for a three-year period the additional
federal student loan amounts that became available through the
Unsubsidized Stafford Loan Program starting in July 2008, and to
include more non-Title IV revenues, such as revenues from
institutional loans under certain circumstances. Using the
Department of Educations formula under the
90/10 Rule
that was in effect prior to the August 2008 reauthorization of
the Higher Education Act, for our 2007 and 2008 fiscal years, we
derived approximately 74.0% and 78.6%, respectively, of our
revenues (calculated on a cash basis) from Title IV program
funds. These rates have been reviewed by our financial
accounting firm as reflected in the notes to our audited
financial statements for each fiscal year. We are reviewing the
Department of Educations proposed regulations and other
factors bearing on the trends in our percentage under the 90/10
Rule for our 2009 fiscal year and future years. However, as a
result of recent changes in federal law that increased
Title IV grant and loan limits, as well as the current
economic downturn, which has adversely affected the employment
circumstances of our students and their parents and increased
their reliance on Title IV programs, we expect the
percentage of our revenue that we receive from the Title IV
programs to continue to increase in the future, making it more
difficult for us to satisfy this requirement.
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Exceeding the 90% threshold such that we lost our eligibility to
participate in the Title IV programs would have a material
adverse effect on our business, prospects, financial condition,
and results of operations.
Student loan defaults. Under the Higher
Education Act, an educational institution may lose its
eligibility to participate in some or all of the Title IV
programs if defaults by its students on the repayment of their
FFEL student loans or Federal Direct Loans exceed certain
levels. For each federal fiscal year, the Department of
Education calculates a rate of student defaults for each
institution (known as a cohort default rate). An
institutions cohort default rate for a federal fiscal year
historically has been calculated by determining the rate at
which borrowers who became subject to their repayment obligation
in one federal fiscal year default in that same year or by the
end of the following federal fiscal year (the two-year
method). The reauthorization of the Higher Education Act
in 2008 extended the measurement period for cohort default rates
so that the rate is calculated by determining the rate at which
borrowers who became subject to their repayment obligation in
one federal fiscal year default in that same year or by the end
of the second following federal fiscal year (the
three-year method), which is expected to increase
cohort default rates for most if not all institutions.
The Department of Education has proposed a regulation indicating
that it will begin to implement this extended measurement period
for the cohort default rates that will be calculated for loans
that enter repayment in federal fiscal year 2009, which is the
year that ends on September 30, 2009. The Department of
Education has proposed a transition period of three years during
which it will calculate two cohort default rates for each
institution for each of federal fiscal years 2009, 2010 and
2011, with one such rate measured under the two-year method and
the other such rate measured under the three-year method. The
cohort default rates for federal fiscal year 2009, 2010 and
2011, as calculated under the new three-year method, are not
expected to be published until calendar years 2012, 2013 and
2014.
The Department of Education will apply different legal
thresholds to measure an institutions compliance under
each set of rates. If the Department of Education notifies an
institution that its cohort default rates exceed 25%, as
calculated under the two-year method, for each of its three most
recent federal fiscal years, or exceed 30%, as calculated under
the three-year method, for each of the three most recent federal
fiscal years, the institutions participation in the FFEL
program, the FDL program and the Pell program ends 30 days
after that notification, unless the institution appeals that
determination in a timely manner on specified grounds and
according to specified procedures. In addition, an
institutions participation in the FFEL program and the FDL
program ends 30 days after notification by the Department
of Education that its most recent cohort default rate, as
calculated under either the two-year method or the three-year
method, is greater than 40%, unless the institution timely
appeals that determination on specified grounds and according to
specified procedures. An institution whose participation ends
under either of these provisions may not participate in the
relevant programs for the remainder of the fiscal year in which
the institution receives the notification and for the next two
fiscal years. If an institutions cohort default rate for
any single federal fiscal year equals or exceeds 25% under the
two-year method, or 30% under the three-year method, the
Department of Education may place the institution on provisional
certification status.
Our cohort default rates on FFEL program loans for the 2004,
2005 and 2006 federal fiscal years, the three most recent years
for which such rates have been calculated, were 1.4%, 1.8% and
1.6%, respectively. Our draft cohort default rate for the 2007
federal fiscal year is 1.4%. We expect our cohort default rate
for the 2008 federal fiscal year to increase due primarily to
the impact of current economic conditions on our students and
former students, although we expect such rate to remain well
below the Department of Educations thresholds.
Our students have begun the process of applying for loans under
the FDL program for the fall of 2009. When these loans are
disbursed, they will be combined with our students FFEL
loans in calculating our annual student loan cohort default
rate. In such case, the potential sanctions discussed in this
section would be based on the combined cohort default rate.
Incentive compensation rule. An institution
that participates in the Title IV programs may not provide
any commission, bonus, or other incentive payment based directly
or indirectly on success in securing enrollments or financial
aid to any person or entity engaged in any student recruitment,
admissions, or financial aid awarding activity. The Department
of Educations regulations set forth 12 safe
harbors which
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describe payments and arrangements that do not violate the
incentive compensation rule. The Department of Educations
regulations make clear that the safe harbors are not a complete
list of permissible practices under this law. For example, one
of these safe harbors permits adjustments to fixed salary for
enrollment personnel provided that such adjustments are not made
more than twice during any twelve month period, and that any
adjustment is not based solely on the number of students
recruited, admitted, enrolled, or awarded financial aid, but the
regulations do not address other practices, such as the
provision of non-cash awards to enrollment personnel. The
restrictions of the incentive compensation rule also extend to
any third-party companies that an educational institution
contracts with for student recruitment, admissions, or financial
aid awarding services. Since 2005, we have engaged Mind Streams,
LLC to assist us with student recruitment activities.
In recent years, several for-profit education companies have
been faced with whistleblower lawsuits, known as qui
tam cases, brought by current or former employees alleging
that their institution had made impermissible incentive
payments. A qui tam case is a civil lawsuit brought by
one or more individuals (a relator) on behalf of the
federal government for an alleged submission to the government
of a false claim for payment. The relator, often a current or
former employee, is entitled to a share of the governments
recovery in the case. A qui tam action is always filed
under seal and remains under seal until the government decides
whether to intervene in the case. If the government intervenes,
it takes over primary control of the litigation. If the
government declines to intervene in the case, the relator may
nonetheless elect to continue to pursue the litigation at his or
her own expense on behalf of the government.
On September 11, 2008, we were served with a qui tam
lawsuit that had been filed against us in August 2007, in
the United States District Court for the District of Arizona by
a then-current employee on behalf of the federal government. All
proceedings in the lawsuit had been under seal until
September 5, 2008, when the court unsealed the first
amended complaint, which had been filed on August 11, 2008.
The qui tam lawsuit alleges, among other things, that we
violated the False Claims Act by knowingly making false
statements, and submitting false records or statements, from at
least 2001 to the present, to get false or fraudulent claims
paid or approved, and asserts that we have improperly
compensated certain of our enrollment counselors in violation of
the Title IV law governing compensation of such employees,
and as a result, improperly received Title IV program
funds. The complaint specifically alleges that some of our
compensation practices with respect to our enrollment personnel,
including providing non-cash awards, have violated the
Title IV law governing compensation. While we believe that
our compensation policies and practices at issue in the
complaint have not been based on success in enrolling students
in violation of applicable law, the Department of
Educations regulations and interpretations of the
incentive compensation law do not establish clear criteria for
compliance in all circumstances and some of our practices,
including in respect of non-cash awards, have not been within
the scope of any specific safe harbor provided in
the compensation regulations. The complaint seeks treble the
amount of unspecified damages sustained by the federal
government in connection with our receipt of Title IV
funding, a civil penalty for each violation of the False Claims
Act, attorneys fees, costs, and interest. We filed a
motion to dismiss this case in November 2008, which was denied
by the court in February 2009, and we have continued to
vigorously contest this lawsuit.
Pursuant to the courts mandatory scheduling order, we have
entered into settlement discussions with respect to the qui
tam matter with the relator. In connection with such
discussions, we are negotiating for a comprehensive settlement
that would include, among other things, the resolution by the
Office of Inspector General of its investigation. Accordingly,
any such settlement would need to be approved not only by the
relator, but by the U.S. Department of Justice (which has
authority to approve settlements of False Claims Act matters),
and the Department of Education. Based on publicly available
information, we believe that similar qui tam lawsuits
involving compensation practices of other post-secondary
education institutions have settled (or have resulted in
announced charges in anticipation of settlement) in the range of
$4.9 million to $7.0 million. While we cannot assure
you that this matter will be settled on terms acceptable to us
or at all, we do not believe that any potential settlement, if
in the amount (which is within the range of such other
settlements) and on the terms currently under discussion, will
materially adversely affect our business, operations, or
liquidity, although any charge taken in connection with such a
potential settlement would likely be material to our operating
results and cash flow for the periods affected by the charge. If
such settlement does not occur, we would continue to vigorously
defend this lawsuit.
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The Office of Inspector General of the Department of Education
is responsible for, among other things, promoting the
effectiveness and integrity of the Department of
Educations programs and operations, including compliance
with applicable statutes and regulations. The Office of
Inspector General performs investigations of alleged violations
of law, including cases of alleged fraud and abuse, or other
identified vulnerabilities, in programs administered or financed
by the Department of Education, including matters related to the
incentive compensation rule. On August 14, 2008, the Office
of Inspector General served an administrative subpoena on Grand
Canyon University requiring us to provide certain records and
information related to performance reviews and salary
adjustments for all of our enrollment counselors and managers
from January 1, 2004 to the present. The Office of
Inspector Generals investigation is focused on whether we
have compensated any of our enrollment counselors or managers in
a manner that violated the Title IV statutory requirements
or the related Department of Education regulations concerning
the payment of incentive compensation based on success in
securing enrollments or financial aid. We have been cooperating
with the Office of Inspector General to facilitate its
investigation and have completed production of all requested
documents. See Risk Factors The Office of
Inspector General of the Department of Education has commenced
an investigation of Grand Canyon University, which is ongoing
and which may result in fines, penalties, other sanctions, and
damage to our reputation in the industry.
Any fine or other sanction resulting from the Office of
Inspector General investigation or otherwise, or any monetary
liability resulting from the qui tam action, could damage
our reputation and impose significant costs on us, which could
have a material adverse effect on our business, prospects,
financial condition, and results of operations. We cannot
presently predict the ultimate outcome of the qui tam lawsuit or
the Office of Inspector General investigation or any liability
or other sanctions that might result.
In May 2009, the Department of Education announced that it was
initiating a process to revise its regulations in certain areas,
including the regulations implementing the incentive
compensation rule. The process will involve convening one or
more negotiated rulemaking teams composed of various
representatives of the postsecondary education community
nationally, as well as Department of Education employees, to
consider how the current regulations should be revised. The
Department of Education has stated that it intends for the
committees to be appointed and to begin their work in the fall
of 2009. Following a committees review and drafting of
possible revisions to the incentive compensation regulations,
the Department of Education will develop and publish proposed
revisions to the regulations, on which members of the public
will be invited to provide comments. Following review of any
public comments, the Department of Education will publish final
new regulations. Under current law, any such revisions to the
current incentive compensation regulations would not take effect
any earlier than July 1, 2011.
Compliance reviews. We are subject to
announced and unannounced compliance reviews and audits by
various external agencies, including the Department of
Education, its Office of Inspector General, state licensing
agencies, agencies that guarantee FFEL loans, the applicable
state approving agencies for financial assistance to veterans,
and accrediting commissions. As part of the Department of
Educations ongoing monitoring of institutions
administration of the Title IV programs, the Higher
Education Act also requires institutions to annually submit to
the Department of Education a Title IV compliance audit
conducted by an independent certified public accountant in
accordance with applicable federal and Department of Education
audit standards. In addition, to enable the Department of
Education to make a determination of an institutions
financial responsibility, each institution must annually submit
audited financial statements prepared in accordance with
Department of Education regulations.
Privacy of student records. The Family
Educational Rights and Privacy Act of 1974, or FERPA, and the
Department of Educations FERPA regulations require
educational institutions to protect the privacy of
students educational records by limiting an
institutions disclosure of a students personally
identifiable information without the students prior
written consent. FERPA also requires institutions to allow
students to review and request changes to their educational
records maintained by the institution, to notify students at
least annually of this inspection right, and to maintain records
in each students file listing requests for access to and
disclosures of personally identifiable information and the
interest of such party in that information. If an institution
fails to comply with FERPA, the Department of Education may
require corrective actions by the institution or may terminate
an institutions receipt of further federal funds. In
addition, educational
52
institutions are obligated to safeguard student information
pursuant to the Gramm-Leach-Bliley Act, or GLBA, a federal law
designed to protect consumers personal financial
information held by financial institutions and other entities
that provide financial services to consumers. GLBA and the
applicable GLBA regulations require an institution to, among
other things, develop and maintain a comprehensive, written
information security program designed to protect against the
unauthorized disclosure of personally identifiable financial
information of students, parents, or other individuals with whom
such institution has a customer relationship. If an institution
fails to comply with the applicable GLBA requirements, it may be
required to take corrective actions, be subject to monitoring
and oversight by the FTC, and be subject to fines or penalties
imposed by the FTC. For-profit educational institutions are also
subject to the general deceptive practices jurisdiction of the
FTC with respect to their collection, use, and disclosure of
student information. The institution must also comply with the
FTC Red Flags Rule, a section of the federal Fair Credit
Reporting Act, that requires the establishment of guidelines and
policies regarding identity theft related to student credit
accounts.
Potential effect of regulatory violations. If
we fail to comply with the regulatory standards governing the
Title IV programs, the Department of Education could impose
one or more sanctions, including transferring us to the
reimbursement or cash monitoring system of payment, requiring us
to repay Title IV program funds, requiring us to post a
letter of credit in favor of the Department of Education as a
condition for continued Title IV certification, taking
emergency action against us, initiating proceedings to impose a
fine or to limit, suspend, or terminate our participation in the
Title IV programs, or referring the matter for civil or
criminal prosecution. Since we are provisionally certified to
participate in the Title IV programs on a
month-to-month
basis, the Department of Education could allow our certification
to expire at the end of any month without advance notice and
without any formal procedure for review of such action. In
addition, the agencies that guarantee FFEL loans for our
students could initiate proceedings to limit, suspend, or
terminate our eligibility to provide FFEL loans in the event of
certain regulatory violations. If such sanctions or proceedings
were imposed against us and resulted in a substantial
curtailment or termination of our participation in the
Title IV programs, our enrollments, revenues, and results
of operations would be materially and adversely affected.
If we lost our eligibility to participate in the Title IV
programs, or if the amount of available Title IV program
funds was reduced, we would seek to arrange or provide
alternative sources of revenue or financial aid for students. We
believe that one or more private organizations would be willing
to provide financial assistance to our students, but there is no
assurance that this would be the case. The interest rate and
other terms of such financial aid would likely not be as
favorable as those for Title IV program funds, and we might
be required to guarantee all or part of such alternative
assistance or might incur other additional costs in connection
with securing such alternative assistance. It is unlikely that
we would be able to arrange alternative funding on any terms to
replace all the Title IV funding our students receive.
Accordingly, our loss of eligibility to participate in the
Title IV programs, or a reduction in the amount of
available Title IV program funding for our students, would
have a material adverse effect on our results of operations,
even if we could arrange or provide alternative sources of
revenue or student financial aid.
In addition to the actions that may be brought against us as a
result of our participation in the Title IV programs, we
are also subject to complaints and lawsuits relating to
regulatory compliance brought not only by our regulatory
agencies, but also by other government agencies and third
parties, such as present or former students or employees and
other members of the public.
Uncertainties, increased oversight, and changes in student
loan environment. Since 2007, student loan
programs, including the Title IV programs, have come under
increased scrutiny by the Department of Education, Congress,
state attorneys general, and other parties. Issues that have
received extensive attention include allegations of conflicts of
interest between some institutions and lenders that provide
Title IV loans, questionable incentives given by lenders to
some schools and school employees, allegations of deceptive
practices in the marketing of student loans, and schools leading
students to use certain lenders. Several institutions and
lenders have been cited for these problems and have paid several
million dollars in the aggregate to settle those claims. The
practices of numerous other schools and lenders are being
examined by government agencies at the federal and state level.
53
As a result of the increased scrutiny of student loan programs,
Congress has passed new laws, the Department of Education has
enacted stricter regulations, and several states have adopted
codes of conduct or enacted state laws that further regulate the
conduct of lenders, schools, and school personnel. These new
laws and regulations, among other things, limit schools
relationships with lenders, restrict the types of services that
schools may receive from lenders, prohibit lenders from
providing other types of funding to schools in exchange for
Title IV loan volume, require schools to provide additional
information to students concerning institutionally preferred
lenders, and significantly reduce the amount of federal payments
to lenders who participate in the Title IV loan programs.
In addition, recent adverse market conditions for consumer loans
in general have adversely affected the student lending
marketplace.
The cumulative impact of these developments and conditions has
caused some lenders to cease providing Title IV loans to
students, including some lenders that previously provided
Title IV loans to our students. Other lenders have reduced
the benefits and increased the fees associated with the
Title IV loans they do provide. We and other schools have
had to modify student loan practices in ways that result in
higher administrative costs. If the costs of their Title IV
loans increase, some students may decide not to take out loans
and not enroll in a postsecondary institution. In May 2008, new
federal legislation was enacted to attempt to ensure that all
eligible students would be able to obtain Title IV loans in
the future and that a sufficient number of lenders would
continue to provide Title IV loans. Among other things,
that legislation:
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authorized the Department of Education to purchase Title IV
loans from lenders, thereby providing capital to the lenders to
enable them to continue making Title IV loans to
students; and
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permitted the Department of Education to designate institutions
eligible to participate in a lender of last resort
program, under which federally recognized student loan guaranty
agencies would be required to make Title IV loans to all
otherwise eligible students at those institutions.
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While this legislation appears to have provided some stability
to the marketplace for Title IV loans, it is not yet clear
if it ultimately will be effective in ensuring students
access to Title IV loans. The environment surrounding
access to and cost of student loans remains in a state of flux.
The Department of Education proposed new regulations regarding
student loans in July 2009, which could go into effect on
July 1, 2010, and Congress is considering legislation to
eliminate the FFEL loan program and move all federal student
lending into the FDL program. The uncertainty surrounding these
issues, and any resolution of these issues that increases loan
costs or reduces students access to Title IV loans,
may adversely affect our student enrollments. Although we are
approved to participate in the FDL program, because a
significant percentage of our revenue is derived from the
Title IV programs, any action by Congress that
significantly reduces Title IV program funding or our
ability or the ability of our students to participate in the
Title IV programs could increase our costs of compliance,
reduce the ability of some students to finance their education
at our institution, require us to seek to arrange for other
sources of financial aid for our students and materially
decrease our student enrollment, each of which could have a
material adverse effect on us. In addition, a transition to the
FDL program could cause disruptions in the administration of
Title IV program loans to our students if we or the
Department of Education encounter difficulties with the systems
or processes necessary for increased FDL program loans.
Regulatory
Standards that May Restrict Institutional Expansion or Other
Changes
Many actions that we may wish to take in connection with
expanding our operations or other changes are subject to review
or approval by the applicable regulatory agencies.
Adding teaching locations, implementing new educational
programs, and increasing enrollment. The
requirements and standards of state education agencies,
accrediting commissions, and the Department of Education limit
our ability in certain instances to establish additional
teaching locations, implement new educational programs, or
increase enrollment in certain programs. Many states require
review and approval before institutions can add new locations or
programs, and Arizona also limits the number of undergraduate
nursing students we may enroll (which represents a small portion
of our overall nursing program). The Arizona State Board for
Private Postsecondary Education, the Higher Learning Commission,
and other state education agencies and specialized accrediting
commissions that authorize or accredit us and our programs
54
generally require institutions to notify them in advance of
adding new locations or implementing new programs, and upon
notification may undertake a review of the quality of the
facility or the program and the financial, academic, and other
qualifications of the institution. For instance, following
applications we filed in December 2006, we received approval
from the Higher Learning Commission and the Arizona State Board
for Private Postsecondary Education in March 2008 to add our
first doctoral level program.
With respect to the Department of Education, if an institution
participating in the Title IV programs plans to add a new
location or educational program, the institution must generally
apply to the Department of Education to have the additional
location or educational program designated as within the scope
of the institutions Title IV eligibility. However, a
degree-granting institution such as us is not required to obtain
the Department of Educations approval of additional
programs that lead to an associate, bachelors,
professional, or graduate degree at the same degree level as
programs previously approved by the Department of Education.
Similarly, an institution is not required to obtain advance
approval for new programs that prepare students for gainful
employment in the same or a related recognized occupation as an
educational program that has previously been designated by the
Department of Education as an eligible program at that
institution if it meets certain minimum-length requirements.
However, as a condition for an institution to participate in the
Title IV programs on a provisional basis, the Department of
Education can require prior approval of such programs or
otherwise restrict the number of programs an institution may add
or the extent to which an institution can modify existing
educational programs. If an institution that is required to
obtain the Department of Educations advance approval for
the addition of a new program or new location fails to do so,
the institution may be liable for repayment of the Title IV
program funds received by the institution or students in
connection with that program or enrolled at that location.
Acquiring other schools. While we have not
acquired any other schools in the past, we may seek to do so in
the future. The Department of Education and virtually all state
education agencies and accrediting commissions require a company
to seek their approval if it wishes to acquire another school.
In our case, we would need to obtain the approval of the Arizona
State Board for Private Postsecondary Education or other state
education agency that licenses the school being acquired, the
Higher Learning Commission, any other accrediting commission
that accredits the school being acquired, and the Department of
Education. The level of review varies by individual state and
accrediting commission, with some requiring approval of such an
acquisition before it occurs while others only consider approval
after the acquisition has occurred. The Higher Learning
Commission would require us to obtain its advance approval of
such an acquisition. The approval of the applicable state
education agencies and accrediting commissions is a necessary
prerequisite to the Department of Education certifying the
acquired school to participate in the Title IV programs
under our ownership. The restrictions imposed by any of the
applicable regulatory agencies could delay or prevent our
acquisition of other schools in some circumstances.
Provisional certification. Each institution
must apply to the Department of Education for continued
certification to participate in the Title IV programs at
least every six years, or when it undergoes a change in control,
and an institution may come under the Department of
Educations review when it expands its activities in
certain ways, such as opening an additional location, adding an
educational program, or modifying the academic credentials that
it offers.
The Department of Education may place an institution on
provisional certification status if it finds that the
institution does not fully satisfy all of the eligibility and
certification standards. In addition, if a company acquires a
school from another entity, the acquired school will
automatically be placed on provisional certification when the
Department of Education approves the transaction. During the
period of provisional certification, the institution must comply
with any additional conditions or restrictions included in its
program participation agreement with the Department of
Education. If the Department of Education finds that a
provisionally certified institution is unable to meet its
responsibilities under its program participation agreement, it
may seek to revoke the institutions certification to
participate in the Title IV programs without advance notice
or advance opportunity for the institution to challenge that
action. In addition, the Department of Education may more
closely review an institution that is provisionally certified if
it applies for recertification or approval to open a new
location, add an educational program, acquire another school, or
make any other significant change. Students attending
provisionally certified institutions remain eligible to receive
Title IV program funds.
55
We are currently provisionally certified to participate in the
Title IV programs on a
month-to-month
basis. The Department of Education issued our current program
participation agreement in May 2005, after an extended review
following the change in control that occurred in February 2004.
The Department of Educations 2005 recertification imposed
certain conditions on us, including a requirement that we post a
letter of credit, accept restrictions on the growth of our
program offerings and enrollment, and receive Title IV
funds under the heightened cash monitoring system of payment
rather than by advance payment. In October 2006, the Department
of Education eliminated the letter of credit requirement and
allowed the growth restrictions to expire, and in August 2007,
it eliminated the heightened cash monitoring restrictions and
returned us to the advance payment method. We submitted our
application for recertification in March 2008 in anticipation of
the expiration of our provisional certification on June 30,
2008. The Department of Education did not make a decision on our
recertification application by June 30, 2008 and therefore
our provisional certification to participate in the
Title IV programs has been automatically extended on a
month-to-month
basis until the Department of Education makes its decision.
Since June 2008, we have filed updates with the Department of
Education and communicated with Department of Education
personnel in order to update our pending recertification
application with relevant information, such as our status as a
publicly-traded corporation after the initial public offering
and the identity of the members of our Board of Directors. There
can be no assurance that the Department of Education will
recertify us while the investigation by the Office of Inspector
General of the Department of Education is being conducted, while
the qui tam lawsuit is pending, or at all, or that it will not
impose restrictions as a condition of approving our pending
recertification application or with respect to any future
recertification.
Change in ownership resulting in a change in
control. The Department of Education and the
Higher Learning Commission, as well as many accrediting
commissions and states require institutions of higher education
to report or obtain approval of certain changes in control and
changes in other aspects of institutional organization or
control. The types of and thresholds for such reporting and
approval vary among the various regulatory bodies.
Under Department of Education regulations, an institution that
undergoes a change in control as defined by the Department of
Education loses its eligibility to participate in the
Title IV programs and must apply to the Department of
Education in order to reestablish such eligibility. In
connection with our initial public offering in November 2008, we
submitted a description of the offering to the Department of
Education, including a description of the voting agreement that
forms the basis for the Richardson Voting Group. Based on this
description, the Department of Education concluded that our
initial public offering did not result in a change in control
under the Department of Educations regulations that were
applicable to us before we became a publicly-traded corporation.
With respect to publicly-traded corporations, like us,
Department of Education regulations provide that a change in
control occurs if either: (i) there is an event that would
obligate the corporation to file a Current Report on
Form 8-K
with the SEC disclosing a change in control, or (ii) the
corporation has a stockholder that owns, or has voting control
over, at least 25% of the total outstanding voting stock of the
corporation and is the largest stockholder of the corporation
(defined in the regulations as a controlling
shareholder), and that controlling shareholder ceases to
own, or have voting control over, at least 25% of such stock or
ceases to be the largest stockholder. Based on the number of
shares of common stock expected to be sold by us and the selling
stockholders in this offering, we believe that the Richardson
Voting Group will continue to hold voting power with respect to
25% or more of our total outstanding voting stock after the
completion of the offering and that this offering will not
constitute a change in control under the Department of
Educations regulations. See Beneficial Ownership of
Common Stock. We have notified the Department of Education
of this offering and we plan to initiate further communications
with the Department of Education to seek its confirmation that
the offering will not constitute a change in control under its
standards.
The Higher Learning Commission provides that an institution must
obtain its approval in advance of a change in ownership,
corporate control or structure in order for the institution to
retain its accredited status. In June 2009, the Higher Learning
Commission adopted new policies and standards for the review of
transactions that may constitute such a change in control. One
standard provides that a transaction may be considered a change
in control if an individual, entity or group increases or
decreases its control of shares to greater than or
56
less than 25% of the total outstanding shares of the stock of a
parent corporation that owns or controls the accredited
institution. In addition, in the event of a change in control,
the Higher Learning Commission requires the institution to
obtain its approval in advance of the change, and in certain
circumstances that process may require several weeks or several
months or more to complete. In addition, following a change in
control, the Higher Learning Commission will conduct an onsite
evaluation within six months in order to continue the
institutions accreditation. The Higher Learning Commission
did consider our initial public offering in November 2008 to be
a change in control under its policies and, while it approved
our consummation of the offering, it informed us that it would
conduct a site visit to confirm the appropriateness of the
approval and to evaluate whether we continue to meet the Higher
Learning Commissions eligibility criteria. The Higher
Learning Commission, after conducting its site visit in March
2009, determined, among other things, that the initial public
offering was conducted in a manner that did not disrupt our
ongoing operations and that no further action would be required
as a result of the change in control, and formally approved the
change in control in June 2009. Based on the number of shares of
common stock expected to be sold by us and the selling
stockholders in this offering, we believe that the Richardson
Voting Group will continue to hold voting power with respect to
25% or more of our total outstanding voting stock after the
completion of the offering and that this offering will not
constitute a change in control under the Higher Learning
Commissions policies. See Beneficial Ownership of
Common Stock. We have submitted a description of this
offering to the Higher Learning Commission and have been advised
by the Higher Learning Commission that the offering will not
constitute a change in control under its policies and standards.
Even if this offering will not constitute a change of control
under the Department of Educations regulations or the
Higher Learning Commissions policies, under the terms of
the voting agreement with the Richardson Voting Group, if any
person party to the voting agreement transfers shares covered by
the proxy in registered or open-market sales, the proxy is no
longer effective as to such shares. Accordingly, the number of
shares over which the Richardson Voting Group will continue to
hold voting power will decrease over time as shares held by
other parties to the voting agreement are sold, and we may not
be aware of these sales since many of the shares subject to the
voting agreement are held in street name. If at any
time in the future, as a result of such future registered or
open-market sales, the number of shares over which the
Richardson Voting Group holds voting power falls below 25%, a
change in control will occur. At that point, with respect to the
Department of Education, if we file a timely and materially
complete application, the Department of Education may
temporarily certify us on a provisional basis following the
change in control, so that our students would retain access to
Title IV program funds until the Department of Education
completes its full review. In addition, the Department of
Education will extend our temporary provisional certification if
we timely file other required materials, including any approval
of the change of control by the Higher Learning Commission and
the Arizona State Board for Private Postsecondary Education, as
required, and certain required financial information (consisting
of our recent SEC filings) showing our financial condition. As a
general matter, an institution is required to file the
materially complete application within ten business days after
the change in control, as measured from the date of the event
that constitutes the change in control. The deadline for an
institution to timely file the other materials, including the
financial documentation, that are required following a change in
control is the last day of the month following the month in
which the change of control occurs. For an institution that is
owned by a publicly traded corporation, like us, a related
Department of Education regulation provides that the deadline to
notify the Department of Education of a significant change in
the distribution of the ownership of the institution is ten
days, as measured from the date on which management of the
corporation learns of such significant change or, alternatively,
the date that the institution notifies its accrediting agency of
such change. If the Department of Education were to determine
that we failed to meet any of these application and other
deadlines, our certification would expire and our students would
not be eligible to receive Title IV program funds until the
Department of Education completes its full review, which
commonly takes several months and may take longer. If the
Department of Education approves the application after a change
in control, it would normally certify us on a provisional basis
for a period of up to approximately three years. The precise
conditions and duration of our provisional certification in this
circumstance and what restrictions, if any, may be imposed, are
difficult to predict because we have been certified on a
month-to-month
basis for an extended period and are subject to the ongoing
investigation
57
by the Office of Inspector General of the Department of
Education and the qui tam lawsuit, which may affect the
Department of Educations decision regarding the terms to
attach when it next renews our certification.
With respect to the Higher Learning Commission, if we anticipate
that the number of shares over which the Richardson Voting Group
holds voting power will fall below 25% at any time in the
future, we would be required to obtain the approval of the
Higher Learning Commission before such event occurs. However,
because we may be unaware when such event occurs, we would seek
the cooperation of the Higher Learning Commission to allow us to
arrange an appropriate review procedure at that time since there
may not be an opportunity to obtain the Higher Learning
Commissions advance review and approval, as is typically
required by its policies. Another policy of the Higher Learning
Commission provides that an institution is obligated to provide
notice of certain transactions, such as the transfer of stock by
an investor, promptly after the institution becomes reasonably
knowledgeable of such transaction. This policy suggests that, in
certain circumstances, the Higher Learning Commission can adapt
its procedures to allow an institution, like us, to provide
notice and seek the necessary approval after the institution
gains knowledge of an investor transaction such as the sale of
shares by other parties to the voting agreement, but there can
be no assurance that would be the case with respect to this
offering or any such sales of stock that may occur following the
completion of this offering. In such a circumstance, we cannot
predict whether the Higher Learning Commission would impose any
limitations or conditions on us, or identify any compliance
issues related to us in the context of the change in control
process, that could result in our loss of accreditation by the
Higher Learning Commission. Any such loss would result in our
loss of eligibility to participate in the Title IV programs
and cause a significant decline in our student enrollments.
Many states include the sale of a controlling interest of common
stock in the definition of a change in control requiring
approval, but their thresholds for determining a change in
control vary widely. The standards of the Arizona State Board
for Private Postsecondary Education provide that an institution
that is owned by a publicly-traded company whose control is
vested in the voting members of the board of directors, such as
Grand Canyon Education, undergoes a change in control if 50% or
more of the voting members of the board of directors change
within a
12-month
period or the chief executive officer of the corporation
changes. A change in control under the definition of one of the
other state agencies that regulate us might require us to obtain
approval of the change in control in order to maintain our
authorization to operate in that state, and in some cases such
states could require us to obtain advance approval of the change
in control.
We notified the Arizona State Board for Private Postsecondary
Education of our initial public offering and, based on our
communications with that agency before and after the
consummation of the initial public offering, we do not believe
that our initial public offering constituted a change in control
under Arizona law that was applicable to us before we were a
publicly traded corporation. We notified the Arizona State Board
for Private Postsecondary Education of this offering and the
Arizona State Board for Private Postsecondary Education has
confirmed in writing that this offering does not constitute a
change of ownership or control under its standards. If we were
to undergo a change in control under the standards of the
Arizona State Board of Private Postsecondary Education at any
time in the future, we would be required to file an application
with the Arizona State Board for Private Postsecondary Education
in order to obtain approval for such change in control. We
cannot predict whether the Arizona State Board for Private
Postsecondary Education would impose any limitations or
conditions on us, or identify any compliance issues related to
us in the context of the change in control process, that could
result in our loss of authorization in Arizona. Any such loss
would result in our loss of eligibility to participate in the
Title IV programs and cause a significant decline in our
student enrollments.
We also notified other accrediting commissions and state
agencies, as we believed necessary, of our initial public
offering and the reasons why we believed that offering did not
constitute a change in control under their respective standards,
or to determine what was required if any such commission or
agency did consider the offering to constitute a change in
control. None of the other accrediting commissions and state
agencies that we notified of our initial public offering advised
us that it concluded that the offering constituted a change in
control under its policies or that it required us to take any
further action. We have provided each of these
58
other accrediting commissions and state agencies, as we
believed necessary, with a notice and description of this
offering before the consummation of the offering. We do not
believe that any of them will require us to obtain their
approval in connection with this offering, but we cannot be
certain of that. If this offering were considered a change of
control under the standards of any of these commissions or
agencies, and we failed to obtain the approval of that
commission or agency, we could lose accreditation, state
licensure, or be subject to other limitations or penalties.
Additional state regulation. Most state
education agencies impose regulatory requirements on educational
institutions operating within their boundaries. Some states have
sought to assert jurisdiction over
out-of-state
educational institutions offering online degree programs that
have no physical location in the state but that have some
activity in the state, such as enrolling or offering educational
services to students who reside in the state, employing faculty
who reside in the state, or advertising to or recruiting
prospective students in the state. State regulatory requirements
for online education vary among the states, are not well
developed in many states, are imprecise or unclear in some
states, and can change frequently. In addition to Arizona, we
have determined that our activities in certain states constitute
a presence requiring licensure or authorization under the
requirements of the state education agency in those states, and
in other states we have obtained approvals as we have determined
necessary in connection with our marketing and recruiting
activities. We review the licensure requirements of other states
when appropriate to determine whether our activities in those
states require licensure or authorization by the respective
state education agencies. Because state regulatory requirements,
including agency interpretations, can change frequently, and
because we enroll students from all 50 states and the
District of Columbia, we expect we will have to seek licensure
or authorization in additional states in the future. If we fail
to comply with state licensing or authorization requirements for
any state, we may be subject to the loss of state licensure or
authorization by that state, or be subject to other sanctions,
including restrictions on our activities in that state, fines,
and penalties. While we do not believe that any of the states in
which we are currently licensed or authorized, other than
Arizona, are individually material to our operations, the loss
of licensure or authorization in a state other than Arizona
could prohibit us from recruiting prospective students or
offering services to current students in that state, which could
significantly reduce our enrollments.
59
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Policies
and Procedures for Related Person Transactions
We have a written related party transactions policy, pursuant to
which our executive officers, directors and principal
stockholders, including their immediate family members, are not
permitted to enter into a related person transaction with us
without the prior consent of our audit committee. Any request
for us to enter into a transaction with an executive officer,
director, principal stockholder or any of such persons
immediate family members or affiliates, in which the amount
involved exceeds $120,000 must be presented to our audit
committee for review, consideration and approval. All of our
directors, executive officers and employees are required to
report to our audit committee any such related person
transaction. In approving or rejecting the proposed agreement,
our audit committee will take into account, among other factors
it deems appropriate, whether the transaction is on terms no
less favorable than terms generally available to an unaffiliated
third-party under the same or similar circumstances and the
extent of the related partys interest in the transaction.
Under the policy, if we should discover related person
transactions that have not been pre-approved, the audit
committee will be notified and will determine the appropriate
action, including ratification, rescission or amendment of the
transaction.
Under the policy, certain types of transactions have been
pre-approved by the audit committee, including employment
arrangements with executive officers, director compensation,
transactions where all stockholders receive proportional
benefits, transactions involving competitive bids, regulated
transactions, and banking-related service transactions.
Set forth below is a summary of certain transactions since
January 1, 2006, in which the Company was or is to be a
participant and involving our directors, our executive officers,
beneficial owners of more than 5% of our common stock, and some
of the entities with which the foregoing persons are affiliated
or associated, and in which the amount involved exceeds or will
exceed $120,000.
Investor
Rights Agreement and Financing Transactions
In connection with our conversion from a limited liability
company to a corporation and the related investment in us by
Endeavour Capital and its affiliates (the Endeavour
Entities), and certain other investors on August 24,
2005, we entered into an investor rights agreement. The investor
rights agreement, as currently in effect, contains agreements
among the parties with respect to registration rights. See
Description of Capital Stock Registration
Rights. On December 18, 2007, we sold an aggregate of
3,829 shares of Series C preferred stock at a purchase
price of $3,500.00 per share, or approximately
$13.4 million in total gross proceeds, of which
1,675 shares were sold to the Endeavour Entities, and
834 shares were sold to an investment entity controlled by
Brent D. Richardson, our Executive Chairman, and Christopher C.
Richardson, our General Counsel and a director (which shares
were paid for, in part, by the exchange of 865 outstanding
shares of Series B preferred stock purchased in 2006). All
outstanding shares of the Series C preferred stock were
automatically converted into common stock in connection with our
initial public offering.
Voting
Agreement
The Department of Education, the Higher Learning Commission, and
other accrediting commissions and states require institutions of
higher education to report or obtain approval of certain changes
in control and changes in other aspects of institutional
organization or control. Certain of our stockholders, including
the Endeavor Entities, have entered into a proxy and voting
agreement, pursuant to which such persons have granted to Brent
D. Richardson, our Executive Chairman, and Christopher C.
Richardson, our General Counsel and a director, on behalf of the
Richardson Voting Group, a five-year irrevocable proxy to
exercise voting authority with respect to certain shares of our
common stock held by such persons, for so long as such shares
are held by such persons. Upon the completion of our initial
public offering, as a result of the proxy and voting agreement,
the Richardson Voting Group had the power to exercise voting
authority with respect to 19,516,242 shares of our common
stock, or 42.9% of our common stock at such time.
Under the terms of the voting agreement, if any person party to
the voting agreement transfers shares covered by the proxy in
open-market or other transactions, the proxy is no longer
effective as to such shares.
60
Accordingly, the number of shares over which the Richardson
Voting Group will continue to hold voting power will decrease
over time as shares held by other parties to the voting
agreement are sold, which sales we may be not be aware of since
many of the shares held by such other parties are held in
street name. After giving effect to this offering,
and based on the number of shares expected to be sold by us and
the selling stockholders participating in this offering, we
believe that the Richardson Voting Group will continue to have
the power to exercise voting authority with respect to more than
25% of our common stock. See Regulation and
Beneficial Ownership of Common Stock.
Special
Distribution
We declared a special distribution that was paid promptly after
the completion of our initial public offering in November 2008
to our stockholders who owned shares of record immediately prior
to the consummation of our initial public offering. The
aggregate amount of the special distribution was equal to 75% of
the gross proceeds from the sale of common stock in our initial
public offering, including 75% of the gross proceeds received by
us from the underwriters exercise of their over-allotment
option. The aggregate amount of the special distribution was
$108.7 million, or approximately $3.27 per common share on
an as if converted basis.
The following table sets forth the amount of cash paid as a
result of the special distribution in respect of outstanding
shares of our capital stock as to which each of our executive
officers and directors, as well as persons who were holders of
5% or more of our common stock at the time, was deemed to have
sole or shared voting or investment power as of the date of the
special distribution.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
Special
|
|
|
|
Owned and
|
|
|
Date of Acquisition
|
|
Original Acquisition
|
|
|
Distribution
|
|
|
|
Outstanding as of
|
|
|
of Shares
|
|
Cost of Shares to Which
|
|
|
Amount for Shares
|
|
|
|
November 18,
|
|
|
Beneficially
|
|
Special Distribution
|
|
|
Beneficially
|
|
Name of Beneficial Owner
|
|
2008(1)
|
|
|
Owned
|
|
Related(2)
|
|
|
Owned
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
5% Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Endeavour Capital Fund IV and
affiliates(3)
|
|
|
9,035,048
|
|
|
August 24, 2005
|
|
$
|
16,000
|
|
|
$
|
29,547
|
|
|
|
|
977,090
|
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,012,138
|
|
|
|
|
|
21,863
|
|
|
|
32,742
|
|
220 GCU, L.P. and
affiliates(4)
|
|
|
4,756,328
|
|
|
February 2, 2004
|
|
|
3,042
|
|
|
|
15,554
|
|
|
|
|
1,835,130
|
|
|
August 24, 2005
|
|
|
3,250
|
|
|
|
6,001
|
|
|
|
|
545,218
|
|
|
December 18, 2007
|
|
|
3,271
|
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,136,676
|
|
|
|
|
|
9,563
|
|
|
|
23,338
|
|
Staci L.
Buse(5)
|
|
|
3,347,452
|
|
|
February 2, 2004
|
|
|
1,443
|
|
|
|
10,947
|
|
|
|
|
155,719
|
|
|
December 18, 2007
|
|
|
934
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,503,171
|
|
|
|
|
|
2,377
|
|
|
|
11,456
|
|
Significant Ventures,
LLC(6)
|
|
|
2,767,321
|
|
|
February 2, 2004
|
|
|
36
|
|
|
|
9,050
|
|
|
|
|
203,823
|
|
|
December 18, 2007
|
|
|
1,223
|
|
|
|
667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,971,144
|
|
|
|
|
|
1,259
|
|
|
|
9,717
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chad N.
Heath(3)
|
|
|
9,035,048
|
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
29,547
|
|
|
|
|
977,090
|
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,012,138
|
|
|
|
|
|
21,863
|
|
|
|
32,742
|
|
D. Mark
Dorman(3)
|
|
|
9,035,048
|
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
29,547
|
|
|
|
|
977,090
|
|
|
December 18, 2007
|
|
|
5,863
|
|
|
|
3,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,012,138
|
|
|
|
|
|
21,863
|
|
|
|
32,742
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brent D.
Richardson(5)
|
|
|
3,347,452
|
|
|
February 2, 2004
|
|
|
1,443
|
|
|
|
10,947
|
|
|
|
|
155,719
|
|
|
December 18, 2007
|
|
|
934
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,503,171
|
|
|
|
|
|
2,377
|
|
|
|
11,456
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
Special
|
|
|
|
Owned and
|
|
|
Date of Acquisition
|
|
Original Acquisition
|
|
|
Distribution
|
|
|
|
Outstanding as of
|
|
|
of Shares
|
|
Cost of Shares to Which
|
|
|
Amount for Shares
|
|
|
|
November 18,
|
|
|
Beneficially
|
|
Special Distribution
|
|
|
Beneficially
|
|
Name of Beneficial Owner
|
|
2008(1)
|
|
|
Owned
|
|
Related(2)
|
|
|
Owned
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
John E.
Crowley(7)
|
|
|
382,435
|
|
|
February 2, 2004
|
|
|
164
|
|
|
|
1,251
|
|
|
|
|
19,465
|
|
|
December 18, 2007
|
|
|
117
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
401,900
|
|
|
|
|
|
281
|
|
|
|
1,315
|
|
Christopher C.
Richardson(5)
|
|
|
3,348,317
|
|
|
February 2, 2004
|
|
|
1,443
|
|
|
|
10,950
|
|
|
|
|
155,719
|
|
|
December 18, 2007
|
|
|
934
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,504,036
|
|
|
|
|
|
2,377
|
|
|
|
11,459
|
|
All directors and executive officers as a group
|
|
|
7,078,204
|
|
|
February 2, 2004
|
|
|
3,050
|
|
|
|
23,148
|
|
|
|
|
9,035,048
|
|
|
August 24, 2005
|
|
|
16,000
|
|
|
|
29,547
|
|
|
|
|
1,307,993
|
|
|
December 18, 2007
|
|
|
7,848
|
|
|
|
4,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,421,245
|
|
|
|
|
$
|
26,898
|
|
|
$
|
56,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the purpose of calculating shares beneficially owned and
outstanding as of November 18, 2008, which was the date
immediately prior to our initial public offering and the record
date for purposes of determining the stockholders entitled to
receive the special distribution, the number of shares of common
stock deemed outstanding included all shares of common stock
issuable upon the conversion of all outstanding shares of our
Series A and Series C preferred stock. Beneficial ownership
is determined in accordance with the rules of the SEC that
generally attribute beneficial ownership of securities to
persons that possess sole or shared voting power and/or
investment power with respect to those securities. The persons
identified in this table have sole voting and investment power
with respect to all shares shown as beneficially owned by them,
except as set forth in the footnotes to the table included in
Beneficial Ownership of Common Stock. |
|
(2) |
|
On August 24, 2005, we converted from a limited liability
company to a taxable corporation. The reported acquisition cost
of shares of common stock represents the value of the capital
contributions originally made to acquire the limited liability
company interests that were converted into common stock upon
such conversion plus capital contributions for which no
additional interests were issued, less capital distributions. |
|
(3) |
|
Represents shares held of record by the Endeavour Entities.
Messrs. Chad N. Heath and D. Mark Dorman, each of whom is a
managing director of Endeavour Capital IV, LLC, the general
partner of each of the Endeavour Entities, are members of our
Board of Directors. |
|
(4) |
|
Represents shares previously held of record by 220 GCU, L.P.,
220 Education, L.P., 220-SigEd, L.P., and SV One, L.P., which,
prior to our initial public offering, were collectively the
beneficial owners of more than 5% of our common stock. |
|
(5) |
|
Represents shares previously held of record by Rich Crow
Enterprises, LLC, and Masters Online, LLC, of which Brent D.
Richardson, Christopher C. Richardson, and Staci L. Buse were
members and, in each case, which were attributable to, and
beneficially owned by, Brent D. Richardson, Christopher C.
Richardson, or Staci L. Buse, as applicable. |
|
|
|
(6) |
|
Represents shares previously held of record by Significant
Ventures, LLC which, prior to our initial public offering, was a
beneficial owner of more than 5% of our common stock. |
|
|
|
(7) |
|
Represents shares previously held of record by Rich Crow
Enterprises, LLC, of which John E. Crowley, our former chief
operating officer, was a member, which were attributable to, and
beneficially owned by, John E. Crowley. Mr. Crowley
resigned his position as chief operating officer on
February 17, 2009. |
For additional information regarding share ownership, see
Beneficial Ownership of Common Stock.
62
Arrangement
with Mind Streams
We are a party to an agreement with Mind Streams, LLC, which is
owned and operated, in part, by Gail Richardson, father to Brent
D. Richardson, our Executive Chairman, and Christopher C.
Richardson, our General Counsel and director. Pursuant to this
agreement, Mind Streams identifies qualified applicants for
admission to Grand Canyon University in return for which it is a
paid a stated percentage of the net revenue (calculated as
tuition actually received, less scholarships, refunds, and
allowances) derived by us from those identified applicants that
matriculate at Grand Canyon University. The term of the
agreement runs through December 31, 2010, and can be
terminated by either party upon 45 days prior written
notice. For the years ended December 31, 2006, 2007, and
2008, and for the six months ended June 30, 2009, we
expensed $3.7 million, $4.3 million,
$5.9 million, and $1.8 million, respectively, to Mind
Streams pursuant to this arrangement for students enrolled and
expenses reimbursed.
Arrangement
with Vergo Marketing
From time to time we obtain marketing services from Vergo
Marketing, Inc., of which the
sister-in-law
of Brent D. Richardson, our Executive Chairman, is a significant
stockholder and chief executive officer. For the years ended
December 31, 2007 and 2008, and for the six months ended
June 30, 2009, we paid Vergo Marketing, Inc.
$0.5 million, $0.4 million, and $0.2 million,
respectively, for such services.
Endeavour
Professional Services Agreement
In connection with the investment by the Endeavour Entities,
among others, on August 24, 2005, we entered into a
professional services agreement with Endeavour Capital IV, LLC.
Under the agreement, we engaged Endeavour Capital IV, LLC as a
consultant to our Board of Directors on business and financial
matters, including, without limitation, corporate strategy,
budgeting, acquisition and divestiture strategies, and debt and
equity financings. Under the agreement, we paid Endeavour
Capital IV, LLC a one time fee of $340,667 upon execution of the
agreement and agreed to pay Endeavour Capital IV, LLC a
consulting fee of $250,000 per year thereafter, subject to
annual increases as determined by the Board of Directors (not
including those directors appointed by Endeavour) based on
performance. In addition, we agreed to reimburse Endeavour
Capital IV, LLC for reasonable legal, due diligence, travel and
other
out-of-pocket
expenses, and to indemnify Endeavour Capital IV, LLC and its
affiliates for any action or inaction related to the agreement,
except as a result of their gross negligence or intentional
misconduct. For the years ended December 31, 2006, 2007,
and 2008, we paid fees to Endeavour Capital IV, LLC in the
amount of $0.3 million, $0.3 million, and
$0.4 million, respectively, which amounts, in each year,
constituted less than 5% of Endeavour Capital IV, LLCs
consolidated gross revenues for such year. The professional
services agreement terminated by its terms upon the closing of
our initial public offering.
Center
for Educational Excellence
The Center for Educational Excellence, LLC was created to
explore opportunities to promote and enhance the academic
experience we offer. John Crowley, our former Chief Operating
Officer, is a member of The Center for Educational Excellence,
LLC. For the year ended December 31, 2007, we paid
approximately $0.6 million of expenses incurred by The
Center for Educational Excellence, LLC, of which
$0.3 million was reimbursed to us, and $0.3 million
was owed to us and included in due from related parties as of
December 31, 2007. No amounts were paid by us to The Center
for Educational Excellence, LLC in 2008 or in the six months
ended June 30, 2009. The Center for Educational Excellence,
LLC was dissolved on April 29, 2009.
Consulting
Agreements
On January 8, 2004, we entered into consulting agreements
with Significant Ventures, Inc., predecessor to Significant
Ventures, LLC, which is one of our significant stockholders, and
with 220 Partners, LLC, which is affiliated with Charles M.
Preston III, one of our former directors. For the year ended
December 31, 2006, we paid $0.4 million and
$0.3 million to Significant Ventures and 220 Partners,
respectively, for services rendered and expenses reimbursed
pursuant to these agreements. These consulting agreements
terminated by their terms on December 31, 2006.
63
BENEFICIAL
OWNERSHIP OF COMMON STOCK
The following table sets forth information regarding the
beneficial ownership of our common stock as of June 30,
2009 for:
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each person, or group of affiliated persons, known to us to own
beneficially 5% or more of our outstanding common stock;
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each of our directors;
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each of our named executive officers; and
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all of our directors and named executive officers as a group.
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The information in the following table and related footnotes has
been presented in accordance with the rules of the SEC. Under
SEC rules, beneficial ownership of a class of capital stock
includes any shares of such class as to which a person, directly
or indirectly, has or shares voting power or investment power
and also any shares as to which a person has the right to
acquire such voting or investment power within 60 days
through the exercise of any stock option, warrant or other
right. If two or more persons share voting power or investment
power with respect to specific securities, each such person is
deemed to be the beneficial owner of such securities. Except as
we otherwise indicate below and under applicable community
property laws, we believe that the beneficial owners of the
common stock listed below, based on information they have
furnished to us, have sole voting and investment power with
respect to the shares shown. Unless otherwise noted below, the
address for each holder listed below is
3300 W. Camelback Road, Phoenix, Arizona 85017.
The calculations of beneficial ownership in this table are based
on 44,576,417 shares outstanding at June 30, 2009.
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Common Stock
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Amount and Nature of
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Beneficial Ownership
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Percent of
Class(1)
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Principal Stockholders:
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Endeavour Capital Fund IV, L.P. and
affiliates(2)(7)
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10,012,138
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22.5
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%
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Luke M. Buse and Staci Lin Buse Revocable
Trust(3)(7)
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3,503,171
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7.9
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%
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Directors and Named Executive Officers:
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Brent D.
Richardson(4)(7)
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16,847,516
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37.8
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%
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Brian E. Mueller
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109,329
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*
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Christopher C.
Richardson(4)(7)
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16,847,516
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37.8
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%
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Daniel E. Bachus
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10,000
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*
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Dr. W. Stan Meyer
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2,500
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*
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Michael S.
Lacrosse(5)
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30,603
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*
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Dr. Kathy
Player(5)
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30,463
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*
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Chad N.
Heath(6)
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10,012,138
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22.5
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%
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D. Mark
Dorman(6)
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10,012,138
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22.5
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%
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David J. Johnson
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11,298
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*
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Jack A. Henry
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6,748
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*
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All directors and executive officers as a group
(11 persons)
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20,056,790
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45.0
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%
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* |
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Represents beneficial ownership of less than 1% |
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(1) |
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The percentage of beneficial ownership as to any person as of a
particular date is calculated by dividing the number of shares
beneficially owned by such person, which includes the number of
shares as to which such person has the right to acquire voting
or investment power within 60 days after such date, by the
sum of the number of shares outstanding as of such date plus the
number of shares as to which such person has |
64
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the right to acquire voting or investment power within
60 days after such date. Consequently, the denominator for
calculating beneficial ownership percentages may be different
for each beneficial owner. |
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(2) |
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Endeavour Capital IV, LLC is the general partner of the
Endeavour Entities, and, other than as noted below, has voting
and dispositive power with respect to the shares held by the
Endeavour Entities. Messrs. Chad N. Heath and D. Mark
Dorman, each of whom is a managing director of Endeavour Capital
IV, LLC and serves on our Board of Directors, disclaim
beneficial ownership of these shares except to the extent of
their respective pecuniary interests. The address for these
entities is 920 SW Sixth Avenue, Suite 1400, Portland,
Oregon 97204. Pursuant to a proxy and voting agreement,
Messrs. Brent D. Richardson and Christopher C. Richardson
have voting power over 6,337,138 shares owned by the Endeavour
Entities. Each of Messrs. Brent D. Richardson and
Christopher C. Richardson disclaims beneficial ownership of such
shares, except to the extent of such voting interest. |
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(3) |
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Luke M. Buse and Staci Lin Buse, as co-trustees, share
dispositive power with respect to the shares owned by of the
Luke M. Buse and Staci Lin Buse Revocable Trust. Staci Lin Buse
is the sister of Brent D. Richardson, our Executive Chairman,
and Christopher C. Richardson, our General Counsel and director.
The address for this trust is 6236 E. Montecito
Avenue, Scottsdale, Arizona 85251. Pursuant to a proxy and
voting agreement, Messrs. Brent D. Richardson and
Christopher C. Richardson have voting power over the shares
owned by the trust. Each of Messrs. Brent D. Richardson and
Christopher C. Richardson disclaims beneficial ownership of such
shares, except to the extent of such voting interest. |
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(4) |
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The totals for Brent D. Richardson and Christopher C. Richardson
consist of: |
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3,503,171 shares of common stock held of record by Exeter
Capital, LLC, a limited liability company of which Brent D.
Richardson, our Executive Chairman and a member of our Board of
Directors, is the manager, which are attributable to, and
beneficially owned by, Mr. Brent D. Richardson;
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3,504,036 shares of common stock held of record by Calle
Camelia Investments, LLC, a limited liability company of which
Christopher C. Richardson, our General Counsel and a member of
our Board of Directors, is a manager, which are attributable to,
and beneficially owned by, Mr. Christopher C. Richardson;
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6,337,138 shares of common stock held by the Endeavour
Entities, as described in note (2) above; and
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3,503,171 shares of common stock held of record by the Luke
M. Buse and Staci Lin Buse Revocable Trust, as described in note
(3) above.
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Pursuant to a proxy and voting agreement, Messrs. Brent D.
Richardson and Christopher C. Richardson have voting power over
the shares beneficially owned by each other, the Luke M. Buse
and Staci Lin Buse Revocable Trust and the Endeavour Entities,
in the amounts described above. Each of Messrs. Brent D.
Richardson and Christopher C. Richardson disclaims beneficial
ownership of such shares, except to the extent of such voting
interest. The totals for Brent D. Richardson and
Christopher C. Richardson do not include other shares that
may remain subject to the proxy and voting agreement described
in Note (7) below.
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(5) |
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Includes 29,463 shares of common stock issuable upon
exercise of vested stock options. |
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(6) |
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Consists of 10,012,138 shares of common stock held of
record by the Endeavour Entities (see note (2) above).
Messrs. Chad N. Heath and D. Mark Dorman, each of whom is a
managing member of Endeavour Capital IV, LLC, the general
partner of the Endeavour Entities, and serves on our Board of
Directors, disclaim beneficial ownership of these shares except
to the extent of their respective pecuniary interests. |
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(7) |
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Certain of our stockholders, including the stockholders
described in notes (2) through (4) above, have entered into a
proxy and voting agreement, pursuant to which such persons have
granted to the Richardson Voting Group a five-year irrevocable
proxy to exercise voting authority with respect to certain
shares of our common stock held by such persons, for so long as
such shares are held by such persons. Upon the completion of our
initial public offering, as a result of the proxy and voting
agreement, the Richardson Voting Group had the power to exercise
voting authority with respect to 19,516,242 shares of our
common stock, or 42.9% of our common stock at such time. Under
the terms of the voting agreement, if any person party to the
voting agreement transfers shares covered by the proxy in
open-market or other transactions, the proxy is no longer
effective as to such shares. Accordingly, the number of shares
as to |
65
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which the Richardson Voting Group has the shared power to vote
or direct the vote will decrease over time as shares held by
other parties to the voting agreement are sold, which sales we
may not be aware of since many of the shares held by such other
parties are held in street name. After giving effect
to this offering, and based on the number of shares expected to
be sold by us and the selling stockholders participating in this
offering, and the addition of the Endeavour Entities as parties
to the proxy and voting agreement, we believe that the
Richardson Voting Group will continue to have the power to
exercise voting authority with respect to more than 25% of our
common stock. See Certain Relationships and Related
Transactions Voting Agreement. |
66
SELLING
STOCKHOLDERS
The following table sets forth information with respect to the
number of shares of common stock beneficially owned by the
selling stockholders named below and as adjusted to give effect
to the sale of the shares offered hereby. The following table is
prepared based on information supplied to us by the selling
stockholders. The information in the following table has been
presented in accordance with the rules of the SEC. Under SEC
rules, beneficial ownership of a class of capital stock includes
any shares of such class as to which a person, directly or
indirectly, has or shares voting power or investment power and
also any shares as to which a person has the right to acquire
such voting or investment power within 60 days through the
exercise of any stock option, warrant or other right. If two or
more persons share voting power or investment power with respect
to specific securities, each such person is deemed to be the
beneficial owner of such securities.
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Over-
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Shares Beneficially
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allotment
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Shares Beneficially Owned
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Shares
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Owned After the
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Shares
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Prior to the Offering
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Being
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Offering
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Being
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Shares Beneficially Owned After the
Over-allotment(3)
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Shares
|
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Percent(1)
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Offered
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Shares
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Percent(2)
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Offered(3)
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Shares
|
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|
Percent(2)
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Stockholders
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Endeavor Associates Fund IV, L.P. and
affiliates(4)(7)
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10,012,138
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22.5
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%
|
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|
3,000,000
|
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|
7,012,138
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15.4
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%
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|
675,000
|
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|
6,337,138
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13.9
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%
|
Brent D.
Richardson(5)(7)
|
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16,847,516
|
|
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37.8
|
%
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|
666,667
|
|
|
|
14,847,516
|
|
|
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32.6
|
%
|
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75,000
|
|
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14,622,516
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|
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|
32.1
|
%
|
Christopher C.
Richardson(5)(7)
|
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16,847,516
|
|
|
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37.8
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%
|
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|
666,666
|
|
|
|
14,847,516
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|
|
|
32.6
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%
|
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75,000
|
|
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|
14,622,516
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|
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|
32.1
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%
|
Luke M. Buse and Staci Lin Buse Revocable
Trust(6)(7)
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3,503,171
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7.9
|
%
|
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666,667
|
|
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2,836,504
|
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6.2
|
%
|
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75,000
|
|
|
|
2,761,504
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6.1
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%
|
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total
|
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|
20,522,516
|
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|
|
46.0
|
%
|
|
|
5,000,000
|
|
|
|
15,522,516
|
|
|
|
34.1
|
%
|
|
|
900,000
|
|
|
|
14,622,516
|
|
|
|
32.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Based on 44,576,417 shares outstanding at June 30,
2009. |
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(2) |
|
Based on 45,576,417 shares outstanding, which reflects
shares outstanding at June 30, 2009 plus
1,000,000 shares issued by the Company in connection with
this offering. |
|
(3) |
|
Amounts presented assume that the over-allotment option is
exercised in full. |
|
|
|
(4) |
|
Endeavour Capital IV, LLC is the general partner of the
Endeavour Entities, and, except as noted below, has voting and
dispositive power with respect to the shares held by the
Endeavour Entities. Messrs. Chad N. Heath and D. Mark
Dorman, each of whom is a managing director of Endeavour Capital
IV, LLC and serves on our Board of Directors, disclaim
beneficial ownership of these shares except to the extent of
their respective pecuniary interests. Pursuant to a proxy and
voting agreement, Messrs. Brent D. Richardson and
Christopher C. Richardson have voting power over 6,337,138
shares owned by the Endeavour Entities. Each of
Messrs. Brent D. Richardson and Christopher C. Richardson
disclaims beneficial ownership of such shares, except to the
extent of such voting interest. |
|
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|
(5) |
|
The totals for Brent D. Richardson and Christopher C. Richardson
consist of: |
|
|
|
|
|
3,503,171 shares of common stock held of record
by Exeter Capital, LLC, a limited liability company of which
Brent D. Richardson, our Executive Chairman and a member of our
Board of Directors, is the manager, which are attributable to,
and beneficially owned by, Mr. Brent D. Richardson;
|
|
|
|
|
|
3,504,036 shares of common stock held of record
by Calle Camelia Investments, LLC, a limited liability company
of which Christopher C. Richardson, our General Counsel and a
member of our Board of Directors, is a manager, which are
attributable to, and beneficially owned by, Mr. Christopher
C. Richardson;
|
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|
6,337,138 shares of common stock held by the
Endeavour Entities, as described in note (4) above; and
|
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|
|
|
3,503,171 shares of common stock held of record
by the Luke M. Buse and Staci Lin Buse Revocable Trust, as
described in note (6) below.
|
67
|
|
|
|
|
Pursuant to a proxy and voting agreement, Messrs. Brent D.
Richardson and Christopher C. Richardson have voting power over
the shares beneficially owned by each other, the Luke M. Buse
and Staci Lin Buse Revocable Trust and the Endeavour Entities,
in the amounts described above. Each of Messrs. Brent D.
Richardson and Christopher C. Richardson disclaims beneficial
ownership of such shares, except to the extent of such voting
interest. The totals for Brent D. Richardson and Christopher C.
Richardson do not include other shares that may remain subject
to the proxy and voting agreement described in Note (7)
below. |
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|
(6) |
|
Luke M. Buse and Staci Lin Buse, as co-trustees, share
dispositive power with respect to the shares owned by the Luke
M. Buse and Staci Lin Buse Revocable Trust. Staci Lin Buse is
the sister of Brent D. Richardson, our Executive Chairman, and
Christopher C. Richardson, our General Counsel and director.
Pursuant to a proxy and voting agreement, Messrs. Brent D.
Richardson and Christopher C. Richardson have voting power over
the shares owned by the trust. Each of Messrs. Brent D.
Richardson and Christopher C. Richardson disclaims beneficial
ownership of such shares, except to the extent of such voting
interest. |
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|
(7) |
|
Certain of our stockholders including the stockholders described
in notes (4) through (6) above, have entered into a proxy and
voting agreement, pursuant to which such persons have granted to
the Richardson Voting Group a five-year irrevocable proxy to
exercise voting authority with respect to certain shares of our
common stock held by such persons, for so long as such shares
are held by such persons. Upon the completion of our initial
public offering, as a result of the proxy and voting agreement,
the Richardson Voting Group had the power to exercise voting
authority with respect to 19,516,242 shares of our common
stock, or 42.9% of our common stock at such time. |
|
|
|
|
|
Under the terms of the voting agreement, if any person party to
the voting agreement transfers shares covered by the proxy in
open-market or other transactions, the proxy is no longer
effective as to such shares. Accordingly, the number of shares
as to which the Richardson Voting Group has the shared power to
vote or direct the vote will decrease over time as shares held
by other parties to the voting agreement are sold, which sales
we may not be aware of since many of the shares held by such
other parties are held in street name. After giving
effect to this offering, and based on the number of shares
expected to be sold by us and the selling stockholders
participating in this offering, and the addition of the
Endeavour Entities as parties to the proxy and voting agreement,
we believe that the Richardson Voting Group will continue to
have the power to exercise voting authority with respect to more
than 25% of our common stock. See Certain Relationships
and Related Transactions Voting Agreement. |
68
DESCRIPTION
OF CAPITAL STOCK
The following description of our capital stock summarizes
provisions of our amended and restated certificate of
incorporation and amended and restated bylaws. As of the date of
this prospectus, our authorized capital stock consists of
100,000,000 shares of common stock, $0.01 par value
per share, and 10,000,000 shares of undesignated preferred
stock, $0.01 par value per share. Immediately after
completion of the offering, 45,613,794 shares of common
stock (inclusive of 37,377 shares of common stock issued
upon exercise of options since June 30, 2009) and no shares
of preferred stock will be outstanding.
The following description of the material provisions of our
capital stock and amended and restated certificate of
incorporation and amended and restated bylaws is only a summary,
does not purport to be complete and is qualified by applicable
law and the full provisions of our amended and restated
certificate of incorporation and amended and restated bylaws.
Common
Stock
Voting Rights. Holders of common stock are
entitled to one vote per share on any matter to be voted upon by
stockholders. All shares of common stock rank equally as to
voting and all other matters. The shares of common stock have no
preemptive or conversion rights, no redemption or sinking fund
provisions, are not liable for further call or assessment and
are not entitled to cumulative voting rights.
Dividend Rights. Subject to the prior rights
of holders of preferred stock, for as long as such stock is
outstanding, the holders of common stock are entitled to receive
ratably any dividends when and as declared from time to time by
our Board of Directors out of funds legally available for
dividends. We have never declared or paid cash dividends. We
currently intend to retain all future earnings for the operation
and expansion of our business and do not anticipate paying cash
dividends on the common stock in the foreseeable future.
Liquidation Rights. Upon a liquidation or
dissolution of our company, whether voluntary or involuntary,
creditors and holders of our preferred stock with preferential
liquidation rights will be paid before any distribution to
holders of our common stock. After such distribution, holders of
common stock are entitled to receive a pro rata distribution per
share of any excess amount.
Undesignated
Preferred Stock
Under our amended and restated certificate of incorporation, our
Board of Directors has authority to issue undesignated preferred
stock without stockholder approval. Our Board of Directors may
also determine or alter for each class of preferred stock the
voting powers, designations, preferences, and special rights,
qualifications, limitations, or restrictions as permitted by
law. Our Board of Directors may authorize the issuance of
preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders
of the common stock. Issuing preferred stock provides
flexibility in connection with possible acquisitions and other
corporate purposes, but could also, among other things, have the
effect of delaying, deferring or preventing a change in control
of our company and may adversely affect the market price of our
common stock and the voting and other rights of the holders of
common stock.
Registration
Rights
We are a party to an amended investor rights agreement with the
Endeavour Entities and certain other parties pursuant to which
we agreed, under certain circumstances, to register shares of
common stock held by each of the parties to the agreement under
the Securities Act. The registration rights provisions of the
investor rights agreement grant to the Endeavour Entities the
right, beginning 90 days following the completion of our
initial public offering, to cause us, at our expense, to use our
reasonable commercial efforts to register such securities held
by the Endeavour Entities for public resale, subject to certain
limitations. The exercise of this right will be limited to two
requests. In the event that we register any of our common stock,
the Endeavour Entities and certain other holders are entitled to
piggyback registration rights in which they may
require us to include their securities in future registration
statements that we may file, either for our own account or for
69
the account of other security holders exercising registration
rights. In addition, such holders have the right to request that
their shares of common stock be registered on a Registration
Statement on
Form S-3
so long as the anticipated aggregate sales price of such
registered securities as of the date of filing of the
Registration Statement on
Form S-3
is at least $1 million. These registration rights are
subject to various conditions and limitations, including the
right of the underwriters of an offering to limit the number of
registrable securities that may be included in the offering. We
are generally required to bear all of the expenses of these
registrations, except underwriting discounts and selling
commissions and transfer taxes, if any. Registration of any
securities pursuant to these registration rights will result in
shares becoming freely tradable without restriction under the
Securities Act immediately upon effectiveness of such
registration.
Provisions
of Delaware Law and our Charter and Bylaws with Anti-Takeover
Implications
Charter
and Bylaw Provisions
Our amended and restated certificate of incorporation and
amended and restated bylaws include a number of provisions that
may have the effect of encouraging persons considering
unsolicited tender offers or other unilateral takeover proposals
to negotiate with our Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions include the
items described below.
Board Composition and Filling Vacancies. Our
bylaws provide that directors may be removed only for cause by
the affirmative vote of the holders of a majority of the voting
power of all the outstanding shares of capital stock entitled to
vote generally in the election of directors voting together as a
single class. Furthermore, any vacancy on our Board of
Directors, however occurring, including a vacancy resulting from
an increase in the size of our board, may only be filled by the
affirmative vote of a majority of our directors then in office
even if less than a quorum.
No Written Consent of Stockholders. Our
charter provides that all stockholder actions are required to be
taken by a vote of the stockholders at an annual or special
meeting, and that stockholders may not take any action by
written consent in lieu of a meeting.
Meetings of Stockholders. Our bylaws provide
that only a majority of the members of our Board of Directors
then in office may call special meetings of stockholders and
only those matters set forth in the notice of the special
meeting may be considered or acted upon at a special meeting of
stockholders. Our bylaws limit the business that may be
conducted at an annual meeting of stockholders to those matters
properly brought before the meeting.
Advance Notice Requirements. Our bylaws
establish advance notice procedures with regard to stockholder
proposals relating to the nomination of candidates for election
as directors or new business to be brought before meetings of
our stockholders. These procedures provide that notice of
stockholder proposals must be timely given in writing to our
corporate secretary prior to the meeting at which the action is
to be taken. Generally, to be timely, notice must be received at
our principal executive offices not earlier than the close of
business on the 120th day, nor later than the close of
business on the 90th day, prior to the first anniversary
date of the annual meeting for the preceding year. The notice
must contain certain information specified in the bylaws.
Amendment to Bylaws and Charter. As required
by the DGCL, any amendment of our charter must first be approved
by a majority of our Board of Directors and, if required by law
or our charter, thereafter be approved by a majority of the
outstanding shares entitled to vote on the amendment, and a
majority of the outstanding shares of each class entitled to
vote thereon as a class, except that the amendment of the
provisions relating to stockholder action, directors, limitation
of liability and the amendment of our bylaws and certificate of
incorporation must be approved by no less than
662/3 percent
of the voting power of all of the shares of capital stock issued
and outstanding and entitled to vote generally in any election
of directors, voting together as a single class. Our bylaws may
be amended by the affirmative vote of a majority vote of the
directors then in office, subject to any limitations set forth
in the bylaws; and may also be amended by the affirmative vote
of at least
662/3 percent
of the voting power of all of the shares of capital stock issued
and outstanding and entitled to vote generally in any election
of directors, voting together as a single class.
70
Blank Check Preferred Stock. Our charter
provides for 10,000,000 authorized shares of preferred stock.
The existence of authorized but unissued shares of preferred
stock may enable our Board of Directors to render more difficult
or to discourage an attempt to obtain control of us by means of
a merger, tender offer, proxy contest, or otherwise. For
example, if in the due exercise of its fiduciary obligations,
our Board of Directors were to determine that a takeover
proposal is not in the best interests of us or our stockholders,
our Board of Directors could cause shares of preferred stock to
be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or
other rights of the proposed acquirer or insurgent stockholder
or stockholder group. In this regard, our certificate of
incorporation grants our Board of Directors broad power to
establish the rights and preferences of authorized and unissued
shares of preferred stock. The issuance of shares of preferred
stock could decrease the amount of earnings and assets available
for distribution to holders of shares of common stock. The
issuance may also adversely affect the rights and powers,
including voting rights, of these holders and may have the
effect of delaying, deterring, or preventing a change in control
of us.
Section 203
of the Delaware General Corporate Law
We are subject to the provisions of Section 203 of the
DGCL. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a business
combination with an interested stockholder for
a three-year period following the time that this stockholder
becomes an interested stockholder, unless the business
combination is approved in a prescribed manner. A business
combination includes, among other things, a merger, asset
or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. An interested
stockholder is a person who, together with affiliates and
associates, owns, or did own within three years prior to the
determination of interested stockholder status, 15% or more of
the corporations voting stock. Under Section 203, a
business combination between a corporation and an interested
stockholder is prohibited unless it satisfies one of the
following conditions:
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before the stockholder became interested, the board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
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upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding, shares owned by persons who are directors and also
officers, and employee stock plans, in some instances; or
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at or after the time the stockholder became interested, the
business combination was approved by the board of directors of
the corporation and authorized at an annual or special meeting
of the stockholders by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
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Limitations
of Director Liability and Indemnification Directors, Officers
and Employees
As permitted by the DGCL, provisions in our charter and bylaws
limit or eliminate the personal liability of our directors.
Consequently, directors will not be personally liable to us or
our stockholders for monetary damages or breach of fiduciary
duty as a director, except for liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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any unlawful payments related to dividends or unlawful stock
repurchases, redemptions or other distributions; or
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any transaction from which the director derived an improper
personal benefit.
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71
These limitations of liability do not alter director liability
under the federal securities laws and do not affect the
availability of equitable remedies, such as an injunction or
rescission.
In addition, our bylaws provide that:
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we will indemnify our directors, officers and, in the discretion
of our Board of Directors, certain employees, to the fullest
extent permitted by the DGCL, subject to limited exceptions,
including an exception for indemnification in connection with a
proceeding (or counterclaim) initiated by such persons; and
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we will advance expenses, including attorneys fees, to our
directors and, in the discretion of our Board of Directors,
certain officers and employees, in connection with legal
proceedings, subject to limited exceptions.
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We have entered into indemnification agreements with each of our
executive officers and directors. These agreements provide that,
subject to limited exceptions and among other things, we will
indemnify each of our executive officers and directors to the
fullest extent permitted by law and advance expenses to each
indemnitee in connection with any proceeding in which a right to
indemnification is available.
We maintain general liability insurance that covers certain
liabilities of our directors and officers arising out of claims
based on acts or omissions in their capacities as directors or
officers, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, or
persons who control Grand Canyon Education, we have been
informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable.
These provisions may discourage stockholders from bringing a
lawsuit against our directors for breach of their fiduciary
duty. These provisions may also have the effect of reducing the
likelihood of derivative litigation against directors and
officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a
stockholders investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions. We believe that these provisions, the
indemnification agreements and the insurance are necessary to
attract and retain talented and experienced directors and
officers.
At present, there is no pending litigation or proceeding
involving any of our directors or officers where indemnification
will be required or permitted. We are not aware of any
threatened litigation or proceeding that might result in a claim
for such indemnification.
Nasdaq
Our common stock is listed on the Nasdaq Global Market under the
symbol LOPE.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Computershare Trust Company, N.A.
72
MATERIAL
U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS
FOR NON-U.S.
HOLDERS
The following is a general discussion of the material
U.S. federal income and estate tax consequences to
non-U.S. Holders
with respect to the acquisition, ownership and disposition of
our common stock. In general, a
Non-U.S. Holder
is any holder of our common stock other than the following:
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a citizen or resident of the United States, including an alien
individual who is a lawful permanent resident of the United
States or meets the substantial presence test under
section 7701(b)(3) of the Internal Revenue Code of 1986, as
amended, or the Code;
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a corporation (or an entity treated as a corporation) created or
organized in the United States or under the laws of the United
States, any state thereof, or the District of Columbia;
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an estate, the income of which is subject to U.S. federal
income tax regardless of its source; or
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a trust, if (i) a U.S. court can exercise primary
supervision over the administration of the trust and one or more
U.S. persons can control all substantial decisions of the
trust, or (ii) it has a valid election to be treated as a
U.S. person in effect.
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This discussion is based on current provisions of the Code,
Treasury Regulations promulgated under the Code, judicial
opinions, published positions of the Internal Revenue Service,
or IRS, and all other applicable authorities, all of which are
subject to change, possibly with retroactive effect. This
discussion does not address all aspects of U.S. federal
income and estate taxation or any aspects of state, local, or
non-U.S. taxation,
nor does it consider any specific facts or circumstances that
may apply to particular
Non-U.S. Holders
that may be subject to special treatment under the
U.S. federal income tax laws, such as insurance companies,
tax-exempt organizations, financial institutions, brokers,
dealers in securities, and U.S. expatriates. If a
partnership is a beneficial owner of our common stock, the
treatment of a partner in the partnership will generally depend
upon the status of the partner and the activities of the
partnership. This discussion assumes that the
Non-U.S. Holder
will hold our common stock as a capital asset, generally
property held for investment.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS
REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND
NON-U.S. INCOME
AND OTHER TAX CONSIDERATIONS OF ACQUIRING, HOLDING, AND
DISPOSING OF SHARES OF COMMON STOCK.
Dividends
As described above under Dividend Policy, we do not
anticipate declaring or paying any cash dividends on our common
stock in the foreseeable future. However, if we do make
distributions on our common stock, those payments will
constitute dividends for U.S. tax purposes to the extent
paid from our current and accumulated earnings and profits, as
determined under U.S. federal income tax principles. To the
extent those distributions exceed our current and accumulated
earnings and profits, they will constitute a return of capital
and will first reduce the recipients basis in our common
stock, but not below zero, and then will be treated as gain from
the sale of stock as described below under
Gain on Sale or Other Disposition of Common
Stock.
In general, dividends paid to a
Non-U.S. Holder
will be subject to U.S. withholding tax at a rate equal to
30% of the gross amount of the dividend, or a lower rate
prescribed by an applicable income tax treaty, unless the
dividends are effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States. Under applicable Treasury Regulations,
a
Non-U.S. Holder
will be required to satisfy certain certification requirements,
generally on IRS
Form W-8BEN,
directly or through an intermediary, in order to claim a reduced
rate of withholding under an applicable income tax treaty. If
tax is withheld in an amount in excess of the amount prescribed
by an applicable income tax treaty, a refund of the excess
amount may generally be obtained by filing an appropriate claim
for refund with the IRS.
73
Dividends that are effectively connected with such a
U.S. trade or business (and where a tax treaty applies, are
attributable to a U.S. permanent establishment maintained
by the recipient) generally will not be subject to
U.S. withholding tax if the
Non-U.S. Holder
files the required forms, including IRS
Form W-8ECI,
or any successor form, with the payor of the dividend, but
instead generally will be subject to U.S. federal income
tax on a net income basis in the same manner as if the
Non-U.S. Holder
were a resident of the United States. A corporate
Non-U.S. Holder
that receives effectively connected dividends may be subject to
an additional branch profits tax at a rate of 30%, or a lower
rate prescribed by an applicable income tax treaty, with respect
to effectively connected dividends (subject to adjustment).
Gain on
Sale or Other Disposition of Common Stock
In general, a
Non-U.S. Holder
will not be subject to U.S. federal income tax on any gain
realized upon the sale or other taxable disposition of the
Non-U.S. Holders
shares of common stock unless:
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the gain is effectively connected with a trade or business
carried on by the
Non-U.S. Holder
within the United States;
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the
Non-U.S. Holder
is an individual who holds shares of common stock as capital
assets and is present in the United States for 183 days or
more in the taxable year of disposition and various other
conditions are met; or
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our common stock constitutes a U.S. real property interest
by reason of our status as a United States real
property holding corporation, or USRPHC, for
U.S. federal income tax purposes at any time within the
shorter of the five-year period preceding the disposition or the
Non-U.S. Holders
holding period for our common stock.
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If the recipient is a
non-United
States holder described in the first bullet above, the recipient
will be required to pay tax on the net gain derived from the
sale under regular graduated U.S. federal income tax rates,
and corporate
non-United
States holders described in the first bullet above may be
subject to the branch profits tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty. If
the recipient is an individual
non-United
States holder described in the second bullet above, the
recipient will be required to pay a flat 30% tax on the gain
derived from the sale, which tax may be offset by United States
source capital losses.
We believe that we are not currently and will not become a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property relative to the fair market value of our other business
assets, there can be no assurance that we will not become a
USRPHC in the future. Even if we become a USRPHC, however, as
long as our common stock is regularly traded on an established
securities market, such common stock will be treated as
U.S. real property interests only if the
Non-U.S. Holder
actually or constructively held more than 5% of our common stock
Information
Reporting and Backup Withholding
Generally, we must report annually to the IRS the amount of
dividends paid, the name and address of the recipient, and the
amount, if any, of tax withheld. A similar report is sent to the
recipient. These information reporting requirements apply even
if withholding was not required because the dividends were
effectively connected dividends or withholding was reduced by an
applicable income tax treaty. Under tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in the recipients country of residence.
Payments made to a
Non-U.S. Holder
that is not an exempt recipient generally will be subject to
backup withholding, currently at a rate of 28%, unless a
Non-U.S. Holder
certifies as to its foreign status, which certification may be
made on IRS
Form W-8BEN.
Proceeds from the disposition of common stock by a
Non-U.S. Holder
effected by or through a United States office of a broker
will be subject to information reporting and backup withholding,
currently at a rate of 28% of the gross proceeds, unless the
Non-U.S. Holder
certifies to the payor under penalties of perjury
74
as to, among other things, its address and status as a
Non-U.S. Holder
or otherwise establishes an exemption. Generally, United States
information reporting and backup withholding will not apply to a
payment of disposition proceeds if the transaction is effected
outside the United States by or through a
non-U.S. office
of a broker. However, if the broker is, for U.S. federal
income tax purposes, a U.S. person, a controlled foreign
corporation, a foreign person who derives 50% or more of its
gross income for specified periods from the conduct of a
U.S. trade or business, specified U.S. branches of
foreign banks or insurance companies or a foreign partnership
with certain connections to the United States, information
reporting but not backup withholding will apply unless:
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the broker has documentary evidence in its files that the holder
is a
Non-U.S. Holder
and other conditions are met; or
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the holder otherwise establishes an exemption.
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Backup withholding is not an additional tax. Rather, the amount
of tax withheld is applied to the U.S. federal income tax
liability of persons subject to backup withholding. If backup
withholding results in an overpayment of U.S. federal
income taxes, a refund may be obtained, provided the required
documents are filed with the IRS.
Estate
Tax
Our common stock owned or treated as owned by an individual who
is not a citizen or resident of the United States (as
specifically defined for U.S. federal estate tax purposes)
at the time of death will be includible in the individuals
gross estate for U.S. federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
75
UNDERWRITING
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2009, we and the selling stockholders have agreed to sell to the
underwriters named below, for whom Credit Suisse Securities
(USA) LLC and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as representatives, the following
respective numbers of shares of common stock:
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Underwriter
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Number of Shares
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Credit Suisse Securities (USA) LLC
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Merrill Lynch, Pierce, Fenner & Smith
Incorporated
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BMO Capital Markets Corp.
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William Blair & Company, L.L.C.
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Piper Jaffray & Co.
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Barrington Research Associates, Inc.
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Total
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6,000,000
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The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
The selling stockholders have granted to the underwriters a
30-day
option to purchase on a pro rata basis up to an aggregate of
900,000 additional outstanding shares from such selling
stockholders at the public offering price less the underwriting
discounts and commissions. The option may be exercised only to
cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus and to selling group members at that price less a
selling concession of $ per share.
Thereafter, the representative may change the public offering
price and concession.
The following table summarizes the compensation and estimated
expenses we and the selling stockholders will pay:
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Per Share
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Total
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Without
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With
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Without
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With
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Over-allotment
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Over-allotment
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Over-allotment
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Over-allotment
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Underwriting discounts and commissions paid by us
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$
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$
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$
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$
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Expenses payable by us
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$
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$
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$
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$
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Underwriting discounts and commissions paid by the selling
stockholders
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$
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$
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$
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$
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Expenses payable by the selling stockholders
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$
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$
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$
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$
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We, our directors and executive officers, and the selling
stockholders have agreed that we and they will not offer, sell,
contract to sell, pledge, or otherwise dispose of, directly or
indirectly, or file with the SEC a registration statement under
the Securities Act relating to, any shares of our common stock
or securities convertible into or exchangeable or exercisable
for any shares of our common stock, enter into a transaction
that would have the same effect, or enter into any swap, hedge,
or other arrangement that transfers, in whole or in part, any of
the economic consequences of ownership of our common stock,
whether any of these transactions is to be settled by delivery
of our common stock or other securities, in cash or otherwise,
or publicly disclose the intention to make any offer, sale,
pledge, disposition, or filing, or to enter into any
transaction, swap, hedge, or other arrangement, without, in each
case, the prior written consent of Credit Suisse Securities
(USA) LLC and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, for a period of 90 days after the date of
this prospectus. However, in the event that either
(1) during the last 17 days of the
lock-up
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the
lock-up
period, we announce that we will release earnings results during
the 16-day
period
76
beginning on the last day of the
lock-up
period, then in either case the expiration of the
lock-up
will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC and
Merrill Lynch, Pierce, Fenner & Smith Incorporated
waive such extension in writing. The restrictions described in
this paragraph do not apply to, among other things, the sale of
shares to the underwriters, transactions by any person other
than us relating to shares of common stock or other securities
acquired in open-market transactions after the completion of the
offering of shares or the offer, sale, issuance, or disposal by
us of any of our securities, or any securities convertible into
or exchangeable or exercisable for any of our securities,
pursuant to our equity compensation plan.
We and the selling stockholders have agreed to indemnify the
underwriters against liabilities under the Securities Act, or
contribute to payments that the underwriters may be required to
make in that respect.
Certain of the underwriters and their respective affiliates have
from time to time performed, and may in the future perform,
various financial advisory, commercial banking, and investment
banking services for us and our affiliates in the ordinary
course of business, for which they received, or will receive,
customary fees and expenses. An affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated has also acted as
lender under our term loan due 2014.
In connection with the offering the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act.
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Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
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Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any covered short position by
either exercising their over-allotment option
and/or
purchasing shares in the open market.
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Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
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Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
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These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result
the price of our common stock may be higher than the price
77
that might otherwise exist in the open market. These
transactions may be effected on the Nasdaq Global Market or
otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
websites maintained by one or more of the underwriters, or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make Internet distributions on the same basis as other
allocations.
78
NOTICE TO
EUROPEAN ECONOMIC AREA RESIDENTS
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, which we refer
to as a Relevant Member State, with effect from and including
the date on which the Prospectus Directive is implemented in
that Relevant Member State, which we refer to as the Relevant
Implementation Date, an offer of shares of common stock to the
public may not be made in that Relevant Member State prior to
the publication of a prospectus in relation to the shares of
common stock which has been approved by the competent authority
in that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with
the Prospectus Directive, except that an offer to the public of
any shares of common stock may be made at any time under the
following exemptions under the Prospectus Directive if they have
been implemented in the Relevant Member State,
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000, and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the manager for any
such offer;
provided that no such offer of shares shall result in a
requirement for the publication of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this section, the expression an offer
of shares of common stock to the public in relation to any
shares of common stock in any Relevant Member State means the
communication in any form and by any means of sufficient
information on the terms of the offer and the shares of common
stock to be offered so as to enable an investor to decide to
purchase or subscribe the shares of common stock, as the same
may be varied in that Member State by any measure implementing
the Prospectus Directive in that Member State and the expression
Prospectus Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
NOTICE TO
UNITED KINGDOM RESIDENTS
An invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the Financial Services
and Markets Act 2000, or the FSMA) has only been communicated or
caused to be communicated and will only be communicated or
caused to be communicated in connection with the issue or sale
of the shares in circumstances in which Section 21(1) of
the FSMA does not apply to us. All applicable provisions of the
FSMA have been complied with and will be complied with, with
respect to anything done in relation to the shares in, from or
otherwise involving the United Kingdom. This document is only
being distributed to and is only directed at (i) persons
who are outside the United Kingdom or (ii) investment
professionals falling within Article 19(5) of the Financial
Services and Markets Act 2000 (Financial Promotion) Order 2005,
or the Order, or (iii) high net worth entities, and other
persons to whom it may lawfully be communicated, falling within
Article 49(2)(a) to (d) of the Order (all such persons
together, we refer to as relevant persons). The shares are only
available to, and any invitation, offer or agreement to
subscribe, purchase or otherwise acquire such shares will be
engaged only with, relevant persons. Any person who is not a
relevant person should not act or rely on this document or any
of its contents.
NOTICE TO
SWISS INVESTORS
This document, as well as any other material relating to the
shares which are the subject of the offering contemplated by
this prospectus, do not constitute an issue prospectus pursuant
to Article 652a of the Swiss Code of Obligations. The
shares will not be listed on the SWX Swiss Exchange and,
therefore the documents relating to the shares, including, but
not limited to, this document, do not claim to comply with the
disclosure standards of the listing rules of SWX Swiss Exchange
and corresponding prospectus schemes annexed to the listing
rules of the SWX Swiss Exchange. The shares are being offered in
Switzerland by way of a private
79
placement, i.e. to a small number of selected investors
only, without any public offer and only to investors who do not
purchase the shares with the intention to distribute them to the
public. The investors will be individually approached by us from
time to time. This document, as well as any other material
relating to the shares, is personal and confidential and do not
constitute an offer to any other person. This document may only
be used by those investors to whom it has been handed out in
connection with the offering described herein and may neither
directly nor indirectly be distributed or made available to
other persons without our express consent. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in (or from) Switzerland.
NOTICE TO
INVESTORS IN THE DUBAI INTERNATIONAL FINANCIAL CENTRE
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt offers. The
Dubai Financial Services Authority has not approved this
document nor taken steps to verify the information set out in
it, and has no responsibility for it. The shares which are the
subject of the offering contemplated by this prospectus may be
illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the shares offered should conduct their own due diligence on
the shares. If you do not understand the contents of this
document you should consult an authorized financial adviser.
NOTICE TO
CANADIAN RESIDENTS
Resale
Restrictions
The distribution of the common stock in Canada is being made
only on a private placement basis exempt from the requirement
that we and the selling stockholders prepare and file a
prospectus with the securities regulatory authorities in each
province where trades of common stock are made. Any resale of
the common stock in Canada must be made under applicable
securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made under
available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the common stock.
Representations
of Purchasers
By purchasing the common stock in Canada and accepting a
purchase confirmation a purchaser is representing to us, the
selling stockholders, and the dealer from whom the purchase
confirmation is received that:
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the purchaser is entitled under applicable provincial securities
laws to purchase the common stock without the benefit of a
prospectus qualified under those securities laws,
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where required by law, that the purchaser is purchasing as
principal and not as agent,
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the purchaser has reviewed the text above under Resale
Restrictions, and
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the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of the common
stock to the regulatory authority that by law is entitled to
collect the information.
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Further details concerning the legal authority for this
information is available on request.
Rights of
Action Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchase a security offered by this prospectus during the period
of distribution will have a statutory right of action for
damages, or while still the owner of the common stock, for
rescission against us and the selling stockholders in the event
that this prospectus contains a misrepresentation without regard
to whether the purchaser relied on the misrepresentation. The
right of action for damages is exercisable not later than the
earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and
three years from the date on which payment is made for the
common stock. The right of action for rescission is exercisable
not later than 180 days from the
80
date on which payment is made for the common stock. If a
purchaser elects to exercise the right of action for rescission,
the purchaser will have no right of action for damages against
us or the selling stockholders. In no case will the amount
recoverable in any action exceed the price at which the common
stock were offered to the purchaser and if the purchaser is
shown to have purchased the securities with knowledge of the
misrepresentation, we and the selling stockholders will have no
liability. In the case of an action for damages, we and the
selling stockholders will not be liable for all or any portion
of the damages that are proven to not represent the depreciation
in value of the common stock as a result of the
misrepresentation relied upon. These rights are in addition to,
and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario
purchasers should refer to the complete text of the relevant
statutory provisions.
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
herein and the selling stockholders may be located outside of
Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or
those persons. All or a substantial portion of our assets and
the assets of those persons may be located outside of Canada
and, as a result, it may not be possible to satisfy a judgment
against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside
of Canada.
Taxation
and Eligibility for Investment
Canadian purchasers of the common stock should consult their own
legal and tax advisors with respect to the tax consequences of
an investment in the common stock in their particular
circumstances and about the eligibility of the common stock for
investment by the purchaser under relevant Canadian legislation.
81
LEGAL
MATTERS
The validity of the shares of common stock offered by this
prospectus and other legal matters will be passed upon for us by
DLA Piper LLP (US), Phoenix, Arizona. The underwriters have been
represented by Latham & Watkins LLP, Los Angeles,
California.
EXPERTS
The financial statements of Grand Canyon Education, Inc.
appearing in Grand Canyon Education, Inc.s Annual Report
(Form 10-K)
for the year ended December 31, 2008 have been audited by
Ernst & Young LLP, independent registered public
accounting firm, as set forth in their report thereon, included
therein, and incorporated herein by reference. Such financial
statements are incorporated herein by reference in reliance upon
such report given on the authority of such firm as experts in
accounting and auditing.
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1,
which includes amendments and exhibits, under the Securities Act
and the rules and regulations under the Securities Act for the
registration of common stock being offered by this prospectus.
This prospectus, which constitutes a part of the registration
statement, does not contain all the information that is in the
registration statement and its exhibits and schedules. Certain
portions of the registration statement have been omitted as
allowed by the rules and regulations of the SEC. Statements in
this prospectus that summarize documents are not necessarily
complete, and in each case you should refer to the copy of the
document filed as an exhibit to the registration statement.
We are subject to the reporting and information requirements of
the Exchange Act and, as a result, we are required to file
periodic and current reports, proxy statements and other
information with the SEC. You may read and copy the registration
statement, including exhibits and schedules filed with it, and
reports or other information we file with the SEC at the public
reference facilities of the SEC at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may call the
SEC at
1-800-SEC-0330
for further information on the operation of the public reference
rooms. In addition, the registration statement and other public
filings can be obtained from the SECs Internet site at
http://www.sec.gov.
INCORPORATION
BY REFERENCE
The SEC allows us to incorporate by reference
information in this prospectus that we have filed with it. This
means that we can disclose important information to you by
referring you to another document already on file with the SEC.
The information incorporated by reference is an important part
of this prospectus, except for any information that is
superseded by information that is included directly in this
prospectus.
This prospectus incorporates by reference the documents listed
below that we have previously filed with the SEC (excluding any
document, or portion thereof, to the extent disclosure is
furnished and not filed).
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our Annual Report on
Form 10-K
for the year ended December 31, 2008, filed with the SEC on
February 20, 2009, which incorporates by reference certain
sections from our proxy statement filed with the SEC on
April 10, 2009, which we also incorporate by reference into
this prospectus;
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our Quarterly Reports on
Form 10-Q
for the quarters ended March 31, 2009 and June 30,
2009; and
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our Current Reports on
Form 8-K
filed with the SEC on February 19, 2009, March 25,
2009, April 3, 2009, April 27, 2009, May 4, 2009,
August 3, 2009, August 27, 2009, and September 4,
2009.
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82
We will provide to each person, including any beneficial owner,
to whom a prospectus is delivered, a copy of the reports and
documents that have been incorporated by reference in this
prospectus, at no cost. Any such request may be made by writing
or telephoning us at the following address or phone number:
Grand Canyon
Education, Inc.
3300 West Camelback Road
Phoenix, Arizona 85017
Attention: Corporate Secretary
(602) 639-7500
These documents can also be requested through, and are available
in, the Investor Relations section of our website, which is
located at www.gcu.edu, or as described under Where You
Can Find Additional Information above. The information on,
or accessible through, our website does not constitute part of,
and is not incorporated into, this prospectus.
83
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 13.
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Other
Expenses of Issuance and Distribution.
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The following are the estimated expenses to be incurred in
connection with the issuance and distribution of the securities
registered under this registration statement, other than
underwriting discounts and commissions. All amounts shown are
estimates except the SEC registration fee and the Financial
Industry Regulatory Authority, Inc. filing fee. The following
expenses will be borne solely by the registrant.
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SEC registration fee
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8,442
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FINRA filing fee
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15,628
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Legal fees and expenses
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417,000
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Accounting fees and expenses
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50,000
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Printing expenses
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55,000
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Transfer agent fees and expenses
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7,500
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Miscellaneous expenses
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145,000
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Total
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698,570
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Item 14.
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Indemnification
of Directors and Officers.
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Section 145(a) of the DGCL provides, in general, that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (other than an action by or in
the right of the corporation), because he or she is or was a
director, officer, employee, or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee, or agent of another corporation, partnership,
joint venture, trust, or other enterprise, against expenses
(including attorneys fees), judgments, fines, and amounts
paid in settlement actually and reasonably incurred by the
person in connection with such action, suit, or proceeding, if
he or she acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his or
her conduct was unlawful.
Section 145(b) of the DGCL provides, in general, that a
corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or
completed action or suit by or in the right of the corporation
to procure a judgment in its favor because the person is or was
a director, officer, employee, or agent of the corporation, or
is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation,
partnership, joint venture, trust, or other enterprise, against
expenses (including attorneys fees) actually and
reasonably incurred by the person in connection with the defense
or settlement of such action or suit if he or she acted in good
faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the corporation, except
that no indemnification shall be made with respect to any claim,
issue, or matter as to which he or she shall have been adjudged
to be liable to the corporation unless and only to the extent
that the Court of Chancery or other adjudicating court
determines that, despite the adjudication of liability but in
view of all of the circumstances of the case, he or she is
fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or other adjudicating court shall
deem proper.
Section 145(g) of the DGCL provides, in general, that a
corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against such person
and incurred by such person in any such capacity, or arising out
of his or her status as such, whether or not the corporation
would have the power to indemnify the person against such
liability under Section 145 of the DGCL.
II-1
Section 8.1 of our bylaws provides that we will indemnify,
to the fullest extent permitted by the DGCL, any person who was
or is made or is threatened to be made a party or is otherwise
involved in any action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, by reason of the
fact that he, or a person for whom he is the legal
representative, is or was one of our directors or officers or,
while serving as one of our directors or officers, is or was
serving at our request as a director, officer, employee, or
agent of another corporation or of another entity, against all
liability and loss suffered and expenses (including
attorneys fees) reasonably incurred by such person,
subject to limited exceptions relating to indemnity in
connection with a proceeding (or part thereof) initiated by such
person. Section 8.1 of our bylaws further provides for the
advancement of expenses to each of our officers and directors.
Article VIII of our charter provides that, to the fullest
extent permitted by the DGCL, as the same exists or may be
amended from time to time, our directors shall not be personally
liable to us or our stockholders for monetary damages for breach
of fiduciary duty as a director. Under Section 102(b)(7) of
the DGCL, the personal liability of a director to the
corporation or its stockholders for monetary damages for breach
of fiduciary duty can be limited or eliminated except
(i) for any breach of the directors duty of loyalty
to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; (iii) under
Section 174 of the DGCL (relating to unlawful payment of
dividend or unlawful stock purchase or redemption); or
(iv) for any transaction from which the director derived an
improper personal benefit.
We also intend to maintain a general liability insurance policy
which covers certain liabilities of directors and officers of
our company arising out of claims based on acts or omissions in
their capacities as directors or officers, whether or not we
would have the power to indemnify such person against such
liability under the DGCL or the provisions of charter or bylaws.
We have entered into indemnification agreements with each of our
directors and our executive officers. These agreements provide
that we will indemnify each of our directors and such officers
to the fullest extent permitted by law and by our charter and
bylaws.
In any underwriting agreement we enter into in connection with
the sale of common stock being registered hereby, the
underwriters will agree to indemnify, under certain conditions,
us, our directors, our officers and persons who control us,
within the meaning of the Securities Act, against certain
liabilities.
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Item 15.
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Recent
Sales of Unregistered Securities.
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Since January 1, 2006, we have issued the following
securities that were not registered under the Securities Act:
Preferred
Stock
On December 18, 2007, we sold an aggregate of
3,829 shares of our newly designed Series C preferred
stock at a purchase price of $3,500 per share, or approximately
$13.4 million total, of which 1,675 shares were sold
to the Endeavour Entities, 834 shares were sold to Rich
Crow Enterprises, LLC (an investment entity controlled by Brent
D. Richardson, our Executive Chairman, and Christopher C.
Richardson, our General Counsel and a director), and
935 shares were sold to 220 GCU, L.P. and its affiliates.
The purchase price payable by Rich Crow Enterprises for its
shares of Series C preferred stock was paid in part by the
exchange of the 865 outstanding shares of Series B
preferred stock it purchased in 2006. The sales were made in
reliance on Rule 506 of Regulation D promulgated under
the Securities Act.
Common
Stock
In November 2008, we issued, in reliance on Section 4(2) of
the Securities Act, 909,348 shares of our common stock upon
the exercise of a warrant that was issued in June 2004. The
exercise price of the warrant was approximately $0.58 per share,
or $526,316 of the aggregate.
In November 2008, we granted, in reliance on Section 4(2)
of the Securities Act, 109,329 shares of our common stock
to our Chief Executive Officer.
II-2
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Item 16.
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Exhibits
and Financial Statement Schedules.
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(a) Exhibits
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Number
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Description
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Method of Filing
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1.1
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Form of Underwriting Agreement
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To be filed by amendment.
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3.1
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Amended and Restated Certificate of Incorporation
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Incorporated by reference to Exhibit 3.1 to Amendment
No. 6 to the Companys Registration Statement on
Form S-1
filed with the SEC on November 12, 2008.
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3.2
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Amended and Restated Bylaws
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Incorporated by reference to Exhibit 3.2 to Amendment
No. 6 to the Companys Registration Statement on
Form S-1
filed with the SEC on November 12, 2008.
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4.1
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Specimen of Stock Certificate
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Incorporated by reference to Exhibit 4.1 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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4.2
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Amended and Restated Investor Rights Agreement, dated September
17, 2008, by and among Grand Canyon Education, Inc. and the
other parties named therein
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Incorporated by reference to Exhibit 4.2 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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5.1
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Opinion of DLA Piper LLP (US) regarding the validating of the
common stock
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*
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10.1
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Amended and Restated Executive Employment Agreement, dated
September 10, 2008, by and between Grand Canyon Education, Inc.
and Brent D. Richardson
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Incorporated by reference to Exhibit 10.1 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.2
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Amended and Restated Executive Employment Agreement, dated
September 10, 2008, by and between Grand Canyon Education, Inc.
and Christopher C. Richardson
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Incorporated by reference to Exhibit 10.2 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.3
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Executive Employment Agreement, dated September 1, 2008, by and
between Grand Canyon Education, Inc. and Kathy Player
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Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the SEC on March 25, 2009.
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10.4
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2008 Equity Incentive Plan
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Incorporated by reference to Exhibit 10.4 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.5
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2008 Employee Stock Purchase Plan
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Incorporated by reference to Exhibit 10.5 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.6
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Lease Agreement, effective June 28, 2004, by and between Spirit
Finance Acquisitions, LLC and Significant Education, LLC
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Incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.7
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First Amendment to Lease Agreement, effective September 24,
2004, by and between Spirit Finance Acquisitions, LLC and
Significant Education, LLC
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Incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.8
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Second Amendment to Lease Agreement, effective August 23, 2005,
by and between Spirit Master Funding, LLC and Significant
Education, LLC
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Incorporated by reference to Exhibit 10.9 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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II-3
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Number
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Description
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Method of Filing
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10.9
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Third Amendment to Lease Agreement, effective June 2006, by and
between Spirit Master Funding, LLC and Significant Education,
Inc.
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Incorporated by reference to Exhibit 10.10 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.10
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Fourth Amendment to Lease Agreement, effective August 9, 2006,
by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.11 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.11
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Fifth Amendment to Lease Agreement, effective December 31, 2006,
by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.12 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.12
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Sixth Amendment to Lease Agreement, effective September 30,
2007, by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.13 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.13
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Seventh Amendment to Lease Agreement, effective March 28, 2008,
by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.14 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.14
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License Agreement, dated June 30, 2004, by and between Blanchard
Education, LLC and Significant Education, LLC
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Incorporated by reference to Exhibit 10.15 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.15
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Letter Agreement, dated February 6, 2006, by and between The Ken
Blanchard Companies and Grand Canyon University
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Incorporated by reference to Exhibit 10.16 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.16
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Amendment to License Agreement, dated May 8, 2008, by and
between Blanchard Education, LLC and Grand Canyon Education, Inc.
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Incorporated by reference to Exhibit 10.17 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.17
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Collaboration Agreement, dated July 11, 2005, by and between
Mind Streams, LLC and Significant Education, LLC (as
supplemented by Project One and Project Two)
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Incorporated by reference to Exhibit 10.18 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.18
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Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Daniel E. Bachus
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Incorporated by reference to Exhibit 10.19 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.19
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Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Brian E. Mueller
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Incorporated by reference to Exhibit 10.20 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.20
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Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and W. Stan Meyer
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Incorporated by reference to Exhibit 10.21 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.21
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Form of Director and Officer Indemnity Agreement
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Incorporated by reference to Exhibit 10.21 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.22
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Purchase and Sale Agreement, dated April 27, 2009, by and among
Grand Canyon Education, Inc., Spirit Master Funding, LLC, and
Spirit Management Company
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Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
filed with the SEC on August 3, 2009.
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II-4
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Number
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Description
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Method of Filing
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10.23
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Loan Agreement, dated April 27, 2009, by and between Grand
Canyon Education, Inc. and Bank of America, N.A.
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Incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q
filed with the SEC on August 3, 2009.
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23.1
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Consent of Independent Registered Public Accounting Firm
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Filed herewith.
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23.2
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Consent of DLA Piper LLP (US)
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*
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24.1
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Power of Attorney
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*
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Significant Education, LLC is the predecessor to Significant
Education, Inc., which is the former name of Grand Canyon
Education, Inc.
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Indicates a management contract or any compensatory plan,
contract or arrangement. |
(b) Financial Statement Schedules
All schedules are omitted because they are not required, are not
applicable or, the information is included in the financial
statements or the notes thereto.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers, and
controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by us of expenses incurred or paid by a
director, officer, or controlling person of us in the successful
defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the
securities being registered, we will, unless in the opinion of
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question
whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
We hereby undertake that:
(i) for purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(ii) for purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona on
September 4, 2009.
GRAND CANYON EDUCATION, INC.
Name: Brian E. Mueller
Title: Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
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Signature
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Title
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Date
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*
Brent
D. Richardson
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Executive Chairman
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September 4, 2009
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/s/ Brian
E. Mueller
Brian
E. Mueller
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Chief Executive Officer and Director (Principal Executive
Officer)
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September 4, 2009
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/s/ Daniel
E. Bachus
Daniel
E. Bachus
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Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
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September 4, 2009
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/s/ Christopher
C. Richardson
Christopher
C. Richardson
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General Counsel and Director
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September 4, 2009
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*
David
J. Johnson
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Director
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September 4, 2009
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*
Jack
A. Henry
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Director
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September 4, 2009
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*
D.
Mark Dorman
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Director
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September 4, 2009
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*
Chad
N. Heath
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Director
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September 4, 2009
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*By:
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/s/ Christopher
C. Richardson
Christopher
C. Richardson
Attorney-in-fact
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II-6
EXHIBIT INDEX
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Number
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Description
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Method of Filing
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1.1
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Form of Underwriting Agreement
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To be filed by amendment.
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3.1
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Amended and Restated Certificate of Incorporation
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Incorporated by reference to Exhibit 3.1 to Amendment
No. 6 to the Companys Registration Statement on
Form S-1
filed with the SEC on November 12, 2008.
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3.2
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Amended and Restated Bylaws
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Incorporated by reference to Exhibit 3.2 to Amendment
No. 6 to the Companys Registration Statement on
Form S-1
filed with the SEC on November 12, 2008.
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4.1
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Specimen of Stock Certificate
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Incorporated by reference to Exhibit 4.1 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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4.2
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Amended and Restated Investor Rights Agreement, dated September
17, 2008, by and among Grand Canyon Education, Inc. and the
other parties named therein
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Incorporated by reference to Exhibit 4.2 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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5.1
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Opinion of DLA Piper LLP (US) regarding the validity of the
common stock
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*
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10.1
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Amended and Restated Executive Employment Agreement, dated
September 10, 2008, by and between Grand Canyon Education, Inc.
and Brent D. Richardson
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Incorporated by reference to Exhibit 10.1 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.2
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Amended and Restated Executive Employment Agreement, dated
September 10, 2008, by and between Grand Canyon Education, Inc.
and Christopher C. Richardson
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Incorporated by reference to Exhibit 10.2 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.3
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Executive Employment Agreement, dated September 1, 2008, by and
between Grand Canyon Education, Inc. and Kathy Player
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Incorporated by reference to Exhibit 10.1 to the
Companys Current Report on
Form 8-K
filed with the SEC on March 25, 2009.
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10.4
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2008 Equity Incentive Plan
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Incorporated by reference to Exhibit 10.4 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.5
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2008 Employee Stock Purchase Plan
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Incorporated by reference to Exhibit 10.5 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.6
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Lease Agreement, effective June 28, 2004, by and between Spirit
Finance Acquisitions, LLC and Significant Education, LLC
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Incorporated by reference to Exhibit 10.7 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.7
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First Amendment to Lease Agreement, effective September 24,
2004, by and between Spirit Finance Acquisitions, LLC and
Significant Education, LLC
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Incorporated by reference to Exhibit 10.8 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.8
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Second Amendment to Lease Agreement, effective August 23, 2005,
by and between Spirit Master Funding, LLC and Significant
Education, LLC
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Incorporated by reference to Exhibit 10.9 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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Number
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Description
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Method of Filing
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10.9
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Third Amendment to Lease Agreement, effective June 2006, by and
between Spirit Master Funding, LLC and Significant Education,
Inc.
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Incorporated by reference to Exhibit 10.10 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.10
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Fourth Amendment to Lease Agreement, effective August 9, 2006,
by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.11 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.11
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Fifth Amendment to Lease Agreement, effective December 31, 2006,
by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.12 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.12
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Sixth Amendment to Lease Agreement, effective September 30,
2007, by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.13 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.13
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Seventh Amendment to Lease Agreement, effective March 28, 2008,
by and between Spirit Master Funding, LLC and Significant
Education, Inc.
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Incorporated by reference to Exhibit 10.14 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.14
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License Agreement, dated June 30, 2004, by and between Blanchard
Education, LLC and Significant Education, LLC
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Incorporated by reference to Exhibit 10.15 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.15
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Letter Agreement, dated February 6, 2006, by and between The Ken
Blanchard Companies and Grand Canyon University
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Incorporated by reference to Exhibit 10.16 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.16
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Amendment to License Agreement, dated May 8, 2008, by and
between Blanchard Education, LLC and Grand Canyon Education, Inc.
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Incorporated by reference to Exhibit 10.17 to the
Companys Registration Statement on
Form S-1
filed with the SEC on May 13, 2008.
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10.17
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Collaboration Agreement, dated July 11, 2005, by and between
Mind Streams, LLC and Significant Education, LLC (as
supplemented by Project One and Project Two)
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Incorporated by reference to Exhibit 10.18 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.18
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Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Daniel E. Bachus
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Incorporated by reference to Exhibit 10.19 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.19
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Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and Brian E. Mueller
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Incorporated by reference to Exhibit 10.20 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.20
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Executive Employment Agreement, dated June 25, 2008, by and
between Grand Canyon Education, Inc. and W. Stan Meyer
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Incorporated by reference to Exhibit 10.21 to Amendment
No. 1 to the Companys Registration Statement on
Form S-1
filed with the SEC on August 13, 2008.
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10.21
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Form of Director and Officer Indemnity Agreement
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Incorporated by reference to Exhibit 10.21 to Amendment
No. 2 to the Companys Registration Statement on
Form S-1
filed with the SEC on September 29, 2008.
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10.22
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Purchase and Sale Agreement, dated April 27, 2009, by and among
Grand Canyon Education, Inc., Spirit Master Funding, LLC, and
Spirit Management Company
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Incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on
Form 10-Q
filed with the SEC on August 3, 2009.
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Number
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Description
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Method of Filing
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10.23
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Loan Agreement, dated April 27, 2009, by and between Grand
Canyon Education, Inc. and Bank of America, N.A.
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Incorporated by reference to Exhibit 10.2 to the
Companys Quarterly Report on
Form 10-Q
filed with the SEC on August 3, 2009.
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23.1
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Consent of Independent Registered Public Accounting Firm
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Filed herewith.
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23.2
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Consent of DLA Piper LLP (US)
|
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*
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24.1
|
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Power of Attorney
|
|
*
|
Significant Education, LLC is the predecessor to Significant
Education, Inc., which is the former name of Grand Canyon
Education, Inc.
|
|
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Indicates a management contract or any compensatory plan,
contract or arrangement. |
exv23w1
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the reference to our firm under the caption Experts in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-161571) and related Prospectus of Grand Canyon Education,
Inc. for the registration of 8,000,000 shares of its common stock and to the incorporation by
reference therein of our report dated February 19, 2009, with respect to the financial statements
of Grand Canyon Education, Inc. included in its Annual Report (Form 10-K) for the year ended
December 31, 2008, filed with the Securities and Exchange Commission.
Phoenix, Arizona
September 1, 2009